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Noncompete Agreement Interpretation and Enforceability

Seventh Circuit Court of Appeals (Illinois, Indiana, Wisconsin) Rules that Company’s Distributor Is Not its “Competitor” in E.T. Products, LLC v. D.E. Miller Holdings, Inc., No. 16-1204 (Sept. 20, 2017)

November 1, 2017

What is a business “competitor”?  What does “indirectly” mean?  Is the difference between “and” and “or” a big deal?  Are you competing with the buyer of your business by leasing operation space to its competitor?  In E.T. Products, the Indiana trial court and the 7th Circuit weighed in on all these issues.

Background:

Doug Miller and his son Tracy owned two Indiana-based companies, E.T. Products and Petroleum Solutions.  The former blended and sold fuel additives.  The latter blended and sold lubricants.  The latter also had a few customers to whom it sold fuel additives supplied by E.T. Products, making Petroleum Solutions E.T.’s distributor.  After 13 or so years in operation, Miller put both companies up for sale.  In January 2011, Miller sold E.T. to an investment group for $5 million.  Ancillary to the sale contract, Doug and Tracy signed 5-year noncompete agreements covering the continent of North America that prohibited them from “directly or indirectly, as agent, employee, consultant, distributor, representative, equity holder, manager, partner, or in any other capacity, … assist[ing] any Person, … that engages in or owns, … any venture that directly or indirectly engages in the Business.”  The “Business” was defined in the sales contract as “the business of blending, packaging, marketing and selling chemical fuel additive products, with its primary focus on diesel fuel additives.”

In January 2012, Miller sold Petroleum Solutions to an individual named Kuhns.  Doug was generous to Kuhns.  He provided low-interest financing for the purchase; a lease for the land on which the business was operated; training in lubricant blending and consulting help as Kuhns learned the business; and Tracy helped by training Kuhns on the company’s computer programs for a few months after the sale.  Throughout most of 2012, Petroleum Solutions continued to be a customer and distributor of E.T. fuel additive products.   In late 2012, E.T. presented Kuhns with a non-compete agreement which Kuhns refused to sign. Presumably, E.T. wanted Kuhns to distribute only E.T. products. In December 2012, E.T. stopped supplying fuel additives to Petroleum Solutions.  Petroleum Solutions found a new supplier. When Doug learned that E.T. severed its relationship with Petroleum Solutions, Kuhns and the Millers parted ways.

E.T. sued, alleging that the generous financing and lease terms, and the Millers’ assistance to Kuhns during 2012, breached the noncompete agreement.  Miller, in turn, argued that the noncompete agreements were overly broad and unenforceable.  On motions for summary judgment, the Indiana trial court (applying Indiana law) ruled that the agreements were enforceable but that the Millers had not breached them.  The court found that all of the complained-of conduct occurred while Petroleum Solutions sold only E.T. fuel additive products and that acting as E.T.’s distributor did not violate the agreements.  The court also strictly construed the “in the Business” term in the noncompete agreements against E.T., finding that by the use of “and” in the definition, unless Petroleum Solutions engaged in all of the same aspects of the additive business as E.T. Products, it was not competing with E.T.

The 7th Circuit affirmed the decision, holding that “a firm whose sole conduct in the relevant market consists of distributing one manufacturer’s product plainly isn’t that manufacturer’s competitor.  The 7th Circuit called E.T.’s argument that the Millers’ assistance to Petroleum Solutions was a form of “indirect” involvement in the industry “a bit much.”

The 7th Circuit went on to discuss whether Petroleum Solutions became E.T.’s competitor once it began blending its own fuel additives and distributing additives from other suppliers:

The [trial court] thought that the noncompete wasn’t triggered unless Petroleum Solutions engaged in all the same aspects of the additive business as E.T. Products:  blending, packaging, marketing, and selling.  That’s not correct.  Two companies need not perfectly mirror each other before they are considered competitors, and the inclusion of the phrase “directly or indirectly” in the noncompete was designed to preclude precisely this kind of narrow construction.  That language means, if nothing else, that complete overlap isn’t required.

The 7th Circuit also found that Miller did not breach the noncompete by failing to revoke the property lease:

Taking affirmative steps to lease to a competitor is quite different from what Doug Miller did here.  Recall that Kuhns and Doug entered into the lease agreements in January 2012.  At that point Petroleum Solutions and E.T. Products were business partners.  …  On E.T. Products’s reading of the noncompete, Doug was required to break the existing lease with Kuhns – itself a breach of contract – once Petroleum Solutions became E.T. Products’s competitor.  That’s an overbroad and unreasonable reading of the agreement.

Takeaways:

  • This noncompete agreement arose in the context of the sale of a business, but the analysis of who is a “competitor” applies in the context of employment agreements, as well.
  • Be mindful of how you define the “business” you seek to protect from competition, especially when the noncompete agreement is in the context of an employment contract.  Courts dislike these agreements and will look for reasons to find the noncompete agreement overly broad and unenforceable. But even in the context of a sale of a business, Illinois courts are loathe to enforce an overly broad covenant.
  • Be mindful of the use of the word “and,” and “or.”  Consider using “and/or.”
  • In many jurisdictions (including Indiana), the law requires covenants, even in the sale of business context, to be “strictly construed against the covenantee” or the preparing party. Consider stating that the language in the noncompete agreement is chosen by the parties to express their mutual intent and that no rule of strict construction will be applied against either party.

“Limited Guardianship: A Customized Approach to Substitute Decision Making”

IICLE Special Needs Conference
Lisle, IL – September 23, 2016

“Substitute Decision Making – Limited Guardianship”

IICLE Special Needs Conference
Lisle, IL – September 26, 2017

A WIN FOR THE LITTLE GUY

Introduction:
This month’s edition of my newsletter provides a “war story” of a zoning matter with a successful result at the trial court level. It’s been awhile since I’ve sent out this newsletter. I’ll try to be more diligent in 2017 and trust you’ll find my articles of interest and of use. Remember I am here to provide the best legal advice and service that I can. If I can be of assistance I am only a phone call or email away. Also if you know of anyone who can use my services or those of our law firm I’d appreciate the referral.

A WIN FOR THE LITTLE GUY

My client is a hard working and honest man. He’s Mexican-American and English is not his first language. In 1982 he and his wife bought a parcel of property in unincorporated Cook County with a small house on it. My client and his wife took up residence on the property and he began his landscape business. Over the next three years my client acquired three adjacent properties; two of which had small houses on them. Eventually his sons moved into the houses and worked with their father and helped him make the business a success.

In 1988 an adjacent municipality approached my client and asked him to voluntarily annex two of his properties. This municipality was in a boundary war with another Village and wanted my client’s property so they could control the area. My client asked what was he going to get in return and was told he could “keep staying there and working there.” My client trusted the municipal officials who approached him and he and his wife signed a voluntary petition to annex two of their properties. Once these properties were annexed the other properties were surrounded and were forced annexed. Upon annexation as is customary the properties were zoned residential.

For the next twenty-seven years my client and his sons continued to reside on the properties and operated their landscape business. During this period numerous building permits were issued for improvements and one was for an eight foot fence along the west boundary of the properties that needed an exception because the height limit was six feet. Also during this twenty-seven year period violation notices were issued from time to time. Each time a violation was brought to my client’s attention he and his sons promptly corrected the problem.

In May of 2015 the Village issued a complaint for operating a landscape business in a residential district and operating a contractor’s yard without a special use permit. Obviously my client was surprised and shocked at the Village’s actions. He felt they had gone back on their promise that he would be able to stay at his property and continue to work there. Once I was retained I endeavored to settle the matter but the Village Board had directed staff to “shut down” any businesses that were operating in residential zoning districts regardless of the circumstances.

A zoning complaint such as the one issued to my client is first heard by an Administrative Hearing Officer. They are referred to as Administrative Law Judges. Generally they are attorneys hired by the municipality to conduct hearings and issue decisions. Their decisions are subject to what is called “Administrative Review” by the circuit court.

An administrative hearing was held in May of 2016. The Village put on its evidence and in defense I had my client testify as well as one of his sons. In addition I had a well regarded land planner testify. My client testified through an interpreter as to how he acquired the properties and started his landscape business. He testified as to how the Village asked him to annex and what they told him about being able to continue to operate. My client’s son testified as to how the business operates with trucks going out early in the morning and coming back late afternoon or early evening. There’s little activity during the day. Landscape materials are stored on the property but there are no high stockpiles and landscape waste is removed every few days. I had my client’s son go through each of the building permits that were issued and how one of the violation notices was because they were expanding the business from what it was when the property was annexed. My client’s son testified that the Village did not require him to remove the additional storage containers that had been brought onto the property but told him “just to keep it as it was.” A new house is being built just a lot or two away to the north and my client’s son estimated its cost of construction at five hundred to six hundred thousand dollars. Our expert in land planning testified that in his opinion there has been no adverse impact from the landscape business on the normal and orderly development of the area.

When I cross examined the Village’s Director of Community Development he admitted that he had been employed by the Village for twelve years and he always knew how my client’s property was being used. I got him to admit that he granted the exception that allowed the eight foot high fence because the Village wanted my client’s trucks and landscape operation screened from the adjoining residential street.

In closing argument I argued my client’s use of the property was a legal non-conforming use and that he had acquired a vested right to continue to operate as he had been for twenty-seven years. I also argued the legal theories of equitable estoppel and laches. Equitable estoppel can be applied to a municipality when a person’s action was induced by the conduct of municipal officers and where in the absence of relief the property owner will suffer a substantial loss and “the municipality would be permitted to stultify itself by retracting what its agents have done”. Laches is a doctrine that bars a plaintiff relief where because of the delay in the plaintiff asserting a right the defendant is misled or prejudiced.

I had warned my client that most likely we would lose before the Administrative Law Judge. Not because our case was weak or my legal arguments were not well founded. It’s just how the system works. Sure enough I was right and the Administrative Hearing Officer ruled against my client and found that his business was not a permitted “home occupation” and there was no basis to find a vested right had been acquired or that the doctrines of equitable estoppel or laches should apply. In addition he found my client’s use of the property was not a legal non-conforming use. My client authorized filing a lawsuit in the Circuit Court of Cook County for Administrative Review.

When a complaint for Administrative Review is filed the municipality is required to answer by filing the record that was made at the administrative hearing. This includes the transcript of the testimony and any exhibits that were introduced into evidence. On Administrative Review the trial court is not allowed to consider any additional evidence. The Judge is limited to reviewing the record that was made at the administrative hearing. This is why it is critical to get into the record anything you think is needed to succeed. You do not have an opportunity to add anything before the trial court.

Fortunately the trial judge was a former City of Chicago alderman and very familiar with zoning and its legal nuances. Once the Village filed the record I made a Motion for Judgment on the Pleadings. The Village filed a response and I filed a reply.

At the hearing the Judge directed his questions mainly to the Village attorney. The Judge started with questions regarding why my client’s business should not be considered a legal non-conforming use. It appeared the Judge was leaning in my client’s favor. I have done this long enough to know that when this occurs the best thing to do is say as little as possible. That’s what I did and before I knew it the Judge shifted gears and focused on our legal defense of “laches”. The Judge went through each and every time the Village issued a permit or inspected the property. He found especially compelling the inspection where the inspector noted on his report that my client was expanding the non-conforming use from what it had been at the time of annexation. The Judge also noted how the Village had issued an exception for the height limit of the fence because it wanted the commercial vehicles and landscape operation screened from the adjacent residential street.

The Judge stated that my client’s case was the “poster child” for the equitable defense of laches. I knew this was our strongest defense and emphasized the doctrine of laches in my initial brief and the reply I filed. Also I concentrated on this defense in the oral argument I made and specifically referred to the Illinois Appellate Court decision in Du Page County vs K-Five Construction. In K-Five, Du Page County was prevented from enforcing its zoning ordinance against a concrete batching plant that was an illegal use because the County waited five years from the time it knew of the illegal use. Obviously I argued that if five years was enough in K-Five then waiting twenty-seven years was far more egregious. Also in K-Five the Appellate Court noted that the County had failed to prove harm to the general public if its zoning ordinance was not enforced. I argued the same situation existed in my client’s case and this was borne out by the fact a house worth half a million dollars was being built two lots away.

The Judge ruled in my client’s favor and held that the Village cannot enforce its zoning ordinance against my client’s property and business. He’s allowed to continue to operate as he has been all these years. The Judge ruled that my client can’t expand his use but that’s fine and as it should be.

My client will have to wait and see if the Village appeals the trial court’s ruling. If it does I think we have a good chance of success at the Appellate Court level due to the manner in which the trial court went through each and every time a building permit was issued or a violation notice issued and nothing was done for over twenty-seven years to stop my client from doing what he had been told from the beginning he’d be allowed to do if he cooperated with the Village and annexed his property. My client always acted in good faith.

In my opinion justice has prevailed and a win obtained for the “little guy.” Hopefully the Village will see fit to leave my client and his business alone. If not we’ll move up to the Appellate Court and I trust the Appeals Court will agree with the trial court. In the meantime my client can continue to cut grass, prune bushes and plant flowers. However, this time of the year its snow plowing.

New Illinois Freedom to Work Act Bans Non-Competes for Low Wage Earners

Spurred in part by sandwich shop Jimmy John’s requirement that sandwich-makers and delivery drivers sign over-reaching non-compete agreements, the Act prohibits private sector employers from entering into non-compete restrictions with “low-wage employees” and renders such agreements “illegal and void.” The Act applies to non-compete agreements entered into on or after the Act’s effective date of January 1, 2017.

A “low-wage employee” is someone who earns the greater of (1) the hourly minimum wage under federal (currently, $7.25 per hour), state (currently, $8.25 per hour), or local law (currently, $10.50 per hour in Chicago) or (2) $13.00 per hour. Therefore, the Act initially will apply to agreements with employees earning $13.00 per hour or less.

The Act defines “covenant not to compete” broadly to mean an agreement between an employer and a low-wage employee that restricts the employee from performing:

(1) Any work for another employer for a specified period of time;
(2) Any work in a specified geographic area;
(3) Work for another employer that is similar to the low-wage employee’s work for the employer in question.

Can I Recover My Attorneys Fees? Maybe. It Depends.

When I first meet with a client on a new litigation matter, one of their first questions is how much is this going to cost. The second question is “whether the party will be responsible to pay my attorneys fees”. My answer to that question is always “It depends.”

These are legitimate questions. We all know that litigation is expensive. When clients come to us and want to sue somebody, it’s because they believe that they have been wronged . If they have been wronged, they believe that they should not be responsible for the fees to bring the lawsuit.

Whether or not the defendant will be responsible for attorneys fees depends on whether: a) there is a contract which provides for attorney fee recovery; or b) there is a statute which provides recovery of attorneys fees as part of the damages. Let’s walk through both instances.

You may come to us because your employer owes you wages and is refusing to pay you what you are owed. You want to sue for the wages. Can you recover your attorneys fees if you win in court? The answer is yes, because under the Illinois Wage Payment and Collection Act, in the case an employer is found to have wrongfully withheld wages to an employee, the employee may recover not only wages, but attorneys fees and costs in bringing the action. The law encourages attorneys to file suit against employers, and encourages employers to pay their employees, to avoid being sued for wages. Several other city, state and federal statutes, like discrimination statutes, landlord tenant statutes and employment statutes allow for the plaintiff to recover attorneys’ fees as a way to balance power.

Examples of contractual provisions for recovery of legal fees follow:

You may be a contractor. You are hired by a homeowner to work on her house. You have her sign a contract that provides that you are entitled to recover your attorneys fees and costs if you need to sue to enforce payment. The homeowner fails to pay you at the end of the project because she doesn’t like the color of the paint. You do sue her for the balance due because your contract allows for recovery of your attorneys’ fees and costs, you can recover them if you win at trial.

You may be a contractor who performed work on a building for a general contractor. The contractor did not pay you, and you are out several thousand dollars. You have an oral contract with the general contractor (not in writing.) You did not record a lien on the property. (If you had a lien, you may be entitled to recover fees because of the statute.) You can sue the general contractor and recover the contract amount, but you will not recover any of your attorneys fees. There is no statute contract provision that provides for recovery your attorneys’ fees.

You may be a homeowner who hired a painter to paint your house. You have paid the down payment, but the painter does a bad job painting your house. You refused to pay the painter at the end, showing him the issues you have with the work. You have a contract with the painter. It provides that if there is a lawsuit with regards to the contract that “the prevailing party shall recover its reasonable attorneys fees”. Can the painter recover its fees? The answer is yes if he wins at trial. But so can the homeowner if the court finds in his favor. The contract allows for the winner at trial to be awarded his fees.

So the point is that if you are in a position to have a written contract, make sure it has language in it that allows you as the prevailing party to recover your reasonable attorneys fees and costs. Look at your contract today to see if that language is contained in the contract. If it is not, call us, and we will help you draft that language. In particular, the term “prevailing party” should be defined in the contract.

Window Closing On Discounted Family Gifts

Making gifts of partial interests in family-controlled business entities in order to reduce transfer taxes is likely to become much more challenging in 2017. Using family-owned limited partnerships and limited liability companies to make children partners has been an effective way to transfer wealth out of a parent’s generation at a discounted value for transfer tax (estate, gift and generation-skipping taxes) purposes. When such gifts are made, gift tax returns for each gift must be filed demonstrating the value of property that has been gifted.

The logic of the technique is quite simple: say a couple owns development real estate with a value of $1,500,000 and wants their children to participate in the development of the land and to not have to pay estate taxes to inherit it. The owners would first deed the land into a newly-organized LLC of which one or both of them is the member (owner). If the owners had 3 children, they then could transfer, say, 30% membership interests in the LLC to each of the children, making each a 30% owner of the land development.

But ownership of a membership interest in an LLC is subject to the terms of the LLC’s partnership agreement also known as an operating agreement. Those terms include lack of marketability limitations (right of first refusal for other members) on selling the membership interest as well as lack of voting control over the investment for minority (say 30%) interests. So even though a 30% interest in the land should be worth an asset value of about $450,000, it is unlikely any unrelated buyer would pay that amount because of the partnership limitations.

When we counsel clients regarding making such discounted wealth-transfer gifts, we always have an appraisal prepared which indicates the appraiser’s evaluation of just how much the value of the LLC membership interest is diminished by these two factors and therefore what is the actual value of the gift. Over the years, while much more aggressive discounts are sometimes sought, we have typically seen discounts of 20-30%. Thus, a gift of $450,000 in value of real estate would only be assessed for gift and estate tax purposes for $337,500, which is 75% of its true asset value. Multiplied by three, the couple could transfer 90% of $1.5 Million real estate to their children for a value of just over $1 Million. In addition, the post-gift appreciation of the land would also be out of the parents’ estates, amplifying the estate tax avoidance benefits.

It should come as no surprise that the IRS has been very unhappy with this concept through the years, as the family is able to keep their property into the next generation with a nice estate tax discount. But while they have consistently fought court challenges to the amount of claimed discounts, the IRS has been unable to provide a legal objection to the discount concept. The IRS on August 2 finally issued long-anticipated proposed regulations which will be the subject of public hearings, after which final regulations will be issued which will be binding upon taxpayers. The proposed regulations, as expected, effectively eliminate discounts for transfers to family-controlled entities. The hearings will commence soon, and it is expected the regs will become enforceable sometime near the beginning of 2017.

If gifting makes sense for your plan, please call your DiMonte & Lizak estate planning attorney to evaluate whether it will be possible to make discounted gifts prior to the new law’s effective date. Until then, the technique will be legal. Even after the law takes effect, it may make sense to gift certain assets to children if the gifted assets are likely to appreciate over the years. Every family’s estate planning needs are unique, so allow us to be of assistance.

Please Comply with the Illinois Mechanic’s Lien Act When Performing Home Repairs

We are in the tail end of summer with the kids going back to school. As you contemplate those home repair projects you procrastinated having done, be sure to protect yourself as an owner when having contractors perform work on your home. Whether you are having an addition put on to your house all the way down to small projects such as replacing a broken fence, the Illinois Mechanic’s Lien Act (“Mechanic’s Lien Act”) applies to your project. The Illinois Home Repair and Remodeling Act also applies to your project. However, this is a subject of separate newsletter articles that can be found on DiMonte and Lizak’s website at www.dimontelaw.com.

It has been said that the Mechanic’s Lien Act is a powerful tool for a contractor, subcontractor, or material supplier to force payment from an owner when the general contractor or subcontractor fails to pay. In certain instances, even if you have paid the general contractor, a subcontractor or material supplier can force you to pay its balance due if the general contractor failed to pay it. In order to avoid this apparent unjust result, the Mechanic’s Lien Act has a provision to safeguard you. However, if you don’t comply with the Act’s requirements, you can not rely on the Act’s protections.

Very few people and sometimes few contractors consider the requirements of the Mechanic’s Lien Act when performing home repair and remodeling work. I will give you this hypothetical in order to illustrate the problems that can occur. All winter you have stared out the window at the section of your fence which blew down during the winter storm. Now that summer is here, you are eager to get a new fence installed. You contract with Woody’s Wooden Fences for $3,000.00 to have your old fence removed and a new fence installed. Burch Woody of Woody’s Wooden Fences presents a proposal to you that identifies the project, has a brief description of the work to be performed, a proposal price of $3,000.00, a line for you to sign and a line for someone to sign on behalf of Woody’s Wooden Fences. Once signed, the proposal becomes a binding written contract between the parties. This contract does not specifically reference the Mechanic’s Lien Act. However, the Mechanic’s Lien Act is read into every construction contract in Illinois regardless if it is specifically identified.

Burch Woody and his crew do a fantastic job, and in less than a week your old fence is torn down, hauled away and a new fence erected. Happy as a nine year old in line at the ice cream truck after baseball practice, you pay Woody’s Wooden Fences in full and receive a receipt in return. You do not ask Mr. Woody for a contractor’s sworn statement or waivers of lien required under the Mechanic’s Lien Act and he doesn’t offer them to you. Everyone is happily oblivious, that is until one month later when you receive a notice from Stiffed Lumber Company serving you with a Subcontractor’s Claim for Lien providing that it sold $2,000.00 worth of lumber to Woody’s Wooden Fences and delivered this material to your home for the construction of your new fence. It also provides that Woody’s Wooden Fences failed to pay any money to Stiffed Lumber Company in return.

Of course, you have recourse directly against Woody’s Wooden Fences and so does Stiffed Lumber Company. In the ensuing investigation, you both come to realize that Burch Woody and his company are in financial ruin and Mr. Woody has left the country to live as a nomadic bush man in the northern Canadian wilderness. He closed Woody’s Wooden Fences for good with no assets to cover this debt.

The Mechanic’s Lien Act requires the owner to ask for, and requires the contractor to supply, a contractor’s affidavit and sworn statement and Lien Waivers from the general contractor and all subcontractors and material suppliers. Stated differently, if the owner doesn’t ask for these documents, he or she is not afforded the protection of the Mechanic’s Lien Act. If the owner asks for these documents and the contractor doesn’t provide them, the contractor is not entitled to get paid.

So lets review what documents we are talking about. The contractors sworn statement and affidavit which should accompany every request for payment identifies that contract price, any extras or credits, the revised contract price, payments made to date, the amount of the current payment or draw request, and the remaining balance due. It also identifies the same information for each subcontractor or material supplier working on your project. Also accompanying each payment should be either a partial or a final waiver of lien from all subcontractors or material suppliers which identifies the amount being paid and the amount due on its contract.

If you obtain these documents with each draw payment you have a defense to any Mechanic’s Lien Claim by the general contractor, subcontractor or material supplier to the extent of the lien waivers received. In addition, if the general contractor fails to identify a subcontractor or material supplier on the contractor sworn statement and affidavit and you did not have prior knowledge of the subcontractor or material supplier working on your project, you can only be compelled to pay that subcontractor or material supplier any balance due from you to the general contractor remaining on the contract. As such, you can not be forced to pay more for your project than your contract price. The unpaid subcontractor or material supplier’s only recourse is against the insolvent general contractor.

As a homeowner, you need to protect yourself from claims of an unpaid subcontractor or material supplier whether you knew they were working on your project or not. The Mechanic’s Lien Act provides a statutory remedy to these unpaid subcontractors or material suppliers which could ultimately result in the sale of your home to satisfy the debt even if you have already paid the general contractor the full contract price. The only way to avoid this problem is to be aware of and force the general contractor’s compliance with the Mechanic’s Lien Act requirements whether you’re project is $2,000.00 or $2 million dollars.

Of course, everybody wants to be frugal and save money. However, if you do not understand the obligations and requirements of the Mechanic’s Lien Act, it may save you a lot of headaches and money in the future to retain an attorney to advise you in advance in negotiating a contract and requiring performance under the Mechanic’s Lien Act throughout the project. Please give me a call if I can assist you, your family or friends in this process. I hope you are having a wonderful summer.

401(K) Fiduciary Compliance Review

Recently I had a breakfast meeting with a friend and in the course of the meeting he brought up the fact that there is personal liability in the event that a retirement plan administrator, or plan trustee, does not comply with certain standards. This conversation caught my attention because I believe that most plan administrators of small retirement plans are the owners of the company or members of upper management in larger companies.
Well, what does it mean to be in compliance? After all, the client generally works with an advisor for an investment company (such as Voya, Fidelity, Merrill Lynch and many others) and at least annually, and in many cases more frequently, the employees of the company meet with the investment counselor. The employees are given a list of investments and told what the risk element is for various investments being offered. Isn’t this enough to be compliant? And the answer is a resounding NO!
Plan sponsors are required to regularly and continuously monitor investments offered under the plan to plan participants. The plan sponsors are responsible to be knowledgeable with respect to the fees charged and use appropriate benchmarks to evaluate the performance of the investments. This process needs to be documented. So if Plan fiduciaries (those making decisions about what investments are being offered to participants) should adopt and then review their Investment Policy Statement (IPS) to ensure that it contains clear guidelines as to how investments should be monitored and how often the reviews will take place. Best practices indicate that the investments being offered should be reviewed at least annually or more frequently if the fiduciary determines that doing so would be prudent under ERISA’s fiduciary standards. Once it is confirmed that the IPS contains language that periodic monitoring will take place, it is crucial that the monitoring process actually take place and is documented.
In a recent case (Tibble vs. Edison International) the Supreme Court stated a “fiduciary must discharge his responsibility with the care, skill, prudence, and diligence that a prudent person acting in like capacity and familiar with such matters would use.” The plan sponsors are fiduciaries. The ruling in that case emphasizes the need for plan sponsors to regularly and continuously monitor investments and fees, use appropriate benchmarks and document the process. Additionally, the plan sponsor will need to monitor the costs of administering the plan, not just the investment expense. This becomes extremely important if the plan participants are bearing the cost of the administration and recordkeeping for the plan.
Okay, I’m a busy executive and I don’t have time to do all of the things that appear to be necessary in order to be compliant with the regulations for managing a 401(k) program. What should I do?
First, if you have a plan advisor, find out if you have an IPS currently in place. If so, are you meeting regularly to review the criteria set forth in the policy? If not, you will want to work with an advisor to create an IPS for your plan. The criteria should be broadly drafted to provide for both quantitative and qualitative analysis of the investments offered, but not too stringent so as to require a specific action if the fund’s performance lags the appropriate benchmarks for a short period of time. Remember, you don’t have to be the investment expert here, you, as a plan fiduciary, just need to make reasonable and prudent decisions based on the information provided to you.
Also, keep minutes of these investment meetings along with any reports provided by your Advisor. This will provide defensible documentation of your periodic and formal monitoring process.
Lastly, you may want to consider fiduciary liability insurance coverage to help protect personal assets against claims by participants and beneficiaries as related to investment decisions made for the retirement plan. You may want to consider hiring an independent advisor who specializes in retirement plans.

Fraudulent Transfers: A lesson in persistence and asset recovery

Litigation is like a maze; there are twists, turns and uncertainties. To successfully navigate the maze of litigation you need to utilize many different skill sets and resources: preparedness, collaboration and organization are major components of any successful litigation. But in some matters, persistence is the litigator’s chief asset. This was so in our recent representation of a bank whose bankrupt borrowers secretly transferred their sole unencumbered asset to a family member.
We assisted the client in successfully foreclosing on one of the Bank’s customers who had defaulted on a commercial loan. The Bank was the successful bidder at the judicial sale and became the record title holder of the property. However, the Bank was not made whole as the value of the real estate was substantially less than the amount due it under the note. As such, the Bank obtained a deficiency judgment against the borrower.
The Bank believed that the borrower had other real property that could be used to satisfy the deficiency judgment. One of those properties was no longer owned by the borrower, having been transferred to a third party (“transferee”). The Bank believed that the transferee was related to the borrower. Based on the information provided to us by the Bank, we filed suit against the transferee, invoking sections 740 ILCS 160/5(a) and 740 ILCS 160/6(a) of the Illinois Uniform Fraudulent Transfer Act (“UFTA”). Unbeknownst to the Bank, the transferee was the borrower’s brother with a different surname.
The UFTA is a wonderful tool in asset recovery matters that permits a party to recover assets that were transferred from a judgment debtor to a third party. For the UFTA to apply there must be either (under section 5 – Fraud in Fact) the presence of statutorily defined 11 “badges of fraud” or (under section 6 – Fraud in Law) a transfer made after a claim arose and the transfer results in the transferor becoming insolvent. We pursued both claims, uncertain at the outset whether the proofs would support a Fraud in Fact or Fraud in Law claim. What unfolded over the next two years was one of the most trying and rewarding cases I have been involved in.
After initiating discovery we learned that the transferee was in fact a close relative of the borrower (one of the badges of fraud). Thereafter, we focused on learning who was actually in control of the real estate (another badge of fraud). After months of discovery disputes we were able to obtain both the borrower’s and transferee’s bank statements. However, the statements only told us that other bank accounts existed that had been withheld from production in discovery by both the borrower and the transferee. As a result, we issued additional subpoenas to the new bank accounts, engaged in additional discovery disputes and another three months later, obtained the additional bank account records. The results provided us with the proverbial smoking gun: evidence that the borrower had paid back the transferee for the purchase price of the real estate and that the transferee was signing over rent checks paid to it from the real estate to the borrower. Despite the avalanche of evidence we had, the case did not settle until the day of trial, when the transferee and his attorney could no longer ignore the magnitude of the evidence we had gathered.
The lesson from this case was persistence, because early on in the case it appeared the transaction was at arm’s length. But through hours of researching public records, obtaining and reviewing the financial records of the borrower and transferee, we were able to piece together a clear line of proofs to support both our fraud in fact and fraud in law claims. By staying true to the planned course of action and leaving no stone unturned, the maze became a path, clear and straight to a successful conclusion.

Updating Your Estate Plan

Many people are inclined to forget about their estate plans once they’ve signed the documents and filed them away. However, once you have an estate plan in place, it’s important to keep it up to date. You should review your estate plan every few years and any time there is a major event in your life, such as a divorce or a significant change in health.

Evaluating your estate plan every few years ensures that it will be updated when there are changes in the law. This includes your powers of attorney, which allow someone you elect to act as your agent if you are incapacitated or disabled and unable to make certain financial or health care decisions. A properly executed power of attorney can ensure that your wishes are followed and may help avoid conflict between family members. In Illinois, the statutory forms for both the health care power of attorney and property power of attorney have recently been modified. Even if you have existing powers of attorney, you should consider executing new documents using the most recent language. The property power of attorney was updated in 2011 to raise the standard of care for an agent, and effective January 1, 2015, the Illinois Power of Attorney Act also modified the power of attorney for health care. The amendments to the act included changes to the language describing the duties and responsibilities of the agent, as well as the descriptions for life-sustaining treatment options. The new form also indicates that the agent will act as the principal’s personal representative as defined under HIPAA, giving the agent access to medical records governed by HIPAA. Outdated powers of attorney that do not specifically include a reference to HIPAA may not allow the agent to have access to these records.

Estate planning strategies have also evolved in recent years in light of the greatly increased estate tax exemptions. The federal estate tax exemption is currently $5.45 million, while the Illinois estate tax exemption remains at $4 million. With the exemptions being so high, income tax planning has in some ways become more important than planning to avoid estate taxes. For example, incorporating a disclaimer trust is a tax efficient way to give a surviving spouse flexibility in determining which assets he or she would like to receive from the decedent. Additionally, before the exemptions were significantly increased, clients with large estates may have been advised to make gifts during their lifetimes to reduce their taxable estates. Now, the focus has shifted to taking advantage of the step-up in basis at death. For the majority of estates, paying estate taxes is no longer a concern and a more appropriate strategy is to maximize asset values at death.

We encourage you to reexamine your estate plan to be certain that it accurately represents your intentions and that it takes advantage of the recent changes in the law. An up-to-date estate plan will not only ensure that your wishes are respected, but will also lessen the burden on your surviving family.

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Transfer on Death Instrument: Requirements, Amendments & Considerations

Jeffery Ramirez

On January 1st, 2012, the Illinois Legislature passed the Illinois Residential Real Property Transfer on Death Instrument Act (“Act”). The purpose of the Act is to allow an owner of residential real estate to designate a beneficiary who would receive the residential real estate upon the owner’s death. This transfer was memorialized through a Transfer on Death Instrument (“TODI”). This article examines the statutory requirements for creating a TODI, analyzes notable amendments to the Act, and discusses key advantages to consider before using a TODI as part of your estate plan.

I. Statutory Requirements

There are four essential elements required to create a TODI. First, the TODI must contain the same elements and formalities as required to execute an inter vivos deed. In other words, the TODI must be done in writing, contain words of conveyance, and provide a legal description of the real estate. Second, the TODI must be signed by the owner and two witnesses who must attest to the fact they believe the owner is exercising a free and voluntary will and is of sound mind and memory and both the owner and witnesses signatures must be notarized. Third, the TODI must expressly designate a beneficiary and state the transfer to the designated beneficiary is contingent upon the owner’s death. Fourth, the TODI must be recorded in the county where the residential real estate is located in prior to the owner’s death.

II. Notable Amendments

On January 1st, 2015, the Illinois Legislation amended the Act in two notable ways. The first notable amendment limited the class of individuals who have the right to create or revoke a TODI. In the original text of the Act, there were two individuals who had the power to create or revoke a TODI. First, the owner of real estate has the power to create or revoke a TODI. Second, the owner could previously vest their right to create or revoke a TODI in a third party by expressly granting that third party the power to create or revoke a TODI through a power of attorney for property. Under the amended Act, an owner no longer had the ability to vest their right to create or revoke a TODI in a third person. The amendment limited that right strictly in the owner of the real estate. However, the amended Act does not restrict an agent, pursuant to a power of attorney for property, to sell, transfer, or encumber the residential real estate; which ultimately has the same effect of revoking the TODI.

The second notable amendment eliminated a requirement placed on a beneficiary receiving real estate through a TODI. In the original text of the Act, a beneficiary receiving real estate under a TODI had to file a notice of death affidavit within 30 days of the owner’s death to make the transfer. Otherwise, the beneficiary would be liable to the personal representative of the owner’s estate for the expenses incurred in the management and care of the property subject to the TODI. The original text also contained a 2 year statute of limitations period by which a beneficiary was required to file a notice of death affidavit. Otherwise, the TODI in its entirety would be null and void to transfer the real estate to the designated beneficiary. Fundamentally, the amendment to the Act eliminated the burden on a beneficiary and it no longer made the filing of a notice of death a condition to the transfer of the real estate.

III. Considerations

Further, there are some considerations to keep in mind when determining whether a TODI is an appropriate estate planning tool for your estate plan. First, the creation of a TODI does not affect an owner’s right to sell, encumber, mortgage, refinance, receive public assistance, grant a legal interest to a designated beneficiary, or subject the owner’s real estate to a beneficiary’s creditors. Much like transferring a piece of real estate to a self-declaration life time trust and re-titling the real estate in the name of the trust; the owner does not lose any ownership rights or control with respect to that real estate. Likewise, the mere creation of a TODI does not affect an owner’s present ownership interest, right, and control with respect to the real estate subject to the TODI because the TODI does not become effective until the owners death.

Second, the Act defines a TODI as a non-testamentary instrument. To keep it simple, a non-testamentary instrument generally passes outside of probate. Much like contracts, life insurance policies, and promissory notes, those instruments are considered non-testamentary and are generally excluded from a decedent’s probate estate. In effect, property passing outside of a probate estate is not subject to decedent’s probate creditors or claimants. Therefore, a TODI can be used as way to transfer a residential real estate to a beneficiary and may provide a level of protection against a decedent’s creditors.

Lastly, using a TODI to transfer residential real estate to a designated beneficiary can make it simpler, less costly, and more efficient to refinance instead of using a Land Trust. In most cases, lenders require real estate held in a Land Trust be deeded out of the Land Trust to refinance the real estate. Consequently, the owner must deed the property back into his or her name to proceed with the refinance. Then after the refinance is completed, the owner has to remember to deed the property back into the Land Trust. This process is repeated every time an owner applies for a refinance. Alternatively, if the owner used a TODI instead of a Land Trust to hold the residential real estate, the owner would not have to go through the same process of deeding the real estate back into their name and then deed it back afterwards. This is because the TODI does not become effective until the owner of the real estate passes away. Thus, using a TODI instead of a Land Trust to hold residential real estate makes the refinance process much simpler, less costly, and more efficient.

Always consult your estate planning attorney, financial advisor, and tax specialist to determine whether a TODI is an appropriate estate planning strategy for your estate plan.

Aunt Rena and Julia, the “Service Dog,” in Commercial Establishments

Aunt Rena Albarello was born in 1925 in the Town of Pullman. She lost her sight at age 4 from spinal meningitis. In her late teens, she attended a residential guide dog school in Michigan where she was paired with Julia, a beautiful black Doberman Pinscher. Julia was taught by skilled instructors to safely guide her ward through the complexities of pedestrian travel. Julia provided Rena with increased independence and they loved each other very much.

Shop owners in Pullman and Roseland, like Fattori’s Square Deal and Frigo Bros. Foods, freely allowed Julia to accompany Rena into their establishments. Julia was harnessed. She had impeccable manners. She was not a “pet.” These business owners accommodated Rena long before the passage of the Illinois White Cane Law, the Service Animal Access Act, and the Americans with Disabilities Act of 1990 (ADA).

Title III (public accommodations and commercial facilities) of the ADA makes it illegal for places like restaurants, theaters, schools, and hospitals to interfere with the ability of people with disabilities to come onto the premises and access services. Today, Julia would be deemed a “service animal” under the ADA. The ADA defines a “service animal” narrowly as any dog that is individually trained to do work or perform tasks for the benefit of a person with a disability, including a physical, sensory, psychiatric, intellectual, or other mental disability. In certain circumstances, businesses also must permit the use of a miniature horse. Notably, the ADA regulations specify that the provision of emotional support, well-being, comfort, or companionship do not constitute work or tasks.

If Rena entered the Italian Village today for a meal of polenta and roast chicken, she could not be turned away. The restaurant legally could not ask her about the nature or extent of her disability because her blindness is open and obvious and the work performed by Julia for Rena’s disability is readily apparent. The restaurant legally could not ask Rena for proof that Julia has been certified or trained as a service animal. Special identification and certification are not required by the ADA. Neither a deposit nor a surcharge may be required as a condition of allowing the service animal to accompany the individual.

However, if Rena’s disability was a non-apparent seizure condition and Julia’s work or task relative to the condition was not readily apparent, the restaurant legally could make two inquiries to determine whether Julia qualified as a service animal: 1) Is this a service animal that is required because of a disability? and 2) What work or tasks has the animal been trained to perform? If the answer to the first question is yes, and the second question is answered, further inquiries are impermissible, and the restaurant cannot ask that Julia demonstrate her ability to perform the work or task for which she is trained.

The restaurant has some protection. If Julia is out of control and Rena does not take effective action to control her, or Julia does not control her waste or acts in a manner that poses a direct threat to the health or safety of others, the Italian Village legally could deny Julia access to the restaurant. However, a determination that a service animal poses a direct threat must be based on an individualized assessment based on the animal’s actual conduct. The restaurant legally cannot deny Julia access because of a stereotype that Doberman Pinschers are dangerous.

The law concerning “assistance animals” in the housing context differs from the above. I address the topic in this article.

© Margherita M. Albarello, Esq., 01-31-16

Whose Ring Is It Anyway?

By Julia Smolka

Love is in the air. Between Christmas and Valentine’s Day, there is a surge of wedding proposals. There is also a surge in the purchase of expensive diamond engagement rings. Usually, those engagements end in wedding bells and nuptials. However, sometimes they do not. Current statistics show twenty percent of engaged couples break off engagements before weddings take place.

When the engagement ends, who ends up with the ring?

An engagement ring, given as part of a proposal, has been found to be a conditional gift. It is a gift, given by one party to another in contemplation of marriage between the parties. The proposal itself is a contract between two people – it’s a promise to marry. Once the parties are married, the condition for the gift is met, making the party who received the engagement ring the owner of the ring. The ring is a gift and it cannot be taken back by the giver.

Illinois courts have typically required the return of an engagement ring if the parties fail to marry. The courts found that an engagement ring is a gift given in contemplation of a marriage and is a conditional gift, meaning if the marriage does not happen, the ring should be returned to the proposing party.

But what happens if the party proposed to breaks off the engagement? What if the party in possession of the ring acts in such a way which makes going forward with the marriage impossible? What if the proposing party commits adultery during the engagement? What if there exists other abuse, addiction or other faults committed by the proposing party, making calling off the wedding a valid choice by the party in possession of the engagement ring? What if the proposing party is at fault for the breakup? The cases as they are now being decided find that fault does not matter. The ring must be returned if the marriage does not go forward.

The underlying law used as basis for the lawsuit is called a replevin action, and under Illinois replevin laws, there is no mention of assessing or considering “fault” when determining who is entitled to keep the ring. It matters who purchases the ring, why it was purchased, and why the party has the ring in his or her possession. The judges do not look at the party who was “bad.” The judge must decide which party has the right to possess and keep the ring.

I recently represented a woman who was given a very expensive diamond cocktail ring by her boyfriend. They broke up and she kept the ring. Six years after the breakup, the former boyfriend filed suit for return of the ring, claiming it was an engagement ring and my client had wrongfully kept it. My client maintained the position that it was just a gift, no proposal was made, no acceptance given and no engagement, meaning no conditional gift was made and the ring belonged to my client. The judge dismissed the action, without having to decide whether the ring was an engagement ring because the former boyfriend brought the lawsuit six years after the breakup. There is a five-year statute of limitations from the time of a breakup to bring an action to recover an engagement ring. My client’s former boyfriend was a year too late.

This was an interesting case, and I enjoyed working on it. If you have any interesting litigation cases, call me. I would love to discuss them with you.

Di Monte & Lizak Welcomes Maria Laftchiyska to Firm

Maria Laftchiyska graduated from Carlson School of Management at the University of Minnesota in 2009. She received her J.D. in 2013 from Loyola University Chicago School of Law. While at Loyola University, Maria was a member of the ABA National Appellate Advocacy Competition team and National Moot Court team.

Maria focuses her practice on estate planning, asset protection, and taxation. She assists business owners and families to create individualized estate plans, including preparation of wills and trust. She works closely with clients to restructure personal and professional assets to maximize wealth preservation and minimize gift and estate taxation. Maria also has experience in general business and taxation matters for corporations, limited liability companies, and partnerships.

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Section 38.1: A New Era on Illinois Mechanics Lien Law

On January 1, 2016, the Illinois Mechanics Lien Act (the “Act”) will be amended to include section 38.1, which will permit a lien claimant, housing association, owner, or any person or entity that may be liable for a lien claim, to file a petition to substitute a surety bond for the lien claim. In other jurisdictions the substitution is known as “bonding over”. The following will explain how to initiate and effectuate the bonding over process.

How to Initiate the Substitution of the Bond Claim

The surety bond may be obtained after a lien claim is initiated. The substitution of a surety bond for a lien claim will act as security for the claim, not result in its release. A petition may be filed within the two year time limit to file suit under the Act or within 5 months from the date of filing the complaint. However, before a petition can be filed the lien claim has to be properly perfected, i.e. a subcontractor’s 90 day notice issued, and recording of the lien within 4 months of the last day worked. A failure to properly perfect the lien will also bar the filing of a petition to substitute the bond claim.

A petition may be filed pre-suit. Under that scenario the petition should be filed with the clerk of the county where the property subject to a lien claim is located.

Section 38.1 spells out specifically what the petition must include. Chief among the requirements of the petition is that the surety bond has a financial strength rating of an ‘A’ or greater, that it be in the amount of 175% of the lien claim, and that the principal and surety be jointly and severally liable for the amount due the lien claimant.

The person filing the petition shall personally serve or send via certified mail, return receipt requested, to each person whose name or address is stated in the petition and his or her attorney of record in a pending action on the lien claim. The notice to each interested party should also contain language specifically set forth in Section 38.1.

Proceeding on the Petition.

Each party receiving notice of the petition has 30 days after receipt of the notice or 33 days after the notice is mailed to object to the petition. A failure to object will be deemed a waiver. If there are no objections to the petition, then the court upon an ex parte motion of the petitioner shall substitute the eligible surety bond for the property securing the lien claim, and the lien claimant’s right to recover under section 9, 27, or 28 of the Act. If there is an objection to the petition, a hearing will be set to determine whether the proposed surety bond is an eligible surety bond.

If no action has been commenced at the time the bond has been substituted in, the principal and surety of the bond will become parties to the action in equity. If an action has already been commenced at the time the bond has been substituted in, the principal and surety of the bond will become parties to the action without the need to intervene and all other parties to the action may be dismissed.

Prevailing Party

A unique characteristic of Section 38.1 is that it permits the prevailing party of the claim to recover its attorney fees. However, the attorney fees for the lien claimant will be limited to the amount remaining under the surety bond after satisfaction of the judgment, and the principal will not be able to recover its attorney fees in excess of 50% of the lien claim. The prevailing party means a lean claimant awarded at least 75% of its lien claim or a principal awarded a judgment equal to less than 25% of the amount of lien claimant’s claim. For purposes of determining the prevailing party, the amount of the lien claim shall be reduced by any payments received by the lien claimant before the entry of judgment.

The amendment should help streamline the process of proceeding on a mechanics lien; making the procedure simpler and involving fewer parties. And with the addition of the attorney fee provision, may assist in mechanics lien matters being resolved pre-suit or pre-petition.

Doing Business on the Internet

More and more businesses are opting for an online presence in hopes of reaping the commercial benefits of increased national and global exposure. The benefits of an online presence are numerous, including increased brand awareness, a more expansive market to sell goods and improve customer interaction and response.
However, many businesses may not understand or be prepared to face the potential legal risks of an e-commerce venture. For example, an online business could unknowingly subject itself to lawsuits in foreign jurisdictions, violate intellectual property laws or encroach on the privacy of its customer base.
The following legal problems that arise from an online presence can stem from any number of issues, including:

  • Copyrights and Trademarks
  • Advertising
  • Privacy and Protection of Consumer Data
  • Online Contracts – Delivery of Products
  • Internet Sales Taxes
  • Online Speech
  • Commercial E-mail Regulations

A misstep in anyone of these areas could subject your business to a State or Federal investigation, litigation and potential liability. In the next several of our firm’s newsletters, I will review the legal hurdles commonly faced by online businesses and the best practices for successfully surviving these challenges. In the meantime, should any of these issues arise, please do not hesitate to contact our firm.

…And You Think Your Case Is Taking a Long Time?

Riccardo A. DiMonteLitigants bemoan the time and expense consumed by lawsuits. Whether you are the proponent or the respondent, our clients find that the quest for justice is not easy nor convenient. The discovery, the depositions, the court appearances, the motions, the hearings, trials and appeals – it’s all extremely time-consuming and expensive. Even a case that is resolved “quickly” – say less than a year – is something most people would rather not endure. Like a surgical procedure, a lawsuit is a legal procedure that most people would prefer to avoid, especially after having experienced one themselves. However, lawsuits, like surgery, are inevitable and neither surgery nor litigation is a pleasant experience for the parties involved. Given the annoyance of devoting your time and your treasure to the legal system in order to resolve a dispute, YOU WANT IT OVER NOW!

Clients often ask us, “How long will this take? How long could this take? What is the longest and oldest case you have handled?” Well, this one could take the cake!

During 1996, our client decided to build an ice arena facility in Lincolnwood. In order to design the building, the owner hired an architect who agreed to design the building and function as construction manager. The owner and architect agreed on a warehouse type masonry and steel building containing ice rinks, concession stands, locker rooms, and other amenities. The architect estimated the construction cost to be $1,800,000, exclusive of ice-making equipment. In July of 1996, the parties started construction with an anticipated completion date of December, 1996.

In his role as architect and construction manager, the architect was the owner’s agent for the purpose of construction. However, the owner later learned that the architect abused his authority by approving cost increases for the project without obtaining the consent of the owner. Without the owner’s knowledge or consent, the architect had approved extras with 40 subcontractors and material suppliers totaling approximately $1,000,000! The unauthorized cost increases came to the owner’s attention in December 1996 and the owner was forced to borrow extra money to settle with all of the subcontractors. This cost the owner an additional $900,000.

During 1997, various subcontractors and material suppliers filed mechanics lien foreclosure lawsuits and the owner settled and resolved all of them between 1997 and 2001. However, the dispute between the owner and the architect remained undetermined and we had a trial that took approximately 2.5 months between June 11th and August 31, 2001. 14 witnesses testified and the judge ruled in favor of the owner finding the architect liable for approximately $1,000,000 in unauthorized extras and attorney’s fees as a result of the architect’s failure to obtain the owner’s consent to order extras not authorized by the owner. The court’s decision was filed in May, 2002, six years after the construction project was finished. Six years is a long time. But the story goes on…

By 2002, the architect was broke and unable to pay a $1,000,000 judgment. However, he did have an architectural malpractice insurance policy that covered the architect and the owner for this type of loss. We should have received immediate payment in full. End of story? Nope – the story goes on…

In 2003, we pursued the insurance company to pay the architect’s covered claim. However, the New York insurance company was insolvent. After the judgment was entered against the architect and we demanded payment under the policy, the New York insurance company was placed into receivership by the New York Department of Insurance. After much investigation, we learned the New York insurance company was a subsidiary of a parent insurance company located in California. Although the New York insurance company was technically insolvent, its parent company in California was not. During 2003 and 2004, the claims we asserted against the New York and California insurance companies caused the California parent insurance company to be placed into receivership in California as well. We pursued the California Department of Insurance to get our client paid. After eight more years of delay, our client finally received its first distribution from the California Department of Insurance in March of 2012, ten years after the judgment was entered. In July of 2015, the owner received its final distribution, 18 years after the case was originally filed!

Lawyers and judges say, “The wheels of justice grind slowly, but always forward.” This case was a prime example. It took six years to resolve the original lawsuit and 12 more years of additional litigation against insurance companies to finally get paid. Thankfully, the client had the patience and the perseverance to hang on for 18 years. During this 18 year period, some of our children were born and others graduated from high school and college. So, next time you ask your lawyer how long your case might take, rest assured it will probably not take 18 years. But it will always take longer than you hoped!

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Reorganizing the Balance Sheet: How Millennial Professionals Can Take Advantage of Government Tax Breaks

Many millennials carry heavy student debt burdens, but there are tax-advantaged strategies that some may employ to better take advantage of the Internal Revenue Code. The term “millennial” has become almost a bad word among generation-xers and their baby boomer parents, used to describe the generation born between 1980 and the mid-2000s. Sometimes characterized as entitled, self-centered and needy, the millennial generation now makes up over one-third of the population of the United States; the largest generation. The generation provides the U.S. labor market with 53.5 million workers, also the largest in the nation. Yet, nearly half of all millennials entering the work force, and nearly 70% of those with college degrees, are burdened with heavy debt loads – the average student debt burden is ~$29,000 per person.

Millennials are the most educated generation in United States history, with at least 61% having attended college, compared to only 46% of their parents. Many in the maligned generation entered the labor force in the midst of one of the worst recessions in United States history and unemployment among the generation remains high. The result is a highly educated, yet underemployed generation grappling with financing their education. To illustrate, according to the USA Today total student loan debt in the U.S. now exceeds $1.2 trillion. Of course, the debt burden has manifested itself in the housing market as home ownership among the generation has fallen to 36.2%, the lowest level among their cohorts since the United States Census Bureau began the survey in 1982. Though, for those professionals that have moved out of mom and dad’s basement and into their own home, there are some important strategies that can be utilized to save on student loan spending.

Student loan interest, especially among graduate students, is expensive. Since 2006, and despite historically low federal funds rates, graduate loans have averaged between 6.8%-8.5%. Importantly, these rates are fixed and cannot be refinanced through the world’s largest student lender, the United States government. A married couple, each with a graduate degree, is likely to start out with $105,000 of student loan debt (2014 average). That couple is likely paying at least $7,140 in interest per year, without any payment towards principle. Unfortunately for that couple, they are limited to a total tax deduction of only $2,500. Had they not gotten married, they would each have been able to deduct $2,500, for a total of $5,000; but because they got married – only $2,500. It gets worse. As soon as that married couple exceeds $130,000 in joint income, the deduction begins being phased out, with a total phase out at $160,000 of income.

Importantly, the tax code provides big benefits for home ownership. A couple can deduct home mortgage interest on a home worth up to $1 million, and can deduct interest on home equity lines of credit up to $100,000. Home mortgage debt is much cheaper than student loan debt; currently around 4.0% or lower for a 30-year fixed mortgage. Therefore, a $100,000 home equity line of credit costs $4,000 per year, nearly $3,000 less than the student loan. Additionally, for households earning less than $309,900 per year (or $258,250 for single individuals) all of that interest is deductible. Take for example, a married couple consisting of a dentist and an accountant carrying $240,000 of student loan debt (average dental student loan debt in 2013 was $241,000), and a joint adjusted gross income of $300,000. That family would be squarely in the 33% tax bracket, meaning that the interest on a $100,000 home equity line of credit would provide them with a $4,000 tax deduction, or a reduction of their total tax liability of $1,320 per year ($4,000*33% tax bracket). Therefore, if that family is able, they should strongly consider “refinancing” existing loan debt through equity in their home. The savings would total over $4,000 per year ($2,800 in interest plus a reduced tax liability of $1,320).

Of course, this plan is not without pitfalls; the most glaring being that the couple has $100,000 of equity in their home. However, young owners may be surprised to learn how much equity that they have built in the last 5+ years, especially in urban areas. Additionally, married couples need to closely analyze their student debt situation. For those couples where only one borrowed and accumulated the student debt before marriage, careful consideration and planning must take place. Should that couple own the home jointly, the non-borrowing spouse would effectively be accepting personal responsibility for the debt. However, there may be estate planning techniques to avoid this pitfall. Additionally, for those on income based repayment or “pay as you earn” plans, the lower monthly payment and potential loan forgiveness would be forfeited. Note, however, that in the long run, these repayment options can be extremely expensive as any amount forgiven by the government is taxable as income ($100,000 of loan forgiveness would likely trigger a tax due of $28,000-$33,000). This plan is best for those with stable careers and measured income growth. It is also likely inappropriate for those over the age of 60 (the fastest growing student-borrower population as a result of co-signer requirements).

There are some slight tangential advantages to stripping equity from the home to pay off student loan debt. Student loan debt is not dischargeable in bankruptcy, but home equity lines are. Certainly, one should not take advantage of this strategy with the plan to declare bankruptcy, as it is likely fraudulent and would not benefit the borrower. However, if unforeseen circumstances arise in the future, such as the incapacity or disability of a high-earning spouse, the debt may now be discharged where before it could not. Again, this cannot be the sole purpose for “refinancing” with home equity debt, but the added creditor protection is beneficial.

Ultimately, this is a niche plan best suited for young professionals with stable careers. There are other options out there for refinancing graduate student loans. Some private lenders have begun to identify high-quality credits, such as physicians, and are attracting borrowers looking to refinance at rates up to half of what the federal government is charging. The end result will be net negative for the taxpayer and average student borrower as the government’s portfolio will continue to be stripped of the higher quality credits, requiring the administration to charge higher rates to offset defaults. However, refinancing through such a lender would not provide for the same tax benefit as using home equity as only a fraction of the interest would be deductible, and would subject the borrower to income phase out restrictions. Further, the total debt load would be unchanged (mortgage plus student loan debt vs. mortgage plus home equity line), and a large portion would remain undischargeable in bankruptcy.

Before engaging in any strategy, the borrower and their family should assess their current and future financial situation, their lending status, and their risk tolerance. This plan provides real benefits for the right borrowers, and vastly increases the return on educational investment. Any individual considering such a strategy should consult their financial advisor and tax professional.

Jeffery Ramirez Joins DiMonte & Lizak

Di Monte & Lizak is proud to announce the hiring of Jeffery Ramirez. Jeff joined Di Monte & Lizak’s transactional department in June of 2015. Jeff devotes his practice to real estate and business transactions, estate planning and taxation. Jeff earned his B.S with honors from DePaul University in Accounting with a minor in Economics in 2011. Jeff earned his juris doctorate degree from DePaul University College of Law in 2014. He lives in Des Plaines with his wife and daughter.

How to Deal With a Preference

In a bankruptcy proceeding, preference law is the means by which the debtor or a trustee, can recover a payment or other transfer which was made by the debtor within 90 days of the debtor’s bankruptcy filing or alternatively within one year in the case of a transfer to an insider. An insider is generally a person or entity that bears a close relationship to the debtor.

The preference law is designed to treat all creditors equally. The main purpose of the law is to clawback transfers and eventually make them available for redistribution among the creditors of the estate. This purpose, however, does not always work perfectly and certainly does not provide much solace to a creditor who is being sued for such a recovery. After all, the creditor was simply paid a debt owed to it for services or products it actually provided. The creditor may also still have an unpaid balance with the debtor. Therefore being sued for a preference, from the creditor’s viewpoint, is simply rubbing salt in the wounds.

If you operate a business you may run into a preference payment situation. DiMonte & Lizak is well versed in this area of law and may assist in softening the blow or minimizing the risk when you suspect that someone you are dealing with may be heading towards bankruptcy. This article is only intended to give you a primer on how to deal with such situations.

The basic elements of a preference are as follows:

  1. A transfer of an interest of the debtor in property;
  2. To or for the benefit of a creditor;
  3. For or on account of an antecedent debt owed by the debtor before such transfer was made;
  4. Made while the debtor was insolvent;
  5. Made on or within 90 days of the date the bankruptcy was filed (or within 1 year if the creditor was an insider); and
  6. That enables the creditor receive more than it would have received in a Chapter 7 liquidation.

There are various defenses to a preference. The most common are as follows:

  1. The parties intended the transaction to be a contemporaneous exchange for new value and it actually was one;
  2. The ordinary course of business, generally either based upon the parties history of dealings or of the norms of the industry;
  3. Perfection of a lien for which a relevant statute provides for relation back if compliance is within a statutorily specified time period;
  4. Subsequent new value. The delivery of goods or services after the alleged preference; and 5) Solvency. Insolvency, however, is presumed within 90 days of the filing.

There are also various business practices, when dealing with a person or entity that is likely to wind up in a bankruptcy, that may insulate you or provide some protection. One simple method is to receive prepayment or simultaneous payment (Cash on Delivery). Prepayment results in the transfer not being made on the account of an antecedent debt. You must take care to document/evidence that the parties agree to, intend to, and have actually consummated the desired business practice. Generally, under the preference law, unless otherwise specified by the parties (best practice in writing), payments are applied to the oldest invoices. Therefore if you did not document a prepayment or contemporaneous payment, as being the intent between both you and the debtor, the payment will most likely be allocated to the earliest invoice, which very well might result in preference exposure.

The adherence to a prior consistent course of conduct between the parties may also provide some protection. For instance, if there is a history under which the debtor always paid your business within 30 days of invoice, and assuming invoices are promptly issued and not backdated, the adherence to that practice will strengthen an ordinary course defense. A separate defense would be adherence to the ordinary terms of payment of the industry that is involved. Regardless of the forgoing it almost always is best to accept payment without concern of a clawback. The person or entity may never file for bankruptcy or the filing, as relevant to you, could be outside the clawback period. Preferences can also be settled. We can assist you if such litigation is threatened or filed.

In the event you suspect someone who you are dealing with is unfortunately heading towards a potential bankruptcy, it is prudent to contact a lawyer specializing in bankruptcy law. At DiMonte & Lizak we have several attorneys with that specialization.

UCC Financing Statements Are Not Impenetrable Shields

By Derek D Samz

Collecting on judgments or other accounts receivable can often be a daunting and murky endeavor, especially without the assistance of an attorney. Oftentimes debtors will go to great lengths to avoid payment of your debt. A common tactic that debtors will employ is to assert that they owe money to a lender whose loan is secured by a UCC Financing Statement. UCC Financing Statements are security instruments typically used to secure loans where the collateral for the loan are not real property, but consist of vehicles, tools, cash, accounts receivable and other forms of personal property. However, this form of security instrument is not as ironclad as the debtor, and its secured lender, would hope you believe.

I represented a subcontractor that had obtained a judgment against the general contractor (“Debtor”) for breach of contract. After issuing a citation to discover assets to the Debtor, I discovered that the Debtor was due to receive a payment of $80,000 on a different project. However, upon the filing of the request that these funds be turned over to my client, the Debtor’s primary lender stepped in and asserted that it possessed a higher priority security interest in the Debtor’s collateral, and that my client would not use the Debtor’s assets to satisfy its judgment. However, the Debtor was still operating its business as a going concern. Indeed, documents produced by the Debtor pursuant to the citation to discover assets revealed that its lender had made similar statements to other creditors, but at the same time had allowed the Debtor to continue operating instead of liquidating the Debtor’s assets to satisfy the loan. In fact, documents produced revealed that the lender had made additional loan advances to the Debtor after the date the Lender had supposedly declared the Debtor to be in default under the loan.

After submitting briefs to the Court detailing these facts, the Judge held that the Lender could not assert a higher priority under the UCC Financing Statement until it had declared the Debtor to be in default. The Judge determined that based upon the facts before him, most notably that the Lender had allowed the Debtor to continue operating and access to additional funding, that the Lender had not declared a default, or was actively assisting the Debtor in shielding its assets from creditors. The Judge went on to rule in my client’s favor, and ordered that the $80,000 receivable be turned over to my client to satisfy its judgment.

The moral of the story is that the simple existence of a UCC Financing Statement, or other security instrument, is not the end of the inquiry in collection proceedings. A diligent and savvy creditor may be able to obtain superior rights over a lender that has not declared a default and taken action to enforce its secured lien. If you have any questions regarding your collection issues, please give DiMonte & Lizak, LLC a call.

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Prevailing Wage Act It’s That Time of Year Again! Fringe and Overtime

As another bleak, cold and snowy Chicago winter melts into an all too brief Spring, it is time to get outside and start those “Public Works Projects” again. Therefore, a brief refresher regarding the applications of the Illinois Prevailing Wage Act (“Act”) seems particularly appropriate. This article will focus on paying of wages, fringe and overtime.

Before discussing the wages, fringe benefits and overtime required by the Act, it is important to understand which projects are covered under the Act. The Act applies only to “Public Works Projects” that improve, build, demolish or alter property or equipment owned or operated by the government. In other words, any contract for public works that involves work for the State of Illinois or any governmental subdivision such as the Illinois Depart of Transportation, municipalities or school districts is covered under the Act. The Act does not cover employers who are engaged in private sector work or even that work performed for the federal government.

Wages and Fringe

After determining whether your current project is a Public Works job, the next step is to determine what wages the Act requires. The current Prevailing Wage Act rates can be found at http://www.illinois.gov/idol/Laws-Rules/CONMED/Rates). It is important to note that each county has a separate wage scale. The Act requires employers to pay all covered employees the statutorily required wages and the associated fringe benefits regardless whether the employees are members of a particular union. Perhaps the most common mistake non-union contractors make is that they pay the base rate but do not add the fringe to the hourly rate normally paid by union contractors to union trust funds as required by the respective CBAs. The Act requires that both union and non-union contractors make contributions to Health and Welfare, Insurance, Pension, Vacation and Training that are either paid to employees through employer-offered benefits, or paid directly to the employees as hourly wages. For example, if Employee A is a Laborer working in Cook County and not covered under a CBA and does not receive benefits from his or her employer, Employee A is to be paid $62.40 per hour for all straight time hours worked covered under the Act ($38.00 for straight time wages plus $24.40 for fringe).

Overtime

Another common mistake employers make relates to the payment of overtime. The Act requires the payment of overtime, time-and-a-half or double time under three distinct circumstances:

  1. When an employee works more than 8 hours on a given day. The mistake many employers make is that they believe overtime is based on the number of hours an employee works during a week. That is incorrect. Overtime is applied on a daily basis. http://www.illinois.gov/For example, if Employee A works 9 hours on Monday, 8 hours on Tuesday, does not work Wednesday or Thursday and works 10 hours on Friday, Employee A is owed 3 hours of overtime. One for Monday and two for Friday even though s/he did not work on Wednesday or Thursday.
    ***Please note that while the majority of the labor classifications defined by the Act require time and a half for daily overtime, a significant number require double time for daily overtime. Please consult the prevailing wage scale for your county to determine the proper overtime scale.
  2. When the employee works on a Saturday. If an employee works on a Saturday, even if s/he has not worked a full 40 hour week, overtime must be paid, either time-and-a-half or double time (depending on the labor classification). Taking the example from Paragraph A, if Employee A also worked 8 hours on Saturday, Employee A’s employer is required to pay for 8 hours of overtime (time-and-a-half) even though Employee A worked only 27 hours Monday through Friday.
  3. When an employee works on a Sunday or Holiday (or the Monday following a Sunday holiday). All labor classifications, except for painters and painters of signs, require double time for Holiday or Sunday work. Once again, how many hours an employee worked in the days leading up to the Holiday or Sunday has no impact on whether overtime is paid. Using our example from Paragraph A, Employee A works the same hours as detailed above plus 8 hours on Saturday and 5 hours on Sunday, that employee is to be paid 11 hours of time-and-a-half (3 hours of daily overtime and 8 Saturday hours) plus 5 hours of double time for Sunday.
    Note: If Employee A works on the Monday following a recognized Holiday that falls on a Sunday, such as Christmas, Employee A would be entitled to double time for the hours worked.

Penalties

It is extremely important that employers do their absolute best to ensure compliance with the Act because the penalties for a violation are severe. First, employers who violate the Act are required to pay back wages to affected employees for the difference between the wages paid and the wages earned under the Act plus the applicable fringe benefits. Second, the Act allows for a 20% penalty to be paid by the employer to the Illinois Department of Labor of all wages, including fringe and overtime, owed to employees, plus an additional 2% payment of that 20% penalty is paid to the employees in addition to the back wages owed. Third, and perhaps of greater importance, contractors who incur two violations within a five-year period can be barred from performing any Public Works Projects in Illinois for a period of four years. For employers who rely on work in the public sector, this ban could sound a death knell for their businesses.

If you receive a notice of investigation from the Illinois Department of Labor, feel free to contact Paul A. Greco or Peter M. Follenweider of Di Monte & Lizak (847-698-9600).

A second, and much less obvious, potential violation occurs during the hauling of material and debris, including rocks, concrete and blacktop, either to or from a jobsite. It is important to note that not all drivers who deliver materials to a job site are covered under the Act. The Act carves out an exemption for material sellers and suppliers. If a contractor or subcontractor has its own employees deliver materials to a jobsite and engage in actual construction, those employees are covered under the Act. An additional and often overlooked aspect of the Act is the hauling of material and debris, including rocks and blacktop, to and from jobsites. If contractors or subcontractors contract to have debris brought to or taken away from jobsites, the Act applies. If sellers of materials direct their own employees or hire a third party to bring materials to the jobsite, the Act will not apply. If contractors or subcontractors hire third parties to remove debris from jobsites, the Act applies and the drivers must be paid according to mandates of the Act. It is important to remember that the courts narrowly construe the extremely limited delivery and hauling exemptions to the Act. In most cases, it is more likely than not the Act will apply to material delivery to the jobsite and debris hauling from the jobsite.

The important factor in determining if the Act applies to hauling debris from a jobsite is not whether the debris will be recycled or who now owns the debris. The important factor is who is doing the hauling and with whom the hauler contracted to haul the debris. If you have any questions as to whether the Act applies, please contact Paul Greco or Peter Follenweider at Di Monte and Lizak, LLC before creating a potential Act violation. This is truly a case in which an ounce of prevention is not worth the pound of cure which will most definitely be dispensed by the Illinois Department of Labor.

Turned Down For What? Settlement Offer Rejected By Plaintiff Leads to Poor Trial Result

As a case gets closer to a scheduled trial date, the parties frequently engage in eleventh hour settlement discussions. The uncertainty of a trial result often influences all parties to settle a pending dispute with a certain result via settlement. The party who had more success during the discovery phase of the litigation may have more leverage in the settlement negotiations. However, more often than not, the terms of a settlement agreement leave both sides with a feeling of discontent. The plaintiff often feels as though he or she should have received more and the defendant often feels as though he or she should have paid less. The settlement negotiation process requires the parties to exercise reason over emotion. When a plaintiff turns down a substantial cash offer during settlement negotiations, he or she has to be prepared for a result at trial that could be worse. I recently experienced such an occasion while defending a general construction client.

This case involved the build out of a commercial space. The owner had a cost-plus agreement with the general contractor, which required our client to pass through his actual costs for materials and labor to receive an agreed upon percentage mark-up for overhead and profit. At the conclusion of the project, the owner accused our client of intentionally inflating the invoices from his laborers and material suppliers to receive a much larger profit than our client was entitled to. Our client disputed these allegations, but had discarded much of the documentation regarding the project. Accordingly, the owner filed a lawsuit against the general contractor in his individual and corporate capacities alleging claims for both breach of contract and fraud.

After five painstaking years of discovery and pretrial motion practice, the case was finally set for trial. After the trial date was set, the parties focused on settlement negotiations. At first, it appeared as though the parties were too far apart. Initially, the plaintiff demanded in excess of $1,000,000, which was quickly reduced to a mid-six figure demand. The defendant’s offer slowly crept up from $0 to $50,000 to $100,000. At the final pretrial conference, the judge persuaded both parties to move even further. The plaintiff’s final settlement demand was $160,000. At that point, the defendant would not agree to come up with more than $120,000 paid over several years. The general construction company had stopped doing business and our client was going to have to make these payments personally. Therefore, the defendant was hesitant to commit to more than he thought he could pay.

In the week before trial, the parties agreed that the financial amount for the settlement would be $160,000 with monthly payment over several years. However, the plaintiff then demanded that the defendant must stipulate to specific facts concerning fraudulent conduct. The defendant absolutely refused to stipulate to fraudulent conduct, because he had not inflated the invoices he passed through to the owner. Rather, he was agreeing to settle the dispute to avoid the uncertain result of the trial and the expense of attorney’s fees associated with the trial. On the first day of trial, the judge cautioned the plaintiff of two things: 1.) Be careful when pointing fingers, because three fingers may be pointed back at you; and 2.) Reconsider the proposed settlement offer, because not all breaches of contract amount to fraud. However, based on the defendant’s refusal to stipulate to fraudulent conduct, the plaintiff rejected the settlement offer and the case proceeded to trial with the plaintiff claiming that it was entitled to approximately $1,300,000 in damages.

At the beginning of trial, the plaintiff was very confident. The plaintiff believed that most of the evidence produced in discovery supported his position. However, the evidence did not come in at trial in plaintiff’s favor. Rather, the plaintiff was impeached multiple times during cross-examination and one of his witnesses was nearly found in contempt for refusing to directly answer questions that were asked on cross-examination.

After calling six fact witnesses and an expert witness over nearly two full weeks of trial, the plaintiff rested its case. At the conclusion of the plaintiff’s case, the defendant moved for a directed finding. When moving for a directed finding in a bench (non-jury) trial, the defendant asks the court to weigh the evidence and rule in defendant’s favor on the plaintiff’s claims without requiring the defendants to put on a defense at trial. After a lengthy oral argument, the judge ruled in favor of the defendants on the fraud and breach of contract claims against the general contractor in his individual capacity and on the fraud claim against the general contractor in its corporate capacity. This ruling left the plaintiff in a very poor position. The only claim that survived the motion for a directed finding was the breach of contract claim against the corporate defendant, and the corporate defendant had no assets because it had stopped doing business several years prior.

Since all of the fraud claims were denied and there was no longer the potential for personal liability, the defendants did not put on a defense case. After closing arguments, the judge entered a small judgment against the corporate defendant, which was less than 10% of the damages initially sought by the plaintiff. Regardless, the judgment resulted in little comfort to the plaintiff, because the corporate defendant had no assets to satisfy the judgment. Accordingly, instead of accepting the $160,000 settlement offer, the plaintiff incurred the substantial expense of having two attorneys prepare for and conduct trial for nearly two weeks and the additional expense of its expert witness preparing and testifying at trial.

While our client received a very successful result at trial, this story should serve as a cautionary tale to those who are currently involved in litigation and those who may experience litigation in the future. Always give careful consideration to settlement offers in the days before trial and even settlement offers that may arise during or after trial. There is an inherent value to a certain result, plus you save the cost of trial. Always be aware that the result at trial could be less than the amount offered in settlement; it could even result in no recovery at all. Even the strongest cases have potential flaws, and it is impossible to predict with 100% accuracy how a judge or jury will interpret the evidence presented at trial. It has been said that there are only two certainties in life: death and taxes. Well there is only one certainty in trial: additional litigation expense. Accordingly, the prudent litigant should always assign value to the certainty of settlement, because the uncertainty of trial may prove to be the greatest expense of all.

Business Owners Beware: Advertising Via Prerecorded Phone Messages, Mass Unsolicited Faxes or Mass Text Messages May Cost More Than Its Worth

A common problem for business owners experiencing a loss of customers based on the current economy is how to market your services and products to potential new customers. Advertising on billboards, television and radio is expensive and may not reach your intended market. Therefore, you may consider hiring a company that sends out phone calls with prerecorded messages, mass faxes and/or mass text messages. These companies have the ability to send out thousands of advertisements to thousands of customers in a matter of minutes using automatic dialing system equipment. Even more enticing is the fact that these companies perform this service for a relatively low fee in comparison to the other available forms of advertising. While this method may appear to be attractive because it is extremely economical on the front end, the fact that it is now prohibited by federal law makes it incredibly expensive on the back end.

The Telephone Consumer Protection Act

In response to consumer complaints regarding the receipt of unsolicited phone calls, which requires the use of the consumer’s cell phone minutes, and unsolicited faxes, which uses the consumer’s paper, toner and ink, the federal government enacted the Telephone Consumer Protection Act, 47 U.S.C. §227 (“TCPA”). The TCPA prohibits: 1.) using automatic dialing machines to make calls to emergency telephone lines, health service providers’ lines and cellular phones; 2.) calling residential telephone lines using a prerecorded voice to deliver a message without the prior consent of the recipient; and 3.) using fax machines or computers to send unsolicited advertisements to fax machines. Furthermore, courts interpreting the TCPA have found that sending unsolicited text messages is also prohibited by this statute.

Civil Liability for Violations of the TCPA

Not only does the TCPA prohibit the use of prerecorded messages, unsolicited faxes and unsolicited text messages for commercial advertisement purposes, but it also creates a civil cause of action for individuals harmed by the receipt of these advertisements. One would think the damages for receiving an unsolicited fax would be relatively low. A few minutes on the phone or the cost of a piece of paper, a small amount of ink and toner cannot amount to much, right? Wrong. The TCPA creates a statutory fine in the amount of $500 per violation. Further, the court can triple the amount to $1500 per violation in the event there is a finding that the party violated the TCPA willfully or knowingly. Therefore, if a company sends out 1,000 faxes, then it could be liable for $500,000 (1,000 faxes x $500 per violation) in liability, or up to $1,500,000 in liability if the court finds that the violation was committed willfully or knowingly.

Perhaps the most damaging aspect of this statute is that courts have been imposing personal liability on the agent of the corporation who directed the advertisements to be sent out, rather than simply imposing liability on the corporation. Imagine this scenario- a business owner goes to a store that performs these mass faxing services. His business is decreasing, it does not have fixed assets and he needs to do something to generate more customers. He sends out 1,000 faxes and hopes the business will come pouring in. A few months later he receives a summons and complaint, which states that he is being sued for violating the TCPA. To his surprise, the plaintiff is not only seeking to recover from his company, but also from him personally. Therefore, business owners need to be careful to comply with this statute because not only are your business assets at stake, but so are your personal assets.

These types of cases have become a hot commodity for plaintiff’s class action attorneys. Once they find a potential plaintiff who has received a single fax, they will file suit and use discovery procedures to attempt to find out how many faxes have been sent and to whom they were sent. They will use this information to create a class of plaintiffs who all have the same TCPA violation claim against the party who sent the prerecorded messages, unsolicited faxes or text messages. In the scenario discussed above, the business owner who sent out 1,000 faxes could now be facing between $500,000 and $1,500,000 of personal liability. The potential for liability and litigation are simply not worth the use of advertising via prerecorded messages, mass faxes or mass text messages.

We have successfully defended multiple companies and individuals who have been sued for alleged TCPA violations. If you are faced with litigation regarding violation of the TCPA or are considering advertising for your company using prerecorded messages, faxes or text messages, please contact us to discuss your legal rights before proceeding.

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A Recent Decision in Mechanic’s Lien Law Affecting Public Works

The Illinois Supreme Court in an opinion filed October 17, 2014, in the case of Lake Country Grading Company, LLC v. The Village of Antioch clarified the law requiring completion and payment bonds for public works projects. A grading company sued the Village alleging that the Village failed to obtain a payment bond as required by the Construction Bond Act; 30 ILCS 550/1 (The Bond Act). Both the trial and appellate courts ruled in favor of the grading company.

The Bond Act requires public bodies, when contracting for public works costing more than $50,000, to obtain from the contractor a payment bond guaranteeing that all contractors who perform construction services, including labor and materials, be paid for their services and materials.

The Bond Act also requires a public body to obtain a performance bond (a completion bond) guaranteeing that all work contracted for by the contractor be completed by the bond company if the contractor fails to do so. In the case mentioned herein the bond contained language guaranteeing completion of the project. However, it did not include language guaranteeing payment.

The Bond Act also requires a claimant to serve a notice of claim against the bond upon the public body, within 180 days after claimant’s last day worked on the project.

In the subject case the Plaintiff did not serve the 180 day notice on the Village instead, it filed suit against the Village for failure to obtain a payment bond.

The Supreme Court ruled that although no payment guarantee language was included in the bond in question, the bond is presumed to include a payment guarantee. This is because of the language in Section 1 of the Bond Act that each bond is deemed to contain provisions ensuring payment to all persons who perform labor or provide materials and guaranteeing completion “whether such provisions are inserted in such bond or not.”

The Supreme Court ruled that the above language from the Bond Act unambiguously provided that both payment and completion provisions are deemed to be included in the bond as a matter of law. Therefore only the one bond was necessary as it was deemed to include both provisions. Separate bond or expense language for each provision were not necessary. Thus the Village acted in compliance with the Bond Act.

The Supreme Court overruled both the trial and appellate court and held in favor of the Village, determining that it had in fact obtained a bond which included both payment and completion provisions in accordance with the Bond Act.

New Year Resolution: Review Your Employment Agreements and Behave Accordingly

The courts continue to look past the language of confidentiality and non-solicitation and non-competition agreements and to focus on whether the employer has a “thing” worthy of protection and whether the employer has given the employee adequate, independent consideration to support the restrictive covenant.

In nClosures, Inc. v. Block and Company, Inc., October 2014, the 7th Circuit Court of Appeals (covering Illinois, Indiana, and Wisconsin) reminded businesses that their confidentiality agreements will not be enforceable unless the business takes reasonable steps to protect the alleged confidential information.  nClosures was an industrial design firm.  It hired an independent contractor to design metal enclosures for items like the iPad.  Block and Company manufactured the enclosures for nClosures.  Before the parties began doing business with each other, they signed a confidentiality agreement in anticipation of the potential business relationship.  The agreement stated that nClosures’ confidential information would be used solely for the purpose of engaging in discussions and evaluating a potential business relationship regarding Block’s manufacture of the enclosures.  Block subsequently started manufacturing the enclosures.  Shortly after nClosures’ product entered the market for sale, Block developed a competing design for its own tablet enclosure.  nClosures sued Block for breach of the confidentiality agreement.

The court granted Block’s motion for summary judgment, finding that nClosures did not take reasonable steps to keep its proprietary information confidential.  The court acknowledged the elements a party must show to bring a successful breach of contract claim, but stated that when assessing the enforceability of a confidentiality agreement, the agreement will be enforced only when the Ainformation sought to be protected is actually confidential and reasonable efforts were made [by the owner] to keep it confidential.@  The court noted the following concerning nClosures’ conduct:

  1. nClosures did not enter into a confidentiality agreement with the independent contractor who designed the enclosure.
  2. nClosures did not require Block’s engineers or other employees to sign confidentiality agreements before accessing the design information.
  3. The design drawings were not marked “confidential” or “contain proprietary information.”
  4. The design drawings were not kept under lock and key.
  5. The design drawings were not stored on a computer with limited access.

Takeaway: Companies should review all confidentiality agreements for content, should identify gaps in coverage, and should conduct themselves in accordance with the non-disclosure clause.

Client Prevails Against Insurer on Denial of Insurance Coverage

Recently, one of our clients who owns a number of apartment buildings was sued by a tenant for personal injury. Our client had purchased insurance for the building, and had paid the premium, so he tendered the claim to his insurance company. He was confident the insurance company would take care of the claim. After all, that is why he had purchased insurance. He was in for a shock.

It turned out, there was a mix up when he purchased the insurance, and the insurance company failed to name our client as the insured on the policy. Our client was not covered for this injury, and he was worried about what to do next. Faced with the possibility of having a judgment against him, he came to see us.

We were hired to persuade the insurance company to do the right thing – to cover our client for this injury which should have been covered but for the clerical mix up. I contacted the insurance company to suggest settling the claim. The tenant did not suffer a major injury. It would be cheaper to settle than to fight with us in court on whether there was coverage. The insurance company ignored my suggestion. So we fought back.

We filed an answer to the personal injury claim of the tenant, a counterclaim lawsuit against the insurance company, and a third party lawsuit against the insurance broker for charging our client the insurance premium, but failing to provide coverage for our client. We initiated discovery and noticed up depositions of the parties. Suddenly, all of the parties realized that this matter should be resolved.

The insurance company settled the claim with the injured tenant. It then amended the insurance policy to name our client as the insured. The insurance company agreed to pay our client’s attorneys fees in full, including paying the retainer our client paid us.

Most denials of insurance claims do not involve facts as clear as in the above case. Insurance companies usually deny claims based upon language provisions in the policy, and the failure of the insured to comply with such policy language. Among the reasons set forth for denial of coverage is the failure to timely renew the policy, failure to pay the premium, a claim that another insurance company is primarily responsible, or a claim that the insurance company is not responsible for intentional conduct or claims for punitive damages. Quite often the basis for the denial of the claim is found under the AExclusions@ listed in the policy.

In some cases the reason for the denial involves a mistake as to the facts. The insured can deliver a copy of a canceled check that proves that the insurer received the check on or before the grace period had expired. Where the facts are clear, the insured need only contact his insurance agent to clear up the mistake.

However, most denials of claims involve interpretation of the terms of the insurance contract, application of the insurance law of the state, issues of public policy, and other related questions.

If you receive a denial of claim, assemble the denial letter, declaration page, and the insurance policy, then come see us. Your insurance coverage attorney will examine the foregoing documents, and be able to give you an opinion as to the merits of the insurance company’s denial. If the matter is not resolved expeditiously, it is highly likely that you will be able to recover the attorneys fees that you expended if the insurance company has wrongfully denied your claim.

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Jonathan Morton Appointed to New Positions

Jonathan D. Morton was appointed to the Illinois State Bar Association Federal Tax Section Council. The Council’s purpose is to inform and advise members of the bar on current developments in federal taxation, to review and comment on pending tax laws, regulations, and court decisions, and to make proposals on additions or changes to existing tax laws and regulations. Jonathan was also appointed to the Young Leaders Board of the Lakeview Food Pantry. The Lakeview Food Pantry is one of the largest and longest-lived food pantries in Chicago, providing on-site food distribution, food delivery to home-bound clients, and helping clients with other services they need to address causes of food insecurity.

D&L Recovers Large Settlement on Eve of Trial

DiMonte & Lizak, LLC’s litigation team of Riccardo DiMonte, David Arena, Margherita Albarello and Ryan Van Osdol recently obtained a favorable settlement for their client and against the Village of Mount Prospect. In the lawsuit, various Village employees and the Village of Mount Prospect were alleged to have violated the civil RICO statute and plaintiff’s civil rights in an effort to force plaintiff to sell his property for less than fair market value. On the eve of trial, we successfully recovered a $6,500,000 settlement for our client and resolved a dispute that had been pending for approximately six years. We will publish a full article regarding this case in the next edition of the firm newsletter, but until then, see:

  1. The Daily Herald article and;
  2. The Chicago Tribune article.

Illinois Enacts Law Impacting Criminal Background Inquiries

The Job Opportunities for Qualified Applicants Act is effective January 1, 2015, and applies to Illinois private employers and employment agencies with 15 or more employees. It restricts the timing of pre-employment inquiries by employers about an applicant’s criminal past. Employers still can conduct background checks or inquire about criminal convictions; the law only affects when they do so.

The law is called a “ban the box” law because it removes the “box” asking about criminal history information from a job application. The public policy behind the law is the belief that employers should judge applicants on their qualifications first, without the stigma of a record, and that putting people back to work is good for the economy and reduces recidivism. The most effective policies don’t just remove the “box” – they ensure that background checks are used fairly, that the employer makes individualized assessments instead of blanket exclusions, and that the employer considers the age of the offence and its relevance to the job.

The employer can inquire about, consider, and require disclosure of the applicant’s criminal record or history after he has been deemed qualified for the position and notified that he has been selected for an interview. If the employer does not conduct interviews, the inquiry cannot take place until after a conditional offer of employment has been made to the applicant

The law exempts certain positions from coverage, including where a federal or state law excludes applicants with certain criminal convictions from working in the position sought; the position requires a standard fidelity bond or equivalent and the conviction would preclude the applicant from obtaining the bond; or the employer employs individuals licensed under the Emergency Medical Services Systems Act. Employers may provide applicants advance notice of specific offenses that would disqualify the applicant under state or federal law.

The Illinois Department of Labor is empowered to investigate violations and impose civil penalties for violations of the law. Multiple violations and failures to remedy violations can lead to heightened or additional penalties.

If the Dress Fits, You Must Acquit

I love trial work. It’s why I became a lawyer. However, 90-95% of cases are settled before trial. It makes sense because trials are expensive and the outcome is uncertain. I typically try to settle my cases before trial. But not every case settles. I recently tried a case that I will remember for a long time.

Our client was an upscale women’s boutique in Chicago. It sells high end clothing and accessories. It purchased several dresses and shirts from an up and coming young designer. The designs were beautiful and expensive. When they arrived at the store in time for spring, there was a problem. The dresses and shirts were sized improperly. Some ran large, some ran small. And they were not selling.

The store complained and tried to return the merchandise. They called, emailed and sent photos to the designer without receiving satisfaction. They had a sales representative come to the store to see the problems. The representative agreed the merchandise was not cut properly, but the designer would not take back the merchandise, and demanded to be paid in full. The store refused to pay for the merchandise. The store struggled to sell it, and slashed the prices. Finally a dozen or so pieces sold from the clearance section for a fraction of what the store was charged for the merchandise. The designer eventually sued the store.

The designer was not interested in settling the dispute, he wanted to be paid in full. We eventually tried the case. The designer came to Chicago from New York. As plaintiff, he testified first, and told the judge what a great designer he was. He told her about his background, his stint on a reality TV design show, and about how popular he is. The designer’s attorneys called the shop owner as a witness to try to have her admit that she did not pay the invoice. She admitted it, but claimed the clothing was not cut properly. The shop owner brought the dresses and shirts with her to show the judge how the fit was incorrect. However, the judge stated she could not tell from merely holding up the dress, she said she needed a model to tell. After the designer presented his case, we took a lunch break.

Over lunch, I decided it was not enough to explain why the clothes did not fit. We had to show the judge. We didn’t have any models at the ready. So we took matters into our own hands. My client, who was a size 4, put on a dress that was a size 6 and was tight in all of the wrong places. The dress retailed for $495.00. I then put on a dress that was a size 6, but fit my size 10 frame. That dress retailed for $595.00. I put my suit jacket on over it. We returned from lunch.

I had my client stand and testify to her true size by showing the label of her skirt to the court. She then showed the judge how tight the dress was on her and explained why it was sized incorrectly. The designer’s counsel became upset and shouted his objections to what we were doing. I reminded the judge of her own words before lunch that she needed a model to show the clothes. The judge smirked a bit and overruled the objection and allowed the demonstration. I then took off my suit jacket, had the client read the label which confirmed it was a size 10, then had the client read the size label in the dress, which was 6. The two dresses were each size 6, each mis-sized.

The designer returned to the stand for rebuttal and stated that his clothes were made in New York under strict quality control. I merely asked him to confirm that this dress fit me properly. He admitted that it did. We won the trial. The judge agreed that the designer, who sued for breach of contract, could not meet his burden by showing he performed his terms of the contract, which was to sell clothing that was made properly.

I will remember this case for a long time. It was fun to be part of the trial evidence as well. And to answer the question you are probably thinking, no, I did not get to keep the dress.

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Data Mining: A Look Into the Future of Privacy Regulation

You are being watched. Every time you access the internet and peruse the halls of the world’s information database you leave a trail. This trail is bits of data, identifying where you have been and what you have looked at. This information is also being collected and used to predict where you will go and what you will look at. This practice is referred to as data mining and its practice has become ubiquitous among companies (and governments) with savvy marketing/internet teams. Used properly, this information provides a great service to the consumer and vendor alike, and has untold potential to improve the way we interact.

Anyone who has followed the Edward Snowden affair is not surprised by the revelation that you are leaving bits of data to be collected and analyzed when you access the internet. Despite the media attention that the practice of data mining has received of late, the law has yet to really sink its teeth into the obvious privacy implications that arise from its practice. The following will briefly discuss the privacy issues the law has addressed regarding data mining, and then suggest what the future of the law may hold.

In Sorrell v. IMS Health Inc., the United States Supreme Court found a Vermont statute that sought to prevent pharmaceutical companies from using information data mined from databases that showed the medications physicians prescribed, violated the first amendment. The Court’s ruling was based in large part on the fact that under the statute the State of Vermont granted itself access to the information so it could promote generic medications, but at the same time barring pharmaceutical companies from promoting their medications. There are two major lessons from the Sorrell decision. First, that efforts to protect data mined information will be subject to first amendment scrutiny, and thus must be consistent with the established precedents on first amendment protections. Second, that the law has a ways to go on addressing the myriad of privacy implications brought on by data mining.

The Sorrell court speculated on the future efforts to protect information obtained by data mining. Information that is data mined may be protected by statutes if those statutes are more even in their bar of the use of that information. Meaning, if the State of Vermont prevented its use of the medications physicians prescribed, in the same manner it prevented pharmaceutical companies, the statute may have been constitutional. The bigger issue for DiMonte & Lizak clients and consumers at large is: what about information you leave behind when you are on the internet looking for something as innocuous as new shoes (as opposed to medical related information). It is likely that the law will develop some protections for consumers, unlikely to prohibit the use of data mining entirely, but rather limiting how that information is used. Companies will likely be permitted to use information about things you like, to offer you other things you may like. This already occurs; when you shop for a Brooks Brother’s suit, you begin to see advertisements on your web pages for other suit makers. The limitations will likely occur within specific industries that have a higher propensity to use the information to commit fraud against its consumers. Another possibility is that certain web pages, and companies, may offer its consumers a way to opt-out of their information being data mined; this could be provided as a way to enhance a company’s relationships with its customer base.

The practice of data mining is here to stay and if used properly it provides a wonderful service to the world. As the practice further develops, and flaws with its use arise, the law will react and serve to instill standards, ideally permitting data mining to continue to provide benefits, while not impinging upon your constitutional rights.

Should My Business Be a Corporation or a Limited Liability Company?

At DiMonte & Lizak, our clients who are starting a business often ask us to advise them as to whether they should operate their business as a traditional corporation or as the newer type of entity, the limited liability company. Our recently deceased partner, Linscott R. Hanson was one of the authors of the Illinois Limited Liability Act, and our firm has always been comfortable recommending either the LLC or corporate entity for our clients.

When we advise our clients, we focus on the differences between corporations and LLCs regarding the following factors: Financial Cost, Management Flexibility, Income Tax Results and Liability Protection.

Financial Cost

The Illinois Secretary of State is charged with administering registration of both corporations and LLCs. Their filing fees occur upon initial filing and annually upon renewal of both types of entity. The fees are lower for corporations: $175.00 for initial incorporation for a corporation vs. $500.00 for organization of an LLC, and $100.00 annual corporate renewal vs. $250.00 for annual LLC renewal.

Also, attorney=s fees at organization are lower for corporations: with multiple partners, corporations typically require fairly standardized buy-sell agreements while LLCs require a more complicated and nuanced operating agreement. However, Illinois laws require more annual corporate documentation for corporations than for LLCs, so attorneys fees for proper annual reporting and meeting documentation are somewhat higher for corporations.

Management Flexibility

A major drawback for corporate ownership is inflexibility, especially in two person entities. With two equal business partners, our clients typically wish to share decision making. With a corporation, only one shareholder can be President, and the President determines business operation decisions. With equal owners, disagreements can lead to deadlock, and the non-president shareholder is unable to have a voice in management. With an LLC, both members can share management rights and duties and we typically draft dispute resolution procedures into the operating agreement or at least require unanimous consent for major decisions. This is why legal costs are higher to draft LLC initial documents: these documents can be more flexible and thus are more extensive and complicated to draft.

Income Tax Results

LLCs have a disadvantage as to social security and medicare tax costs. While the LLC itself is not taxed on its income, its members report their share of the LLC=s income personally, and all income is employment income for social security and medicare tax purposes.

S-Corporations are more flexible – as long as the shareholders pay themselves a reasonable salary, the excess corporate profit above their salaries is taxable to the shareholders as a dividend and not as social security or medicare wages, thereby avoiding employment taxes on that excess income.

In addition, in the right circumstances, a corporation can choose not to be a “S-Corp” and pay its own taxes, but the owners= deductible deferred (pension) compensation can reduce that corporate profit and benefit the owners through tax deferral.

Liability Protection

Our clients operate their businesses as LLCs or corporations primarily to protect their personal assets from the liability that can result from operating a business. Both corporations and LLCs accomplish that all-important goal. Though very difficult if an LLC or corporation is properly maintained and operated, in some instances it may be possible for creditors of a business operated as an LLC or corporation to attempt to “pierce the veil” to attach the personal assets of a shareholder or member to satisfy the business= debt. Recent Illinois case law has made it clear that LLCs are superior to corporations in protecting owners of the business from such liability.

Every client and type of business involves unique considerations, but our firm explains and applies the above factors in advising our clients in choosing their entity.

Unsigned Proposal Found Binding – The Last Hurrah

In the June 2012 edition of this newsletter my article was “An Unsigned Contract-Is It Binding?” I advised that it depends and what it depends on are the facts. In September of last year I tried a case for a long time client who had given a proposal to manufacture and erect flexicore slabs for a warehouse building in Bloomington. The client’s proposal was not signed so we had a real life experience with an unsigned contract. We prevailed at trial. The trial judge found in our favor based upon you know what, “the facts.”

I have represented this client for over thirty years. While it’s a family owned business during those thirty years I have worked with three different management groups. I am very proud that I was able to satisfy three different management teams and keep the client for all these years. Unfortunately with the downturn in the economy in 2008 and the profound effect this recession had on the construction industry the client ceased operations in 2010. At this time we had a couple of claims pending and were able to settle all but one. We had to go to trial on the last one involving the unsigned proposal. The trial took place in McLean County in downstate Bloomington. We had a day and a half bench trial and the Judge found in our favor because I was able to prove that through the parties conduct the general contractor accepted my client’s proposal.

In March of 2008 the client issued a written proposal to manufacture and erect flexicore slabs for a 500,000 square foot warehouse building. Our salesman/estimator was not available for trial but I was able to get into evidence company records that showed that in early June a phone call was received from the general’s project manager giving the order to go ahead with the flexicore slabs. Our salesman/estimator then wrote a letter acknowledging the order and asking for full sized copies of the plans and also the specifications for the project. The general sent them a few days later. While the client asked on several occasions that its proposal be signed and returned it never was.

Once my client received the full sized project drawings and the specs shop drawings were prepared and submitted to the general for review and approval. My client and the general then went through a six month process of shop drawing submittal, review, revision and resubmittal until the fourth set of shop drawings was approved. I subpoenaed the general’s project manager who no longer worked for the general as a witness in our case in chief. I was able to have him admit that many of the revisions to the shop drawings were due to changes being made in the building and what was finally submitted and approved met all the job requirements. In addition I was able to have him testify that one of the things the general required of subs it hired was to have the sub submit a certificate of insurance. I was then able to have my client’s business record admitted into evidence showing the general made a request for us to submit a certificate of insurance in early October of 2008 and that we did submit it.

The project for which these slabs were made was never completed because the owner filed bankruptcy. While my client manufactured the slabs they were not delivered and erected since the project went bust. The general didn’t want to pay for the slabs and his main defense was that there was no contract. The owner of the general contractor testified that subs are required to sign their standard form agreement which has a “no pay until I get paid” provision. On cross examination I brought out that they had no record of ever sending their standard form agreement to my client and no copy of such an agreement in their files.

The general also tried to establish that my client was taking the risk of manufacturing the slabs without a written contract being signed. However, I was able to show through emails that were sent back and forth the general knew my client was manufacturing the slabs even before the final set of shop drawings was approved and never took any action to stop my client. The President of my client testified that what was manufactured before the final set of shop drawings was approved was what she termed the “safe slabs”; those that would not change even if changes were made to the shop drawings.

The trial Judge found in our favor and ruled that the conduct of my client and the general showed that my client’s written proposal was accepted. While the trial Judge reduced the amount of damages we were seeking(not uncommon in a bench trial for a judge to give everybody something) he did find that because my client’s proposal was accepted the provision in the proposal for interest at 18% was binding as well as the provision for my client to recover the attorneys fees incurred.

In my June 2012 article I advised that when you have an unsigned contract it can be found to be binding depending on the “facts”. This case I tried bore this out. My petition for interest and attorneys fees is pending before the trial court and I’ll let you know how it turns out. This case was the last one for a long time client. It was our LAST HURRAH and I am pleased we went out with a victory.

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Civility In Law: DiMonte & Lizak’s Winning Edge

The wonderment of the law is its vastness; vast in the texts that make it up, and the individuals that practice it. There are innumerable ways to practice law, and succeed in the practice. However, there are some aspects of the law that are necessary for every attorney’s success. This article is about one of those ways: civility.

Civility was best defined by the 18th century English author Lady Mary Wortley Montagu who said, “Civility costs nothing, and buys everything.” A litigator’s job is to resolve a dispute and in pursuing this goal he will deal predominantly with two individuals: the judge and the opposing attorney(s). How you interact with the opposing attorney and judge will dictate the tenor of the entire matter. Being civil with opposing counsel has many obvious advantages, such as keeping settlement communications open and available, or resolving disputes related to discovery without having to run to court. Being civil can save the client money because it permits issues to be resolved with a conversation as opposed to a motion. Being civil with opposing counsel when in court, and with the Judge is also persuasive. It tells the judge that you are reasonable, which allows him or her to trust your efforts outside of the court. This can result in having more leeway to pursue resolution of the cause or perhaps extend a deadline of something that is due to the court.

It is easy to disregard civility in litigation because of the adversarial nature of the profession. Thus remaining civil becomes that much more important and that much more prominent when it is displayed. Too many lawyers confuse harshness and rudeness with opposing counsel as zealously advocating for their client. In reality all incivility does is build-up walls between the lines of communication, stall progress, and drive up costs of litigation. For these reasons civility is one of the lawyer’s most important tools; particularly when opposing counsel has forgotten how to be civil. To match incivility with civility is a quick way to establish a rapport with an otherwise difficult opposing counsel and to build a relationship with him for each and every case he is your adversary.

DiMonte & Lizak prides itself on the civility within its practice. Being civil is not only the right thing to do; it is the right way to practice. It permits each matter we handle to be put in the best position to be resolved, efficiently and quickly.

The Affordable Care Act: What Is It and How Does It Work?

In 2010, Congress enacted the Patient Protection and Affordable Care Act (PPACA), commonly called the Affordable Care Act (ACA) or Obamacare. This controversial law is the most significant regulatory overhaul of the United States healthcare system since the passage of Medicare and Medicaid in 1965. Obamacare opponents in Congress have attempted to repeal it 44 times. After enactment of the ACA, some groups challenged the constitutionality of the ACA but the US Supreme Court upheld most of the law in 2012. Therefore, whether you like it or not, Obamacare is here to stay. This article does not take a position on the wisdom of Obamacare. Instead, now is the time to understand the law and how it affects you and your business.

The Health Insurance Problem

At the time it was passed, Congress recognized that approximately 80% of all Americans had some form of health insurance. This left 20% completely uninsured. 44% of Americans were covered directly or indirectly through an employer while 23% were covered by the government, mainly through Medicare and Medicaid. Another 10% purchased various types of private policies. The 20% group with no insurance was a combination of healthy, younger people who could afford to buy health insurance but chose not to and others of all ages who needed healthcare but could not afford to pay for the care nor for the insurance. Congress observed that 60% of all consumer bankruptcies were medical-expense driven. Those bankrupt debtors had either no health insurance or insurance with inadequate coverage.

The Obamacare Concept

The Obamacare Concept has several components that are intended to achieve the following objectives:

  1. Increase the quality and affordability of health insurance;
  2. Decrease the number of uninsured individuals by expanding both public and private insurance coverage;
  3. Reduce the cost of healthcare for individuals and the government.

Several controversial mechanisms, including mandates, subsidies, and insurance exchanges, were intended to increase coverage and affordability. The ACA regulates insurance companies and requires them to cover all applicants within new minimum standards and offer the same rates regardless of pre-existing conditions or gender.

The key components of the strategy were as follows:

  1. Make health insurance mandatory for everyone, sick and healthy alike. Force those who can afford it to buy the insurance. Subsidize those who can partially afford it. Expand Medicaid to those who cannot afford it.
  2. Encourage small employers to furnish health insurance to their workers and require large employers to offer the insurance or pay a tax.
  3. Require insurance companies to provide health insurance to all customers, young and old, sick and healthy, disregarding pre-existing conditions and gender. Every policy must contain the “ten essential benefits” of healthcare.

2010-2022 Rollout

Due to the profound changes required by the Obamacare Law, the changes are scheduled to take place over a 12-year period. The gradual rollout allows citizens, businesses, insurance companies, and the government to adjust to the changes required by the law. Congress recognized that it would take time for everyone to adjust to the new requirements. Part of the strategy in forcing healthy people to pay into the system makes funding available to pay for healthcare for people who need it.

As of January 1, 2014, the most significant reforms are as follows:

  1. Insurance companies are prohibited from denying coverage to individuals due to pre-existing conditions and may not refuse to renew policies because claims are submitted. Insurers must offer the same premium price to all applicants of the same age and geographical location without regard to gender and most pre-existing conditions.
  2. Every health insurance policy is required to meet a minimum standard of coverage. (The ten essential benefits).
  3. Every individual not covered by an existing employer sponsored health plan, Medicaid, Medicare, or other public insurance program must secure an approved private insurance policy or pay a penalty. For 2014, the penalty is the greater of $95 or 1% of adjusted gross income. This increases to $395 and 2% of adjusted gross income for 2015 and $695 or 2.5% of adjusted gross income for 2016. The IRS will enforce and collect these penalties.
  4. Health insurance exchanges began operations in every state from October 1, 2013 to March 31, 2014. New health insurance exchanges are created for individuals and small businesses to buy coverage. Tax credits for most consumers purchasing insurance through the exchanges will be provided based on household income. Subsidies end when household income exceeds 400% of the poverty rate or currently $88,000 for a family of four.
  5. Low income individuals and families who cannot afford private insurance will receive federal subsidies. Additionally, small businesses will be encouraged to offer insurance to their employees by receiving federal subsidies as well.
  6. Businesses which employ 50 or more people but do not offer health insurance to their full-time employees will pay a $2,000 tax penalty if the government has subsidized a full-time employee’s healthcare through tax deductions or other means. This was originally scheduled to commence 2014 but has been delayed to 2015.
  7. Insurance premiums may only vary by age and three other conditions. Higher rates will be allowed on the basis of place of residence, family size, and tobacco use only.
  8. Insurance sold through the exchanges will be offered in four tiers covering bronze (60%), silver (70%), gold (80%), and (90%) platinum levels of reimbursement. Employer-sponsored plans must meet the same qualified coverage standard as plans sold on the exchange.

These are some of the most popular provisions of Obamacare:

  1. The ACA prohibits insurance companies from dropping your coverage if you get sick or if you make an honest mistake on your insurance application.
  2. The ACA eliminates pre-existing conditions as a factor and prohibits gender discrimination.
  3. The ACA allows young adults to stay on their parents= insurance plans until age 26.
  4. The ACA creates state-based health insurance market places where Americans can shop for federally regulated and subsidized health insurance.

The ACA eliminates pre-existing conditions and gender discrimination meaning no one can be charged more or be dropped from their health insurance coverage for health or gender related reasons. American employers with over 50 full-time equivalent employees must choose between providing insurance that meets Obamacare standards or paying a penalty. The penalty is intended to offset the cost of employees who are not covered through their employer to purchase insurance through the public health insurance exchanges instead of using emergency services. Employers with fewer than 25 full-time equivalent employees may qualify for tax credits, tax breaks, and other assistance for insuring employees through the health insurance market place. If you make less than $200,000 individually or $250,000 as a family or small business, you will be exempt from almost all Obamacare tax levies aside from the mandate to obtain insurance. On the other hand, if you make more than $200,000 individually or $250,000 as a family or small business, you will see an increase in insurance costs and taxes.

Obamacare requires that every American have health insurance either through a private provider or through a state or federally assisted program. If you do not buy insurance then you must pay a tax equal to 1% of your income in 2014, 2% of your income in 2015, and 2.5% of your income in 2016. Obamacare will expand Medicaid to over 15 million uninsured, low-income Americans.

Insurance Company Regulation

All group health plans will have to be certified as “Qualified Health Plans” and a minimum table of required benefits will be established. This is to prevent employers from offering low-benefit “sham plans.” Starting in 2014, the only factors that can affect premiums for new insurance plans are your income, age, tobacco use, family size, geography, and the type of plan you buy. This applies to all plans sold through your state’s health insurance market place. All new plans must include the ten essential health benefits.

What are the Ten Essential Health Benefits?

Beginning January 1, 2014, every health insurance plan must conform to the minimum standards of Obamacare. The list of ten essential health benefits are as follows:

  1. Ambulatory patient services (out patient care).
  2. Emergency services (trips to the emergency room).
  3. Hospitalization (treatment in the hospital for in-patient care);
  4. Maternity and newborn childcare;
  5. Mental health services and addiction treatment;
  6. Prescription drugs;
  7. Rehabilitative services and devices;
  8. Laboratory services;
  9. Preventative services, wellness services, and chronic disease treatment;
  10. Pediatric services for children.

Conclusion

Controversial as it may be, Obamacare is here to stay. For those of you without individual health insurance plans, you must have bought a policy before March 31st or pay a penalty on your 2014 tax return. For those of you owning and/or operating businesses with over 50 full-time employees, penalties will accrue in 2015 unless you offer health insurance plans to your employees as well. Likewise, for small businesses, 2014 brings incentives for you to offer your employees health insurance as part of the compensation package. For many insureds receiving premium increases, your coverage goes up as well. Finally, premiums for the young and the healthy will increase and premiums for older Americans and those who need insurance the most will go down.

Texas Does It Again

The Texas Supreme Court recently ruled in favor of a national home builder, Lennar Corporation, against its insurance company in a case where Lennar repaired construction defects in many new homes built by Lennar without the insurance company’s approval. The insurance company wanted to wait to see if the affected home owners would bring claims. Lennar believed it would be less expensive to replace all the defective work to prevent damages from getting worse and notified its insured that it expected to be reimbursed its’ cost.

There was a clause in the insurance policy prohibiting Lennar from voluntarily settling claims without the insured company’s consent which was not given. At trial the jury found that the insurance company had not been prejudiced and had the builder not taken steps to correct the defects the damages would have been greater. The Supreme Court ruled that because the jury found that the builder limited the damages that the insurance company was not prejudiced and ruled against the insurance company in favor of the builder.

This result is not uniform throughout the United States but seems to be becoming a trend in favor of policy holders against their insurers.

Want to Win Unemployment Insurance Claim Protests? Plan Ahead.

Employers hate unemployment claims. Benefit awards increase unemployment insurance tax rates. Protests can be time-consuming and results can be frustrating. Employers complain that even though they fired the employee for violating company policy, the employee was awarded benefits. Or, that the employee voluntarily quits, argues that she was fired, and is awarded benefits. Often, the problem lies not in the award itself, but in the lack of planning preceding the employment termination. The time to establish your protest is before the termination. Here are some key strategies:

Rule No. 1. Understand the Illinois Department of Unemployment Security (IDES) definition of “misconduct.” The employee is ineligible for benefits if he was fired for misconduct. The Illinois Unemployment Insurance Act requires the employer to prove that the employee deliberately and willfully violated a reasonable work rule and that the violation harmed the employer or the violation was repeated by the employee after a warning from the employer. Mere negligence or carelessness is not enough.

Rule No. 2. Understand the IDES definition of “voluntary leaving without good cause attributable to the employer.”Not all employee quits are created equal. The first question in a voluntary leave case is whether the employee had the option of remaining employed. If the employee quit because he was tired of making the same commute, he is ineligible for benefits because he had the option of continuing employment. If he is a truck driver, and can no longer drive because he lost his license due to a DUI conviction, his resultant work separation is a voluntary quit because his conduct caused him to lose the “tool of the trade” necessary to perform his job. What if the employee complains to her boss about a co-worker’s sexual advances, the boss does nothing (thinking she can take care of herself), the advances continue, and the employee quits? She will be eligible since the employer knew of the harassment and failed to take corrective action. In essence, the law says that she did not have the option of remaining employed in the unreasonable work environment.

Rule No. 3. Document, document, document. Armed with these definitions, consider what behaviors can be viewed as deliberate and willful before you fire the employee. Pinpoint the work rule being violated. Talk to the employee about the violation and document the violation and the warning you gave the employee. Have the employee sign the warning document, acknowledging that he received the warning. If the employee refuses to sign the acknowledgment, document that, too. Make a note of witnesses to the behavior. Obtain witness statements. All of these efforts will pay off when you file a protest or participate in a telephone hearing with an administrative law judge. Here’s a war story: Our client’s employee complained to management about her boss’ alleged intimidating and threatening behavior. Our client took prompt steps to address the situation, including counseling the boss and having the employee report to another manager. The employer documented its actions and had the employee sign an acknowledgment that the supervisory change was an acceptable resolution of her complaint. Several weeks later, the employee went to her new supervisor and announced that she quit because of an incident with her former supervisor the day before. She did not complain to her supervisor about the incident until she announced she was leaving work. The employee filed a claim and was awarded benefits. On appeal, I argued that the employee had a duty to make reasonable efforts to resolve the conflict before voluntarily leaving and seeking unemployment benefits. The fact that she didn’t complain about the most recent incident and the employer’s prompt action when she did complain saved the day for our client. The administrative law judge found that the employee left her job without good cause attributable to the employer and she was disqualified for benefits.

Rule No. 4. Don’t delay. Employers sometimes discipline an employee for deliberate and willful misconduct (say, misuse of a company credit card) but decide not to fire the employee for the incident. Months later, the employer fires the employee because she is making too many mistakes, feeling that this is the “last straw.” Even though the employer had good reason to terminate the employee, the employee’s credit card misuse probably will not make her ineligible for benefits. Discharging the employee after a substantial passage of time is viewed by the IDES as condoning the credit card misuse, and poor work performance alone is not “misconduct.”

Think through these definitions before you terminate an employee. Have written job descriptions identifying the tools of the trade necessary for the employee to perform his job. Document efforts you make to resolve work problems. Line up your witnesses. Careful planning and timely terminations bolster the likelihood that your protest will be successful. You also are in a better position to defend against discrimination claims related to the termination.

Changes To Be Aware of This Filing Season

Net Investment Income

High income taxpayers can expect a new tax on capital gains and net investment income. There are, however, slight differences in the respective definitions of “capital gain” and “net investment income.” Net investment income (or “NII”) is defined as “gross income from interest, dividends, annuities, royalties, and rent…other gross income derived from a trade or business [that is considered a passive activity]…and the net gain attributable to the disposition of property,” or what would commonly be called a capital gain. The important thing to note about the definition is that the tax applies to passive activities, or those activities to which the taxpayer does not “materially participate.”

The NII tax rate is 3.8% and applies to the lesser of all NII or modified adjusted gross income over $200,000 for individuals, or $250,000 for married couples filing jointly (or $125,00 per individual, if filing separately). Therefore, where a taxpayer has income exceeding $200,000, (or $250,000 for a couple), but has no NII, then no tax would be imposed. For example, take the simplified scenario where an individual taxpayer has modified AGI consisting of $275,000, which consists of NII of $50,000. That taxpayer would face the 3.8% tax only on the $50,000 of NII, not the amount that their modified AGI exceeds $200,000, and which would result in an additional tax of $1,900.

It is important to note that the NII tax is in addition to any other taxes. So, the taxpayer subject to the NII tax will necessarily be subject to at least a 15% tax on capital gains, plus the 3.8% tax (and state income taxes).

End of the Employee Social Security Tax Holiday

In 2013, the social security tax holiday given to employees expired. Employees in 2013 were subject to an additional 2% tax on wages, which had been suspended in prior years. In 2013 employees paid 6.2% for social security taxes, compared to 4.2% the previous year.

Medicare Surcharge

Another of the new taxes is the Medicare surcharge tax. The Medicare surcharge applies to individuals with wages over $200,000 or couples over $250,000. The tax is .9% on the amount that the taxpayer’s wages exceed the threshold amounts, and is in addition to the standard Medicare tax of 2.9%. For example, an individual taxpayer with wages of $250,000 would pay 2.9% on the first $200,000 of wages, and 3.8% on the remaining $50,000 of wages. It is important to note that with regard to the Medicare surcharge, an individual that has other self-employment income, or that is employed at more than one business, may not be subject to automatic withholding and will have to pay this tax at the end of the year.

Increase in Capital Gains

Capital gains rates for top earners increased in 2013. For top bracket earners, i.e. individuals with over $400,000 or couples with $450,000 in adjusted gross income, the capital gains rate increased from 15% to 20%. Note that this tax is in addition to the net investment income tax. Therefore, a top bracket earner that in 2012 would have paid a 15% tax on capital gains will pay 23.8% in 2013.

Income Tax Increase to Top Bracket Earners

Lastly, the top marginal tax rate increased from 35% to 39.6%, creating a new bracket. Individuals with adjusted gross income over $400,000 or couples with over $450,000 fit into this bracket. The increase virtually wiped out the 35% tax bracket for individuals, which now applies only to income between $398,351 and $400,000 for individuals.

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Attorney Ryan Van Osdol Receives AV Preeminent Rating from Martindale-Hubbell

DiMonte & Lizak, LLC is proud to announce that Ryan Van Osdol has earned the AV Preeminent Rating from Martindale Hubbell. The Martindale Hubbell AV Preeminent Rating is the highest Ryan R. Van Osdolpossible rating for an attorney for both ethical standards and legal ability. This rating represents the pinnacle of professional excellence. This prestigious recognition was bestowed upon Ryan based upon peer reviews and recommendations submitted by both attorneys and judges in Illinois. Congratulations go to Ryan for his receipt of this honor.

The Martindale Hubbell AV Preeminent Rating is a credential highly valued and sought after in the legal world. It used to be a “secret” among attorneys who used the rating as a screening device when they needed to hire a lawyer they did not personally know. Now, it can easily be accessed by all individuals via the Internet when searching for an attorney.

Ryan has practiced at DiMonte & Lizak, LLC for the past five years. He currently focuses his practice on business litigation, construction litigation, collection disputes, business formation and various other aspects of commercial litigation. While the majority of his clients are medium-sized local businesses, Ryan has successfully represented a diverse group of clients, ranging from individuals to financial institutions. Ryan is experienced in successfully representing clients in trial courts, appellate courts, and in mediation/arbitration proceedings.

Ryan would like to thank all of his peers who nominated and recommended him for this distinction. He is very proud to have earned the highest possible rating from Martindale Hubbell.

More information about Ryan, his experience and his practice areas is here.

Big Win in Trade Secret Dispute

Margherita Albarello won a complete defense victory for a home health care agency and its owners in a case alleging misappropriation of trade secrets, breach of fiduciary duty, and other businessMargherita M. Albarello torts.

The plaintiff, a competing home health care agency, alleged that our clients stole patient and referral information, began competing with the plaintiff before they left employment, and interfered with the plaintiff=s relationship with patient referral sources and with Medicare. The plaintiff sought damages in excess of $1 million.

After two days of trial, the plaintiff rested its case. Margherita made a motion for a directed finding, arguing that the plaintiff had not proven any of its six causes of action and that our clients did not even need to put on their defense case. The trial court agreed and entered judgment in favor of our clients.

In Memoriam: Linscott R. Hanson 1937-2013

Linscott R. HansonLinscott R. Hanson
1937-2013

If you were trying to reach Mr. Hanson
or need to speak to someone at Di Monte & Lizak,
please contact MaryLeslie Naker for assistance
in reaching the appropriate person.

 

The entire firm mourns the passing of equity partner Lin Hanson. More than just a co-worker, Lin was considered to be a mentor and friend to everyone he worked with. His experience, expertise and good nature will be missed professionally and personally.

Lin was born October 4, 1937 in Evanston, Illinois. Lin was a graduate of the University of Michigan, both undergraduate and law school. He practiced in the areas of corporate law and estate planning for over 50 years, and was one of the drafters of both the Business Corporation Act and the Limited Liability Act. Lin was a 20 year member and past chairman of the Secretary of State’s Business Laws Advisory Committee.

Lin was a life-long supporter of the University of Michigan Athletics, and was a proud member of Delta Kappa Epsilon Fraternity. Lin is survived by his wife Mary Cate Hanson and their son. Linscott Hanson II.

Contractors’ Liability Insurance (Something New)

For companies engaged in a construction contracting business, recent decisions of the Connecticut Supreme Court and the U.S. Court Appeals for the Second Circuit (AZ) have opened the door for claims against a contractors’ liability insurer. The first case came down from the Connecticut Supreme Court the second is one from the U.S. Court of Appeals. The first referenced is Capstone Building Corporation v. American Motorists Insurance Company and the latter is Scottsdale Insurance Company v. R.I. Pools, Inc.

The policies excluded claims relating to work done “by others”, for example subcontractors of the insured. Because of that exclusion the courts reasoned that by inference the policy might insure against work done by the named insured (the contractor). The courts also reasoned that the contractors’ work might be considered an “occurrence” or an “accident” which are terms the policies insured against.

Although neither case ruled that the insurance company defendants were in fact liable under the policies, the reviewing courts decided that because the insurance companies might be liable under the terms of the policy, the cases were remanded (sent back) to the trial courts for further consideration.

Also at issue in the cases was whether or not the insurance companies were required to provide and pay for the defense fees and costs. These cases stand for the proposition that the insurance companies were obligated to defend the claims at their cost. In the Scottsdale Insurance Company case the court ruled that the duty of the insurance company to defend is considerably broader than the duty to indemnify. So, notwithstanding the fact that the insurance company may eventually be found not to be liable to the contractor, under the policy to pay for the claim against the insured the court ruled that “if an allegation of the complaint falls even possibly within the coverage” the insured company was liable to provide and pay for the cost of defense, including legal fees and costs. On November 4, 2013 the Appellate Court of Illinois, Third District published an Opinion in the case entitled Selective Insurance Company of South Carolina v. Cherrytree Companies, Inc., d/b/a Macon General Contractors arriving at a similar result as the out of state cases mentioned above.

These cases open the door for insured companies to make claims against their liability insurer for indemnification.

Think Post Judgment Collection Before You Even Enter into the Contract

When you enter into a contract with another party, you expect the other party to do what they say they will – to repaint your house, to pay you for the product you send them or to repay the money you lend them. But sometimes they do not. You hire DiMonte & Lizak, LLC, we file suit, and the court enters a judgment in your favor. A judgment is known to the collection bar as a “Hunting License.” With it, we can initiate post judgment collection proceedings.

Some post judgment collection tools are familiar. They include wage garnishments and real estate levies. Did you know that a judgment creditor can also seize bank accounts and collect money owed to your debtor by unrelated third parties? Certain assets, such as cash value life insurance, qualified retirement plans and a portion of a home’s equity called the “Homestead Exemption” are exempt from claims of creditors, but there are many assets that can be seized and turned over. We need to know where to look for these assets. The most valuable commodity in post judgment collection is information, and the best time to obtain the information is when you both are still smiling and shaking hands – before you enter into the contract.

The best way to obtain this information is to ask for a financial statement. But sometimes it’s not practical. Even if you do, the information can become outdated. Another, simpler method may be to just ask questions.

Whether its your first meeting with a new client or service provider, or if you have an ongoing relationship, take the time to ask some questions. If it’s a business, find out where they bank, where their office is located, if they have satellite offices or other real estate, who their current customers are, if they have any new projects on the horizon, if they have standing orders or constant work with certain customers, if they have any expensive equipment or vehicles or if they are related to or are a branch of other businesses.

If its an individual, find out where they live, who their employer is, where they bank, if they invest in the stock market or mutual funds, if they have their own business, if they are collectors or have expensive hobby equipment, what vehicles they own, and what real estate they own.

And when you find information, write it down, and keep it where you can retrieve it when you need it. Contact management software on your computer (Microsoft Outlook 7 for instance) can be a great place to keep helpful notes. Also, if you are paid by check, make a copy and leave it in your file. All this information may lead to assets which can be liquidated or seized to satisfy your judgment. Keep in mind the time to have these conversations is before, and anytime during the relationship.

Example: Last winter, our client, a sewer company, repaired a sewer at a municipal building. Our client was hired by another contractor, but that contractor failed to pay. When I called that contractor, he begged me not to contact the municipality, stating that they were a longtime client and he had future jobs lined up. We gave the contractor an opportunity to pay the invoice, and when he didn’t, we got a judgment and immediately sent a citation to the municipality and tied up the funds the municipality was going to pay the contractor. The contractor sent us the total invoice price by the end of the week. That was a great ending because we knew where to find key assets.

While these topics may seem intrusive at a business lunch or a first time meeting, most can be easily introduced into the conversation. Besides, people like to talk about themselves and their business, and they also enjoy an avid listener.

A judgment is only a hunting license, but with the right information, and the right attorneys, the hunt will be successful. Please contact your DiMonte & Lizak, LLC attorney if you would like to discuss further how you can implement this technique.

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D&L Attorney Ryan Van Osdol Receives Back-to-Back Honor

DiMonte & Lizak, LLC is proud to announce that Ryan Van Osdol has been named to the 2013 Illinois Super Lawyers’ Rising Stars list as one of the top attorneys in Illinois for 2013. Ryan also Ryan R. Van Osdolreceived this honor in 2012, making it the second year in a row that he was nominated and recognized by other Illinois attorneys for this prestigious award.

No more than 2.5 percent of attorneys in Illinois are selected to the Rising Stars list. Super Lawyers is a rating service of outstanding attorneys from more than 70 practice areas who have attained a high degree of peer recognition and professional achievement. Attorneys cannot pay to be listed as a Super Lawyers’ Rising Star. The annual selections are made using a rigorous multi-phased process that includes a statewide survey of attorneys, an independent research evaluation of candidates, and peer reviews by practice area.

Ryan has practiced at DiMonte & Lizak, LLC since September 2008. He focuses his practice on business litigation, construction litigation and various other aspects of commercial litigation. While the majority of his clients are medium-sized local business owners, Ryan has successfully represented a wide range of clients in trial courts, appellate courts, and in alternative dispute resolution proceedings. He completed a 12 day trial this summer, in which he and partner David Arena successfully defended a client against claims of fraud, breach of a merger agreement and piercing the corporate veil. Ryan was recently admitted to the trial bar for the Northern District of Illinois and is a member of the Illinois State Bar Association’s Commercial Banking, Collections and Bankruptcy Committee.

James J. Riebandt Joins DiMonte & Lizak, LLC

DiMonte & Lizak, LLC welcomes James J. Riebandt, previously of the firm Riebandt & DeWald, P.C., who joined the firm effective January 1, 2013. Mr. Riebandt’s addition brings another James J. Riebandtexperienced transactional attorney to the firm. He graduated with high honors from the University of Notre Dame in 1972 and from De Paul University College of Law in 1975. His practice areas include business formation, representation, purchase and sale; commercial and residential real estate purchase, sale and leasing; and estate planning and administration. Mr. Riebandt began his career with Daley, Reilly and Daley in 1975. He formed the firm which eventually became Riebandt & DeWald, P.C. in 1978.

With the addition of Mr. Riebandt, the total number of attorneys at DiMonte & Lizak comes to 24. DiMonte & Lizak’s attorneys practice in most areas of the law, with attorneys dedicated to both litigation and transactional practice. The firm prides itself on its ability to represent clients in most areas of litigation, including commercial litigation, contract disputes, business and contract fraud, accounting actions, actions to dissolve corporations, partnerships and other businesses, construction and mechanic’s liens, employment matters before courts and state and federal administrative agencies, will contests, trust and probate litigation. DiMonte & Lizak attorneys represent clients in all aspects of real estate development and land use. The firm also provides transactional counsel to clients in corporate and business governance, sale, merger, acquisition of businesses, leasing, estate planning and probate, loan documentation and closings, and commercial and residential real estate transactions. DiMonte & Lizak also boasts a strong creditors’ rights and bankruptcy practice, representing debtors, creditors, and bankruptcy trustees in proceedings under Chapters 7, 11, and 13 of the Bankruptcy Code, non-bankruptcy insolvency and restructuring matters, fraudulent transfer litigation, and loan enforcement.

DiMonte & Lizak is conveniently located adjacent to the Kennedy Expressway between the Canfield and Cumberland exits in Park Ridge. Free parking is available right outside the firm’s building located at the intersection of Higgins Road and Washington Avenue.

Julia Jensen Smolka Promoted to Partner

DiMonte & Lizak is proud to announce that Julia Jensen Smolka has been promoted to partner. As a commercial and bankruptcy litigation attorney, she defends preference actions, prepares Julia Jensen Smolkaconsumer and commercial bankruptcy petitions. Julia advocates creditors’ rights in bankruptcies as well as prosecuting and defending breach of contract suits. She has extensive litigation and collection experience and considerable experience in perfecting, prosecuting and defending mechanic liens and construction litigation claims.

“Julia is an accomplished lawyer, capable of vigorously representing her clients without losing sight of their overall business objectives. We are delighted to welcome her to the partnership and look forward to her future,” said David T. Arena, partner at DiMonte & Lizak, LLC.

Julia received her J.D. from Loyola University Chicago School of Law, and her B.A. from the University of Illinois at Chicago. Julia is also an active member of the Illinois State Bar Association. She serves on the Board of Directors for the Harwood-Heights Norridge Chamber of Commerce, the Senior Assistance Center and is active in the Park Ridge Chamber of Commerce.

Julia Jensen Smolka Speaks at Park Ridge Chamber Roundtable

On April 2, 2013, Julia Jensen Smolka spoke at a small business roundtable discussion hosted by the Park Ridge Chamber of Commerce. Among the topics Ms. Smolka discussed were the pros andJulia Jensen Smolka cons of forming a corporation or an LLC, commercial lease negotiations and pitfalls small business owners should be aware of subjecting them to personal liability for business debt, such as for leases, credit cards, vendor debt, employee claims and the IRS.

Richard Laubenstein Receives Award for Excellence in Pro Bono Service

Di Monte & Lizak is pleased to announce that Richard Laubenstein received an Award for Excellence in Pro Bono Service by the United States District Court and the Chicago Chapter of the FederalRichard W. Laubenstein Bar Association. Richard was appointed pro bono by the Court to represent a client in a criminal matter spending unending time and money in said representation. Richard received the award on May 23, 2013 at the United States District Court.

A Refresh to the D&L Newsletter

My name is Derek Samz and I am the new editor of the quarterly D&L newsletter. I have been an attorney with D&L for six years. My areas of practice focus on bankruptcy litigation, commercial litigation and related debtor-creditor relations issues. I want to highlight a few changes that you may have already noticed in this issue. But first, I would like to recognize the hard work and commitment of the outgoing newsletter editor, Adam Poteracki. Adam served as the editor for a number years, and always put out a great product.

The first change I would like to highlight is that the newsletter contains Quick Response (QR) codes for each of the attorneys that publish an article. The QR codes can be scanned by a number of apps available for your mobile device, and will direct you to the article author’s biography on the D&L website. There you can obtain more information about the attorney and review other articles the attorney has authored.

The second change is that you can now submit comments or suggestions to D&L via a dedicated newsletter E-mail address. Feel free to send in questions regarding the articles, or topics you would like to see covered in future newsletters. The E-mail address is newsletter@dimontelaw.com. It will be reprinted on the back cover of each issue going forward.

Please enjoy this issue of the newsletter.

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Case Snapshot: A Story from the Litigation Trenches

Jordan A. Finfer

Jordan A. Finfer

The following is a tale of a condominium association’s unjust practices and an owner’s path to justice. In September of 2011 a condominium owner came to DiMonte & Lizak seeking assistance with resolving a dispute with her condominium association. The association was refusing to recognize responsibility for defects in the common elements which caused flooding and the development of mold in the owner’s unit. When the owner came to our office she had already made numerous requests upon the association to address the water infiltration and mold in her unit; her requests had fallen on deaf ears. Without any means to compel the association to act on her behalf, the owner took measures into her own hands and made the necessary repairs to remediate the mold in her unit and to prevent future water infiltration. The owner came to DiMonte & Lizak and asked us to assist her in recouping the costs she had incurred due to the associations failure to assume its responsibilities.

DiMonte & Lizak agreed to assist the owner. We reviewed the condominium association’s by-laws and determined that the association had a duty to act. We issued a demand letter to the association seeking reimbursement for the costs the owner had incurred. Our request was simple, pay the owner for the costs she incurred because of your failure to adhere to your association responsibilities. The association denied our request claiming it was unconvinced it had a duty to act, despite the overwhelming evidence supporting our position.

The owner and DiMonte & Lizak decided to escalate the matter and filed a law suit against the association. The law suit, like the demand letter, set forth the clear logic of our position, and sought to recover the owner’s damages, plus punitive damages, and attorney fees. The basis for the punitive damages and attorney fees was the association’s egregious and baseless denial of the owner’s request. From the beginning of this matter it was clear that the association failed to act because it believed it could use its position of strength to exploit its members.

A year after filing the lawsuit the matter was ready for a bench trial. All along the association stuck to its position that it did not have to act. After two days of trial the flaws in the association’s position were exposed through the use of fact witness testimony, expert reports, and the owner’s paid invoices. At the conclusion of the our case in chief we asked for damages in the amount of the repairs, punitive damages in an amount two and a half times the amount of the repair damages, and attorney fees as punitive damages relying upon recent case law. After a short deliberation, the Judge awarded the owner everything we asked for.

In the end, and over two and a half years after the association’s initial offense, the owner obtained just retribution in an amount 7 times greater than the damages sought in the initial demand letter. The result was righteous, and for the association a tough lesson in understanding the obligations born from their own by-laws.

Epilogue

Chester A. Lizak

Chester A. Lizak

The foregoing result achieved by Jordan Finfer is truly a remarkable litigation achievement.

It is the kind of result that most clients expect when they are involved in a dispute and are convinced of the righteousness of their position. The client wants you to secure an award for the full amount of their damages, the amount of their attorneys fees, and punitive damages.

It is highly unlikely that they will achieve such a result for the following reasons:

1. In most cases there are two sides to every story – the prevailing party usually does not get one hundred percent of what he or she asks for;

2. Illinois follows the “American Rule” that disallows claims for attorneys fees except in cases where a statute or contract specifically provides for attorneys fees;

3. Punitive damages are usually awarded only in cases of willful and wanton conduct.

Summary

It is highly unlikely that your claim will result in a litigation trifecta i.e., an award for the full amount of damages, attorneys fees and punitive damages. If you have a chance to settle your claim on a reasonable basis, do so.

If Jordan ever achieves another litigation trifecta we will add the letters “S.L.” to his name. (Super Litigator)

Losing a Battle, but Winning the War: How Evidence Triumphs Over Grandstanding

As a litigation attorney, it is never a pleasant experience to inform a client that a motion was lost during a court appearance. On the flip side, I imagine that it is an equally unpleasant experience for a client to hear that the judge presiding over the case ruled against him or her on a particular issue. However, as a recent case taught me, it is important to keep focused on the final outcome of a matter, as opposed to the skirmishes that may occur in between, because the evidence presented to the court will ultimately determine how the judge rules on the merits of your case.

I began working on this particular matter about four and a half years ago. The case involved a plaintiff who alleged in his complaint that four individual defendants defrauded him out of his company via a failed merger agreement. Specifically, the plaintiff claimed that the four individuals participated in a scheme to merge the plaintiff’s company into the defendants’ company. After the merger agreements were executed, the plaintiff alleged that the defendants stripped the plaintiff’s company of its assets and returned the plaintiff’s business to him with no assets and substantial debt. The plaintiff sought a multi-million dollar judgment against the four defendants and their business. DiMonte & Lizak represented one of the individual defendants.

After three years of discovery, I felt that we were in a strong position. The testimony from the depositions showed a failed business idea rather than a scheme to defraud. None of the defendants received any money from the failed merger attempt. In fact, some of the defendants lost a substantial amount of money in their attempt to get the business off the ground, which ultimately never happened. Moreover, the deposition testimony of third-party witnesses contradicted the plaintiff’s deposition testimony. Therefore, it appeared that the plaintiff was falsifying some of his “facts” in order to make his case seem stronger than it actually was.

In the months leading to trial, the plaintiff filed a motion for summary judgment and argued that the court should enter a judgment against all of the defendants without the need for a trial. During oral argument on the summary judgment motion, the plaintiff’s counsel misrepresented the facts of the case and argued positions that were not supported by the evidence that had been produced during the discovery phase of the litigation. I argued to the court that the plaintiff’s positions were not only unsupported, but were a blatant misrepresentation of the facts. After hearing argument, the court entered an order finding that “overwhelming evidence supports plaintiff’s arguments”, but reserved ruling on the motion until after trial.

This language appeared to be very damaging. I couldn’t believe the court overlooked the discrepancies between plaintiff’s testimony and that of disinterested third parties. I couldn’t believe the court had reached a substantially different conclusion regarding the quality of the evidence than the conclusion I had reached. I didn’t know how to explain the language in the order to the client. So, I spoke to my trial partner on this case, David Arena, and he gave me some very prudent advice.

David told me that once the trial begins, the only thing that matters is the evidence presented to the court. He told me to forget about what the other attorney said during oral arguments, because the attorney will not be testifying at trial. I decided to take this advice. David and I informed the client of the summary judgment order and began focusing our efforts on preparing for trial.

During the plaintiff’s presentation of evidence at trial, every important portion of the plaintiff’s testimony was again contradicted by the testimony of the other witnesses. After the plaintiff rested his case, our trial team and our client discussed how to proceed in light of the fact that the evidence presented appeared to make plaintiff seem untrustworthy. We all reached the same conclusion that I had reached at the close of discovery – the evidence showed a failed business idea rather than a scheme to defraud and that the plaintiff was being less than truthful in his testimony. Further, all of the defendants’ most compelling evidence was presented during the plaintiff’s case, because the plaintiff called the defendants’ most favorable witnesses during his case. Therefore, we decided not to present a defense case and argued that the judge should rule in the defendants’ favor because the plaintiff failed to meet his burden of proof on his claims.

After the trial concluded, we waited a painstaking 6 months for the court’s ruling. In late December 2012, the judge issue a twenty page written opinion, wherein the court reached the same conclusions we had reached. In fact, the judge’s analysis regarding the quality of evidence was identical to that of our trial team. He referred to the plaintiff’s testimony as “misleading and disingenuous”, “just not credible” and even found that “plaintiff’s unclean hands in this regard bars the equitable relief that he seeks against the named defendants.” Ultimately, the court entered judgment in favor of the defendants on all counts. It was a pleasant experience to see that after presentation of the evidence, the court had reached the same conclusion that I had at the close of discovery.

David was right- the evidence presented at trial triumphed over plaintiff’s attorney’s grandstanding during motion hearings. As both attorneys and clients, it is important to keep this perspective during the course of contested litigation. If there is strong evidence in support of your case, don’t worry about your opponent’s grandstanding, because the evidence will come out at trial.

Martha Stewart Fights the Law – Round ???

The legal profession seems to be recovering from its economic woes. Perhaps we (lawyers) should thank Martha Stewart for her continuing stimulus to the law business. She’s at it again with another big one.

I think we all remember Martha Stewart, the lady who did actual jail time for insider trading in IMClone stock. Warned by her broker that the founders of the company were selling their shares in the company, Martha dumped her entire holding before the news of the FDA action turning down a new cancer drug, Erbitux reached the public. She and the broker then compounded the matter by inventing a false story that the decision to sell if the stock fell below $60 a share was made long before the event of sale. As a result of her conduct, Martha was sentenced to 5 months imprisonment followed by 5 more months of home confinement.

Time and Martha marched on, however, and when she emerged from prison, she struck a deal with Kmart (Sears Holding) to handle her Martha Stewart Everyday line of household items, saving her company from a decline caused by the adverse publicity in the insider trading case and subsequent imprisonment. Of course when that deal appeared to sour, Martha was quick to move on, signing a new deal with Home Depot. In a parting shot Martha allegedly commented about Kmart, “Have you been in a Kmart lately? It is not the nicest place to shop.”

Well, the Home Depot deal didn’t work out either, so Martha signed a deal with Macy’s to handle Martha Stewart Living Omnimedia home goods, giving Macy’s the “exclusive” right to sell Martha’s products in the cookware, home decor, bedding and bath textiles lines, under an agreement that runs until 2018. Macy’s has made the Martha Stewart line its number one line. Sales growth in that line last year was 8%, double the rate of growth at Macy’s as a whole.

There is an exception to Macy’s “exclusive” right to sell the Martha Stewart lines. The contract provides that Martha may also sell her own lines from stores which she owns herself. Can you see what’s coming next?

Without warning, Martha has signed a new agreement with J.C. Penney company under which Penney’s will be opening “Martha Stewart boutiques” in 700 of its stores, and the boutiques will be selling the disputed lines of household products. Martha and Penney’s have justified this on the theory that the boutique operations are, in effect, Martha’s own stores.

It comes as no surprise that Macy’s has elected to sue both Martha Stewart Living Omnimedia and J.C. Penney Co. claiming Martha has breached her contract of exclusivity with Macy’s and Penney’s has induced her to do it. The cases are pending, and have been consolidated for trial in the Supreme Court of New York. (New York calls its trial court the Supreme Court).

Rulings in this case should be of interest to our business owner clients as well as clients who are thinking about going into business. In contract law there is a concept of “good faith and fair dealing” which requires that parties conduct themselves in regard to each other with good faith. The issue of interpretation of the “exclusive” provision in the contract is to be decided. If Martha and Penney’s prevail, it is possible that Macy’s will receive some sort of damage award, and how the court computes damages will be interesting. If the Court decides to stop the Martha Stewart Boutique concept in its tracks, will Martha open up to liability to Penney stores?

In the latest round, First Macy’s then Penney’s seemed to score points. First Macy’s received a court order restraining Penney’s from selling Martha Stewart brand soft goods, then Penney’s sought and received some relief in the appeals court, which allows them to sell Martha Stewart soft goods so long as they do not bear the Martha Stewart name. The battle rages on.

We’ll keep an eye on the case and report further. Meanwhile if you have questions, please feel free to submit them and we’ll deal with your questions in future issues.

When Local Government Wants to Play in Your Backyard

You work hard, respect your neighbor, pay your taxes and do your best to provide for your family. Local government normally does not interfere in your personal life. However, what do you do if local government comes to your home, to your life, and imposes its authority on you absent you bringing yourself to its attention?

This is exactly what happened to a family living in Glenview. In 2011, a family residing in Glenview came to Di Monte & Lizak because all efforts to reach a reasonable agreement with the Village failed.

The clients moved into their home in 2007. The home was constructed in 1987. Mom and Dad were employed and were raising 2 young children. In 2009, a Village engineer rang the doorbell asking if he could look into the clients’ backyard. He was granted access. Later, the clients received a notice from the Village citing them for a zoning violation. The notice alleged that the clients’ backyard elevation was approximately one foot higher than the elevation specified on the subdivision plat of survey. During the three years that the clients lived in their house, they performed no work which altered the elevation of their backyard. However, the Village demanded that they remove 24 cubic yards of soil from the backyard to decrease the elevation and come into compliance. What did this mean? The clients’ backyard was 25 feet wide and 75 feet long. The Village was demanding that the clients remove a swath of earth that was one foot deep, 20 feet wide and 50 feet long.

The clients were perplexed. They performed no work to change the elevation of the backyard, and the Village raised no issue about the backyard when the clients were buying the house. The Village’s demand would render the backyard unusable, jeopardize the life of several large trees, and impair the resale value of the home.

Prior to engaging Di Monte & Lizak, the clients employed an engineering firm to develop multiple alternatives to address the stormwater detention requirements apparently driving the Village’s demands. The Village rejected all efforts to compromise.

At trial, we were able to establish that the subdivision was developed in 1988. The original plan was that the surface of the backyards of the clients’ property and adjacent properties would satisfy stormwater detention requirements. Within several years of development, the Village determined that the original plan was insufficient, and the Village required the developer to install a stormwater sewer system in the backyards. This work apparently altered the elevation of the clients’ backyard. However there was no conclusive evidence of this because the Village did not obtain as-built elevations prepared after the sewer system was installed. The as-built elevations would have set the benchmark elevation by which to measure the client’s existing elevation.

At trial, we were able to establish that the Village had no benchmark from which to measure the elevation on the clients’ backyard at the time they purchased the property and the Village had no evidence that the clients altered the elevation. The zoning ordinance in general mandated that “no person” shall alter the elevation. Ultimately, the court agreed with our arguments that absent proof that the clients took affirmative steps to change the elevation of their backyard, the clients were not liable for the nonconformance. In the end, the Village’s demands were denied and our Clients were not required to perform any corrective work.

So, what is the lesson to be learned here? Local government is a necessary part of our lives. For the most part, municipal employees operate in good faith for the benefit of its citizens. However, municipal employees are not vested with absolute authority. They are people like you and me – and sometimes they get it wrong. If you are having trouble dealing with your municipality, DiMonte & Lizak is experienced with municipal law and working to negotiating a settlement that avoids the expense, time and stress associated with litigation. However, if litigation is necessary, we are fully capable of advocating for our client’s rights at trial.

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Construction Contract Extras: Bizarre Trial Court Decision Overturned

Extras on a construction project are perhaps the single most litigated issue.  A recent Illinois Appellate Court decision addressed what I think was a bizarre ruling by a trial court on a claim for extras and overturned the trial court’s ruling.

A general contractor was employed to expand the warehouse of a Menard’s store.  A concrete subcontractor submitted a bid that did not include “winter protection of concrete or subgrade” nor “winter heat.”  The project got delayed and revised bids were requested.  This time the concrete sub included an up-charge for winter heat but again did not include winter protection. A contract was entered which had the usual provision that no extra work would be paid for unless there was a written change order signed by the general contractor that specified the amount of additional compensation.

The job got further delayed and in December the concrete sub wrote the general contractor a letter expressing concern regarding the necessity of performing winter protection work.  The sub stated that it would move forward with its work to maintain the project schedule and document its additional costs and that upon completion of the disputed work it would resolve its claim under the terms of the contract.  The general contractor’s position was that winter protection was included in the agreement and advised the sub that if it did not quickly complete its work the sub would be removed from the job.  The concrete sub completed its work with winter protection which increased its cost by $171,262.

When the general contractor refused payment for the winter protection, a lawsuit was instituted.  The trial court granted partial summary judgment to the general contractor on the issue of payment of the extra for winter protection.  While the trial court held that winter protection was clearly outside the scope of the contract, it found there was nothing to show the general contractor ordered the work to be done nor did it agree to pay extra for the work.

There are five factors the courts look to when considering a claim for extra compensation:

1. The extras were outside the scope of the contract;
2. The owner or general contractor requested the extra;
3. The owner or general contractor by words or conduct agreed to pay extra;
4. The extra work was not done voluntarily; and
5. The extras were not necessitated by reason of some default of the general contractor or subcontractor.

The trial court held that the subcontractor should have done the work per the terms of the contract even though it knew that in doing so the work would not have been done in a good and workmanlike manner because it was being performed in the winter months and there would be no winter protection.  I think the trial court’s ruling is bizarre because it put the subcontractor in an untenable position.  If the work was done without the winter protection there would be claims for defective performance.  If the sub went ahead and did the work with winter protection, then the trial court would say you are doing so for free and in this case the sub would lose $171,000.  This would certainly not be a good position to be put in.

Fortunately, the Appellate Court came to the subcontractor’s rescue and overruled the trial court.  The Appellate Court held that the subcontractor could not do its work knowing that it would be done in an unworkmanlike manner.  The Appellate Court stated, “One who contracts to perform construction work impliedly warrants to do the work in a reasonably workmanlike manner.” In addition, the Appellate Court held that the trial court was also wrong that the sub could do the work in an unworkmanlike manner because the Menard’s building is open to the public and to allow work to be done in an unworkmanlike manner would be unrealistic and contrary to public policy.  The Appellate Court ordered the case back to the trial court because it could be found that the general contractor impliedly ordered the sub to perform the winter protection work if in fact, doing so was necessary to do the work in a workmanlike fashion. The Appellate Court also noted that the general contractor was informed by the concrete subcontractor that it was going to perform the winter protection work and did not tell the sub to stop.

The lesson to be learned is that if you are placed in a position of being forced to do your work in an unworkmanlike manner, do not do it.  Do what is necessary to perform the work properly.  Inform the owner or general contractor you are doing so and properly document the claim you will be making and the additional costs incurred.  You simply should not do the work in an improper fashion as the consequences of doing so are too grave.

Firing Due to Facebook Post Found Lawful

If you took my advice, and I’m sure you have, then there is no reason to read further because you have remained diligent in staying up to date with the National Labor Relations Board’s (hereinafter “NLRB”) rulings regarding social media and the work place. For the few of you that overlooked the significance of my prior article on social media and the law, allow me to regale you with a story coming out of Lake Bluff, Illinois. The story serves as a good example of what is, and is not, considered to be protected activity, particularly within the framework of Facebook posts.

On June 14, 2010, Knauz BMW employee Robert Becker took to his Facebook page to share his thoughts about work, with his “friends”, family, and the world. The first story Becker shared was about the meager refreshments being offered to customers for Knauz’s big “Ultimate Driving Event’, where customers would have an opportunity to test drive the new BMW Series 5 automobile. Becker felt the hotdogs and potato chips being offered were not on par with the BMW luxury brand. Becker expressed his frustration by posting pictures on Facebook of the refreshments that were offered at the Ultimate Drive Event, supported by a few sarcastic comments. For example Becker noted, “I was happy to see that Knauz went “All Out” for the most important launch of a new BMW in years…”

Becker’s second work story posted on Facebook was about an accident that occurred at the Knauz’s Land Rover dealership, across the street from the BMW dealership. On June 14, 2010, a customer allowed his 13-year-old son to sit in the driver’s seat of a car while the salesperson was in the passenger’s seat. According to the court record, the customer’s son inadvertently stepped on the gas pedal, causing the car to roll down a small embankment, over the foot of the customer and into an adjacent pond, where the salesperson was thrown into the water (although unharmed otherwise). Becker took photos of the incident, posted them on his Facebook account with the caption, “This is your car: this is your car on drugs.” In addition to the caption, Becker posted a brief synopsis of the event, where he divulged the salesperson had been fired and indicated the event was an “OOOPS!”

The next day Becker’s supervisor was made aware of the June 14, 2010, posts and requested that Becker meet with him to discuss the posts. Becker’s position was that the posts were his own and none of his employer’s business. Becker’s employer disagreed. Seven days later, after a management meeting, it was decided that Becker would be terminated.

Becker brought a claim against Knauz for the firing, arguing that he had engaged in protected, concerted activities, thus making the firing a violation of Section 8(a)(1) of the National Labor Relations Act. Becker also brought a claim against Knauz challenging certain provisions of its handbook. The Administrative Law Judge (“ALJ”) found the firing lawful, a finding that was upheld by a three-member panel of the NLRB on September 28, 2012.

The ALJ’s findings relevant to the Facebook post were two-fold. First, the ALJ found that the Facebook posts about the Ultimate Driving Event were protected, concerted activity. The ALJ admitted that the activity of Becker was not ostensibly protected. However, the ALJ noted that comments regarding food for customers could relate to customer satisfaction and as a result, commissions.

The ALJ’s second finding was that Becker’s Facebook post regarding the Land Rover accident was neither protected nor a concerted activity. In making this finding the ALJ stated, “it was posted solely by Becker, apparently as a lark, without any discussion with any other employee of the Respondent, and had no connection to any of the employees’ terms and conditions of employment.”

There are lessons from the case of Karl Knauz Motors, Inc. d/b/a BMW and Robert Becker, case number 13-CA-046452, for both employers and employees alike. First, be careful what you post on Facebook. I know you have heard this before, but as Robert Becker learned the hard way, Facebook is not just personal, it is also professional. Second, and this is for Employers, know your rights. Although a recent NLRB decision found that Employers cannot prohibit the use of social media at work, it does not mean you have to allow your employees to disparage you on public forums. You can take action when an employee acts in a way that is inconsistent with the qualities of your business. However, please consult with an attorney before you consider taking any action against an employee.

To conclude we will go back to the beginning: be diligent, be aware, and understand that social media matters.

Inheritance

A primary motivation in estate planning is leaving to our beneficiaries, the assets we have accumulated over a lifetime. Clients focus on the monetary value of inheritance, most seeking equal treatment for their beneficiaries, some wishing unequal treatment or disinheritance of some, and most concerned about having their wishes respected and carried out.

Very few of our clients have gone beyond this to consider how an inheritance can be used to further their non-monetary objectives for the recipients. What do I mean by this? Let me share some examples.

I had a client who considered a staged distribution of his assets, 1/3 to his children at the ages of 25, 30 and 35. “No,” he said, “that’s not what I want. While I’ve had good jobs all my life, and made good money, I haven’t saved near enough for my retirement. I don’t want my kids, when they approach retirement age, to be in the spot I’m in right now.” He then proceeded to instruct me to prepare his trust permitting his children to withdraw their inheritance in thirds, 1/3 each at 25, 30 and 65. I thought that was a very creative approach.

We have other clients who want to make sure that their children and grandchildren stay in touch and spend time together, even though our modern society tends to send them in different directions as they pursue their careers. Hence the “Travel Trust.” These parents have created a trust providing children with some withdrawal rights, but also provided a portion of the inheritance is to be held and used by family members as a travel fund, providing cash advances to purchase travel tickets, meals and accommodations, perhaps even car rentals, to facilitate travel to visit other family members. In the case of a beneficiary with physical challenges, travel costs might also include travel costs of a needed companion for the principal beneficiary. Some Travel Trusts provide for the same sorts of disbursements in aid of travel for personal growth experiences like visits to famed destinations, perhaps art museums in France, or the pyramids in Egypt. They might go so far as to require the beneficiary to study or take courses in a particular country.

Some who provide money for travel want their descendants to visit the country of family origin, culture or religion. Other trusts encourage travel with a philanthropic twist; for instance, the inheritance would need to be used for volunteer work in a Third World country.

It should be noted that an inheritance distributed outright to a descendant is vulnerable to the claims of the recipient’s creditor(s), possible marital break ups and so forth, while a Travel Trust can be protected from such claims by what lawyers call a “Spendthrift Clause.”

Our clients still want to provide for basic needs of their children and grandchildren, but beyond that, those with extra means are becoming increasingly philosophical in their estate planning. Thoughtfully prepared trusts can be used to influence the behavior of their beneficiaries in a positive way.

While in most cases, family members don’t know what has been set up in the will or trust until after their relative’s death, we urge our clients to discuss their intentions and wishes with their children during their lifetime, so that the children will have a better opportunity to really understand the thinking that lead to the creation of such trusts.

Your DiMonte & Lizak, LLC attorney would be happy to discuss your thoughts and wishes with regard to a planned inheritance for your children and grandchildren. While we can never disclose the confidences of one of our clients to another, we can share the knowledge which our experience in planning the estates of others has given us in counseling you.

Window Closing On Gifting to Reduce Estate Taxes

Over the years, the federal estate and gift tax laws have featured a once-in-a-lifetime exemption enabling taxpayers to make tax-free gifts to reduce their estate tax liability in varying amounts. While the exempt amount was once as little as $60,000, and for quite a few years has been pegged at $1 Million, the gift tax exemption has recently risen dramatically so that, in 2012, the exempt amount (“Exemption”) is $5,120,000 for each taxpayer, meaning a married couple together can gift or leave their beneficiaries up to $10,240,000 without gift or estate tax exposure. Unfortunately, it is highly likely that this opportunity is soon to be drastically curtailed.

Unless Congress acts to provide otherwise, the estate and gift tax laws will automatically and dramatically change effective January 1, 2013. Not only is the Exemption scheduled to shrink from $5.12 Million per taxpayer to $1 Million, but also the estate tax rate is scheduled to increase from 35% to 55% of each taxpayer’s taxable estate assets.

Estate taxes are not typically paid by surviving spouses due to an unlimited marital deduction. However, when there is not a surviving spouse, the decedent’s assets above and beyond the Exemption are subject to estate tax. Due to the impending tax law change, a husband and wife whose estates total $10.24 Million who died prior to 2013 would pay no federal estate or gift tax, while the same family dying after 2012 would incur estate taxes of over $4.5 Million. The immediate reaction of many of our clients to this development is to: (i) become irate and (ii) ask how to avoid this result.

Whether any action should be considered naturally depends upon the size of our clients’ estates, their age, earning expectations and anticipated family and retirement expenses. If it can be projected with confidence that well over $2 Million will remain after both spouses have died, their beneficiaries are faced with the estate tax issue. Because our clients are able to gift up to $5.12 Million at any time prior to December 31, 2012, it may be wise to gift assets to their beneficiaries this year in order to reduce their taxable estates before the gifting window closes on January 1.

The primary consideration for our clients as to whether they should gift substantial amounts in 2012 is whether they foreseeably might need the gifted assets in the future. Such gifts are not reversible, so access to the gifted assets is lost. Appreciated assets often are not the best types of assets to gift for these purposes because the donee is limited to the basis of the donor rather than receiving the step-up in basis as with an inherited appreciated asset, and the gift will require a full appraisal of the asset at the time of gift, which can be costly. Thus, it is often wise to use cash or cash equivalents for gifting purposes.

Clearly, our clients who have net worth well over $2 Million, and especially if they are older, are more likely to be able to safely gift to their beneficiaries. If any gifts to a single donee exceed the annual exempt amount of $13,000, then a gift tax return must be filed by April 15 of the next year.

Some of our clients have taken advantage of a technique which allows them to “give away” their cake and “have it, too.” A spouse can gift assets of up to $5.12 Million into an irrevocable trust for the benefit of his or her spouse and family for the life of the spouse, at which time the trust would be distributed to the family. Because the donee spouse only has a lifetime interest in the trust which expires at his or her death, and because the donor spouse has no further interest in the donated assets, they are not taxed upon the death of the surviving spouse. These Spouse and Family Exempt (“SAFE”) trusts can be very effective in reducing taxable estates. The only downside is that, upon the death of the donee spouse, the assets must stay with the family, and the donor loses the informal enjoyment of the assets he or she once had with the donee spouse.

The upcoming estate and gift tax law changes and the startling difference in the potential amount of death taxes make the evaluation of gifting opportunities quite important for our higher net-worth clients. If your circumstances fit into the categories mentioned in this article, please contact your Di Monte & Lizak, LLC attorney soon, as the gift transfers must be made prior to January 1, 2013 in order to take advantage of this expiring tax-reduction opportunity.

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Social Media, Your Business, and the Law

When you hear the term social media what do you think about? If your only thought is Facebook, you may have a problem. Social media is the future and the present. Social media affects your business everyday: from an employee tweeting a complaint about an employer, to a customer expressing a complaint on Yelp; it has become increasingly important for businesses to control their brand in the world of social media. Equally important is avoiding the legal pitfalls in this widely unchartered area of the law. This article will discuss a couple tips for you to consider as your business becomes increasingly intermeshed with social media.

Create A Social Media Policy

Section 7 of the National Labor Relations Act protects the activity of employees related to the improvement of labor conditions. Section 7’s protection is very broad. Thus, a Facebook post that reads, “only given 30 minutes for lunch today at work, not fair”, is protected activity. On May 30, 2012, the General Counsel of the National Labor Relations Board (hereinafter the “NLRB”) issued a memo in an attempt to clarify how an employer may control an employee’s social media interaction. This article is not a substitute for the 26 page NLRB memo.  Read the memo, or consult counsel before drafting any social media policies.  In the interim, here are some things you should consider: First, make sure your employees read your social media policy. Second, your employees are not your spokesmen; make sure they know this when interacting on social media. Third, protect your business by restricting your employee from posting confidential information.  Be aware that some confidential information, such as salary and bonuses is protected by the Act and likely may not be restricted via a social media policy.  Fourth, prohibit the use of social media at work unless it is work related. Lastly, remain diligent in staying up to date on NLRB social media policy because it is constantly evolving.

Tread Cautiously When Interacting With Employees and Prospective Employees through Social Media

You can learn a lot about your employee or prospective employee by accessing their Facebook, Twitter, or LinkedIn account.  Likewise, your business may derive a benefit from using an employees’ social media account. However, both of the above activities may expose you and your business to civil and possibly criminal liability.
In a recent decision the Northern District of Illinois, found that an employers’ use of its employees Facebook and Twitter accounts were sufficient to allege a false endorsement claim under the Lanham Act.  Maremont v. Susan Fredman Design Group, Ltd., 772 F. Supp. 2d 967, 970 (N.D. Ill. 2011).  Under the Lanham Act, “false endorsement occurs when a person’s identity is connected with a product or service in such a way that consumers are likely to be misled about that person’s sponsorship or approval of the product or service.” Id.  15 U.S.C. §1125(a)(1)(A).  Proven violations of the Lanham Act award the winning party treble damages.
In another Facebook faux pas, a law firm representing an insurance company hired a private investigator to become Facebook friends with a minor to assess her damages resulting from a dog bite. The private investigator, the law firm, and the insurance company are all being sued by the family of the minor for allegedly violating sections 18 U.S.C. §2707, and §2701 of the Stored Communications Act.  The Act, which was enacted to prevent abuse of access to stored electronic communications (think emails and text messages), carries with it both civil and criminal penalties.
Lastly, a lawyer and his client in the Commonwealth of Virginia recently encountered the trappings of Facebook malfeasance when a judge found their conduct sanctionable to the tune of $722,000.00 and a reduced jury verdict award from $6,227,000 to $2,100,000.  The basis of this sanction was that Plaintiff’s counsel directed his client to “clean up” his Facebook page.  The Plaintiff thereafter deleted photos from his Facebook page which depicted him in a jovial state.  These pictures were relevant to the litigation because the Plaintiff’s wife had recently died in a car accident and the pain endured by the Plaintiff in losing his wife was significant in awarding damages.

What To Take From All This?

Social media is big, fast moving, and whether you like it or not, a part of
your business. Unfortunately, the law cannot keep up with the ever changing medium of social media; what is true today may be obsolete tomorrow.  All you can do is remain vigilant, consult counsel before making any social media related decisions, and when all else fails, err on the side of caution.

Tips for Hiring a Nanny

Summertime.  When my children were little and summer rolled around, we used to get someone we called a summer girl to come stay with us for the summer, be an activity director for the children, and give us a little time to ourselves.  Now I think they’re called Nannies, and sometimes they’re hired on a year around basis.  Nannies aren’t all about fun, games and free time, you have to be aware of the legal, tax and other issues involved. Here are some of the most common issues that families should understand before hiring a childcare provider.

Independent Contractor vs. Employee?

Workers classified as independent contractors set their own hours, and can generally work however they choose to get the job done. For a Nanny to be classified as an independent contractor, she would have to set her own schedule (doesn’t work well for someone who is hired to take care of your children), be available to the general public, and may finish a job any way she wishes, without review of the process by the family she works for.

Many businesses are concerned with the distinction between independent contractors (no withholding, no overtime pay, etc.) and employees.  A Nanny is almost always considered an employee. Since the family designates the hours the Nanny must work, as well as specific tasks and other household chores she is to perform, a Nanny would usually not meet the requirements for classification as an independent contractor.

Pay and Overtime Pay

You and the Nanny should be specific about the rate of pay (remember minimum wage applies)  for the Nanny, and when payments will be made.  Will you be providing any fringe benefits, such as health insurance or workers compensation insurance?  Will the Nanny be living in your home?  Provided with free meals?  Have her own bedroom?  TV?  Computer?  Access to your telephone?

All household employees, including nannies, must be paid for overtime work under federal law unless they live in your home. Any time she works more than 40 hours within a 7 day week you must pay her an hourly rate that is 1.5 times her regular hourly wage.  However, there may be other forms of compensation.

Work Eligibility

Before a Nanny starts work, ask her to complete an I-9 Employment Eligibility Verification form. Read the directions on the form and verify the Nanny’s proof of employment eligibility. The prospective Nanny should be ready to show a combination of documents as evidence of her ability to work legally in the U.S. Documents can include a Social Security card, driver’s license, birth certificate, passport, green card, or work permit, or combination thereof. You should make copies of these documents and keep them in your records along with the completed I-9 form.

Additionally you will undoubtedly want to ask applicants for references, check those references, and do a background check on applicants before making a final hiring decision.

Qualifications

You probably will want your Nanny to complete First-Aid and CPR training.  It may be necessary for you to pay the cost of this training, and to find the most convenient place where it can occur.  You may even have to provide transportation for the training, but if you consider it important, its just part of the cost of obtaining Nanny care.

Tax Responsibilities

If your Nanny is paid at least $1,500 a year, you must contribute to Social Security and Medicare. You pay for half of the Social Security taxes and deduct the other half from the Nanny’s pay check. You may choose to withhold income taxes as well, although it is optional. However, it’s usually more convenient for the household worker for you to withhold. When your Nanny starts employment, ask her to complete a W-4 form so you know how much to withhold from her pay. You’ll also need to issue a W-2 form to her every year so she can report her income when she files her tax return.  You are required to withhold tax and social security tax and remit these on a regular basis just as businesses do with their employees.  There is personal liability to the IRS for failure to do so.

Creating an Employment Agreement

When you hire your Nanny, it is a good idea to have a comprehensive Nanny-Family Employment Agreement. This document will include state guidelines such as the hours the Nanny will work, how much and when she will be paid, a description of her basic duties, and conditions and procedures for termination. You may also want to include additional duties and guidelines for confidentiality. Your DiMonte & Lizak, LLC attorney can provide you with such an agreement if you wish.

Automobile

Will it be necessary for your Nanny to have a car to perform her duties?  Will you allow her to use one of yours, or require her to provide her own?  You need to be sure she is licensed to drive.  Insurance – is she providing insurance, or will she be covered under your policy?  What will that do to your insurance rates?  Will she be permitted some limited use of your car when she is on her own time?  Will there be restrictions on such use?

Restrictions

You need to be clear, and make it a part of the contract, on use of substances while in your home and while working.  Is smoking permitted?  Restricted areas?  Drugs and alcohol should also be discussed, and you should have a written agreement covering the whole range of dos and don’ts.  Is Nanny permitted to take food to her room?  Rules on whether food can be kept there are appropriate, as are rules regarding dirty dishes and condition of the room generally.  Can Nanny use the washer and dryer?  Will such use be limited to certain times or days?  Do you want to include provisions for friends and social activities, personal telephone use, use of computers and the Internet, etc?

Conclusion

Like any other business association, a detailed, written agreement can go a long way toward the success of the relationship.  It is also key to avoiding trouble for you over tax and employment issues.

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Linscott Hanson: Teacher, Mentor, Scholar

As many of you know, our partner, Lin Hanson, recently celebrated his 50th year of law practice.

It seems fitting to reflect on what Lin has meant, and continues to mean, to this law firm, to the practice of law and to younger lawyers, and to think about what mentorship means in the law.Linscott R. Hanson

Lin began his law career in 1961, the third in a line of family practice stretching back to 1894 when his maternal grandfather, Roscoe Linscott Roberts (“RL”), graduated from a law school now known as IIT Chicago- Kent College of Law. Lin’s dad, Fred B. Hanson, joined RL in practice when Fred returned from the Navy at the end of World War II. RL then was well past his 50th year in practice. Lin immediately took responsibility for some of RL’s and Fred’s files upon joining the practice in 1961. Fred practiced law until age 84. He continued giving counsel to his clients, and to Lin, until he was almost 94.

Whereas RL was an office lawyer focused on corporations, trust and estates (like Lin is), Fred came from a trial law background, defending cases for a number of insurance companies, and functioning as head of the claims department for Standard Oil of Indiana. In reflecting on his practice, Lin said, “From RL I learned to carefully select a good trustee and then give the trustee flexible guidelines to run the trust by. From Dad I learned the importance of getting out of the office and calling on clients – ‘visit the scene’ was his standard advice. When I undertake the representation of a new company, I try to visit them. You see things you could never hear about over the telephone. Dad insisted on doing the paperwork. He had all kinds of tips, in the books he wrote, and in person, on how to negotiate – tips that work as well in contracting to buy or sell a company as they do in settling an injury claim.”

Lin’s dedication to his profession has included actively serving since 1981 on the Illinois Secretary of State’s Corporation Acts Advisory Committee, now the Institute of Illinois Business Law. Shortly after Jim Edgar became Secretary of State in 1981, he decided to review the Illinois business statutes administered by the Secretary’s office. A number of prominent Illinois attorneys were contacted for their assistance and advice and ultimately Secretary Edgar created a Business Corporations Act Revision Committee. Members included Lin, and the committee went on to draft, revise, or modernize over 500 items of legislation, including the Illinois Business Corporation Act, the Limited Liability Company Act, and the Partnership Act. Lin has been the only member serving continuously since 1981.

Lin also has been a frequent speaker and prolific writer for the Illinois Institute of Continuing Legal Education, the Illinois Bar Association, and numerous other organizations. IICLE is honoring Lin this summer for his contributions.

Lin’s door at the firm is always open, literally and figuratively. He is amazingly generous with his time, providing direction, sharing his skills, asking probing questions, and challenging our assumptions and analyses.

Lin’s 50 years in practice sparked an outpouring of congratulatory missives thanking him for his contributions to the legal profession as a whole, and for positively affecting the lives of young lawyers. Representative is the following from Chicago attorney Markus May:

“Lin, you have always been a great help and inspiration! Throughout the years when I have run across a thorny problem or just a simple question, you have always been there to help out. It is greatly appreciated.

However, it is not only myself and other individual lawyers you have helped. You have taken time out of your schedule to help draft the Illinois business laws and make our statutes some of the best around.

Your service to the legal community is often unrecognized and I am sure that no one knows all the different ways you have contributed. It is with great joy that we get the opportunity to recognize you for 50 years of service!

Way to go and thank you so much for your tireless contributions. You are a class act that many try to emulate and your legacy is found not only in the legal work you did, but greatly in your impact in making all of us a little better. Best wishes Lin!!!”

Lin credits RL and Fred for their guidance and mentoring. Well, apples come from apple trees, and the legal community and we at Di Monte & Lizak are blessed to benefit from the teachings of RL and Fred, and to have the teacher, mentor, and scholar we have in Lin.

Beware of Improper Classification of Workers

Companies may find they need people with certain skills, but are concerned about expanding their workforce with regular employees and the overhead concomitant with employees (unemployment insurance taxes, worker’s compensation insurance, payroll costs, etc.) One solution is to supplement the workforce with independent contractors.

Governmental agencies like the Illinois Department of Employment Security (IDES), the Illinois Department of Labor, and the IRS increasingly are challenging companies’ classifications of workers as independent contractors. These agencies start with the presumption that the company is the legal employer of the independent contractor. Therefore, when a company pays the worker to perform services, the worker is presumed to be the employee of the company upon audit by the agency. Consequently, every company using independent contractors should seriously be preparing, long before an audit or any other legal challenge, to prove that the independent contractor is not a company employee.

How does a company do this? The crux is to prove that the independent contractor is self-employed. What are some indications that an individual is self-employed? One indicator of self-employment is an independent contractor who is incorporated and in “good standing” with the state of incorporation. If the independent contractor is not incorporated, and not willing to be incorporated, make sure that the contractor has a business name as a sole proprietor and uses that business name. Effective proof includes documents showing that the worker holds himself out under his own business name, checks from the company made out to the independent contractor’s business name with the contractor endorsing the checks with his business name, IRS Forms 1099 made out to the business name of the independent contractor, a well-drafted independent contractor agreement, and proof that if the company closed its door tomorrow, the independent contractor could continue to function as a self-employed entity. If the contractor needs a license in order to perform the work, require proof of the license and a copy. A contractor will have a hard time establishing an independent contractor relationship with a roofing subcontractor if the latter does not have the roofing license required by the Illinois Roofing Industry Licensing Act. Companies should maintain files for each independent contractor and include these materials in each file.

The IRS and the IDES have their own detailed checklist of rules and regulations to prove that the workers are independent contractors. The Illinois Employee Classification Act, which applies to construction-related companies, has a test which is particularly difficult for companies to meet.

Penalties for worker misclassification are steep. Careful assessment of worker relationships and taking practical steps can significantly lower your company’s exposure.

Funeral Arrangements

Many clients have strong views on funeral arrangements, and want to know “the best way” to see to it their instructions and wishes are carried out. Some people have asked us to include funeral directions in their will. Since wills commonly are not read until after funeral arrangements have all been settled and completed, we believe a will is not the best place for our clients to express their wishes in regard to funerals.

While in a conventional family structure, the spouse, or if none, the children of the deceased will be presumed to have the authority to make funeral arrangements, more and more people today are in less conventional arrangements. The right to make anatomical gifts and funeral arrangements is sometimes called the “Right of Sepulcher” and is of great importance to couples living in less conventional relationships. Often there is no legal relationship between couples although they may have had close and lengthy living arrangements and, without a legally binding grant of the Right of Sepulcher tragic consequences can occur.

We suggest that these matters be the subject of discussion with family members, just as health care and end of life decisions are. Since people’s attitudes and wishes on these subjects change as life goes on, we suggest this is a topic that needs to be reviewed every few years.

In Illinois, there are two ways to legally authorize someone to make funeral arrangements for you. One of these is the Illinois Statutory Short Form Power of Attorney for Health Care. We are familiar with these documents as authorizing a person to make end of life decisions in cases where the person is no longer able to make these decisions or express these decisions on their own behalf. Often our clients refer to this form as the “pull the plug” form. It contains statement regarding the client’s wishes about prevention of suffering and prolongation of life, and authorizes a person to insure that these wishes are carried out.

The actual power of attorney form was adopted as a part of the statute adopted by the Illinois legislature – its exact language is dictated by the act. While it is possible to create a form which does not exactly follow the language of the act, we recommend, and most of our clients decide to use the statutory form.

A provision of the form which is often ignored by our clients deals with funeral arrangements. Since it is short, it is included here in its entirety:

A. My agent shall have the same access to my medical records that I have, including the right to disclose the contents to others. My agent shall also have full power to authorize an autopsy and direct the disposition of my remains. [Emphasis Added]

B. Effective upon my death, my agent has the full power to make an anatomical gift of the following (initial one):
(NOTE: Initial one. In the event none of the options are initialed, then it shall be concluded that you do not wish to grant your agent any such authority.)

  • Any organs, tissues, or eyes suitable for transplantation or used for research or education.
  • Specific organs: ______________________________________________________________________________
  • I do not grant my agent authority to make any anatomical gifts.

C. My agent shall also have full power to authorize an autopsy and direct the disposition of my remains. [Emphasis Added] I intend for this power of attorney to be in substantial compliance with Section 10 of the Disposition of Remains Act. All decisions made by my agent with respect to the disposition of my remains, including cremation, shall be binding. I hereby direct any cemetery organization, business operating a crematory or columbarium or both, funeral director or embalmer, or funeral establishment who receives a copy of this document to act under it.

So this form, perhaps thought of for a different purpose, allows you to designate someone with an absolute right and authority to make funeral arrangements for you.

There is a second form. Perhaps you wish to use your health care power of attorney to empower someone with regard to medical decisions, but give authority over you funeral to someone else. Since you can only have one health care agent, you might then chose the second form, called “Appointment of Agent to Control Disposition of Remains” which is authorized under another Illinois statute, the Disposition of Remains Act. This form is much more focused than the Health Care Power of Attorney, and permits you to appoint an agent just for the purpose of arranging your funeral, including cremation if that is your wish. Like the Health Care Power, it provides an opportunity to name a successor agent if the original one is unable to act.

Should you wish to make or change either of the forms discussed in this article, please contact me or another attorney at DiMonte & Lizak.

Illinois Estate Tax Provision Hidden in Tax Relief Law Signed by Governor Quinn

Lost in the recent publicity regarding the Illinois income tax relief law enacted to entice Sears and CME to remain in Illinois was a significant change to the Illinois Estate Tax that was tacked on to the law. The statute was signed into law by Governor Quinn on December 16, 2011.

The Illinois Estate Tax law prior to this new law recognized an “exclusion amount” of $2 million. Thus, for Illinois citizens dying before January 1, 2012, the Illinois Estate Tax was levied on the taxable estate of the decedent in excess of $2 million, at a graduated tax rate of eight (8%) to sixteen (16%) percent.

The recently-signed law increases the exclusion amount to $3.5 million for persons dying in 2012 and $4.0 million for persons dying on or after January 1, 2013.

While this relief is welcome, it does not synch up with the federal estate tax, which now taxes decedents’ taxable estates which exceed $5 million for persons dying in 2011 and 2012, but is scheduled to revert to only a $1 million exempt amount beginning in 2013. While the conventional wisdom among tax practitioners assumes that the current $5 million exempt amount (or a similar amount) will be extended by future federal legislation, the experience of the recent past has taught us to be careful about such assumptions.

The change in Illinois’ Estate tax law should not require any change to estate plans drafted with the prior $2 million exemption in mind. Our tax practitioners are watching this developing scenario closely to evaluate what modification, if any, will be required to our clients’ estate plans if and when Congress acts.

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Illinois State Bar Association Distinguished Counselor Award Presented to Eugene A. DiMonte and Linscott R. Hanson

The Illinois State Bar Association bestowed on Eugene A. Di Monte & Linscott R. Hanson, partners in Di Monte & Lizak, LLC its coveted Distinguished Counselor Award in recognition of each having practiced law in Illinois for 50 years. Both Gene and Lin were admitted to practice by the Illinois Supreme Court on November 28th, 1961. When asked about future plans, neither plans to retire in the foreseeable future.

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Van Osdol Named to Illinois Super Lawyers’ Rising Stars List

Di Monte & Lizak, LLC is proud to announce that Ryan R. Van Osdol has been named to the 2012 Illinois Super Lawyers’ Rising Stars list as one of the top attorneys in Illinois for 2012.  No more Ryan R. Van Osdolthan 2.5 percent of the lawyers in Illinois are selected to the list.

Mr. Van Osdol has been with Di Monte & Lizak, LLC since September 2008. He focuses his practice on business litigation, construction litigation and various other aspects of commercial litigation.  Mr. Van Osdol has successfully represented a wide range of clients in trial courts, appellate courts, and in alternative dispute resolution proceedings, such as arbitration and mediation. For more information about Mr. Van Osdol, his experience and his practice areas, see his page on our Web site.

Super Lawyers is a rating service of outstanding lawyers from more than 70 practice areas who have attained a high degree of peer recognition and professional achievement. Attorneys cannot pay to be listed as a Super Lawyers’Rising Star. The annual selections are made using a rigorous multi-phased process that includes a statewide survey of lawyers, an independent research evaluation of candidates, and peer reviews by practice area.

Reminiscence – Fifty Years

This past November 2011, I was thinking about how the law practice has changed since November, 1961, 50 years ago, when I was admitted to the law practice by the Supreme Court of Illinois.

In 1961, we used manual typewriters; electric ones were just starting to come into vogue. When we needed multiple copies of a lawsuit where multiple parties were involved, we used carbon paper to print the copies. The keys on the typewriter had to be struck so hard that they would often cut through the paper. To correct typing errors you had to erase the errors on all the copies and use white chalk to cover the erasure on as many as 12 sheets. Otherwise, you had to simply start over with fresh paper.

One option we had at that time was to use a mimeograph system. This was a very messy procedure involving inking a stencil to be used to make copies. Most of the ink ended up on our hands. Since that time we progressed to electric typewriters, memory typewriters, word processors, and the personal computers presently in use.

The first copy machine I remember using was a wet process one which required you to pass a treated sheet through a special fluid one page at a time and then hang the copy to dry. Imagine how long that took to make multiple copies. Obviously, we seldom used that machine.

In 1961, when lawyers went to court to argue points of law, they carried law books with them to argue legal precedent. Sometimes you carried as many as a dozen books. With the copy machines now in use we are able to make copies of the relevant page of a book or better yet print the pages from electronic copies of the books to take to court, eliminating the need to make copies or carry the books to court.

Back then we used large cumbersome adding machines that enabled us to add, subtract and do other mathematical calculations. Then along came the small battery powered hand-held calculators and of course the modern computers which we now have at our desks to do the same. With the use of their computers, many lawyers draft their own documents and pleadings at their desk or use their computer to organize their thoughts and to transfer the same to their assistants to produce a finished product. Some of the courts require electronic filings as distinguished from filing paper pleadings and documents in the court clerk’s office. In 1961 and until recently you were required to go to the court clerk’s office to file papers.

We receive much less mail through the U.S. Postal Service than we used to. Most important documents come by private carrier services such Federal Express or UPS, etc. or by e-mail. The use of e-mail has become very common.

Starting with the fax machines and now e-mail, there is much more stress placed upon us. I remember an occasion after the use of fax machines became popular when a commercial contractor client faxed voluminous contracts to me and then called a few minutes later asking me what I thought of the document. When I responded jokingly that if he would pay his statements from us as fast as he was now requesting us to do his work that we would respond quicker. He then said that he would then fax his check to us. Today, a scanned copy of a check can be deposited to our bank account electronically. Unfortunately, that client has since passed away and I can not joke with him about this latest change.

Another significant change for us is how legal research is done and how we keep abreast of changes in the law. Back then you had to pull books off the shelves and read them. Now you are able to get the same information over the Internet, making it easier for lawyers to work away from their library. We are also able to dictate directly into a computer with a special program that tells the printer to produce the document.

These reflections obviously apply to other types of businesses besides law offices. It was interesting to reflect on how we now get our work done is so different from 50 years ago.

Timing is Everything When It Comes to Battling Your Creditors

When you cannot pay your bills, eventually you may be sued. Once you are sued, and a judgment is entered against you, a creditor can use the court system to seize your property and collect on the judgment. The creditor and creditor’s attorney have many legal tools in his or her arsenal to collect money to satisfy the judgment. In this newsletter, we have written about them before – wage garnishments, citations to discover assets and real estate levies to name a few. It is usually after a judgment or series of judgments have already been entered, that a client will walk through the door at Di Monte & Lizak and seek assistance. However, timing is everything, and in some cases, if you wait too long, it may be too late to take advantage of all of the state and federal statutory protections afforded to debtors.

Illinois offers several protections for individuals when a creditor is seeking to collect on a judgment. Each state is different in the amount of their exemption allowances. In Illinois, each debtor is given a $15,000 homestead exemption, and a $2,400 auto exemption, and a $4,000 wildcard exemption which can be used to protect any personal property, including funds in a bank account. However, these exemptions need to be exercised in court prior to a turnover order being entered by a judge.

The law in Illinois is clear; once a turnover order is entered, the debtor is divested of his interest in the property. This is true even if the debtor still is in possession of the property. So a debtor who has a used vehicle worth $2,200, has an exemption of the first $2,400 in equity of a vehicle. If he properly asserts his exemption prior to a turnover order being entered, the creditor would not be able to take and sell the vehicle to satisfy the money judgment. However, if the debtor fails to appear, or appears and does not properly exercise his exemption rights and an order is entered, the debtor loses his interest in the car. It will be sold to pay down the judgment against him.
In many instances, it is only after this turnover order is entered that the debtor decides to file a bankruptcy. While the bankruptcy would discharge the remainder of the obligation to that creditor, it cannot be used to save the automobile.

This is also true with a residential foreclosure. Many clients seek to use bankruptcy as a tool to save their home. Bankruptcy can be a very effective tool to save a home. Again, timing is everything. Once a property is sold at a foreclosure auction, the owner has lost his interest in the property, even if he files a bankruptcy before the sale is confirmed in the foreclosure court.
When it comes to debt relief, the sooner you realize you are in trouble, the sooner you should come in to discuss your options with your Di Monte & Lizak attorney.

Transfer on Death Instruments: The Good and the Bad

Effective January 1, 2012, Illinois created a new planning tool for attorneys and their clients relating to the transfer of residential real estate at death. The new transfer on death instrument (“TODI”) Act (755 ILCS 27/1 et seq.) allows an individual to name a beneficiary of their residential real estate during their lifetime that will pass to a beneficiary at the owner’s death. Here are a few brief points:

Residential Real Estate Only. A TODI may only be used to transfer residential real estate. Residential real estate means real property improved with not less than one nor more than four residential dwelling units, condos, or a single tract of agricultural real estate consisting of 40 acres or less which is improved with a single family residence.

Revocable Instrument. The TODI is revocable even if the instrument or another instrument provides otherwise.

Owner. Only a natural person may create a TODI.

Beneficiary. A beneficiary may be any person, including individuals, corporations, trusts, estates, partnerships, limited liability companies or any other legal or commercial entity.

Three Requirements of a TODI:

  1. A TODI must contain the essential elements and formalities of a deed and must be executed in the presence of two witnesses and acknowledged by a notary public. The witnesses must attest in writing that the owner executed the TODI in their presence as his own free and voluntary act and at the time of execution the witnesses believed the owner to be of sound mind and memory. (similar to the requirements of the execution of a will)
  2. A TODI must state that the transfer to the designated beneficiary will occur at the owner’s death; and
  3. A TODI must be recorded before the owner’s death in the county where the real estate is located.

Beneficiary Must Accept. After the owner’s death, the transfer to the beneficiary will be effective upon filing a notice of death affidavit and acceptance by the beneficiary with the county recorder’s office. If this notice is not filed within two years after the owner’s death, the TODI shall be void and ineffective and the real estate will pass to the owner’s estate (subject to some exceptions).

Revocation of TODI. A revocation of a TODI must also be recorded for it to be effective. This revocation may either be another TODI that revokes the instrument or names a new beneficiary.

The Good

Overall, this new legislation gives attorneys and their clients a new and likely inexpensive alternative to a living trust or a land trust by allowing the owner to directly name a beneficiary and avoid probate. Because it is also revocable until death, it may be a better alternative to joint tenancy which creates the presumption of a gift on the creation of the joint tenancy. Holding property in joint tenancy also subjects the property to the creditors of a joint owner.

Another good provision in the new law requires the TODI to be prepared by an Illinois licensed attorney. With the many, many issues that we see with joint tenancy and payable on death accounts, this requirement should provide clients with some protection, although the owner is not prohibited from preparing his own TODI. Additionally, owners may now hold property as tenants by the entirety and provide for a beneficiary (such as the survivor’s living trust) upon the death of the surviving spouse which provides owners with the asset protection features of tenancy by the entirety along with the avoidance of a probate estate. Finally, as a practical matter, clients who hold property in an Illinois land trust can avoid having to take property out of their land trust to refinance the property (which lenders almost always require) if the property is instead held under a TODI.

The Bad (or Not So Good)

One of my biggest fears is that the TODI may not be coordinated with a client’s estate plan. If a client has a living trust that provides for a certain disposition of assets, and their home, which may be one of their largest assets, is left to a beneficiary in a TODI, this may have unintended consequences. The TODI beneficiary may have unintentionally received more assets than the client intended. More importantly, if the client’s estate is subject to estate taxes, the client’s trust may direct estate taxes to be paid from only trust assets, in which case the TODI beneficiary will receive the real estate without any liability for estate taxes, even though the real estate is included in the client’s estate for estate tax calculations. In that case, the trust beneficiaries may be on the hook for estate taxes on an asset that passes to the TODI beneficiary.

Additionally, what if the beneficiaries don’t know about the deed or don’t know that they need to record a notice of death affidavit? If a beneficiary has not recorded a notice of death affidavit two years after the owner’s death, the TODI is void and that beneficiary may have lost his rights to the property. Further, the TODI may also be subject to challenge in a probate estate. There may also be new title insurance issues to deal with. Finally, and somewhat beyond the scope of this article, the incapacity of the owner under a TODI likely creates problems.

Although the TODI legislation creates new opportunities for planning, careful analysis by your trusted attorney and coordination with your existing estate plan should not be overlooked.

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Di Monte & Lizak Adopts Strategic Plan for Future

1111-3Two law firms tracing their origins to 1924 and 1894 are combining their practices and personnel as Di Monte & Lizak, LLC effective November 1.  That’s a lot of history, but what about the future?

On Wednesday, October 12, the partners and associates of both combining firms met for the purpose of examining a Strategic Plan for Di Monte and Lizak’s future.

Partners David Arena, Riccardo Di Monte, and Alan Stefaniak led the presentation of the plan.  The partners have been meeting over many months with a management consulting firm to develop the plan and all the lawyers have been interviewed and have provided important input in the plan’s development.

Particularly significant in the strategic planning process was that in the face of economically challenging times, the unanimous message for the firm’s professionals is that the firm’s partners believe in the values that have brought us this far.  The firm’s mission statement:”Di Monte & Lizak Is an Experienced, Multi‑Practice Firm Working as a Team to Provide Exceptional, Practical Counsel and Quality Service” reflects this fact.

 

By adopting a strategic plan, Di Monte & Lizak has re-committed itself to being an enduring presence in the Chicagoland legal community.  The firm has received offers of merger from three 1111-4national law firms in the past 12 months.  Its conclusion is to thank each of them, reject each offer, and move forward into 2012 and beyond, continuing to serve its clients by following a path of controlled growth, adding strong new partners both to replace those who retire, and to slowly grow the firm.

The firm prides itself on providing a “downtown” service at a suburban cost, and intends to continue to do so.  Accordingly, the plan is focused on prompt, clear-cut, well-reasoned and cost-effective response to client needs.

EMPLOYMENT ALERT: Are You Covered for Claims Brought by the Equal Employment Opportunity Commission Or Other Administrative Agencies? A Recent Federal Court Decision Merits Review of Your Employment Practices Liability Policy (EPLI)

EPLI coverage protects employers from liability for wrongful employment practices.  Although coverage varies greatly, most EPLI policies cover claims for sexual harassment, discrimination, and wrongful termination.  EPLI policies became popular in the mid-1990s because of a major increase in the number of employment practices lawsuits.  The surge resulted from the passage of the Civil Rights Act of 1991, which gave employees the option of trying their claims to a jury instead of a judge, and which provided for both compensatory and punitive damages for certain employment practices violations.

Whether your EPLI policy covers you for certain claims depends on the language of the policy, including how the policy defines “insureds” and “employees” and “covered claims.”  Up until now, most insurers have treated a “covered claim” as including not only a claim brought directly by the prospective, current, or former employee, but also a claim brought by the Equal Employment Opportunity Commission on behalf of the employee.  The October 2011 Tennessee federal court decision in Cracker Barrel v. Cincinnati Insurance Company has called this practice into question, and is a warning to companies to check their EPLI policies and confirm that they do, in fact, cover actions brought by the EEOC or other administrative agencies such as the Illinois Department of Human Rights.

In Cracker Barrel, ten employees filed race and sex discrimination charges with the Illinois Department of Human Rights and the EEOC against Cracker Barrel.  The EEOC took great interest in the case, and itself brought a civil lawsuit on behalf of the employees against the company.  Cracker Barrel filed a timely claim under its EPLI policy which, as do most EPLI policies, covered “a civil, administrative or arbitration proceeding commenced by the service of a complaint or charge, which is brought by any past, present, or prospective employee.”

Cincinnati Insurance Company denied the policy claim because the lawsuit was brought solely by the EEOC, which was not a “past, present, or prospective employee” of Cracker Barrel.  Cracker Barrel objected, arguing that  the EEOC brought the suit on behalf of the employees,  and the civil lawsuit, while commenced by the EEOC, was brought only because the employees filed a charge with the EEOC.   The court sided with the insurance company, and concluded, as a matter of law, that the insurer had no duty to defend or indemnify Cracker Barrel.

Regardless of the merits of the court’s decision, it creates the potential for a gap in coverage that could expose you to significant defense and indemnity costs.  You should review your EPLI policies to understand exactly what is covered and, if necessary, fill the gap by getting confirmation from your insurer that these claims are covered.

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New Power of Attorney Statutory Forms Take Effect

A number of changes to the Illinois Power of Attorney Act became effective on July 1, 2011. The changes are designed to provide greater protection to the elderly, incapacitated, and disabled Adam J. Poterackipersons from their agents serving under powers of attorney (POAs). There are now new statutory form POAs for property and health care, but all POAs which were validly executed prior to July 1, 2011 will remain effective.

Some notable changes are as follows:

  • There are additional duties and a higher standard of care applied to the agent under a POA for property, particularly as it relates to record-keeping.
  • When signed, the new statutory form POAs for property and health care automatically revoke all prior POAs for property and health care, respectively.
  • The new statutory form POA for property includes a notice to the agent explaining the agent’s responsibilities.
  • Definitions from the Health Care Surrogate Act are incorporated into the POA for health care.
  • New court procedures and remedies are provided to protect principals from agents that breach their fiduciary duties under a POA.

Di Monte & Lizak estate planning attorneys have been incorporating the updated POAs into our estate plans in the months leading up to the effective date. If you are interested in learning more about the specifics about the changes to the Illinois Powers of Attorney Act, or any estate planning need please contact a Di Monte & Lizak estate planning attorney and we can provide you with further information.

Business Divorce – What Is It and How Do I Get One?

All businesses have owners. Without owners, a business would not exist. The owner starts the business. The owner has success. The owner makes mistakes. The mistakes cost money. The owner learns from her mistakes. So long as a single business owner remains single, she can make any business decision she wants without consulting anyone. She, alone, will enjoy the benefits or suffer the consequences of her business decisions.

Compare the sole owner to the joint business enterprise. For strategic reasons (additional capital, talent, or both), the single owner joins forces with one or more co-owners. They may decide to operate as a partnership, a corporation, or a limited liability company. Once the sole owner joins forces with a co-owner, business decisions must be made jointly. And the types of business decisions that may cause controversy within the organization are many. For example: (a) Should we perform (or decline) this project? (b) Should we hire (or fire) this employee? (c) Should we buy (or sell) this equipment? (d) Should we distribute (or retain) these profits? (e) Should we raise or contribute capital to cover losses? (f) Should we incur (or defer) these expenses? etc., etc., etc.

Every business owner knows there are many business decisions to make every day, every week, every month, and every year. Each owner has passionate feelings and philosophies which may support a particular position or decision. And, each owner’s decision making ability and style may make the decision-making process easier or more difficult. As we all know, there are both advantages and disadvantages to co-ownership of a business.

Many co-owners divide responsibilities. For example, one partner takes Athe office and the other takes the Ashop. One does the bidding and the other supervises the projects. One performs a sales function and the other performs a service function. Some owners delegate their decision making power to the other partners. Other owners want to be involved in every decision, no matter how small or petty. (My favorite example is the argument about the type of soda pop in the company vending machine). In short, there are many and varied things upon which business owners may disagree.

As you can imagine, the number of owners, the size of the business, and the legal entity used, can multiply the complexity of the organizational structure. The more complex the organizational structure, the more difficult it becomes to navigate and untangle once disputes develop. As an example, the simplest business organization is the two-owner partnership. At common law, one partner could dissolve the partnership by simply declaring it to be ended. The dissolution would automatically follow and both partners were free to settle the joint affairs of the business and go their separate ways to pursue their own separate and independent businesses. Upon dissolution of the partnership, the fiduciary duty owed to one another and the partnership would evaporate and the only lasting legal obligation was to wind up the financial and business affairs of the partnership. After dissolution, each partner was free to go their separate ways and pursue the same or a different line of business.

Compare the simple common law partnership with the modern day corporation or limited liability company-multiple owners, sometimes thousands of shareholders, eternal life, limited liability, by-laws, operating agreements, resolutions, annual shareholders and directors’ meetings, fiduciary duties and director and officer liability-it hardly compares! But modern day business requires a modern day business organization. And, when owners disagree on how to stay in business together, the modern business organization needs to be sold, dissolved, reorganized or sometimes simply liquidated.

The Business Divorce

Whether owners have used a partnership, limited partnership, corporation, or limited liability company to operate the business, the term Abusiness divorce generally means serious disagreement between owners about the way to run the business. In other words, is the disagreement so fundamental that the parties should split up and go their separate ways or would one or more like to buyout the other(s)?

Our business divorce cases take many forms. We have partnership dissolution and accounting, corporate dissolution and shareholder derivative actions, and limited liability company lawsuits. In each of these situations, the owners cannot agree on terms of separation, resolving the disagreement, or mutual buy/sell terms. We encourage negotiation before litigation. Negotiation can be difficult in business divorce situations especially since the personalities of the individuals involved may be difficult, stubborn, or eccentric. Like the dissolution of a marriage, many of these owners have been together for 10, 25, or even 50 years! They involve families, spouses, children, grandchildren, uncles, nephews and cousins. Some family businesses pick and choose between which children can be involved. Others mistakenly include all children much to the detriment of company management. I often observe companies that are Astarted by the father, grown by his son, and squandered by the grandson. Sharing a surname is not necessarily a recipe for success.

Moreover, each case is different and carries its own unique set of circumstances. Getting prompt, practical business and legal advice is essential. Unfortunately, many business divorce cases result in the unnecessary expenditure of corporate assets to fund the litigation between owners in disagreement. As they say, an ounce of prevention is worth a pound of cure. Once disagreements between co-owners reach the level of Airreconcilable differences, good practical, legal advice can prevent financial ruin caused by ego-driven litigation.

In a perfect world, business owners would resolve their problems internally, without lawyers or litigation. However, if that becomes impossible, prompt and practical legal consulting, with the creation of an exit strategy and dispute resolution plan, may prevent years of time-consuming and expensive litigation.

Using the Doctrine of Successor Liability to Stop Runaway Debtors

It is not uncommon for a plaintiff to obtain a judgment against a corporation but not be able to collect on the judgment because the corporation goes out of business. Typically, the debtor corporation genuinely failed because it could not generate sufficient revenue to satisfy its liabilities. However, in some instances, shifty debtor corporations attempt to exploit legal loopholes and prevent a creditor from using the corporation’s assets to satisfy the judgment. Di Monte & Lizak, LLC recently represented a creditor against a corporate debtor who attempted to employ this strategy.

In Mamacita, Inc. v. Colborne Acquisition Company, LLC, et al., Case No. 10-CV-6861, a creditor obtained a judgment against a corporation. In an attempt to avoid satisfying the judgment, the shareholders of the debtor corporation convinced their friends to form a new corporation that would purchase the old corporation’s assets. Pursuant to the scheme, the old corporation’s shareholders’ friends would own new corporation, but the old corporation’s shareholders would manage the new corporation and otherwise enjoy the benefits of owning the business.

The old corporation’s lender, who was complicit in the scheme, initiated an unnecessary Uniform Commercial Code (AUCC@) sale of the old corporation’s assets and then financed the new corporation’s purchase of the old corporation’s assets. The new corporation reaffirmed the old corporation’s obligations to the lender. In effect, no money changed hands, but the old corporation shed itself of liability to the creditor and the shareholders of the old corporation continued to enjoy using the corporate assets for their personal benefit.

After discovering the debtor corporation’s actions, the creditor hired Di Monte & Lizak to file a lawsuit, asserting a claim against the new corporation for successor liability. The new corporation filed a motion to dismiss, arguing that it was not liable for the obligations of the old corporation. In Illinois, a purchaser corporation is generally not liable for the debts of the seller corporation. However, there are four exceptions: 1.) an express or implied agreement of assumption; 2.) a merger of the purchaser and seller corporations; 3.) the purchaser is a mere continuation of the seller; and 4.) the transaction is for a fraudulent purpose. These exceptions are known as the doctrine of successor liability.

In response to the motion to dismiss, the creditor argued that the first exception applied because the old corporation expressly assumed the new corporation’s debt to its lender, and therefore, the old corporation impliedly assumed the new corporation’s debts to its other creditors. The creditor also argued that the second and third exceptions applied because nearly every aspect of the new corporation was a continuation of the old corporation’s business. Finally, the creditor argued that the fourth exception applied because the shareholders of the old corporation orchestrated the collusive UCC sale of its assets to avoid satisfaction of the creditor’s judgment.

With respect to the first exception, the court held that a purchaser corporation does not impliedly assume all of a seller corporation’s liabilities by expressly assuming one or more of the seller’s liabilities. The court also rejected the second and third exceptions because the owners of the new corporation were different than the owners of the old corporation. Despite rejecting the first three exceptions, the court found that the fourth exception applied. The court ruled that the creditor’s allegations of the old corporation’s and its shareholders’ fraudulent conduct was sufficient to state a claim for successor liability against the new corporation. Accordingly, the judge denied the new corporation’s motion to dismiss and allowed the creditor to proceed with its claim for successor liability against the new corporation, seeking to hold the new corporation liable for its judgment against the old corporation.

This real life example shows: 1.) the lengths that a corporate debtor may go to in order to avoid satisfying a judgment; 2.) the ability of a judgment creditor to pursue its judgment against a successor corporation; and 3.) that courts tend to find a way to make the claim stick if a debtor participates in fraudulent conduct to avoid satisfying a judgment. If you obtain a judgment against a corporation and the corporation appears to have gone out of business by selling all of its assets, you should consult an attorney to determine whether you have a claim against the purchasing entity for successor liability.

Wage and Hour News

In Kasten v. Saint-Gobain Performance Plastics Corp. (March 2011), the U.S. Supreme Court found that an employee’s oral complaint about time-keeping practices may constitute protected activity under the Fair Labor Standards Acts anti-retaliation provision, and that employee complaints need not be written to enjoy FLSA protection. Lesson learned: Before taking adverse action against an employee, check whether the employee has engaged in protected activity within the last twelve or so months. Employers should add to the checklist of protected conduct oral complaints about payroll practices.

On May 9, 2011, the U.S. Department of Labor launched its first application (app) for smartphones, described as a timesheet to help employees independently track the hours they work and determine the wages they are owed. Users can track regular work hours, break time, and any overtime hours they work for one or more employers, according to the DOL press release. The free app is compatible with iPhone and iPod Touch and is available in English and Spanish.

The app highlights an employer’s need to maintain accurate time records for its non-exempt employees. Courts in wage and hour litigation have given significant weight to employer time systems which reasonably track employee hours worked. If the employee uses the DOL app, the employee theoretically has a reliable record which challenges the employer’s records. Employers may want to create a workplace policy requiring employees to immediately report any disparity between their time records and their pay stubs and to provide the app records to the employer in order to ensure accurate straight time and overtime payments.

Are Civil Unions the Same as Same-Sex Marriage in Disguise?

The answer to the above question is simply stated: No! While civil unions have many of the same legal characteristics rights and obligations), the civil union relationship is not recognized under federal law. This is particularly significant in the context of estate planning. That is, the deductions and credits for federal estate tax that are available to married couples are not available to participants in civil unions.

Procedurally, there are some similarities between entering into a civil union as compared to entering into a marriage. In both instances the participants must obtain a license from the County Clerk’s office. The application requests basic information about the parties such as their names, sex, occupation, address, Social Security number, dates of birth and places of birth, as well as the names and addresses of the parents or guardians of the participants. The participants must also state whether or not they are related to each other and, if so, how are they so related. Parties cannot enter into a civil union if their relationship is that of parent, grandparent, uncle, aunt, niece, nephew, first cousin, brother, sister, child or grandchild-whether by full-blood, half-blood or adoption. In every other respect this relationship is available to parties of the same-sex as well as parties of the opposite sex.

Participants in a civil union must be at least 18 years of age or if they are 16 or 17 years old they can only obtain a license with parental consent. If either of the parties has been previously married they must present proof that the marriage is dissolved. In order to obtain a license both parties must appear before the County Clerk and have sufficient identification such as a current driver’s license or state issued photo identification. Both applicants must appear and sign the application in the presence of the County Clerk. In order to become official, the civil union must be certified. The civil union may be certified by a judge, a retired judge, the County Clerk and in counties having 2,000,000 or more residents, by a public official whose powers include solemnization of marriage. Civil unions can be certified by religious officials or any other public official whose powers include solemnization of marriage.

Under Illinois law, civil unions confer on the parties the legal obligation, responsibility, protections, and benefits extended to married spouses. But the same legal obligations, responsibilities, protections and benefits that are conferred upon the parties by Illinois law are not recognized under the federal law. Illinois will recognize same-sex marriages, civil unions or substantially similar legal relationships from other states. If such a relationship exists the parties may be required to provide proof of the relationship created out of state.

Parties that enter into a civil union in Illinois where the relationship later ends will be required to dissolve the relationship by a state court. The dissolution of this relationship can be dissolved by the courts of another state if the parties are then resident of that state. The dissolution of civil unions follows the same procedures and is subject to the same rights and obligations that are involved in the dissolution of marriages.

There are several areas where civil unions are substantially different than the marriage relationship. For instance, a prospective civil union partner cannot sponsor a party for immigration. The civil union partner is not entitled to health insurance and other benefits provided by the other civil union partner. Any insurance benefits provided to a civil union partner will be taxable under federal law unless the partner qualifies as a dependent  under federal income tax law. The parties to the civil union relationship cannot file jointly for federal income tax purposes. However, the partners to the civil union may file a joint Illinois state income tax return.

If a civil union partner dies without a will in the state of Illinois, the surviving partner will be entitled to the intestate distribution available to married couples. If a party to a civil union dies with a will, the surviving civil union partner has the right to renounce what is left to the surviving partner and if the deceased partner has no children the surviving partner will be entitled to fifty percent of the estate. If the deceased partner has children, then the surviving partner would be entitled to one third of the estate.

As you can see, there are great deal of similarities between civil unions and marriage as viewed in the context of the state Illinois) law. However, the benefits and obligations of parties seeking formal legal relationship will not be afforded all of the benefits of a married couple. The benefits afforded to married couples under the federal law are substantial both in the estate planning area and in the area of entitlements.

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Penalties to be Assessed on Late S-Corporation Tax Returns

Beginning in 2011, S-Corporations that file a late or incomplete Federal income tax return (Form 1120-S) will be assessed a penalty of $195 per shareholder per month. Husbands and wives are Linscott R. Hansoncounted as two shareholders.  For a 10-shareholder S-Corporation that is one year behind in filing its tax return, the penalty that may be imposed would be $23,400 (12 months x 10 shareholders x $195).

Securing and Collecting an Asset Based Loan

Whether you are looking for a line of credit to improve cash flow, a term loan to purchase new equipment, or you are a lender funding a loan to a rapidly expanding new business, the lending environment has changed dramatically in the past several years. Today’s lenders are more cautious and their due diligence, especially in regards to a borrower’s non real estate based assets, more demanding. Accordingly, it is not surprising that we are receiving many calls from borrowers and lenders alike questioning how lenders secure their interests in a borrower’s accounts receivable, inventory, machinery, equipment, intellectual property and other tangible and intangible assets. These assets are the lender’s collateral in many asset based loans. This article will provide the lender and the borrower a working knowledge of how this type of collateral is collateralized and, in the event of a default, collected.

In an asset based loan transaction, the lender secures its rights in the collateral by entering into a security agreement with the borrower. The security agreement grants to the lender the right, in the event of a default, to seize and sell the collateral to satisfy the debt. The lender places the world on notice of its lien against the collateral by filing with the secretary of state of the relevant jurisdiction a financing statement. The financing statement, like a mortgage recorded with a recorder of deeds, provides notice to third parties of the lender’s rights in connection with the collateral.

When a default occurs, a lender may accelerate the debt owed to it and exercise its rights under the security agreement, including seizing control of and selling the the collateral in accordance with the Uniform Commercial Code (the “UCC”). Significantly, the UCC permits this process to go forward without judicial supervision. Accordingly, if the collateral includes the borrower’s accounts receivable the lender may simply notify the borrower’s customers that future payments to the borrower must be made directly to the lender.

Often times however, the valuable collateral may be a piece of equipment, inventory or even a customer list.  In these cases, the Lender must first gain possession of the collateral before it can conduct a sale. This may be challenging. Undoubtedly, the security agreement will require the borrower to surrender control of the collateral upon demand but if the borrower refuses the lender may then peacefully repossess the collateral. If attempts at peaceful repossession fail the lender will need to seek judicial intervention in a replevin action.
Once in control of the collateral the lender may conduct a sale. There are other options, but typically the sale is a public sale. A public sale is similar to a judicial sale of foreclosed real estate, and like such a sale, competitive bidding is required. The overriding principle for any sale of collateral is that it must be conducted in a commercially reasonable manner. To accomplish this, strict adherence to the requirements of the UCC is essential. Minimally, notice of the sale must be given to the borrower, other lien holders and any guarantors of the loan. The sale must also be advertized in a manner that is likely to generate interest amongst the members of the public likely to purchase the collateral. This includes advertizing the date, time and place of the sale in appropriate trade journals or other publications.

The successful bidder at the sale (who can be the lender) will receive title to the property free of all liens inferior to the lien of the party conducting the sale. The sale proceeds are applied to pay the costs associated with the sale, including attorney’s fees and selling commissions. The remainder of the sales proceeds is applied to the loan and any subordinate debts with the surplus, if any, being returned to the borrower. Notably, the sale does not have to be approved in any judicial process and upon the conclusion of the sale the borrower has no right to redeem the collateral.

A sale conducted in accordance with a security agreement and the UCC generally cannot be reversed. However, if the sale was not conducted in a commercially reasonable manner the borrower may be entitled to a money judgment against the lender and/or the lender may jeopardize its right to a deficiency judgment against the borrower and any guarantors.
Securing and collecting an asset based loan requires the lender to understand and stay informed about the borrower’s business and the borrower to be capable of presenting a clear and concise picture of its operations. Each transaction is unique and upon default each collection will have its own challenges. When in doubt about whether you are giving up too much control to the lender or if a lien against the intended collateral is being properly perfected you should seek legal advice. However, the general considerations detailed above do provide both the borrower and the lender the perspective to begin discussions about an asset based loan.

Wage and Hour Issues: Dine-In and Other Movie Theaters Targeted by DOL for Child Labor Violations

Don’t be surprised if you hear a public service announcement on workplace safety the next time you go to the cinema. In March, the U.S. Department of Labor assessed civil penalties of over $275,000 against three movie theater companies with operations in Illinois, Wisconsin, and seven other states for allowing minors to perform hazardous jobs like operating trash compactors, using power driven dough mixers, and baking. The movie theater industry has a high rate of non-compliance with child labor laws. With the advent of dine-in movie theaters, increasing numbers of minors are being asked to operate power-driven bakery machines and to do baking work.

The operation of power-driven bakery machines is one of 17 “particularly hazardous” non-farm jobs which the U.S. Secretary of Labor says is a no-no for teens below the age of 18. The Secretary also prohibits 14 and 15-year old employees from baking or cooking, with the exception of cooking with electric or gas grills which do not involve working over an open flame or cooking with deep fryers equipped with a device which automatically lowers and raises the baskets into and from the hot oil. In addition to paying financial penalties, the affected companies agreed to implement comprehensive internal compliance and training programs for managers and to make public service announcements about child labor safety on the big screen.

Child labor is work that harms children or keeps them from attending school. “Harm” comes in many forms, including losing an eye to a nail gun or being sexually exploited while working as a hotel maid. Federal and state child labor laws dictate what workers under 18 years of age can do and how many and what hours in a day or week they can work. Many employers will hire high school students for the summer. Now is the time to conduct a self-audit of what work you need performed and when and what age groups can legally perform the work to be done. This will guide you in making appropriate hiring decisions.

Do you need workers to do tasks which are declared “hazardous” by the Secretary of Labor, like driving a car or truck, using power-driven wood-working, metal-forming, or bakery machines? If so, then don’t hire anyone under age 18.

Do you need workers to stand at busy intersections as “sign wavers” to hawk your latest promotion or store relocation? If so, then don’t hire anyone under age 16, as federal law prohibits this employment unless performed directly in front of your establishment.

Do you need workers to vacuum carpets and use floor waxers? If so, you are free to hire 14 and 15-year olds and their mothers will thank you.

Do you need workers to rent shoes at your bowling alley? If the bowling alley is in Illinois, then anyone under age 16 is off limits.

Will you be asking teens to work unlimited hours or hours beyond 9 p.m.? Teens 16 and 17 years old may perform any nonhazardous job for unlimited hours. Teens 14 and 15 years old may work outside of school hours in certain jobs up to three hours on a school day and 18 hours during a school week, and eight hours on a non-school day and 40 hours during a non-school week. Work must be performed between the hours of 7 a.m. and 7 p.m., except from June 1 through Labor Day, when evening hours are extended to 9 p.m.

No matter what job the teen is performing, stress safety and proper training to the teen and the supervisor. Supervisors have the greatest opportunity to influence teen work habits and prevent work injuries.

Historical Fact: The first state child labor law passed in 1836 when Massachusetts required children under age 15 working in factories to attend school at least 3 months per year. Six years later, Massachusetts limited children’s work days to 10 hours.

The New Presence of the Illinois Estate Tax

In our last issue, we examined the changes to the federal estate tax law passed by Congress in December of 2010, which raised the threshold for federal estate tax to its highest amount ever, $5 Million. This law has a significant impact on our estate planning, as the $5 Million amount gives up to $10 Million of “coverage” for married clients, thereby allowing most of our clients to avoid federal estate tax liability. But, as we set forth last issue, the amount is only guaranteed for two years.

Our planners, however, even now cannot completely rely on the $5 Million amount for resolving estate tax exposures, as Illinois has its own estate tax, which takes effect at taxable estate levels of only $2 Million. Thus, if an Illinois resident dies with an estate of, for example, $3 Million (including life insurance, deferred compensation and all other assets), while there would be no federal estate tax because the estate is below the $5 Million threshold, there would be an Illinois estate tax because the estate exceeds $2 Million. The Illinois tax rates begin at 8% and go as high as 16%, so in this example the Illinois estate tax would be in excess of $167,000.

The Illinois estate tax has not always been known as an estate tax. Rather, until January 1, 1983, it was known as the Illinois Inheritance Tax. The tax was levied upon the recipients of inherited property, rather than on the estate itself. Even for surviving spouses, the tax could apply for asset totals beginning at only $20,000! It was a hugely unpopular tax, and had to be enforced by the Illinois Attorney General’s office. Thus, upon learning of the death of one of its depositors or safe deposit box holders, banks were obligated to “freeze” the decedent’s account until a release of the inheritance tax lien could be secured from the Attorney General’s office. Banks actually kept an employee on staff whose job it was to scan the obituary pages of the local newspapers to cross-reference the decedents against their customer list. Funeral directors and attorneys had to direct their surviving clients to rush to the bank to withdraw living expense money before the bank became aware of the death, as the banks had no choice but to freeze the accounts. Estate administration attorneys spent an inordinate amount of their time in those days securing releases for frozen assets.

The inheritance tax was finally abolished January 1st of 1983, to be replaced by the present estate tax system. The replacement Illinois estate tax was basically a “pick-up” tax, whereby there could be no Illinois estate tax unless there was a federal estate tax, and the amount of the Illinois tax was equal to a portion of the federal tax, shared by the federal government with the state. Many states have this system, which is obviously more survivor-friendly than the old inheritance tax system. And estate planning attorneys could do their tax planning solely with an eye toward dealing with the federal estate tax laws, as no additional, separate Illinois tax was possible.

This system worked seamlessly until the federal estate tax exempt amount began to rise steeply in the late 2000s. From 2001 through 2008, the amount grew gradually from $1 Million to $2 Million, but in 2009 jumped to $3.5 Million. When that happened, many states, including Illinois, “de-coupled” from the federal estate tax format and passed new estate tax laws providing that the state estate tax began at a lower amount than $3.5 Million. Thus, Illinois now has the $2 Million threshold for estate tax, and when the federal estate tax threshold amount was raised last December to $5 Million, Illinois again remained at $2 Million. Thus, the amounts between $2 Million and $5 Million are subject to Illinois tax only, and our estate planning counsel must now adjust our client’s existing estate planning documents to respond to that change.

Some amendments to existing trusts and wills are required to maximize our clients’ protection from the state estate tax, especially in the case of married taxpayers. With proper drafting, it is still possible to have no state or federal tax due on the death of the first spouse to die. A spouse with an estate of $5,000,000 or more, who uses the special QTIP election can defer up to $352,158 in Illinois estate taxes that would otherwise be payable upon the death of the first spouse.

We urge our clients whose total joint net worth approaches $2 Million to consult with our estate planning counsel to determine whether modifications to their estate plan could be helpful.