As the owner of a corporation, when you set up your business, you and your lawyer believed that you had taken all necessary steps to protect your personal assets. After all, the primary reason you set up a corporation was to shield your own assets from your business’s creditors. In order to ensure that your assets are safe from the corporation’s creditors, you need to do more than just fill out the Secretary of State’s paperwork. The corporation must conduct itself as an entity separate and apart from you as the owner.
A recent decision provides a “textbook” example of how an owner of a corporation can put his own assets at risk simply by the way he conducted his company’s business. In Puntillo v. Dave Knecht Homes, the plaintiffs were a married couple who entered into a contract with a home builder, a corporation. The defendants, David and Karen Knecht, were the beneficiaries of a trust that held the home builder’s shares of stock. They were, in essence, the owners of the home-builder corporation. After the home was completed, it was riddled with defects and the couple obtained a judgment against the corporation. Thereafter, the corporation dissolved and the couple was unable to enforce their judgment. In the midst of all of it, a new corporation, Dave Knecht Homes, was created with similar ownership, management, staff, purpose and resources as the now asset-less builder. The defunct builder and the new company used the same line of credit. Beginning in 2006, Dave Knecht’s personal line of credit began funding the now defunct builder’s operations. After the new corporation, Dave Knecht Homes, came along, it also used the same credit line. After being unable to collect on its judgment against the out-of-business builder, the plaintiffs sued Dave Knecht Homes and its owners Dave and Karen Hecht personally. The plaintiffs claimed the new company was merely a successor to the defunct corporation and the corporate veil between the individuals and the successor, Dave Knecht Homes, should be “pierced,” allowing the plaintiffs to go after the individual owners for a corporation’s debt.
Generally, a corporation that purchases the assets of another corporation is not liable for the debts or liabilities of the selling corporation. There are, however, four exceptions to this general rule of successor corporate nonliability: (1) where an express or implied agreement of assumption of the liability exists; (2) where the transaction amounts to a consolidation or merger of the purchaser or seller corporation; (3) where the purchaser is merely a continuation of the seller; or (4) where the transaction is for the fraudulent purpose of escaping liability for the seller’s obligations. In this case, the plaintiffs successfully argued that Dave Knecht Homes is a “mere continuation” of the former company and the court agreed. The continuation exception applies when the purchasing corporation is “merely a continuation or reincarnation of the selling corporation.” In other words, the purchasing corporation maintains the same or similar management and ownership, but merely wears different clothes. The Illinois Supreme Court has made it clear that “[t]he exception is designed to prevent a situation whereby the specific purpose of acquiring assets is to place those assets out of the reach of the predecessor’s creditors.” To determine whether one corporate entity is a continuation of another, courts consider “whether there is a continuation of the corporate entity of the seller—not whether there is a continuation of the seller’s business operation.” Thus, the plaintiffs were permitted to look to the assets of the new company to satisfy their judgment. Unfortunately for the Knechts, it didn’t end there.
The plaintiffs also argued that the out-of-business corporation served as the Knecht’s “alter ego” and that the court should pierce the defunct builder’s corporate veil and impose individual liability against the Knechts. A court may disregard a corporate entity and pierce the veil of limited liability where the corporation is merely the alter ego or business conduit of another person or entity.” This doctrine imposes liability on the individual or entity that “uses a corporation merely as an instrumentality to conduct that person’s or entity’s business.” In Illinois, courts use a two-prong test to determine whether to pierce the corporate veil: “(1) there must be such unity of interest and ownership that the separate personalities of the corporation and the individual no longer exist; and (2) circumstances must exist such that adherence to the fiction of a separate corporate existence would sanction a fraud, promote injustice, or promote inequitable consequences.
The court found that the Knechts exercised control over the new builder and treated the company’s assets as their own, causing the company to pay significant sums of money for their own personal expenses including federal and state income tax payments, landscaping for their personal residences; personal life insurance premiums and attorney’s fees. Moreover, the Knechts caused the failed company to pay their personal expenses using David Knecht’s credit line. By causing Knecht’s former company to pay their significant personal expenses, the Knechts treated the company’s assets as their own. The court pierced the corporate veil of Dave Knecht Homes (who it imposed successor liability upon) and allowed the plaintiffs to enforce their judgment against David Hecht Homes and the individual defendants.
In order to insulate yourself from personal liability, as a business owner, the way that you run the business is as important as setting up the corporation in the first place.
For more information, please contact:
Howard Teplinsky at: email@example.com or 312-368-0100.
The current I-9 form that is approved for use by the U.S. Citizenship and Immigration Services (USCIS) is set to expire on August 31, 2019. USCIS has not finalized the next version and in previous years, USCIS has directed employers to continue using the expired form (available at its website) until an updated version is approved. However, once it is approved, employers must start using the updated form with respect to all employees it hires on or after the date such form becomes available.
If you have any questions regarding employment issues, please contact Walker R. Lawrence, or any of our lawyers in our employment law practice at Levin Ginsburg at 312-368-0100. You may reach Walker directly via email at firstname.lastname@example.org
Morris Saunders will be a presenter at two upcoming seminars for the National Business Institute. Both seminars are being held at Illinois Business & Industry Services located at 1100 East Warrenville Road, Suite 150 Naperville IL 60563. The first seminar is titled “Trusts: The Ultimate Guide” where Morris will be giving two presentations. The first is titled “Medicaid Planning Trusts”, and will take place on September 24th from 1:30-2:30. The second presentation is titled “Other Trust Structures and Issues.” and will also take place on September 24th immediately after the first presentation from 2:45-3:30.
The second seminar is titled “Medicaid Planning” and Morris’s presentation is called “Excluded vs. Countable Assets.” This presentation will take place on October 24th from 10:15-11:15.
The internet has unquestionably provided unparalleled access to information to the public, both consumers and businesses, not seen since Johannes Gutenberg invented the printing press. One such benefit of the access the internet has provided is in real estate. Several websites now allow users to get estimates on almost every property imaginable. Zillow is one of these websites which provides “Zestimates.” Although this knowledge can be useful to potential purchasers, some owners may take issue with these valuations. This exact situation occurred in Patel v. Zillow, Inc.
In Patel v. Zillow, Inc., the United States Court of Appeals for the Seventh Circuit reviewed the dismissal of a lawsuit brought by homeowners who took issue with Zillow’s “Zestimate” of their property that they were trying to sell. Before the lawsuit was filed, they learned that Zillow’s “Zestimate” of their property was below their asking price. Zillow’s “Zestimate” listed the property at approximately $160,000 less than Plaintiffs’ listing. Plaintiffs contended that the “Zestimate” scared away potential buyers. Plaintiffs asked Zillow to increase the “Zestimate” or to remove them from the database. Zillow declined. Plaintiffs filed their lawsuit.
Plaintiffs brought suit under the Illinois Real Estate Appraiser Licensing Act contending that Zillow was appraising real estate without a license. Plaintiff also filed claims under the Illinois Uniform Deceptive Trade Practices Act and under the Illinois Consumer Fraud and Deceptive Business Practices Act. Plaintiffs argued that Zillow’s “Zestimate” was unfair and misleading. The District Court (the trial court) dismissed all of Plaintiffs’ claims.
The Seventh Circuit upheld the trial court’s decision. The Seventh Circuit noted that the Illinois Real Estate Appraiser Licensing Act did not create a cause of action for a private citizen. More importantly, as to Plaintiffs’ claims under the Deceptive Trade Practices and Consumer Fraud Acts, the Court stated that these acts deal with statements of fact and that Zestimates are opinions, not fact. Accordingly, where a valuation is explicitly labeled as an estimate, there is no deception.
If your business has current litigation, including claims under the Illinois Uniform Deceptive Trade Practices Act or Illinois Consumer Fraud and Deceptive Business Practices Act, or your business would like a complimentary business “check-up” to help spot any potential liability under those acts, please contact Roenan Patt. (312) 368-010; email@example.com or any of our business attorneys.
It is an all too common scenario these days with mortgage foreclosures still commonplace in Chicago: someone leases a single family home or condominium unit (used for residential purposes) from the then owner of the property. Subsequent to this lease being executed and the tenant taking possession, the owner goes into default on his or her mortgage, the owner’s lender, i.e., a bank, files a judicial foreclosure action and, as is often the case, the bank becomes the owner of the property. Typically in these scenarios the bank will have a court appointed receiver manage the property during the foreclosure process and/or hire a manager subsequent to the foreclosure process to manage the property and address any tenant issues.
As the lease nears expiration, the tenant, who is likely aware of the foreclosure, inquires of the former owner and the bank, as to the status of his or her security deposit (which, for higher-end properties in Chicago, can easily exceed $5,000.00). The former owner, if they respond at all, tells the tenant about the foreclosure and that the former owner has no assets in any event, and that the tenant should contact the bank to get their security deposit. Upon contacting the bank, the bank responds that the former owner’s security deposit was never transferred to it during the course of the foreclosure or at any other time, and that the tenant should seek the return of their security deposit from the former owner. A conundrum is afoot. Is the tenant simply out of luck? The answer to this question has not been specifically addressed by the Illinois courts; however, the Chicago Residential Landlord and Tenant Ordinance (RLTO) likely gives us the answer, and it is not good for the bank.
The RLTO has long been the bane of many landlords’ existence in the City of Chicago, but it could quick become a thorn in the side of foreclosing lenders as well.
According to the City, the purpose of the RLTO is “to protect and promote the public health, safety and welfare of [the City of Chicago’s] citizens, to establish the rights and obligations of the landlord and the tenant in the rental of dwelling units, and to encourage the landlord and the tenant to maintain and improve the quality of housing.” (RLTO, Section 5-12-010).
In our situation above (which is, by the way, a real life situation), the tenant realizes that his former landlord is still liable under the RLTO for the security deposit. At the same time, however, the tenant understands that the former landlord is unlikely to have the security deposit and unlikely to have the assets to satisfy a judgment if the tenant were to sue the former landlord under the RLTO. Therefore, the tenant looks to the bank for the return of his or her security deposit.
Unfortunately for the bank, the RLTO does appear to cover this set of facts and subject the bank to liability for the return of the security deposit. In fact, not only can the bank be liable to the tenant for the return of his or her security deposit but, like any landlord, the bank can be subject to severe penalties should it fail to comply with the relevant terms of the RLTO with respect to the security deposit. The liability stems from the RLTO defining “landlord” as including the original landlord’s successor in interest, i.e., the bank in this instance.
Based on the provisions of the RLTO, whether or not the bank received the security deposit from the original landlord, it would be liable to the tenant for the maintenance and return of the security deposit.
Section 5-12-80(e) of the RLTO further provides that:
[t]he successor landlord shall, within 14 days from the date of such transfer, notify the tenant who made such security deposit by delivering or mailing to the tenant’s last known address that such security deposit was transferred to the successor landlord and that the successor landlord is holding said security deposit. Such notice shall also contain the successor landlord’s name, business address, and business telephone number of the successor landlord’s agent, if any. The notice shall be in writing.
If the bank fails to follow these precise requirements, it would further violate the RLTO. In terms of penalties for violation of the RLTO, the bank is subject to strict liability damages in an amount equal to two times the security deposit plus interest and attorneys’ fees and costs.
The bank is now left with the option to defend a lawsuit initiated by the tenant, which the tenant has a likelihood of winning and to then being awarded his or her attorneys’ fees and costs, or coming out of pocket for the security deposit, thereby hopefully being able to negotiate with the tenant to avoid the severe penalties imposed by the RLTO.
Any lender foreclosing on a property covered by the City of Chicago RLTO would be well-advised to become familiar with the ordinance and do everything possible to comply with its terms.
For more information, please contact:
Jonathan Weis at: firstname.lastname@example.org or 312-368-0100.
The Illinois Appellate Court has reiterated what the Illinois Supreme Court said a few years ago: Employees of a corporation owe a duty of loyalty to the company by which they are employed. And that it is a breach of their fiduciary obligation to appropriate for their own gain an opportunity that rightfully belongs to the company. Advantage Marketing Group, Inc. v. Keane, 2019 IL App (1st) 181126.
In this instance it was clear that the employee was far more than an ordinary employee and that it was not clear whether the company had considered the opportunity but had decided to take a pass on it.
Keane was one of the founders of Advantage Marketing Group (AMG) and, even at the time of his purported misconduct, owned 35% of AMG’s stock. He had served AMG as an officer and director, but was simply an employee when he seized a potential corporate opportunity and made good use of it through another corporation, Keane, Inc. d/b/a The Mail House.
In addition to owning 35% of AMG, Keane performed or had performed the following for AMG:
In the summer of 2013 Keane and AMG’s majority stockholder, Patty Herman, discussed the potential acquisition of The Mail House, a competitor of AMG.
Keane resigned from AMG on September 4, 2015. Prior to his resignation he began making preparations for the acquisition of The Mail House. He organized a new corporation named Keane, Inc. d/b/a The Mail House. He told AMG’s clients and vendors AMG was in financial distress, and solicited his son, an AMG employee, to join him at the new corporation. He also obtained samples of confidential client information and delayed in returning them after being demanded to do so by AMG’s counsel. He registered an internet domain name “mailhousedm.com”. After Keane left AMG, The Mail House was in direct competition with AMG.
AMG sued Keane charging breach of fiduciary duty and improperly appropriating a potential business opportunity (the acquisition of The Mail House) for himself.
Keane defended saying that as an employee he had no fiduciary duty to AMG and, furthermore, that he had discussed the potential acquisition with AMG’s majority stockholder but AMG had not moved forward with it. The court ruled against Keane on both points.
The court said that it was settled Illinois law that an employee owes a duty of loyalty to his employer and prohibits an employee from taking advantage of a business opportunity that belongs to his employer, while still employed.
The court did say that an employee may plan, form and outfit a competing company while still working for his employer. But that was as far as he can go. He cannot commence competing with his employer.
What’s the point? This was an easy decision for the court especially in view of the fact that Keane remained a 35% stockholder in AMG. But the critical point was that an employee must be loyal to his employer while employed and not seize opportunities that would normally flow to his employer. He can make preparations to leave, but cannot actively compete before doing so.
For more information and to raise any questions, please contact any of our business attorneys.
The board of directors made the decision to acquire a company for $100 million. The negotiations and the due diligence process were difficult, but the board finally approved the acquisition and the transaction closed. After closing, the acquirer determined that the value of the acquired company’s assets were greatly overstated and the acquiring company took a loss on its books. The shareholders of the acquiring company have met to determine whether to file litigation against the directors.
In Illinois, courts have ruled that the “business judgment rules acts to shield directors who have been diligent and careful in performing their duties from liability for honest errors or mistakes of judgment”. Absent “bad faith, fraud, illegality or gross overreaching, the courts are not at liberty to interfere with the exercise of business judgment by corporate directors”. Thus, just because a board made the “wrong” business decision, does not mean that the directors are liable to the shareholders.
While the courts are reluctant to make business judgments for companies, this does not always prevent shareholders from “second guessing” decisions of the board. Illinois law provides that a corporation may indemnify its directors and officers from any liability if such director or officer “acted in good faith and in a manner he or she believed to be in, or not opposed to, the best interests of the corporation”. Since the law is permissive, in order for a corporation to attract quality persons to serve as an officer or director, it may wish to agree to indemnify such person in such situations. It is important from the corporation’s perspective to draft such an agreement, in a manner that, while protecting the “well-intended” officer or director, also protects the company. If you have any questions about directors’ and officers’ liability to the corporation, or would like to discuss your company’s legal concerns, please feel free to contact the business lawyers at Levin Ginsburg.
For more information, please contact:
Morris R. Saunders at: (312) 368-0100 or email@example.com
Under the “Carmack Amendment,” a motor carrier (i.e. an entity providing transportation of cargo) is generally strictly liable for damages incurred during the interstate shipment of goods. Alternatively, a broker (i.e. an entity who arranges for the transportation of cargo) is ordinarily not liable under the Carmack Amendment so long as it does not hold itself out to the public to be a motor carrier.
On April 19, 2019, the United States Court of Appeals for the Third Circuit issued an opinion in Tryg Insurance et al. v. C.H. Robinson Worldwide, Inc. that should serve as a cautionary warning to brokers. Specifically, the Third Circuit found C.H. Robinson (a well-known broker), to be liable under the Carmack Amendment because it did not make it clear to the shipper that it was only providing brokerage services.
In Tryg, Tom’s Confectionary Group (“TCG”) contracted with C.H. Robinson (“CHR”) to transport a shipment of chocolate from Pennsylvania to New Jersey. CHR brokered the load to a motor carrier to transport the chocolate. The chocolate melted during transit and TCG filed a claim under the Carmack Amendment against CHR. CHR denied liability and contended that it was a broker and that liability for the damage to the cargo did not extend to brokers under the Carmack Amendment. TCG argued that CHR was a “motor carrier” under the Carmack Amendment and the trial court agreed.
In affirming the trial court’s decision, the Third Circuit held that “if a party has accepted responsibility for transporting a shipment, it is a carrier.” In coming to the conclusion that CHR was a motor carrier, the Third Circuit noted that CHR never made it clear to TCG that it was acting only as a broker. Thus, CHR’s silence in failing to notify TCG of its role in the transportation of the chocolate was not golden.
As shippers increasingly look for additional avenues of recovery on Carmack claims, brokers must be more careful not to assume the liability of a motor carrier. Brokers should affirmatively state to shippers the scope of their services (i.e. that they are merely agreeing to locate and hire a third party to transport goods) to avoid the same situation that occurred in Tryg.
For more information regarding cargo litigation, please contact:
Roenan Patt at: (312) 368-0100 or firstname.lastname@example.org
While most businesses are aware, a surprisingly small number report that they will be ready to comply with the California Consumer Privacy Act (“CCPA”), when it officially takes effect on January 1, 2020.
The CCPA was first signed into law in September 2018. Often touted as “GDPR Lite” or “GDPR 2.0” because of its similarity to the European regulation, CCPA’s key provisions are summarized as follows:
Since the CCPA was passed, it has already undergone changes, in September, 2018, and again on February 25, 2019, with the introduction of California Senate Bill 561 (“561”). While some changes were merely cosmetic, fixing errors, etc., the substantive changes aimed to clarify and strengthen the law. For example, 561’s amendments:
561, while a start, does not clarify all ambiguities in the CCPA. For example, language such as “households” remains vague as to whether it means consumers, or a combination thereof. Also, while the language of “consumers” and “businesses”, and other evidence seem to suggest that the CCPA was not intended to include “employers” vis-à-vis their “employees”, nowhere in the text does it clarify the same. If an amendment did indicate that the CCPA applied to employers and their employees, businesses in California would have to implement stringent security safeguards, as data breaches often involve divulgence of employees’ personal information. Therefore, while 561 provides the initial amendments, the CCPA likely will see further amendments prior to its January 1, 2020 launch
In conclusion, businesses subject to CCPA should begin to take steps toward compliance now. Data mapping, updating policies, developing teams, increasing security measures and other activities that will be required for compliance take time to implement. Businesses with questions as to whether it is subject to CCPA, or what steps to take, should contact a privacy attorney.
For further information regarding this topic, please contact:
Natalie A. Remien at email@example.com or 312-368-0100.
On February 19, 2019, newly elected Governor J.B. Pritzker fulfilled a campaign promise and signed legislation that will raise the Illinois Minimum Wage. The law made two major changes:
Under the new law, the minimum wage will increase annually for all employees over 18. For those employees that are under 18 and work no more than 650 hours in a calendar year, they will be subject to a lower minimum wage.
Businesses that have employees in Chicago or certain Cook County municipalities will need to continue to follow the local minimum wage ordinances which are higher than the Illinois state law. Both the local ordinances update on July 1 and the state law is tied to a Calendar year.
A breakdown of the relevant wage rates is below.
Significant Increase in Penalties for Violations
In addition to the increase in minimum wages across the state, the changes that went into effect on February 19, 2019, significantly increased the penalties for employers that fail to properly pay minimum wage or overtime. This is particularly important for employers that misclassify their workers as independent contractors and may be subject to significant liability as a result of that misclassification.
Under the new law, if an employee is underpaid, they can recover “treble” (three times) the amount of the underpayment. In addition to the treble damages, the statutory monthly damages penalty increases from 2 percent to 5 percent. Finally, there is now an additional penalty of $1,500.00 payable to the Department of Labor’s Wage Theft Enforcement Fund.
Example. If an employee is underpaid $7,500.00 and the employee receives a judgment two years later, the employer will have to pay $33,000 to the employee. The damages are broken down as follows:
These damages do not include attorneys’ fees, as well as other potential damages under the Federal minimum wage law (FLSA) and the local ordinances.
What does this mean for employers?
Given the significant risk if you are underpaying employees you should evaluate your pay policies and ensure that your company is in compliance. It is important to annually conduct a wage and hour audit to proactively mitigate risk.
Please contact us if you need any assistance complying with the Illinois or Federal Minimum wage and overtime laws at 312-368-0100 or Walker R. Lawrence at firstname.lastname@example.org