arcturus – law blog

Arcturus News – Fall 2019

In late November, Arcturus secured an appellate victory in an ongoing family trust dispute..

The previous conservator for a Colorado protected person (suffering from long-standing mental illness) disclaimed certain assets that had been left to the protected person directly, and instead funneled the disclaimed assets through an estate and into three trusts for which the prior conservator was trustee. Two of the trusts were for the benefit of the protected person, but one was for the benefit of the prior conservator and his children.

The scheme was uncovered and the conservator was removed and found liable for breaching his fiduciary duties and civil theft to the extent he had moved funds meant for the protected person into the trust for the benefit of his children. Pursuant to numerous court orders, he was forbidden from accessing trust funds for legal fees.

Undaunted, the former conservator entered into a series of “loan” agreements with his wife and her cousin, in which he sought to encumber the trust assets (contrary to the orders of court preventing him from doing so, and the trust documents themselves). On the same day, through the same counsel, the wife and her cousin filed essentially identical lawsuits in Cook County, Illinois, seeking repayment of these “loans.” Within days, defendants agreed to judgments, and the wife and cousin were free to move forward with collection proceedings in the Illinois courts against the trust assets which were held in an Illinois bank.

Fortunately, counsel for the bank alerted the third trustee of some of the trusts and the new conservator for the protected person, neither of who had been given any notice of the loans or lawsuits. When the new conservator learned of the agreed judgments, she quickly moved to intervene on behalf of the protected person and vacate the judgments.

The circuit court vacated the judgment as to two of the trusts but allowed the judgment to stand as to the third trust on the basis that the conservator couldn’t vacate the judgment as to a trust that the protected person, via the conservator, was not the beneficiary. Arcturus took over the case shortly after this ruling and promptly appealed the denial of the motion to vacate as to the third trust.

The appellate court reversed the trial court’s ruling, vacated the entire agreed judgment, and remanded the matter for further proceedings. Although denials motions to vacate under 735 ILCS 5/2-1301(e) are generally evaluated under the high abuse of discretion standard, the appellate court agreed that the denial of the motion did not do substantial justice. The court found that the conservator had established that the agreed judgments had been the product of fraud and collusion.

The reported decision is available here: Litvak v. Black, 2019 IL App (1st) 181707.

Peter Stasiewicz is a Chicago attorney focusing his practice on assisting small and mid-sized businesses navigate legal issues and overcome obstacles to success. You can call him at 312.957.6194, email him, or connect with him on LinkedIn.

Arcturus News – Summer 2019

In June, Arcturus obtained a total victory on an appeal in Illinois’ First District. Although the opposing party was represented by an AmLaw 100 firm and raised three separate issues implicating both Illinois and Colorado law, the appeal was resolved in favor of Arcturus’ client, on the briefs, without the need for oral argument.

The reported decision is available here: Conservatorship of Black v. Black, 2019 IL App(1st) 1181452

In July, Arcturus obtained a complete defense verdict for its client following a three day bench trial in the Circuit Court of Cook County, Illinois. Plaintiffs claimed breaches of an alleged oral agreement as well as civil rights violations. A three-day bench trial was held in June, and a memorandum opinion was filed July 12. In finding for the defendants, Circuit Judge Margaret Brennan found that Plaintiffs failed to sustain their burden of proof on all counts.

Section 35-1 of the Illinois LLC Act: A New Option in LLC Oppression Cases

There’s been no shortage of articles addressing many of the recent changes to the Illinois LLC Act — including the removal of the requirement that the LLC buy out the interest of certain dissociated members. But I haven’t seen many articles addressing changes to the section regarding “Events causing dissolution and winding up of company’s business,” 805 ILCS 180/35-1. Even as the old buyout provision has been removed from the dissociation section of the Act, amendments to the dissolution section have created a potentially powerful tool for members holding minority interests in an LLC who find themselves locked in a dispute with majority members or managers.

Both the old and new versions of Section 35-1 allow for judicial dissolution based on certain enumerated criteria. The old version provided:

(4) On application by a member or a dissociated member, upon entry of a judicial decree that:

(A) the economic purpose of the company is likely to be unreasonably frustrated;

(B) another member has engaged in conduct relating to the company’s business that makes it not reasonably practicable to carry on the company’s business with that member;

(C) it is not otherwise reasonably practicable to carry on the company’s business in conformity with the articles of organization and the operating agreement;

(D) the company failed to purchase the petitioner’s distributional interest as required by Section 35-60; or

(E) the managers or members in control of the company have acted, are acting, or will act in a manner that is illegal, oppressive, or fraudulent with respect to the petitioner.

old 805 ILCS 180/35-1(4) (repealed)

After the 2017 amendments, the current version lists many similar criteria, but with some changes:

(4) On application by a member or a dissociated member, upon entry of a judicial decree that:

(A) the economic purpose of the company has been or is likely to be unreasonably frustrated;

(B) the conduct of all or substantially all of the company’s activities is unlawful;

(C) it is not otherwise reasonably practicable to carry on the company’s business in conformity with the articles of organization and the operating agreement.

(5) On application by a member or transferee of a distributional interest, upon entry of a judicial decree that the managers or those members in control of the company:

(A) have acted, are acting, or will act in a manner that is illegal or fraudulent; or

(B) have acted or are acting in a manner that is oppressive and was, is, or will be directly harmful to the applicant.

805 ILCS 180/35-1(a)(4)-(5)

But the big change, at least as far as this article is concerned, is in subsection (b) of Section 35-1:

In a proceeding under subdivision (4) or (5) of subsection (a), the court may order a remedy other than dissolution including, but not limited to, a buyout of the applicant’s membership interest.

805 ILCS 180/35-1(b)

Exciting! Now there’s a mechanism buried within the LLC Act’s dissolution provisions that provides for remedies short of dissolution. The only explicitly approved new remedy is a buyout of the applicant’s membership interest, but the new language isn’t limited to dissolution or buyout. What other remedies may exist? We can’t be sure without guidance from the courts, but it seems likely that the remedies available under the Corporations Act would be on the table. Those include:

(1) The performance, prohibition, alteration, or setting aside of any action of the corporation or of its shareholders, directors, or officers of or any other party to the proceedings;

(2) The cancellation or alteration of any provision in the corporation’s articles of incorporation or by-laws;

(3) The removal from office of any director or officer;

(4) The appointment of any individual as a director or officer;

(5) An accounting with respect to any matter in dispute;

(6) The appointment of a custodian to manage the business and affairs of the corporation to serve for the term and under the conditions prescribed by the court;

(7) The appointment of a provisional director to serve for the term and under the conditions prescribed by the court;

(8) The submission of the dispute to mediation or other forms of non-binding alternative dispute resolution;

(9) The payment of dividends;

(10) The award of damages to any aggrieved party;

(11) The purchase by the corporation or one or more other shareholders of all, but not less than all, of the shares of the petitioning shareholder for their fair value and on the terms determined under subsection (e); or

(12) The dissolution of the corporation if the court determines that no remedy specified in subdivisions (1) through (11) or other alternative remedy is sufficient to resolve the matters in dispute. In determining whether to dissolve the corporation, the court shall consider among other relevant evidence the financial condition of the corporation but may not refuse to dissolve the corporation solely because it has accumulated earnings or current operating profits.

805 ILCS 5/12.56(b)

A close reading of amended Section 35-1 shows that there’s now a slight change in who can apply for judicial relief. Where the old Act provided that the provisions of 35-1(4) were available to a “member or dissociated member,” those provisions are now split out into two subparts. New Section 35-1(4) is still available to a “member or dissociated member” while Section 35-1(5), by contrast, is available to “member or transferee of a distributional interest.”

What’s to be made of the difference? Section 35-55 likely provides the answer. When a member dissociates, he or she “ceases to be a member and is treated the same as a transferee of a member.” Accordingly, remedies under 35-1(5) should be available to members, transferees, and dissociated members by dint of Section 35-55. On the other hand, remedies under 35-1(4) would be available to members, dissociated members, but not other transferees. This would be consistent with the idea that transferees do not have a right to participate in running the business of the LLC.

Maybe the lack of ink on this topic is due to the fact that a lot of people don’t know about the availability of the oppression remedy in the first place. There’s very little existing case law citing, even regarding the previous version of 805 ILCS 5/35-1.[note] See e.g. Schewe v. Schewe Farms, LLC, 2017 IL App (5th) 160192-U [/note] Obviously, it remains to be seen exactly how the courts will apply these amended provisions, but litigators should be aware of this new potential weapon for LLC membership disputes.

How To Get Out Of A Distributor Agreement Under Illinois’ Beer Industry Fair Dealing Act

In many respects craft brewers face the same issues as any other small businesses: breach of warranty issues, (like the Left Hand v. White Labs yeast lawsuit); restrictive covenants and non-competes, (for example, in Crown Packaging v. Brown), and of course no shortage of intellectual property disputes (most recently, Stone vs. MillerCoors).

But craft brewers, like all alcohol-related entities, face additional restrictions due to the nature of their business and America’s convoluted relationship with alcohol.

In Illinois, one major law that impacts brewers is the Beer Industry Fair Dealing Act, often abbreviated BIFDA. This article covers some of the restrictions BIFDA places on brewers’ ability to get out of contracts with their distributors (usually referred to in the act as “wholesalers”).

There’s not a lot of information on the internet about BIFDA. If you search for it, Google is convinced you’re looking for a birth defect. But BIFDA is very real and imposes a lot of restrictions on brewers’ contracts with beer distributors that would normally not exist in a standard distribution agreement for non-alcoholic goods.

Section 3 of BIFDA does provide for some situations where a distribution agreement can be cancelled without notice. These include situations where:

The distributor fails to pay an account when due and upon demand by the brewer, in accordance with agreed payment terms. 815 ILCS 720/3(3)(A)

The distributor dissolves, goes bankrupt, or assigns its assets to creditors, or related proceedings. 815 ILCS 720/3(3)(B)-(D)

The distributor loses its license or permit to sell beer, or is convicted of or pleads guilty or no contest to violating an Illinois law “which materially and adversely affects the ability of either party to continue to sell beer in this State.” 815 ILCS 720/3(3)(E)

Certain transfers of business assets or changes is distributor ownership or control, without consent of the brewer, although the act puts significant restrictions on the brewer’s ability to withhold consent. 815 ILCS 720/3(3)(F), 815 ILCS 720/6.

Fraudulent conduct by the distributor when dealing with the brewer. 815 ILCS 720/3(3)(G)

Other than the reasons laid out in Section 3, brewers can’t terminate or fail to renew a distribution agreement without good cause. What constitutes good cause?

“Good cause” exists if the wholesaler or affected party has failed to comply with essential and reasonable requirements imposed upon the wholesaler or affected party by the agreement. The requirements may not be discriminating either by their terms or in the methods of their enforcement as compared with requirements imposed on other similarly situated wholesalers by the brewer. The requirements may not be inconsistent with this Act or in violation of any law or regulation.

815 ILCS 720/1.1(9)(emphasis added)

So let’s say, as a brewer, you’ve talked to a lawyer and decided your distributor has failed to comply with “essential and reasonable requirements” of the agreement. Can you terminate the agreement? Not yet. The act says you have to make a “good faith” effort to resolve the disagreement. 815 ILCS 720/4, 815 ILCS 720/1.1(10). If that effort fails, the next step is providing written notice and documentation to the distributor. The notice has to be in writing, and sent by certified mail at least 90 days before the agreement’s effective cancellation/renewal/termination date. 815 ILCS 720/3(2). The notice has to contain a statement of intent to cancel, fail to renew, or otherwise terminate the agreement, and the effective date of that action. 815 ILCS 720/3(2)(a),(c). The notice has to include a complete statement of reasons for that cancellation, including “all data and documentation” necessary to fully apprise the wholesaler of the reasons for the cancellation. 815 ILCS 720/3(2)(b).

And if you’ve done all that, the distributor still has a 90-day period to cure the problems you’ve listed in the notice. 815 ILCS 720/4.

Apart from these hoops to jump through to get out of distribution agreements, BIFDA also contains plenty of other restrictions on brewers interactions with distributors, which are beyond the scope of this article, but which are important for brewers to review.

By now you’re probably wondering why it’s so hard for brewers to get out of contracts with distributors. BIFDA was first passed in the 80s, when there was a different relative power dynamic between brewers and distributors. Prior to the craft beer boom, big brewers had enough clout to influence distributors improperly and threaten Illinois’ implementation of the three-tier system. BIFDA was supposed to help put the distributors on equal footing, but this being Illinois, the law quickly became a tool for stifling distributorship competition in Illinois. For more on the regulation of alcohol distribution in Illinois, this article from Illinois Policy is a good read (Spoiler: contains familiar names like Mike Madigan and Bill Wirtz of Blackhawks ownership infamy).

How to respond to an Administrative Notice of Ordinance Violation from the City of Chicago

If you own a business in Chicago, it’s not very uncommon to come in one day and find an Administrative Notice of Ordinance Violation courtesy of one city department or another. The most common are probably for violations of the building code, followed by licensing issues, but there are a lot of ordinances that you’re probably not aware of and can run afoul of unwittingly.

One of my favorite examples from my own files was a manufacturing client whose business had a parking lot. Apparently, there was a car parked in their lot for a few weeks with a FOR SALE sign in the window. The car didn’t belong to anyone affiliated with the business.

Guess what? As far as the city was concerned, my client was now running a used car lot, and because this wasn’t disclosed on their business license (which only reflected manufacturing) – it was an unlicensed used car lot. My client was going to have answer for violating ordinance provisions for “failure to disclose all activities and services that are carried on at the licensed premises” and allowing used cars to be sold “in an unfair advantage over properly licensed location.” [note]4-4-050(a) and 2-25-090(a), respectively[/note] The fine for the former offense could only range from $250-$500, but the latter offense is considered unfair competition and punished in the same section as consumer fraud — and that meant potential fines of $2,000 – $10,000 per day that the violation continued!

What is an Administrative Notice of Ordinance Violation?

Basically, it’s a ticket. It’s not a criminal offense, and it’s not a civil matter like a tort or contract claim. However, there’s a good chance you’ll be required to attend an Administrative Hearing at 400 W. Superior, where administrative judges (sometimes called “ALJs”) deal with hundreds of these cases a day. (There’s also a hearing facility on the far south side at 2006 E. 9th Street, and one at 4445 N Pulaski Rd. effective December 4, 2017). At the hearing you’ll have the chance to contest the Notice.

What should you do when you receive an Administrative Notice?

When you receive an Administrative Notice, don’t ignore it! The administrative court will enter a default and your problems will just get worse. If you’ve already defaulted, contact an attorney immediately to see if the default can be vacated.

If your company is a corporation or an LLC, you must have an attorney represent you in front of the administrative court. Since the Stone Street Partners v. City of Chicago decision in 2014, 2014 IL App. (1st) 123654, corporations (including LLCs) have been required to be represented by counsel in front of the ALJ. [note]Stone Street went up to the Illinois Supreme Court – which affirmed the appellate court on the merits, but vacated that portion of the appellate opinion mandating that corporations be represented by counsel in administrative proceedings. 2017 IL 117720. In dissent, Justice Freeman wrote that the Supreme Court should have taken up the issue, and wrote that a layperson could represent a corporation in this context. For now, officially, the issue is legally in flux, but the City continues to require an attorney to represent a corporation or LLC.[/note].

If you’re a sole proprietor or a partnership, you can represent yourself in the administrative hearing, but as always, consulting with an experienced attorney will probably be to your advantage.

If the alleged violation is something you can remedy, try to do so as soon as possible, and document your compliance (for example, if you have been cited for broken windows, take photos showing that the windows have been repaired).

What happens in the hearing?

Before your hearing, there’s usually an opportunity to discuss settlement with the attorney representing the City. In the parking lot case, for example, I was able to negotiate the fines down. We might have tried the matter, but the client was more interested in getting out of the case relatively cheap instead of risking a higher fine. Negotiating with the City is not necessarily always going to be an option, but frequently the City attorney will prefer to get a quick win and a check then risk losing in front of the ALJ.

In other situations, particularly, for a lot of building code violation cases, all that has to happen is getting in compliance with the municipal code. In these cases, providing evidence of compliance may satisfy the city and the case will be dismissed.

Of course there is always the option of fighting the case — most of these violations are based strictly on the text of the ordinances, so if there’s some way in which the violation wouldn’t apply to your business, it may be possible to prevail before the ALJ. A few provisions have case law interpreting them, or incorporate case law interpreting other similar laws.

For attorneys appearing in front of Chicago’s Department of Administrative Hearings, here’s a link to the City’s Procedural Rules and Regulations (last accessed November 12, 2017).

While this article is exclusively about the City of Chicago, Cook County and other Illinois municipalities have their own versions of these administrative courts to deal with municipal violations.

Peter Stasiewicz is a Chicago attorney focusing his practice on assisting small and mid-sized businesses navigate legal issues and overcome obstacles to success. You can email him or connect with him on LinkedIn.

5 New Laws Affecting Illinois Small Businesses and Entrepreneurs in 2018

Every new year in Illinois brings with it a crop of new laws, but only in 2018 do the new laws bring with them a crop: corn now has official grain status in the Prairie State.

That’s not what this post is about.

While official grain designations, Barack Obama day (Aug. 4), and a ban on circus elephants seem to catch more of the headlines, there are some new laws that small businesses and entrepreneurs should be aware of starting in 2018. The first two amend the Consumer Fraud and Deceptive Business Practices Act and may affect some existing businesses, while the next three are designed to help entrepreneurs get new ventures off the ground.

1. The “Right to Yelp” Law

Small businesses often have love/hate relationships with review sites like Yelp or the review sections of Facebook and Google. Good reviews can drive a lot of business, but even one bad review can be damaging. It’s especially annoying for a business owner to read a bad review when they know that the version of events published by a disgruntled customer isn’t true. (Some notable out of state examples: Dallas couple slams their wedding photographer online, get hit with $1 million defamation verdict; internet celebrities mobilize army of followers to leave bad reviews on bar website).

To limit the potential for bad reviews, some businesses have included non-disparagement clauses in their contracts with consumers. You might consider what kind of message including a non-disparagement clause at the outset of a business relationship sends, but that’s a purely academic exercise as these types of clauses are now illegal in Illinois consumer contracts for sales or leases of goods or services, via the “Right to Yelp” law, SB 1898, Pub. Act 100-0240(a). An attempt to enforce such a provision is now considered an unlawful practice under the Consumer Fraud and Deceptive Business Practices Act and can be enforced under the penalties section of that Act.

If “Right to Yelp” sounds familiar, it may be because there’s already a similar federal law on the books. But that law is only enforced by the Federal Trade Commission or state attorneys general — the Illinois law can be enforced by private citizens, and the plaintiffs’ bar knows it.

It should be noted that nothing about the law changes defamation standards. If a customer prints false allegations that meet the legal standards for libel or defamation, that remains actionable independent of any contractual agreement. Business owners are not left without tools to fight to protect their reputation, but consultation with an experienced attorney or reputation management professional is recommended before trying to engage in self-help when tackling negative reviews.

2. Price Discrimination Requirements

Hopefully, it will not come as a surprise to any business owner that it’s not legal to charge different customers different prices for exactly the same good or service solely on the basis of their race or gender. By the same token, it’s understood that tailoring a wedding dress rightly costs more than hemming a man’s pant leg. That’s not because one is for a woman and the other is for a man — one takes a lot more time and skill than the other. A new Illinois law reaffirms this exception to the general rule against price discrimination, but also requires that certain businesses provide price lists on demand for their 10 most requested services, in an effort to make prices more transparent. SB 298; Pub. Act 100-0207.

The affected businesses are:

(1) tailors or other businesses providing aftermarket clothing alteration
(2) barbershops or hair salons, and
(3) dry cleaners and laundries providing services to individuals.

If your business is covered by the new law and found to not be in compliance (i.e., not providing the price information on request), the law provides a 30 day period to fix the issue for a first offense. After that, a second violation could lead to consequences under Section 7 of the Consumer Fraud and Deceptive Business Practices Act. 805 ILCS 505/7. That means fines of up to $50,000, among other potential corrective actions.

3. Reduction in LLC Fees

If you’ve been considering starting a business but haven’t done so yet, good news: limited liability company (“LLC”) fees have just been dramatically slashed in Illinois. In a much-needed move for small businesses, Governor Rauner signed Senate Bill 867, Pub. Act 100-0571 on December 20, lowering LLC registration and other fees to be more in line with national trends as of that date. Illinois no longer has some of the highest LLC fees in the nation: where a new LLC filing used to cost $500, it now costs $150. Series LLC formation has been lowered from $750 to $400.

This makes an LLC a really attractive option for separating your personal assets from your business assets without some of the hassle of a traditional corporation. You’ll still want to evaluate which format is right for you.

If you do go with an LLC, having an attorney draft a solid Operating Agreement for the LLC is key to avoiding problems down the road especially if the LLC will be made up of multiple members. Tacking the attorney’s fees on top of the high LLC costs under the old structure was sometimes cost-prohibitive for new businesses, but the new law frees up resources for small business owners to invest more in legal guidance, other aspects of their business, or, less advisably, a pair of Big Baller Brand shoes.

If you’ve already formed an LLC under the previous pricing scheme, you’re not going to get that money back, but your business can see savings going forward. The filing fee for your annual reports is now $75, down from $250, and other fees have been cut as well.

4. Entrepreneur Learner’s Permit

This isn’t about driving, and it’s not necessarily for 15 year-olds. The General Assembly, over Gov. Rauner’s veto, enacted an Entrepreneur Learner’s Permit pilot program for entrepreneurs running new information services, biotech, or green technology businesses. SB1462, Pub. Act 100-0541. The program reimburses successful applicants for any filing, permitting, or licensing fees imposed by the State of Illinois in connection with the formation of such businesses.

To be eligible, the applicant must not currently own a business, and must have less than five years’ previous experience as a business owner. Priority is given to female- and minority-owned businesses. Because this is a pilot program, reimbursements are capped at a total of $500,000 program-wide. The Department of Commerce and Economic Opportunity (“DCEO”) will adopt rules on the application process.

5. Grants for Public Aid Entrepreneurs

Separately, the Governor signed legislation providing for a grant program to entrepreneurs who are currently on public aid. HB 736, Pub. Act 100-0347. Applicants under this program must submit a business plan or proposal, which will be evaluated by the state to determine whether a grant should be awarded. Annual reports on the progress of the business are required for continued access to the grant funds. As with the Entrepreneur’s Learner’s Permit, the DCEO will adopt rules regarding implementation.

If the Learner’s Permit and Public Aid programs don’t apply to you, there are still a lot of other great programs for small businesses. Check out the federal SBA.gov and the Illinois DCEO entrepreneur site for resources.