Tag: small-business

Must a Limited Liability Company make distributions to its members?

What happens when a member of a Limited Liability Company (LLC) wants an interim distribution, but the other members don’t?  An issue that may arise in a closely held-business formed as an LLC.  LLCs, unlike corporations, are treated as pass-through entities for federal tax purposes, members are taxed based on their interest in the LLC and their proportionate income, whether or not a distribution is made (while it is possible to treat the LLC as a corporation for tax purposes, this is the subject for your CPA or tax adviser to discuss). A member may be allocated income from the company, but may never receive a distribution related to that money.  Some members may not be able to pay taxes on money never received and may demand a distribution. This is one of many issues that may arise in a closely held LLC that can be mitigated in advance with a well drafted operating agreement. 

When forming an LLC with multiple members, a well drafted operating agreement is important for documenting ownership interest and governance of the LLC.  The operating agreement, like many contracts, is used to define the rights and obligations of the parties (members).  Illinois does not require specification as to the ownership interest of each member when filing the Articles of Organization. Further, Illinois does not require that all members be listed, only members with management authority.  

While there are numerous rights and obligations that may be outlined in an operating agreement, this article focuses on rights of distribution, when the company makes a transfer of money, property or other benefit to a member or a party with the member’s ‘distributional interest.’

Default Rule (no Operating Agreement):

The default rule, based on the Limited Liability Company Act (805 ILCS 180), is for distributions to be made in equal shares to the members.  The Act does not provide for mandatory or compelled distributions to members, except when the company is winding up its business.  Many operating agreements may mirror the statutory restrictions on distributions, but may include additional provisions and criteria for distributions. 

Time and Consent for Distribution (in Operating Agreement):

Members may wish to outline the timing and consent for distributions.  The Act does not specify a timing mechanism or voting requirement to make a distribution to members.   An operating agreement can dictate when a distribution is made to the members of the company and may outline the authorization needed for a distribution, including unanimous or majority consent by all members, or only certain members.  The operating agreement can also include requirements for distributions to members when tax liability is incurred. 

Restrictions on ‘Distributional Interest’:

Section 15-5 of the Act restricts what may be altered by an operating agreement, including the restriction of the rights of a person, other than a manager, member, and transferee of a member’s ‘distributional interest.’  Since a ‘distributional interest’ is treated as personal property and may be transferred in whole or in part, a member’s ‘distributional interest’ may be used to satisfy a third-party’s (often a creditor’s) claim against the member, without transferring the other rights held by the member.  Restricting that third-party’s right to a ‘distributional interest’ in the operating agreement violates the Act.     

Additionally, members should be mindful of circumstances when distributions may not be made, regardless of what the operating agreement may state.  A Distribution should not be made, when the LLC would not be able to pay its debts as they become due in the ordinary course of business; or when the assets of the LLC would be less than Liabilities and the amount needed to dissolve.  Individual members may be liable to the LLC for any amount of distribution that exceeds the amount that could have been distributed without violating the prohibitions on distributions.  So even if a distribution is made, but the company is indebted to third-party creditors, the creditors may seek the turnover of those funds from the member.   

When forming an LLC with multiple members, it is important to have a well drafted operating agreement, which may be worth the time and costs of a lawyer to draft and review.  

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This blog and any materials available at this web site are for informational purposes and not for the purpose of providing legal advice. You should contact an attorney to obtain advice with respect to any particular issue or problem. Use of and access to this Web site or any of the e-mail links contained within the site do not create an attorney-client relationship between The Law Office Of Christian Blume, LLC or Christian Blume and the user or browser.

Update to Limited Liability Company Act: Members and Managers may be liable for own wrongful acts or omissions, even while acting within their role for the LLC.

Illinois, through its legislative branches, recently amended the Limited Liability Company Act (805 ILCS 180) through Senate Bill 1495.  Part of the bill was to overrule interpretations of specified portions of the LLC Act set forth in Dass v. Yale, 2013 IL App (1st) 122520, specifically concerning Section 10-10, related to the liability of members and managers. 

Dass v. Yale was the result of an action filed against both an LLC and an individual related to property damage.  One issue presented to the Appellate Court was whether Section 10-10 of the LLC ACT exempts LLC members or managers from personal liability for torts or fraud committed in their capacity as members or manages of the LLC.  The Court in Dass answered this question in the affirmative, reasoning:

In the case at bar, the plain language of section 10-10 states that, ‘[e]xcept as otherwise provided in subsection (d) of this Section, the debts, obligations, and liabilities of a limited liability company, whether arising in contract, tort, or otherwise, are solely the debts, obligations, and liabilities of the company. A member or manager is not personally liable for a debt, obligation, or liability of the company solely by reason of being or acting as a member or manager.’ 805 ILCS 180/10-10(a) (West 2010). Thus, ‘[s]ection 10-10 clearly indicates that a member or manager of an LLC is not personally liable for debts the company incurs unless each of the provisions in subsection (d) is met.’ Puleo, 368 Ill. App. 3d at 68. Here, there is no claim that [the manager] is liable under subsection (d), so [the manager] is not personally liable for the tort claim against [the LLC].

Dass, 2013 IL App. (1st) 122520 at ¶39.

The interpretation in Dass permitted individuals acting within their role for an LLC to escape individual liability for tortious conduct.  In Dass, the tortious conduct alleged was fraudulent misrepresentations by the Manager of the LLC.  The Manager was able to avoid individual liability.  The trial court concluded that the language of the Act protected the Manager “since all of the allegations of the complaint occurred while he was acting solely in his capacity as a manager of [the LLC].”  The appellate court agreed with the trial courts interpretation.

Senate Bill 1495 corrected the interpretation made in Dass, thus restoring personal liability for tortious acts of an individual, even if acting in his or her capacity as a manager or member of a LLC.  Sec. 10-10(a-5) now provides:

Nothing in subsection (a) or subsection (d) limits the personal liability of a member or manager imposed under law other than this Act, including, but not limited to, agency, contract, and tort law. The purpose of this subsection (a-5) is to overrule the interpretation of subsections (a) and (d) set forth in Dass v. Yale, 2013 IL App (1st) 122520, and Carollo v. Irwin, 2011 IL App (1st) 102765, and clarify that under existing law a member or manager of a limited liability company may be liable under law other than this Act for its own wrongful acts or omissions, even when acting or purporting to act on behalf of a limited liability company. This subsection is therefore intended to be applicable to actions with respect to which all timely appeals have not exhausted before the effective date of this amendatory Act of the 101st General Assembly as well as to all actions commenced on or after the effective date of this amendatory Act of the 101st General Assembly.

805 ILCS 180/10-10(a-5).

What does this mean for individuals operating an LLC?  You should be aware that you will remain liable for your individual actions, even if acting on behalf of the LLC. 

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This blog and any materials available at this web site are for informational purposes and not for the purpose of providing legal advice. You should contact an attorney to obtain advice with respect to any particular issue or problem. Use of and access to this Web site or any of the e-mail links contained within the site do not create an attorney-client relationship between The Law Office Of Christian Blume, LLC or Christian Blume and the user or browser.

How to avoid listing your home address when operating a home based business in Illinois

By: Christian Blume – Illinois Business & Real Estate Attorney

Many individuals starting a home-based business may be concerned with listing their home address on public records, for any number of reasons.  A recent amendment to the Illinois Assumed Business Name Act, HB2528 carves out an exception for certain businesses to avoid listing their personal residence when personal safety is an issue.

The Assumed Business Name Act (805 ILCS 405) requires any person or persons transacting business under an assumed name (other than their real names) to file a certificate setting for the assumed business name in the county clerk of the county in which business is transacted.  The types of businesses that are required to register assumed business names include, sole proprietorships, general partnerships, and professional services corporations.  It does not require corporations, limited liability companies (LLC), or limited liability partnerships (LLP) to register their assumed name.

An assumed business name is any name other than that of the individual owner(s) of the business.  Example: Abraham Lincoln, P.C. would not need to register as an assumed name, but Lincoln Law would since it is not the actual name of the individual transacting the business as a professional corporation. 

In August 2019, the Assumed Business Name Act was amended, to add 805 ILCS 405/1a, effective January 1, 2020.  The amendment permits a person or persons transacting business under an assumed name at his or her personal residence, to list the county clerk as the default agent for service if listing their home address would put their safety at risk.  Certain conditions must be met in order to list the county clerk.  

  • The person reasonably believe that publishing his or her home address would put his or her safety at risk, and lists the reasons for that belief on a form submitted to county clerk, which shall be kept confidential;
  • The form is accompanied by a court order or police report;
  • The person provides the address of his or her residence to the county clerk, which shall be kept confidential.

The amendment further stipulates that the county clerk has a duty to notify the business of service of process on behalf of the business, and may charge a nominal fee for this service.  Therefore, effectuating service on an individual or individuals operating under an assumed name can be accomplished through the county clerk, like serving any other registered agent.  Whether the individual(s) receive(s) actual notice from the county clerk would not matter for purposes of jurisdiction, although this hasn’t been tested.

Lastly, the act does not list what the court order or police report must state in order, and leaves this question open for interpretation.  Must the police report or court order confirm there is a reasonable risk of safety for listing the home address?  

Additional Resource: Cook County Application to Register or Amend an Assumed Business Name

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This blog and any materials available at this web site are for informational purposes and not for the purpose of providing legal advice. You should contact an attorney to obtain advice with respect to any particular issue or problem.  The information in this article is current as of the date indicated, and may not be updated to reflect future changes/developments.  Use of and access to this Web site or any of the e-mail links contained within the site do not create an attorney-client relationship between the Law Office Of Christian Blume, LLC or Christian Blume and the user or browser.

Free Donuts for Life!

 

The other day, while finishing off my coffee a donut and a couple donut holes with jimmies (look that one up) at one of the local donut shops near my office, I overheard the donut shop worker talking with a bike messenger about a bird stuck in the donut shop. 

My initial thought…this sounds like a job for a tall guy, like changing light bulbs, pulling down projector screens, or reaching objects from high places, reminiscent of my high school teachers’ requests.  I know makes tall people feel special. 

So I inquired to ask what was going on.  The worker said they were closed, while she was attempting to get the bird out from above the door, with a donut on a stick and with the bike messenger’s assistance.  Yeah that’s right, a donut on end of a stick, as if the bird was only there for a snack, maybe it was.  I offered to grab the distressed bird and the worker looked at me with confusion.   

In attempt to sweep the bird down, it flew across the store and eventually ended up landing in an empty donut box before flying to hide behind some coffee cups.  I asked the worker if I could go behind the counter to get the bird out, while she consented.  Through multiple attempts and without harming the little bird, I was able to trap it using two plastic coffee cups.  I took it outside, a few yards from the door, and released it.  It flew away unscathed.

Here’s where it gets interesting, after thanks, the woman working the store proclaimed “free donuts for life” and told me to come in the following day, when they were re-opened.  Wrong person to offer free donuts for life to, especially the good donuts (you know what I mean if you live in Chicago and appreciate donuts).

So am I to expect free donuts for life?  Does the shop owe me free donuts for life?  Short answer is probably not.   

This promise of “free donuts for life” can be looked at through contract law (i.e. whether we have an enforceable contract), specifically under Illinois contract law.  A contract requires mutual assent, by the parties to the terms of the agreement; the parties here being the donut business (assuming the worker had authority to bind the donut shop, without getting into agency law) and myself.  Mutual assent requires a “meeting of the minds” and typically includes an offer and acceptance.  Both parties must understand and accept the agreement they are entering into.  In addition to mutual assent there must be “consideration”, which is a bargained-for promise, act, or forbearance or the creation, modification, or destruction of a legal relation.

However, past consideration is not sufficient consideration to form an agreement, and would be treated as a gratuitous promise.  Which means since I had already provided the removal of the bird from the donut shop (performance and past consideration), the shop’s promise of “free donuts for life” was based on a prior conferred benefit, and not sufficient to form consideration for the promise.  Had the worker stated “if you get that bird out of here, you will get free donuts for life”, or “whoever gets the bird out of here gets free donuts for life” and I performed, this would satisfy the consideration element of a contract, but not the case here.    

I asked a lawyer friend to discuss and although willing to take my case for a third of the donuts, we both concluded that there was no exchange of consideration, “free donuts for life” for past performance was not enough.  But he did bring up the legal doctrine of promissory estoppel, based on the gratuitous promise of the donut shop. 

 “The restatement of contracts defines promissory estoppel as “A promise which the promisor should reasonably expect to induce action or forbearance of a definite and substantial character on the part of the promisee and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise.”     

Illinois requires the following elements to set out a claim for promissory estoppel: (1) there is a promise that is unambiguous in its terms; (2) there is reliance by the party to whom the promise is made; (3) the reliance is expected and foreseeable by the party making the promise; and (4) the party to whom the promise is made relies on the promise to his or her detriment.   These are all factual questions that must be established, and will hinge on the specifics of each case.

Applying these elements to the bird rescue and “free donuts for life”, one could argue the promise was ambiguous.  What does “free donuts for life” mean? A donut a day or a dozen?  It’s not clear, what the shop was promising, and what the promissee (myself) may be interepreting the promise to be, and this creates ambiguity.   However, a jury or judge may be able to determine what “free donuts for life” means, and give it more definite meaning.

Second, I would have had to rely on this promise, and in Illinois that reliance must be reasonable.  Let’s say I did rely on this promise and showed up every day to ask for a donut and let’s assume this was reasonable, that would satisfy the second element. 

The third element also requires reasonableness, and it would have to be reasonable for the donut shop worker to expect and foresee me rely on this promise; again for a judge or jury to decide.     

The fourth element, detrimental reliance, may be shown through my efforts in showing up at the donut shop day after day to receive my free donut, but it would be unreasonable for me to continue to show up, if after the first day I was told I only get one free donut and cannot continue to come back for free donuts.   

Let’s say I overcome these hurdles and prevail on a claim under the doctrine of promissory estoppel, what could I recover in damages?  Some courts have awarded actual damages (i.e. the detriment of the reliance) others have awarded the promise, “free donuts for life,” so long as necessary for equity to prevail. 

Free Donuts for Life.

*Although I am a consumer of delicious donuts, I am also a business and real estate lawyer and would be happy to speak with you and see how I can be of assistance with your start-up or small business.   Christian@attorneyblume.com

How to Appeal an Administrative Ruling from the City of Chicago Department of Administrative Hearings

The prosecution of ordinance violations can take place at the City of Chicago Department of Administrative Hearings (DOAH), located at 400 W. Superior.  DOAH acts as a ‘quasi-judicial body.’  Cases are heard by licensed attorneys, paid for and contracted with the City of Chicago, and commonly referred to as Administrative Law Judges (or ALJs).  These cases are typically shorter than other litigation, often times, one hearing.  The result can be anywhere from a dismissal of the charges to a substantial fine. Read More Here.

If you failed to appear and present your case to the ALJ, a default judgment may have been entered against you, and your first option may be to file a motion to set-aside the default motion.  This motion generally must be filed within 21 days of the mailing date stamped on top of the default judgment order (the time limit may not apply under certain circumstances).  The motion should be filed in person at 400 W. Superior, and you must appear or have an attorney appear on the date the motion is scheduled.   

If you did appear and contest the charges against you, and a judgment that was entered that was not in conformity of the law, or the ALJ didn’t consider the requisite facts, you may want to appeal the decision.

You do have a right to appeal the decision of the ALJ to a Circuit Judge.   Pursuant to 735 ILCS 5/3-104, jurisdiction to review final administrative decisions is vested in the Circuit Courts.  Unlike ALJs, the Circuit Court is made up of full-time judges, elected or appointed, who are not paid by the City of Chicago. 

The process for appealing and Administrative Law Decision

After your hearing at the DOAH, you will likely be given a copy of the “Findings, Decisions & Order”.    Pursuant to 735 ILCS 5/3-103 “Every action to review a final administrative decision shall be commenced by the filing of a complaint and the issuance of summons within 35 days from the date that a copy of the decision sought to be reviewed was served upon the party affected by the decision…”  So if you are given a copy of the final determination of the ALJ, this would be the start of the 35 day time limit to file your appeal.  If you fail to attend the hearing or otherwise do not receive a copy of the final order from the ALJ, the 35 day period will start when the Findings, Decisions & Order is mailed.

To file an Administrative Appeal, you must file a Complaint for Illinois Administrative Review with the Clerk of the Circuit Court of Cook County, with the Findings, Decisions & Order attached, as well as a summons, and an administrative review cover sheet.  These filings can be made using the forms provided by the Clerk of the Circuit Court of Cook County. 

There is a fee for filing your appeal, and the appeal can be filed in room 602 of the Richard J. Daley Center, 50 W Washington St., Chicago, IL, or electronically.  When the Complaint is filed a court date will be given, typically at least a few weeks in the future.   

The summons is the form notifying the City and the Specific City Department(s) that an administrative review has been filed and the date of the first hearing.   You must mail a copy of the Summons, Complaint and Cover Sheet to each applicable City Department, as well as the City of Chicago Department of Law and the City of Chicago Department of Administrative Hearings.  

At the first court date, the Judge will call your case.  The City will appear and request time to respond to your complaint.  The City will likely be granted time to file its answer to your complaint, or “the record”, which includes a transcript of your administrative hearing and all the evidence used by the City in prosecuting your case.   The Judge will permit you time to file what’s called “Specification of Errors” form.  The “Specification of Errors” is the reasons and your argument as to why the Administrative Hearing Officer (ALJ) was wrong.  The Judge will set the next court date and time. 

The Specification of Errors will need to be filed after your receive the City’s answer.  You will need to mail a copy of the Specification of Errors to the City, as well as file a copy with the Court. 

The next Court date, the judge (who may be a different judge than the one on your first court date) will permit both you and the City to present your arguments.     The Judge will make a ruling on this date. 

*Christian is an Illinois lawyer who assists property owners facing ordinance violations home owners (or future home owners) with real estate transactions, and small businesses. Call (773-706-7514) or email (christian@attorneyblume.com).

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This blog and any materials available at this web site are for informational purposes and not for the purpose of providing legal advice. You should contact an attorney to obtain advice with respect to any particular issue or problem. Use of and access to this Web site or any of the e-mail links contained within the site do not create an attorney-client relationship between the Law Office Of Christian Blume, LLC or Christian Blume and the user or browser.

Chicago Code Violations: How to Navigate the Administrative Hearing Process

Chicago Municipal Code Violations often times carry a potential fine. Know the process, know your rights!

Much like the federal government or state governments, local municipalities in Illinois are permitted to enact and enforce laws. In Chicago these laws are codified in the Chicago Municipal Code, and prescribe: building codes, business licensing, taxing authority, and many more.

While many of these laws are related to “public health, safety, welfare, morals and quality of life of the residents of the City of Chicago”, a violation may result in costly fines. Furthermore, as in the case of building code violations, or violations relating to the care of property, if those fines go unpaid, they may result in a lien against the real property.

For example, the current fine for not cutting or controlling weeds to the required length (§ 7-28-120) can range from $600 to $1,200. Each day the violation exists is a separate offense, which means that the fine can be multiplied by the number of days, and could potentially grow to an even larger amount, much like rapidly growing lawn weeds.

Does the City of Chicago always seek the maximum fine permitted by law? No, but the City could-and would-be within its legal right to do so.

Let’s say you have a neighbor that notices out of control weeds growing on your front lawn, and that person decides to report this alleged violation by dialing 311. The Department of Streets and Sanitation can send out an inspector to make a determination if a violation exists. If there is an alleged violation observed, the violation can be referred to the the City’s Corporation Counsel to prosecute and enforce the Chicago Municipal Code.

The prosecution of the ordinance violation(s), in many cases, is filed at the Chicago Department of Administrative Hearings (DOAH), a ‘quasi-judicial body’, and heard before an Administrative Law Judge (ALJ). ALJs are licensed attorneys, contracted to hear Administrative cases; they are not elected judges.

The rules for prosecuting Administrative Law cases are not as stringent as those in Circuit Court or Federal Court. One difference is that the City need not obtain personal jurisdiction over the individual or business being sued. In most civil cases, personal jurisdiction can be obtained through service of process, whereby the Sheriff or a special process server physically delivers a copy of the summons and complaint to the individual or entity being sued. When the City prosecutes an ordinance violation through the DOAH, it can serve the notice of the violation and hearing by regular mail.

On the date of the hearing, you (or your attorney) will likely file your appearance a-one-page form with your case information and contact info. Typically you (or your attorney) will meet with the Assistant Corporation Counsel (City Attorney), that will be prosecuting your case. During this meeting the City may request that you agree to an order to be entered on that day. Critically, you do not have to agree to the order being requested by the City and you have the right to be represented by your own lawyer at this meeting.

Depending on the nature of the case and what the City is seeking, your first hearing may be the last, and the case may conclude on that date. However, in instances where corrective action is sought, such as building code violations, there may be a return date, or dates, to ensure that the corrective action was taken. The case is called by the ALJ, and if an agreement was reached with the City Attorney, the ALJ will likely enter that order. If no agreement is reached, a hearing will likely be conducted by the ALJ, in which both the City and you will have the opportunity to present evidence, and argue the case. The ALJ will ultimately make a determination as to whether a violation existed and enter a judgement. If the judgment is not entered in your favor, you will have an opportunity to appeal that decision to the Circuit Court, but there are time constraints and specific requirements for filing an appeal.

What happens if you miss the notice by mail, and do not attend the hearing? Likely a default judgment will be entered against you, and the notice of the default judgment will be mailed. Does that mean you have to pay that amount? Not necessarily, you (or your attorney) can file a motion to set-aside the judgment, but there is a time limit to file this motion, in order for it to be considered timely.

Christian Francis BlumeReviewsout of 5 reviews

This blog and any materials available at this web site are for informational purposes and not for the purpose of providing legal advice. You should contact an attorney to obtain advice with respect to any particular issue or problem. Use of and access to this Web site or any of the e-mail links contained within the site do not create an attorney-client relationship between the Law Office Of Christian Blume, LLC or Christian Blume and the user or browser.

Understand whether it’s fraud in fact or fraud in law

In Illinois, the Uniform Fraudulent Transfer Act, 740 ILCS 160/1 (the “UFTA”), permits creditors to reach fraudulent transfers and conveyances made by a debtor with intent to defraud, hinder, or delay a creditor, or place property out of a creditors reach.  A violation of the UFTA requires either ‘fraud in fact’ or ‘fraud in law.’

Fraud in Fact: Fraud in Fact occurs when “the debtor made the transfer or incurred the obligation…with (1) actual intent to hinder, delay, or defraud any creditor of the debtor.”  It’s unlikely a debtor would ever admit actual intent, so circumstantial evidence is necessary to demonstrate actual intent (or fraud in fact).  The UFTA provides (11) factors which may be given consideration in determining whether actual intent is established.  These factors include:

  • Whether the transfer or obligation was to an insider:An insider can be broadly defined as someone with a close relationship (personal or professional) or control over the debtor.  A full list of “insiders” is set forth in 740 ILCS 160/2(g).
  • Whether the debtor retained possession or control of the property transferred after the transfer:  For example, a debtor might have transferred title to his automobile to a friend, but he is still driving it, parking it in his garage, and treating it as his own vehicle.
  • Whether the transfer or obligation was disclosed or concealed: If the transfer was concealed from the creditor, this factor weighs in favor of fraud in fact.   If the transfer was disclosed to the creditor, however, this factor weighs in favor of no fraud in fact.
  • Whether before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit: If the debtor makes the transfer after a lawsuit was filed against the debtor, this suggests that the transfer was made with actual intent to commit fraud.
  • Whether the transfer was of substantially all the debtor’s assets: A debtor knowing it has substantial liabilities to a creditor or creditors may try to transfer everything of value, knowing that it would likely be obtained or liquidated to satisfy debts if it remained in the debtor’s possession.
  • Whether the debtor absconded: The debtor leaves hurriedly and secretively.
  • Whether the debtor removed or concealed assets.
  • Whether the value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred: If the value received for the assets was reasonable, this would weigh in favor of no actual intent to commit fraud.  
  • Whether the debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred: A debtor is considered insolvent when the sum of the debtor’s debts is greater than all of the debtor’s assets at a fair valuation.
  • Whether the transfer occurred shortly before or shortly after a substantial debt was incurred: This factor considers both the timing of the transfer, how close it was to incurring the debt, and the substance of the transfer.
  • Whether the debtor transferred the essential assets of the business to a lienor who transferred the assets to an insider of the debtor.

Fraud in Law: If Fraud in Fact cannot be established, the UFTA provides a creditor with an avenue for recovery if it can establish “Fraud in Law.” 740 ILCS 160/5(a)(2).  Fraud in Law occurs when an asset is transferred, or an obligation is incurred, and the debtor does not receive a reasonably equivalent value in exchange, and:

  • The debtor was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction; or
  • The debtor intended to incur, or believed or reasonably should have believed that he would incur, debts beyond his ability to pay as they became due. 

Determining the “Reasonably Equivalent Value” is a fact specific inquiry, and courts will compare the value of what was transferred to what was received in exchange, whether the asset was transferred or the obligation was incurred for fair market value, and whether the transaction was at arm’s length between a willing buyer and a willing seller. See Barber v. Golden Seed Company, Inc.)

In People ex rel. Hartigan v. Anderson,the defendant transferred a beneficial interest in his marital residence to his wife less than one month prior to being indicted by a grand jury but many months after receiving a subpoena to appear before a grand jury and produce tax documents.  Eventually, the criminal charges were dropped and the state brought a civil suit against the defendant.  A civil judgment was entered, and the state filed an action to set aside the real estate transfer, alleging that is was a fraudulent conveyance.  The Court applied a three pronged tests to determine if the conveyance was fraudulent in law: (1) there must be a transfer made for no or inadequate consideration; (2) there must be existing or contemplated indebtedness against the transferor; and (3) it must appear that the transferor did not retain sufficient property to pay his indebtedness.

The defendant and his wife argued: (1) the wife’s decision not to divorce the defendant, after discovering he had an affair which produced children, was adequate consideration for the transfer, and (2) the defendant did not contemplate a civil judgment at the time of the transfer.  The court conducted a hearing on the matter and found the transfer to be fraudulent.

Bankruptcy Code and Fraudulent Transfers: Debtors who fraudulently transfer assets to avoid turning them over to creditors may be tempted to use bankruptcy as a shield by discharging the debt owed to those creditors. The Bankruptcy Code, however, provides creditors with protection against dishonest debtors. Bankruptcy trustees have the power to avoid fraudulent transfers made within two years before the bankruptcy filing. The standard for proving a fraudulent transfer under that section is the same in many respects as the standard for proving fraud under the UFTA. If a transfer is avoided, then trustees have the power to recover the property or its value and then distribute the recovery to creditors. The trustee’s “look back period” may often exceed two years depending on several factors, including the method and recipient of the transfer and the applicable state law.

This blog and any materials available at this web site are for informational purposes and not for the purpose of providing legal advice. You should contact an attorney to obtain advice with respect to any particular issue or problem. Use of and access to this Web site or any of the e-mail links contained within the site do not create an attorney-client relationship between the Law Office Of Christian Blume, LLC or Christian Blume and the user or browser.

Selling Homemade Food in Illinois: legal considerations.

When I was an Attorney with the City of Chicago, I spent a considerable amount of time doing work at police stations. Some of my fondest memories were made working with Chicago Police Officers. Every so often a retired police officer would make his rounds selling delicious homemade cupcakes.  I will leave his name and company name out of this article, but if you are a south side police officer you may know who I’m talking about. We’ll call him the Cupcake Guy.

The Cupcake Guy would roll into the station with his travel cooler, and the Officers and workers would flock to him to buy an individually packaged cupcake.  These were some of the most moist and delicious cupcakes you could get, and at a very reasonable price.

He likely made these cupcakes in his home.  While not altogether a new concept, homemade goods have been around for much longer than I will even try to determine.  However, the laws that regulate homemade goods, for commercial sale, particularly in Illinois are relatively new, or recently updated.    

There are two statutes this article to focus on relating to home-made food, for commercial use: (1) Home Kitchen Operation (410 ILCS 625/3.6) and (2) Cottage Food Operation (410 ILCS 625/4).

Home Kitchen Operation (410 ILCS 625/3.6)

The Home Kitchen Operation law regulates the production of baked goods in a person’s residence for direct sale to consumers.  Specifically, to fall under the Home Kitchen Operation Statute: (1) monthly gross sales cannot exceed $1,000, (2) the food is a non-potentially hazardous baked good, (3) notice must be given to consumers that the food was produced in a home kitchen, and (4) a label must be affixed to the food package containing the name of the food, and allergen information.  Additionally, the food must be stored in the residence, in which it was produced. In 2018, changes to the statute modified the definition of “baked goods.”   

In order for the law to take effect in your municipality, township, or county, the local government must adopt an ordinance, authorizing home kitchen operations.  

Cottage Food Operation (410 ILCS 625/4):   

Unlike a Home Kitchen Operation, a Cottage Food Operation is not restricted to “baked goods,” but includes all foods other than those specifically banned in the statute, with exceptions.  A Cottage Food Operation permits the sale of home made food to the public, but limits the sale to farmers’ markets, or sold on the farm, where the main agricultural ingredient is grown or delivered directly to the consumer.  

There are several types of foods and ingredients that are banned from being produced by a Cottage Food Operation, unless properly licensed, certified, and compliant to sell these banned foods.  This list includes: meats, certain types of pies (pumpkin, sweet potato, custard, creme), cheese cakes, garlic in oil, and many canned foods.  Additional requirements include: proper labeling, registration with the local government, a food sanitation management certificate, and the placement of a placard with the following notice  “This product was produced in a home kitchen not subject to public health inspection that may also process common food allergens.” Local governments and the Department of Public Health may prescribe further requirements on cottage food operations, so it is important to check with your local municipality.

*Starting a small-business, running a closely held business or facing legal issues in Illinois? Contact Blume Law.

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This blog and any materials available at this web site are for informational purposes and not for the purpose of providing legal advice. You should contact an attorney to obtain advice with respect to any particular issue or problem. Use of and access to this Web site or any of the e-mail links contained within the site do not create an attorney-client relationship between the Law Office Of Christian Blume, LLC and the user or browser.

Illinois Creditor Law: Can you pierce the corporate veil after a final judgment?

As I discussed in a previous blog-post (DON’T PIERCE THE CORPORATE VEIL – 11 mistakes to avoid for small-businesses), piercing the corporate veil is an equitable remedy and a means to impose liability from an underlying claim. It is not a stand-alone cause of action; it must be merged with an underlying claim/cause of action.

A party can pierce the corporate veil as part of the underlying case, allege facts to support an alter-ego theory, and impose liability on the individual or entity attempting to be shielded by the corporate liability limits. However, in some cases a litigant may not have the facts necessary to allege an alter-ego theory until after final judgment before learning that the judgment debtor is unable to satisfy the judgement.

So, how can a creditor pierce the corporate veil after a final judgment against a debtor corporation?

In many cases, after a judgement is entered, supplementary proceedings may be commenced to collect on the judgment, including the filing of a citation to discover assets. (735 ILCS 5/2-1402). Language in 1402(c)(3), permits a judgement creditor to:

“Compel any person cited, other than the judgment debtor, to deliver up any assets so discovered, to be applied in satisfaction of the judgment, in whole or in part, when those assets are held under such circumstances that in an action by the judgment debtor he or she could recover them in specie or obtain a judgment for the proceeds or value thereof as for conversion or embezzlement. A judgment creditor may recover a corporate judgment debtor’s property on behalf of the judgment debtor for use of the judgment creditor by filing an appropriate petition within the citation proceedings.”

This section permits a judgment creditor to determine whether a third-party is holding assets of the judgment debtor, BUT cannot be used to pierce the corporate veil and find the third-party personally liable. Psyhos v. Heart-Land Development Co.

In Pyshos, the creditor secured a judgment in the underlying case and attempted to pierce the corporate veil in a supplementary proceeding. The appellate court found this improper. The court reasoned that the allegations in a supplementary proceeding are limited to considering the allegation that the third-party is holding assets of the judgment debtor, but a supplementary proceeding may not determine personal liability against those shareholder and directors. The Pyshos court outlined two approaches a judgment creditor may take to recovery against a third-party: (1) supplementary proceedings, alleging the third-party is in possession of assets of the judgment debtor, or (2) initiating a new proceeding to pierce the corporate veil.

(1) Supplementary Proceedings – to obtain assets of the judgment debtor, held by a third-party. A supplementary proceeding, can determine whether a third-party is in possession of assets of the judgment debtor. Those assets may be used to satisfy the judgment.
A supplementary proceeding can determine whether a judgment debtor transferred assets to a third-party in violation of the Illinois Uniform Fraudulent Transfer Act (UFTA). (740 ILCS 160), which conforms with Pyshos and precedential interpretation of 1402(c)(3). If the UFTA has been violated, the judgment creditor may be able to avoid the transfer to satisfy the underlying debt, or seek an attachment or other provisional remedy against the transferred asset or other property of the transferee. (740 ILCS 160/8).

While a violation of the UFTA permits some relief pertaining to the assets held by a third-party, it does not provide for personal liability against that third-party.

(2) Initiating a new proceeding to pierce the corporate veil. “A new proceeding is proper because, where a party obtains a judgment against another party, the underlying claim merges with the judgment and the judgment becomes a new and distinct obligation of the [judgment debtor] which differs in nature and essence from the original claim.” Pyshos.

We can look at the case of Buckley v. Abuzir. The Plaintiffs in Buckley obtained a default judgment against a corporation, for violation of the Illinois Trade Secrets Act. Unable to recover from the corporation, the Plaintiffs sought to recover from an individual, in a separate chancery action, under a alter-ego theory. The Plaintiffs incorporated the underlying judgement as part-of the suit to pierce the corporate veil and alleged facts to support an alter-ego theory; thereby merging the judgement with a separate suit. The relief sought was equitable, the legal relief had already been obtained in the underlying case. The filing of the second case was a means to attach liability to the individual for the underlying debt of the corporation.

*Starting a business or running a closely held business in Illinois? Contact Attorney Christian Blume at 773-706-7514 or christian@attorneyblume.com.

This blog and any materials available at this web site are for informational purposes and not for the purpose of providing legal advice. You should contact an attorney to obtain advice with respect to any particular issue or problem.  The information in this article is current as of the date indicated, and may not be updated to reflect future changes/developments.  Use of and access to this Web site or any of the e-mail links contained within the site do not create an attorney-client relationship between the Law Office Of Christian Blume, LLC or Christian Blume and the user or browser.

Don’t pierce the corporate veil: 11 mistakes to avoid for small-business owners

Christian Blume -December 21, 2018

Many business owners and entrepreneurs have likely heard the term ‘piercing the corporate veil’, but don’t understand the meaning, and how to take steps to avoid the ‘piercing.’

Generally, when we talk about piercing the corporate veil, it is holding shareholders (in the case of a corporation), directors, officers or employees liable for the debt of a corporation.  These owners can be individuals or even parent corporations/LLCs. Why might a creditor want to go after the individuals or another corporate entity? The entity may not have the resources to cover the liability, and the creditor is seeking money from someone with ‘deeper pockets.’

Piercing the corporate veil is considered an equitable remedy and a means to impose liability from an underlying claim, such as a breach of contract. To pierce the corporate veil, Illinois courts require a creditor demonstrate: (1) a unity of interest and ownership, such that the separate personalities of the corporation and the individual do not 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.

In Fontana v. TLD Builders, the Illinois 2nd District Appellate Court delineated the following (11) factors, ‘badges of fraud’, to determine whether the unity of interest and ownership has been met, and are insightful as to whether the second-element of the two prong test is met. Corporations should do their best to avoid these mistake.

inadequate capitalization: when the corporation’s ratio of capital to its obligations and business operations is too low.

failure to issue stock: corporations have the power to issue shares of stock, as per the articles of incorporation. However, a failure to issue those authorized shares demonstrates a unity of ownership and may support a piercing of the corporate veil.

failure to observe corporate formalities: not holding regular director and shareholder meetings, keeping minutes at corporate meetings, maintaining corporate records, or updating filings with the secretary of state.

non-payment of dividends: not all corporations pay dividends, and many don’t necessarily have to. However, if dividend payments are required or appropriate based on the circumstances, then they should be paid to the shareholders.

insolvency of the debtor corporation: if the corporation is regularly unable to satisfy its debts when becoming due.

non-functioning of the other officers or directors: if only one of the named officers or directors, when there are multiple listed officers or directors, exercises complete control over the corporation, this demonstrates that the corporation may be in-effect the alter-ego of that individual and not a distinct entity.

absence of corporate records: corporations are required to keep correct and complete books and records, and minutes of the proceedings of its shareholders and directors. Additionally, a record of a corporation’s shareholders must be kept, including the names and addresses, and the number of shares and class of shares held by each shareholder.

commingling of funds: when personal funds are used to pay corporate liabilities, corporate funds are used to pay personal expenses, or when one corporate entity pays the liabilities of another. This can be avoided by maintaining separate and distinct bank accounts for the business entity, and not using one account to pay for the liability of another. This practice may also help in maintaining accurate accounting.

diversion of assets from the corporation by or to a stockholder or other person or entity to the detriment of creditors: when the corporation transfers assets or money, to shareholders or third-parties to prevent creditors from collecting. Additionally, these transfers may violate Illinois Uniform Fraudulent Transfer Act (740 ILCS 160).

failure to maintain arm’s-length relationships among related entities: when lawyers use the term “arm’s-length relationship”, it is typically in reference to a more formal relationship, where each party is independent, well informed, and looking out for their own interest. The opposite would be an “arm-in-arm relationship,” one in which the parties are more intimate, closely related, or familial. An example of this would be a corporation leasing office space/commercial space from another closely held entity below market rent and without any formal leases, or without periodic rental payments.

whether, in fact, the corporation is a mere facade for the operation of the dominant stockholders: when the corporation is set-up as a ‘sham’ or ‘dummy’ corporation. While it is good practice to avoid as many of these mistakes as possible, there is no concrete formula that courts use to determine whether to pierce the corporate veil, and each is determined based on the particular facts.