What if my Business Partner is Stealing from our Company?

6th StForming an LLC or a Corporation for your business is a good idea. It shields you personally from liability and creates potential tax advantages, especially as to entitlement taxes for those opting for S-Corporation status. However, incorporation carries with it an often misunderstand effect, the company as an LLC or Corporation is an entity in and of itself. This means that if someone has impugned the company’s rights, it is the company that has a claim, not the shareholders or members. This manifests itself as especially confusing when, in a closely held company, one member steals money from the company. Read more

What are my rights as a minority member of an LLC?

Waves-Crashing-2-300x174The governance of Limited Liability Companies (LLCs) in Wisconsin is governed by Chapter 183 of the Wisconsin statutes. Those statutes set out the default rules regarding management and membership in an LLC. In an LLC, the owners are called members and have a membership percentage, rather than shareholders with shares of stock like a corporation. While any of these items can be modified by an operating agreement for an LLC (the written agreement between the members), the basic rights of a minority member (less than 50% ownership) are as follows: Read more

What if there is a judgment against my company?

Milwaukee Sunset PhotoWhen your company is sued, the person suing you is looking for money. However, the mechanism for doing this is obtaining a judgment. After a trial or a motion for summary judgment the Judge (or Jury) will make a finding that you owe some money, and that finding will be reduced to a judgment. The question I want to address in this article is: what happens then? Read more

How do I preserve my lien rights as a contractor in Wisconsin?

Lien laws are both stringent and confusing. Any contractor who improves real property is given an extraordinary power of being able to place a lien on the property in the event of non-payment, before obtaining a judgment. However, in order to maintain that right, there are strict requirements for notice to the land owner that must be met. Read more

Contractors Beware – Theft by Contractor is Easier Than You Think

Most contractors represent a shining example of the all-American hardworking small business owner. Unfortunately, a few bad apples have a tendency to poison the public’s perception of the whole bunch. Thus, the Wisconsin Legislature has codified its “Theft by Contractor” statute under Wis. Stat. 779.02 setting forth very draconian rules about the use of customer funds, and very severe penalties for the violation thereof. If you are a contractor, tread lightly, as it is easier than you think to commit a theft by contractor. Read more

What lien rights do I have as a commercial sub-contractor?

The short answer is potentially a fair amount of rights, though as with many things it depends. In general residential work, the main mechanism for enforcing payment for both general contractors and sub-contractors is through the use of construction liens. This may not always be the case in commercial projects as it makes a difference as to what type of project it is to determine what lien rights, if any, exist for sub-contractors and what notice is required to be given.

According to the Wisconsin Courts,

A subcontractor is a person whose relation to the prime contractor is substantially the same for a part of the work as the prime contractor’s is to the owner for the entire job.

Farmer v. St. Croix Power Co. 117Wis. 76, 93 N.W. 830 (1903).

 The Wisconsin Statutes, 779.01(3), sets out the extent of who has lien rights:

Any person who performs, furnishes, or procures any work, labor, service, materials, plans, or specifications, used or consumed for the improvement of land, and who complies with s. 779.02 shall have a lien therefore on all interests in the land belonging to its owners.

It is noteworthy that the statute defines it as “any person,” not limiting those rights just to General Contractors. Therefore, within the scope of the rest of the Wisconsin statutes, sub-contractors may have certain lien rights.

What those lien rights are and what notice requirements there are depends on the type of project. A “public works” project, defined as any improvement or work undertaken by a unit of government, will potentially have different lien rights and notice requirements  for sub-contractors than a “large private” project (which may have notice requirements as short as 5 months from the date the work is performed). “Privately bonded” cases may eliminate all lien rights and instead require any claims to be made pursuant to the bonding contract.

In any case, if you are a sub-contractor and you believe you might have lien rights on a project, it is important to contact an attorney right away as the specifics of your project will bear on whether you have lien rights and what you have to do to preserve them.




What happens if my company is served with a non-earnings garnishment action?

If you are in business long enough, chances are at some point you will be served with a summons and complaint for a garnishee action, an attempt to collect money from your business for a debt that someone else owes. While earnings garnishments are relatively common, non-earnings garnishments are less so and carry with them a stiff penalty for the garnishee if an answer is not filed.

For collection purposes, if a person (or company) has a judgment against them, they are known as the “debtor”. The “creditor” is the person or company owed the money. One tool that an attorney attempting to collect a debt on behalf of a creditor has is a non-earnings garnishment. In a non-earnings garnishment, the creditor files a summons and complaint naming the creditor, the debtor, and a garnishee.

If your company is named as the garnishee, you must file an answer which indicates whether or not your company has control or possession of property belonging to the debtor and the gross value of said property. This includes any money that your company may owe to the debtor.

With that action comes an order to hold all funds (or property) your company may owe to the debtor until instructed by the courts otherwise. If you, as the garnishee, fail to answer the Non-earnings Garnishment summons and complaint within 20 days of being served with the action, your company will have a judgment entered against it for the full amount of the judgment that the creditor has against the debtor.

For example, if you are served with a non-earnings garnishment which states that ABC Bank has a judgment against XYZ company for $200,000 and you are named as the garnishee; if you fail to answer (even if that answer would be that you do not have any property or money belonging to XYZ company) then ABC Bank will be entitled to a judgment against your company for the entire $200,000.

So, if you are served with a garnishment summons and complaint be sure to contact an attorney right away, as the penalty for ignoring such a request can be dire.

What do I do if I have been sued with a frivolous claim?

The dreaded “frivolous claim” is always a difficult situation. First, you have to show that it is actually “frivolous”, and second, you may still end up spending a fair amount on attorneys’ fees getting even a frivolous claim dismissed.

It is sometimes difficult to define what exactly is frivolous. In most lawsuits the Defendant feels that the Plaintiff’s claims are unfounded, but that does not necessarily make the claims frivolous. The Wisconsin Supreme Court in Stern v. Thompson & Coates, Ltd, explained:

A claim is not frivolous simply because there is failure of proof, a claim is later shown to be incorrect, or a claim is lost on the merits; however, a claim cannot be made reasonably or in good faith, even though possible in law, if there is no set of facts which could satisfy elements of a claim, or if party or attorney knows or should know that needed facts do not exist or cannot be developed.
Stern v. Thompson & Coates, Ltd., 185 Wis. 2d 220, 517 N.W.2d 658 (1994)

If it seems that the claim against you or your business is one in which there is no set of facts which could satisfy the elements of the claim, there are a number of tools your attorney can employ to try and resolve the matter and perhaps even entitle the Defendant to costs for defending the action.

Requests to admit, interrogatories, and even depositions are all strong tools that can be utilized to flush out what factual basis existed for the filing of the Plaintiff’s claims. If, after this discovery is completed, your attorney feels there was no basis for the Plaintiff’s claims, under Wisconsin Law the Defendant is required to give the Plaintiff what is known as a 21 day safe harbor to dismiss their claims before the Defendant can file a motion for sanctions. This can be a powerful motivator to resolve merit-less claims before either side incurs further costs.

Regardless of whether you believe the claim is valid or not, if you or your business has been served with a lawsuit you need to be sure to contact an attorney and be sure an answer is entered to preserve your right to defend the claims.

What if my employee is sabotaging my company?

While your employees may not owe a duty of loyalty to you personally , the Wisconsin Supreme Court has held that employees do owe their employer a duty of loyalty.

In Burbank Grease Services, LLC v. Sokolowski, an employee was accused of stealing trade secrets of the Company while employed to benefit a competitor. The Court held that “A claim for the breach of an agent’s duty of loyalty may sound both in tort and in contract.” (“Tort” is a lawyer word for lawsuits involving negligence, fraud, or an injury to a person or business)
The question then becomes, what kind of duty does the employees owe to their employer? and at what point has it been breached? The Wisconsin Supreme Court explains in Burbank Grease that if they are a “key employee” then a fiduciary duty of loyalty exists.

What does this mean?

A fiduciary duty is the highest duty there is in the law. It is generally stated as the requirement that while acting in your capacity as an employee, you are required to put the interest of the company ahead of your own interests.

The practical implications of this are that your key employees need to be acting with the company’s best interests in mind while they are employed. This is not to say that anytime an employee makes a mistake you can sue them over it, as often times in business only with the benefit of hindsight can we see that a decision or action was a bad choice.

However, if you come to find out that an employee, while employed has been working to further the interests of him or herself or a competitor at the company’s expense, you may be able to take action to prevent it or recover your losses as a result of the injury from both the employee and perhaps the competitor that induced them to breach their duty.

If you suspect that an employee or agent of your company has breached a duty of loyalty and caused harm to your company, you may have the ability to seek recourse through the courts and should contact an attorney right away.

Can I just close my doors if my business is sued?

Unfortunately, as is the case with many legal questions, the answer is maybe. There are a number of factors to look at before that question can be answered, and most likely you would need to see a lawyer to evaluate each individual case.

Generally speaking a party suing your business, if they obtain a judgment against your business, is going to be able to collect against the assets (or at least the unsecured assets) of your business.

This can vary from getting a receiver appointed to force the liquidation of company assets, to freezing business bank accounts, or even having the Sheriff go in and collect cash directly from the cash register to help satisfy the judgment. Thus, if your business has more value in assets than the potential judgment amount, it may be worth contesting the lawsuit or trying to reach a settlement. If not, then you can explore whether you can simply close up shop and move on.

Under Wisconsin law you are not allowed to simply close up shop and raid all of the assets of the business just to avoid a creditor. Neither are you allowed to sell all of the assets to a friend or relative (or anyone for that matter) for a severe discount just to avoid creditors. For example, if your business was Bob’s cleaning Company Inc. and your business were sued, you cannot simply sell all of your business assets to your brother for $1 and open up Joe’s Cleaning Company Inc. This would be known as a “fraudulent transfer” and is covered by Wis. Stat. Section 242.04

242.04 Transfers fraudulent as to present and future creditors.

(1) A transfer made or obligations incurred by a debtor is fraudulent as to a creditor, whether the creditor’s claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation:

(a) With actual intent to hinder, delay or defraud any creditor of the debtor; or

The statute provides some guidelines for determining “intent to hinder, delay or defraud any creditor of the debtor.” Some of those include:

  • The transfer or obligation was to an insider;
  • The debtor retained possession or control of the property transferred after the transfer;
  • Before the transfer was made or the obligation was incurred, the debtor had been sued or threatened with suit;
  • The transfer occurred shortly before or shortly after a substantial debt was incurred; and
  • The debtor transferred the essential assets of the business to a lienor who transferred the assets to an insider of the debtor.

Additionally, it is considered to be a fraudulent transfer if the transfer is made:

242.04(1)(b) Without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor:
1. 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
2. Intended to incur, or believed or reasonably should have believed that the debtor would incur, debts beyond the debtor’s ability to pay as they became due.

Not only does this statute prevent you from intentionally disposing of assets to avoid creditors, it also raises issues if you are intending to legitimately sell your business’s assets and you have been sued or you have outstanding creditors. You need to ensure that the transfer cannot be categorized as a fraudulent one.

In any event, if you or your business is sued it is best to immediately see a lawyer who can explore your options with you. If you play your cards right though, one of those options may be to simply close your doors and move on to your next, hopefully more successful, venture.

What happens if I get sued? – Part 5 Trial

After all of the discovery, motions, and attempts at settlement are completed it is time to go to trial, where the case will be decided.

I have seen numerous reports making varied estimate, but the general consensus seems to be that only 2-5% of cases actually go to trial, the other 95-98% are resolved in some fashion before trial.

However, for those cases that get there, the trial is the opportunity for the “facts” of the case to be determined. Either the Judge or a jury will be the fact finder, but in either case, both parties, through their attorneys will present evidence to the fact finder. This will be in the form of testimony and exhibits. This part of the litigation process is what everyone imagines court to be like, jurors sitting in the jury box, witnesses in the witness stand, and the attorneys questioning and cross-examining each witness.

After all parties have presented their evidence the fact finder will render their findings on a number of issues that have been submitted by the parties prior to the trial. Thus, the fact finder does not come out and declare a winner and loser, but rather indicates how they have decided the specific jury questions that have been submitted for them to answer.

Depending on the outcome of the trial, and the in-trial rulings of the Judge during the case, each party has to decide whether or not it wants to appeal the outcome.

Part 4 of 5, “Mediation”

What happens if I get sued? – Part 4 Mediation

While mediation is voluntary, in most counties in Wisconsin, including Milwaukee and Waukesha County, the Court will order the parties to attend mediation. This does not mean that the parties must settle at mediation, only that they will attend.

What Happens at Mediation?

Mediation usually takes place after most of the discovery has been completed in the case, but before final pre-trial hearings or preparations have been done. The idea is that when you go to mediation, both parties know about the other parties case, but still have not made the final investment for their attorneys to get ready for trial.

Each party to the litigation, along with their attorneys, and the agreed upon mediator meet at a location they all agree on (usually one of the attorney’s offices or the mediators office) to discuss settling their case.

Each party usually submits a mediation report to the mediator, setting out the key high points of their case and the low points of the opposing party’s case. The mediator is not there to render a decision, but rather to encourage the parties to settle their dispute. This does not mean that the mediator will not express his/her opinion, or indicate how s/he thinks s/he would have decided the case. Most mediators are lawyers, and many are ex-judges.

By the end of the mediation session, the parties have either reached a voluntary agreement to settle the case, or they continue with the litigation and most likely begin preparing for trial. There are varying statistics, but various reports indicate that mediation is successful more often than not. From an attorneys standpoint mediation is always worthwhile, it either results in a settlement of the case or at the very least you get to learn something about the other side, and their position in the case.

Part 3 of 5, “Motions”

What happens if I get sued? -Part 3 Motions

While there are a number of motions that may be filed during and after the discovery process, such as motions to compel discovery, or motions for protective orders, what I want to talk about are motions which directly effect the outcome of the case. So even though the title of this section is titled “Motions” it should probably be titled “Dispositive Motions”.

The most common question that I am asked by my clients during litigation is a variation on “can’t the judge just decide this case?” This is especially true when one side feels the other side’s case is completely without merit (as opposed to those cases where there is merely a dispute about how much one party owes another, not “if” one party owes something to the other.) Like many things in the law, the answer is that it depends; there are times when the Judge may make dispositive decisions regarding the case, and times when he/she may not. (This explanation is regarding Judges making decision prior to trial in the case of a Court trial case)

The rule of thumb is that for any dispositive motions, the Judge cannot decide issues of fact, but rather can decide issues of law. Therefore, the only time that dispositive motions, such as a motion for summary judgment is appropriate, is when your attorney believes that through the pleadings or discovery process they can show to the Judge that there are no material issues of fact relating to the claim at issue.

A simple example of a claim for summary judgment would be in an instance where there are two claims and three defendants. The claims are Breach of Contract and Intentional Misrepresentation/Fraud against all three defendants. The Defendants are ABC, LLC, Mr. X and Mr. Y both co-owners of the company. A claim of Fraud can be pled directly against an individual, because it is an intentional tort, and therefore Mr. X and Mr. Y cannot hide behind the liability protection of the LLC. However, through the Discovery process it turns out that the Plaintiff only alleges that there was conduct on the part of Mr. X that would constitute Fraud. This may mean that there are no facts alleged against Mr. Y to meet the elements of the claim for Fraud, and therefore it may be appropriate to bring a motion for Summary Judgment in which the Judge could rule that the Fraud claim against Mr. Y is dismissed.

So, while the Judge may be able to address the claims alleged against Mr. Y, he/she is not allowed to determine the sufficiency or the validity of the claims against Mr. X. If the plaintiff through Discovery has alleged that Mr. X has made specific fraudulent representations, it will be up to the trier of fact to determine at trial whether or not those allegations are true, not the Judge at Summary Judgment.

For obvious reasons motions for Summary Judgment can be a powerful tool. The more you are able to narrow your opponents claims or get a decision on your own claims, the more leverage you may have to try and settle the case in mediation

Part 2 of 5, “Discovery”

Part 4 of 5, “Mediation”

What happens if I get sued? – Part 2- Discovery

After the initial pleadings are entered, there will generally be a scheduling conference between the Attorneys and the Judge to set the schedule for the case. Part of that schedule will include a date in which all discovery must be completed.

Litigation has been described as playing poker with everyone’s cards face up. While this is a decent analogy, I would say its more appropriate to say you get to see the other person’s cards only if you ask the right questions. Discovery is the opportunity for each party to ask questions and demand documents from the other side. In this way it is up to the attorneys to ensure that they ask the right questions and in the right way to ensure that they get everything they want. Conversely, it is the responding attorney’s job to comply with the requests in a way that reveals what is required, but does not give away more than what was requested.

This creates a back and forth situation where each attorney is trying to get as much information from the other side as possible while at the same time trying their best not to reveal more than the other side actually asked for.

The Discovery process includes interrogatories, requests to admit, requests for production of documents, depositions, and various other means of finding out information. While all of these methods of obtaining information are used by attorneys with varying frequency, if you, or your business, is a party to a litigation, at some point you will almost certainly be deposed.

In a deposition the other party’s attorney gets to ask you whatever questions they like (within reason, but they are given a lot of leeway) about yourself, your business, and the events surrounding the dispute. Unlike in trial where there are rules regarding hearsay or relevance of questions, in a deposition, even if your attorney objects to the question, you generally are still required to answer. You are put under oath and there is a court reporter there to take down in writing everything that is said.

After depositions there may be additional interrogatories (written questions) or document production requests, but at some point each party will be satisfied that they will have obtained all of the information they can reasonably get about the case. As the discovery process winds down either party may choose to amend their pleadings and add allegations, or file a cross or counterclaim, but once the pleadings and discovery process winds up, it is time for any motions to be filed.

Part 1 of 5, “Pleadings”

Part 3 of 5, “Motions”

What Happens if I get Sued? Part 1- Pleadings

The pleadings stage is the initial stage of any litigation. The Plaintiff (or the person bringing the action) will file a summons and a complaint. The summons will indicate that the Defendant(s) have either 20 or 45 days (depending on the allegations made) to answer the complaint.

The complaint will contain all of the allegations that the Plaintiff says the defendant(s) did or did not do. For example you may see a complaint containing several counts, one may be breach of contract and another may be Fraud or Misrepresentation although they may all be referring to the same facts.

As a defendant you have the obligation to file an answer either 20 or 45 days (depending on what is plead) of being served with the summons and complaint. If you do not answer, a default judgment may be entered against you. (Plaintiff automatically wins). If you are a corporation or an LLC, you have to get a lawyer to enter an appearance and file an answer for you.

Your answer to the complaint is not the time for you to make your case as to why you are right and they are wrong, but rather is simply a format for admitting or denying each allegation made by the Plaintiff. Additionally the defendant(s) will take this opportunity to indicate any affirmative defenses and put forward any counterclaims or cross claims that they may have.

Once all of the pleadings have been filed, and any necessary amendments have been made, the discovery phase of litigation begins.

Part 2 of 5, “Discovery”

What happens if I get sued? An overview of Litigation in Wisconsin

If you run a business, sooner or later you will have a disagreement with a customer, contractor, or vendor that may lead to litigation. For many business owners litigation, and what is entailed, is clouded in mystery. The next few articles are going to attempt to illuminate some of those mysteries and explain the process, in general terms, for litigation with a bend towards the local rules and practices of Milwaukee County.

Please realize that each individual case is going to have its own intricacies and variables, and I certainly would not recommend using these articles as a road map to represent yourself, as this outline will be very broad and may be missing key elements that are essential for your case.

The basic steps of any litigation are the following:

– Pleadings
– Discovery
– Motions
– Mediation
– Trial

While most cases never make it all the way to trial, you can expect anywhere from 18-24 months to go from initial filing to Jury trial.

The next five articles will review each of the above steps and try and give you an overview of what is involved.

Part 1 of 5, “Pleadings”

What are the damages for a breach of a building contract?

In an ideal world we would always get what we pay for, and people would always live up to their obligations. Unfortunately in both residential and commercial buildings, the contractor does not always provide the quality of work that was contracted for. Often litigation arises to resolve the dispute. The focus of the litigation is going to be whether or not the contractor breached his or her contract, but underlying the entire case is the question of what the damages are if the contract was breached.
Do you tear down the building and build a new one? Do you simply get the money it would cost to repair it? Do you get the difference in value of what the building would be worth if was built correctly?

In every case the facts will vary as to what the proper solution is, but Wisconsin Jury Insturction 3700 gives us a clue. Jury Instruction 3700 suggests dealing with damages in the case of a breach of a building contract in the following way:

1. Can the building be repaired? If it can, what is the reasonable cost of repairs?

2. If the building cannot be repaired, what would the value of the building have been if it had been built correctly? What is the current value of the building having been built incorrectly? (The difference would be the damages)

These remedies may not be wholly adequate in every case, and these jury instructions are mandatory, though Wisconsin Courts do prefer to use the model jury instructions, but it can be helpful to know what ultimate question the jury may be facing at the beginning of your dispute as it may help inform the decisions you make in trying to resolve the matter prior to litigation.

Representing your LLC yourself- Owners and Managers Beware

A fascinating and enlightening article by Renee M. Mehl in the March 2009 edition of the Wisconsin Lawyer presents some interesting and note worthy observations about the law in Wisconsin regarding LLC’s and its members or managers representing the entities themselves.

You can see the entire article here

For whatever reason the legislature has never expressly addressed whether or not the members of an LLC can represent the LLC themselves. 

For Corporations, the officers or owners are not allowed to represent the corporation without the risk of violating the unauthorized practice of law statute, as a Corporation is its own separate entity. 

LLC’s provide the same type of liability protection as a Corporation, and it could be argued that therefore it is a separate entity and its members cannot represent it themselves. 

At the end of the day, if you choose to represent your LLC you may run the risk of not only violating Wisconsin’s unauthorized practice of law statutes, but also risk having any answer you submit being deemed invalid allowing the opposing side to obtain a default judgment against your LLC.

The Importance of a Well Written Contract- Revisited

I have written in the past about the importance of a well written contract, but as my litigation practice expands I am constantly reminded about how important this is. The importance of not only including all of the legal boilerplate, but also making sure the specifics of dispute resolution are ironed out is paramount.

While this is certainly a problem with small businesses that are (understandably so) trying to save money by drafting contracts themselves, it also is a problem with large corporations that have Attorneys draft their contracts. It seems so often the Attorneys get caught up in the minutia of who is warranting and representing versus providing notice or knowledge, that they miss defining important practical aspects of the contract.

I am currently involved in a major arbitration proceedings that involves two large companies with a dispute about how to interpret a provision of the contract. The contract sets out all of the proper legal positions of each party, but fails to define a mechanism to determine who actually has what rights. (I cannot give specifics, but it has to do with calculations of different percentages of sales, and there is no method given to determine such calculation)

Now, instead of spending a few more attorney hours sorting this problem out in advance, both parties are spending tens of thousands of dollars arbitrating the dispute.