The 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
When 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
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
Governor Walker’s upcoming trip to China in April, 2013 is a good opportunity to remember potential issues involved in exporting and in particular, importing, from foreign countries. According to the Wisconsin Economic Development Corporation over the last decade Wisconsin Companies have exported nearly $1.4 billion in goods to China. Read more
The Wisconsin Department of Financial Institutions has said in a news release on Thursday that numerous business owners have been receiving a solicitation for information and credit card numbers to pay a fee to “Corporate Records Service.” The form comes pre-filled with very specific corporate information (available on-line) which makes it seem official.
The WDFI confirmed that it is not affiliated in any way with Corporate Records Service.
If you receive this form, be sure you know what service you are paying for, as it does not appear to be related to any annual registration requirements or anything related to the WDFI.
You can see the JS Online story here.
There are a number of different regulations and licenses that a small business has to deal with. The most often overlooked is the requirement from each city for specific licensing.
The State of Wisconsin requires licenses for a number of businesses from Accountants and Acupuncturists to Wild Rice Harvester and X-Ray Services. You can see the complete list here. However, each city or municipality also has its own set of license and business requirements that need to be complied with. Often times these are much more specific than the State requirements. Read more
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
When property disputes come up, one issue that is always raised is whether or not there is a claim for adverse possession.
The concept of adverse possession comes from the common law concept that if someone utilizes, cares for, and treats property as his/her own for a long enough period of time, then they own that land. The point of this rule is not to allow sneaky neighbors to steal a little land, but rather is a practical solution to sometimes uncertain property lines.
The rule has been codified in Wis. Stat. § 893.25 and sets forth the following:
(1) An action for the recovery or the possession of real estate and a defense or counterclaim based on title to real estate are barred by uninterrupted adverse possession of 20 years, except as provided by s. 893.14 and 893.29. A person who, in connection with his or her predecessors in interest, is in uninterrupted adverse possession of real estate for 20 years, except as provided by s. 893.29, may commence an action to establish title under ch. 841.
(2) Real estate is possessed adversely under this section:
(a) Only if the person possessing it, in connection with his or her predecessors in interest, is in actual continued occupation under claim of title, exclusive of any other right; and
(b) Only to the extent that it is actually occupied and:
1. Protected by a substantial enclosure; or
2. Usually cultivated or improved.
The Wisconsin Court of appeals recently explained how strict the requirement for exclusive use (not just continuous use) is to establishing an adverse possession claim when looking at Wis. Stat. § 893.25 (adverse possession of government land). When the Plaintiff argued that he had the right because he had maintained the property, the Court disregarded that argument,
We conclude that this argument fails because, regardless of maintenance and improvement, Vaneman must establish exclusive use, which he has failed to do.
Vanemen v. Reed, No. 2011AP1465. Nov. 1, 2012.
Like any complex legal concept, the facts of each case will vary significantly. If you believe that you may have a claim for adverse possession you need to talk with an attorney, but remember that you need to possess the property openly and exclusively for the statute to apply.
The Wisconsin legislature, effective May 1, 2011, has implemented strict notice requirements for any automatically renewing “Business Contracts” entered into after May 1, 2011.
The rule is codified through Wis. Stat. 134.49, and sets forth that any automatically renewing contract that does not make the following disclosures, will be held to be unenforceable as to the renewing term.
1. A statement that the contract will be renewed or extended unless the customer declines renewal or extension.
2. A statement indicating the duration of the additional contract period that would result from an automatic renewal or extension period.
3. A statement indicating whether an increase in charges to the customer will apply upon an automatic renewal or extension.
4. A description of action the customer must take to decline renewal or extension.
5. The date of the deadline for the customer to decline renewal or extension.
The statute also imposes new obligations on contracts in existence prior to May 1, 2011 that have an initial term of more than one year. If your business utilizes, or intends to utilize automatically renewing contracts, you should contact a Wisconsin Lawyer to ensure that they are in compliance with Wis. Stat. 134.49 and that they will be enforceable.
There are two purposes for a contract: 1) is to make sure the parties understand the deal, and 2) make sure one party or the other can enforce the deal if need be. If you don’t have a well written contract, you may not accomplish either of those goals.
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.
There are two key documents with regards to forming an LLC in Wisconsin. The first is the Articles of Organization, which is filed with the Wisconsin Department of Financial Institutions (WDFI). The second is the Operating Agreement, which outlines the agreement between the members (which could be thought of as the “partners” in the business.)
What purpose does the Articles of Organization serve?
The Articles of Organization is what is needed to actually create and register your LLC with the State. It is in effect putting the world on notice that you have created a separate and distinct entity, and as long as you follow the rules to ensure liability protection (see “Are you actually getting the personal liability protection from your LLC or Corporation?“), if there is any dispute regarding the business, it is between that person and the LLC, not the members personally.
What purpose does the Operating Agreement serve?
This document is what I describe as the internal agreement between the members. It sets out all sorts of important things such as
- who owns what percentage of the LLC?
- What percentage vote is needed to make certain decisions? (ie- hiring and firing, borrowing money, signing contracts, etc.)
- What happens if a member dies, or gets divorced, or files bankruptcy and a trustee is looking to take over their assets?
- How is the sale price of the membership interests determined?
- When can someone sell their interests? To whom?
- Do the other members get the right of first refusal?
A well drafted operating agreement will address a myriad of other issues that are best to be resolved in advance and in writing.
As has been mentioned in many articles on this website, it is always best to make sure your agreements are in writing before a dispute arises (See “Anatomy of a Contract“). An operating agreement, if properly drafted, will serve two purposes. One, it will help avert any potential disputes because the parties will have addressed some of the stickier issues associated with business ownership in advance, and two, in the event of a dispute, it will aid the parties in resolving said dispute as hopefully it will address the very issue at hand.
While getting the LLC filed with the WDFI is great, and creates the liability protection between the members and the public, a well drafted Operating Agreement is equally as important as it protects the members from each other. Halling & Cayo S.C. offers flat rates for many business formation services, if you have any questions be sure to call and ask for Attorney Sean M. Sweeney.
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.
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.
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.
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.
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.
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
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.
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.