Tuesday, February 27, 2018

Renewable Energy Projects - Pitfalls for the Contractor / Subcontractor

This is a continuation of my previous post on the topic of renewable energy project contracts.  The first post focused on contract drafting and review concerns for landowners to note. Again, wind and solar projects in particular have been moving forward through local government approvals lately.  Since my first post, the McLean County Board has, on a 10- 8 vote, followed the recommendation of its Zoning Board of Appeals and approved one wind proposal.  See this recent article from the Bloomington Pantagraph.

In this post, I want to focus particularly on one of the contract issues I mentioned last time, as it affects certain third parties - namely, contract provisions regarding liens and lien rights that are within the easement agreement / lease.  These provisions typically indicate that the renewable energy system is personal property and not an improvement to the real property itself, and that as such will be exempt from the Mechanics Lien Act.  This may also be extended to concrete work and other construction work needed to install the system (say a windmill tower), and not merely the system itself.  If you are a contractor and considering bidding or entering a contract to help, you need to be aware of this, and factor into whether or not to bid at all, and if so what risk factor to include in your price proposal.

For at least one unfortunate contractor, the issue came to a head and the contractor was left hung out to dry.  In AUI Construction Group, LLC v. Vaessen, a subcontractor who had done concrete work for a windmill tower project, and was not paid for its work to the tune of $3 million,  filed suit to foreclose a mechanics lien to recover what payment it could for its work.  The subcontractor was essentially forced to attempt recovery from the lien, because the general contractor was insolvent and had filed a bankruptcy petition.  The issue then was whether the subcontractor's work building the foundation and tower for the project constituted a non-lienable trade fixture and personal property, or an improvement to the real estate itself.

The court noted three factors to consider in this analysis: (1) the nature of the equipment's attachment to the real estate; (2) the equipment's adaptation to and necessity for the purposes to which the premises are devoted, and (3) whether it was intended that the equipment should be considered part of the real estate.  The first two factors supported lien rights for the subcontractor, but the third factor was found to "strongly weigh" against that.  The problem was that the base easement agreement (the contract between the landowner and the energy company), had language declaring the tower to be a trade fixture and personal property, and not an improvement to the real estate.

 The subcontractor's own contract with its general contractor described the general contractor's contract as to design and build the foundation and tower for the facility "...owned by" and identified the energy company as the "owner," NOT the actual landowner.  The court found that by virtue of this language the subcontractor was on notice that the tower was not part of the property owned by the landowner, and therefore that it was separate, personal property.  The mechanics lien claim was therefore invalid.  Furthermore, the point was raised, and the court agreed, that the subcontractor in this case did not have a basis to have filed a personal property lien under the Uniform Commercial Code (UCC), because the work product in question was not a specific product or piece of equipment, but mere "ordinary building materials."

The troubling end result for the subcontractor, is that its only legal recourse to be paid for its work was contractual recovery from the general contractor, who was insolvent and in bankruptcy (where, with no lien available, this would be a mere unsecured claim).  So the subcontractor was left with a $3 million unsecured account receivable due from an insolvent debtor.

So if you are a contractor about to bid or sign a contract on a new wind or solar project, how can you protect your right to be paid for your work?
  1. Read your contract / bid package very carefully (and consider hiring a lawyer to help!) to make sure if your mechanics lien rights are waived.  If you are a subcontractor and it isn't clear from the subcontract form, consider asking for a copy of the energy company's lease/easement agreement so you can be sure.  If the general contractor or project manager is not forthcoming with that, you can likely get it from the county recorder of deeds.  
  2. If your scope of work includes providing tangible personal property / equipment, and not merely building materials, consider including UCC lien rights in your contractWARNING - Unlike Illinois mechanics liens, UCC liens generally require filing a form with the State in advance. If you do this, you should fill out and file the UCC notice immediately when the contract is signed, NOT wait until you are actually not being paid!
  3. Consider requesting more payment up front, or staging draws as advances as the project progresses rather than payments for work already completed.  If this is not negotiable, make sure you understand the players involved with the construction escrow process and push for a third party (like a lender or title company) to be involved with processing draws.  Perhaps also ask for direct draws to you from the escrow, rather than being paid through your general contractor.
  4. Finally, based on this decision, it may be reasonable for renewable energy projects to expect to have to pay contractors more, as a risk premium markup due to having no lien security.  If you are bidding on such a project, be careful to consider this in your bid, and be careful to manage the draws to prevent the amount of your exposure for unpaid work from getting too high.  I'm sure the subcontractor in Vaessen would agree, it's better to not be the low bid than to get the bid and wind up getting stiffed for $3 million worth of work.  
My colleague on the Illinois State Bar Association council for the Construction Law Section, Steven Mroczkowski of Carlson Dash, has written a very helpful article explaining the Vaessen decision and which I'd like to acknowledge as a reference for me in writing this. Here's a link to that article (it's an ISBA newsletter article and so may require ISBA membership or authorization to open the link, which is a great opportunity for me to plug the benefits of the ISBA and the Construction Law Section in particular!  If you are an Illinois attorney interested in this area, I encourage you to check it out!).

Nate Hinch is an attorney and partner at the law firm of Mueller, Reece & Hinch, LLC.  He has offices at 404 N. Hershey Road, Suite C, Bloomington, IL 61704, and 809 Detweiller Drive, Peoria, IL 61615, and can be reached by phone at (309) 827-4055 and email at nhinch@mrh-law.com.

Tuesday, February 13, 2018

Renewable Energy Projects - Landowners, Beware of Contract Landmines

Illinois appears to be undergoing a resurgence in renewable energy projects, in the form of wind farms and now solar farms.    It's only a month into 2018, and McLean County, Illinois has had several such projects in the news, from at least three different energy companies (both wind and solar).  The Bloomington Pantagraph newspaper calls it a "renewable energy boom."  The news has primarily been about local government land use hearings, at which evidence is heard regarding the effects and economic benefits of such projects.  There's some opposition being raised for various reasons, with the economic development of the projects and the big picture benefits of renewable energy raised as supporting arguments.  I'm not here to debate all that.

These projects can be critical to landowner farmers and their families as a revenue stream that is not tied to the ups and downs of agricultural markets, but also can be realized without having to give up farming the land.  In some cases, such a revenue stream could be a deciding factor in whether family-owned farmground can stay in the family. The landowner may get a signing bonus payment upon signing a contract with the renewable company, routine, regular payments over time as compensation for keeping the land under contract but before any project is built, and then if and when the project begins, increased compensation going forward.

The actual contracts typically have two parts - a lease and an easement, and are lengthy forms devised by each company.  I have reviewed several from multiple energy companies, and provided feedback to landowner clients highlighting key provisions and recommending potential changes to consider negotiating.  Depending on the energy company and the project, sometimes these companies are more willing to negotiate terms than others.  At a minimum, even if no changes are made and the landowner chooses to sign the deal in consideration of the economic benefits, I believe it's important to help the landowners to consider and to understand what they are signing, to avoid unpleasant surprises.   Here are a few provisions that I've commonly found in such contracts, that are not always understood by landowners.
  1. Read the Definitions!  Sometimes a contract with have a separate section called "definitions," and sometimes the definitions of terms (look for capitalized words) are disbursed throughout the contract.  They typically are not exciting to read, but are critical to understanding the impact of the substantive parts of the contract that contain the defined words.  For example, in at least one example I've seen, landowner compensation amounts relate to whether it is the "development term" or the "operational term," with the development term being basically from contract signing until whenever the energy company decides to start the project.  In one example, the development term ends upon "commencing construction."  That definition is critical to determining payment to the landowner.
  2. Force Majeure matters!  "Force Majeure" is a standard (boring) contract provision, that basically identifies under what uncontrollable circumstances might a party be excused from performing its contractual obligations.  Typical examples of this would be a tornado, a war, etc. But sometimes contract drafters will write this as broadly as possible, such as "anything outside of our control."  In context here, such a broad provision might be used as an excuse to continue to keep a landowner's property under contract longer and avoid triggering a potential payment increase that would otherwise be required.  
  3. Pay Attention to Deadlines and Notice Requirements!  How many days does the energy company get to tell you before they have to do something?  How many days does the landowner get?  If the energy company gets 30 and the landowner gets 5 days, consider asking for a more equitable revision.  
  4. Be aware of lien provisions.  I'll talk more about this in a subsequent post from the contractor perspective, but for landowners, be aware that the document may specify contractors are working on personal property (the towers, equipment, foundations, etc.) rather than real property, and hence limit or eliminate their lien rights.  If you're a landowner, that may sound like a good thing.   But now consider whether the contractor working on your property is aware of that, and what might happen if they are not paid for their work. Particularly in a rural community in which you perhaps know folks who might be hired by the renewable energy company's general contractor to work on the project, if that general contractor reneges on paying the local subcontractor, it's important for you to know not only your own rights and responsibilities, but to have an idea of the impact on that subcontractor.
  5. Red flags for one-sided clauses.  I recently reviewed one particular energy company form contract that had periodically inserted throughout the document the phrase "for the avoidance of doubt.  When you read something like, "For the avoidance of doubt,..." pay close attention to the ... wording that follows that phrase!  It may signal that the following wording is so particularly one-sided in favor of the drafter (the energy company) and against the other party (the landowner) that it requires specifically pointing out to future readers that the parties did in fact actually voluntarily choose to agree to this one-sided provision.  
These are just a few of issues I have found when reviewing renewable energy leases and easement contracts for agricultural landowners.  If you or your family member is considering one of these contracts, consider having it reviewed by an attorney who is familiar with them and who can at least help you to understand the agreement, and potentially to seek changes before signing.

Nate Hinch is an attorney and partner at the law firm of Mueller, Reece & Hinch, LLC.  He has offices at 404 N. Hershey Road, Suite C, Bloomington, IL 61704, and 809 Detweiller Drive, Peoria, IL 61615, and can be reached by phone at (309) 827-4055 and email at nhinch@mrh-law.com.

Thursday, December 21, 2017

Illinois Reduces Filing Fees for Limited Liability Companies

If you own an interest in an Illinois Limited Liability Company (LLC), good news!  Effective yesterday, certain filing fees have been significantly reduced.  See this press release from Secretary of State Jesse White's office for details as to the fee changes.

If you have a current LLC, you are required to file Annual Reports with the State, and pay the annual filing fee associated with that.  This fee is being reduced from $250 to $75.  The fee is generally due on the anniversary of forming your LLC, which means the payment due date is different for each LLC.  The Secretary of State typically mails the Annual Report form out a few months in advance of the due date.  If your LLC annual report is due soon, you should doublecheck to ensure that you do not accidentally overpay the fee.

For those who may have been holding off on forming a corporation or LLC due to cost concerns, this fee reduction is also great news! To file "Articles of Organization" to form a new Illinois LLC, the fee is being reduced from $500 to $150 (or from $750 to $400 for a Series LLC).

There are many factors that go into choosing how to set up your business and what form of legal entity is the right fit for you, but a few important factors are 1) limiting your personal liability, 2) limiting liability across different businesses or parts of business (for example, having a separate entity hold title to an office building in which your business entity, say a law practice, is operating), and 3) having flexible freedom of contract to structure the management of the entity in the way that makes the most sense to you the owner, and similarly to readily make changes to it as the business changes in the future (say for example, if you take on a partner).  LLCs are ideally suited to accomplish these goals, and have the added benefit of giving you the choice to be treated for tax purposes as either a partnership or a corporation, depending on what is in your best interest.

If you've been thinking about whether to form an LLC or corporation and have been postponing taking action on that, or just have questions about whether doing so might be the best fit for you, I would encourage you to speak with an attorney who regularly works with business owners and can go over your specific situation and questions.

Nate Hinch is an attorney and partner at the law firm of Mueller, Reece & Hinch, LLC.  He has offices at 404 N. Hershey Road, Suite C, Bloomington, IL 61704, and 809 Detweiller Drive, Peoria, IL 61615, and can be reached by phone at (309) 827-4055 and email at nhinch@mrh-law.com.

Tuesday, October 24, 2017

IRS Extends Deadline for Widows' Election of Estate Tax Portability

If your spouse died since 2011, the IRS earlier this year extended the timeframe you have to make a "portability" election by filing a Form 706 Estate Tax Return, until the later of either January 2, 2018 or the second anniversary of the decedent's date of death.  See Revenue Procedure 2017-34.

Here's what that means and why it is important. Remember the "fiscal cliff" issue from a few years back?  The federal estate tax used to have a sunset provision.  When that expired, Congress did not update it right away, but debated what to do, before finally enacting a law that made the estate tax permanent (not sunsetting). The estate tax exclusion, the threshold amount of wealth below which you would not owe any estate tax, was set at $5 million, with an adjustment each year for inflation. (For 2017 that number is $5.49 million, and the IRS has announced it will go up to $5.6 million for 2018.  For ease of reference, I'm going to stick to the round number $5 mill. in this article). Each U.S. citizen has a $5 million exclusion, which means the combined exclusion for a married couple is $10 million.  When one spouse dies, the mechanism for the surviving spouse to claim the unused exclusion from the deceased spouse (this is known as the "deceased spousal unused exclusion," or "DSUE"), is called "portability."

Prior to the aforementioned change in U.S. law, a portability election was made by utilizing a particular trust, called a "credit shelter trust" or "A-B trust."  With the change, couples who did not prepare credit shelter trusts while both spouses were alive can still make a portability election of the DSUE, by filing Form 706.  The general deadline to do so (prior to this IRS change) has been nine (9) months from the date of death.

With Revenue Procedure 2017-34, the IRS is giving anyone whose spouse died more than 9 months ago an automatic extension of time to file and make the portability election.  If you are a widow (or widower) whose spouse died since 2011, were named as executor for the estate of someone who died since 2011 and was survived by their spouse, or are a family member or loved one of a widow in that situation, I encourage you to consult an estate planning/probate attorney or accountant to determine whether it would be beneficial to take advantage of this opportunity and file Form 706 by January 2, 2018.  Even if your initial reaction to this issue is basically, "I don't have $5 million, so who cares?"  I would encourage you to nevertheless check with our attorney while you have the option for this window of time, in the interest of helping to preserve your rights (or the rights of the widow), in event of future unforeseen circumstances.

This article from Forbes has a helpful overview of the situation as well, in layman terms, for further reading on this subject.

Nate Hinch is an attorney and partner at the law firm of Mueller, Reece & Hinch, LLC.  He has offices at 404 N. Hershey Road, Suite C, Bloomington, IL 61704, and 809 Detweiller Drive, Peoria, IL 61615, and can be reached by phone at (309) 827-4055 and email at nhinch@mrh-law.com.

Friday, August 18, 2017

Trustees, Executors, Guardians and POA Agents - Your Accounting Cometh. Be prepared!!!

In the recent case In Re: Estate of Lee, the Illinois Appellate Court, Third District, reviewed orders from the trial court requiring an accounting from the trustee, finding contempt for failure to comply by the deadline in the court order for the accounting, ordering the executor to bypass the trustee and make payments direct to the beneficiaries, and removing the trustee.  The appellate court affirmed the court orders, except reversing the contempt ruling and sanctions.

The decedent (Sandra) died in 2005, leaving three minor children. She had a will that (in a common estate planning strategy for parents with minor children) included a testamentary trust as the means by which her children would receive their inheritance, and providing that each child would receive 1/3 of the trust assets at the age of 25.  The will appointed an executor (Jennifer) and a trustee (Kathleen) who appears to also have served as guardian (the opinion indicates the children lived with Kathleen).  

In 2010 Kathleen as trustee filed a petition in probate demanding an accounting from Jennifer, and an accounting was filed for the estate.  In 2014, one of the children (who appears to have turned 25 that year) filed a petition for an accounting from both the estate and the trust. By agreement, the court so ordered; Jennifer filed one for the estate but Kathleen did not do so for the trust.  Only after a rule to show cause issued and after the subsequent hearing resulted in the court finding Kathleen in contempt, did she file an accounting, and then an amendment.

Her accounting apparently consisted of estimated expenses based on a USDA study, and did not contain figures from specific, actual expenses, nor any supporting receipts, copies of checks, etc.  The accounting resulted in Kathleen alleging she was owed some $315,000 from the Estate.  The children responded by petitioning the court to remove Kathleen as trustee and to enter a judgment against her for $190,000--the amount she had received from the estate already, plus interest.  In a subsequent evidentiary hearing, Kathleen testified that she did not keep records for most of the money she had spent for the children, and that while initially the money she received for the children went into a trust account, it was later transferred to Kathleen's own account.  She and her husband testified that they had built a new house and purchased a new vehicle, to have room to fit Sandra's three children along with their own family.  

The trial court found the evidence to be "overwhelming and basically uncontroverted" that Kathleen had violated her fiduciary duty by essentially treating the trust money as if it were her own.  On appeal Kathleen argued that she had no duty to provide an accounting.  After pointing out that she had waived that argument by entering an agreed order at the trial court, the appellate court confirmed that even without the agreed order, the accounting was required.  Under the Trusts and Trustees Act, a trustee is required to provide a yearly accounting to any income beneficiary, which in this case, the children were.  

The appellate court then affirmed the trial court's order to the executor to make payments directly to the children who had turned 25, as reasonable and within the court's discretion, in light of the "unique circumstances of this particular case."  The same argument might have applied to the ruling to removed her as trustee, but Kathleen failed to argue this issue in her briefs on appeal and so it was deemed waived.  Finally, the court explained the difference between criminal and civil contempt, and between direct and indirect, and found the trial court's contempt finding was not sufficiently clear as to which kind had been determined.  On that basis, the finding was reversed; however the court noted that the children could file a new contempt proceeding as the reversal was without prejudice.  

For Trustees, Executors, POA Agents, Guardians and other Fiduciaries - This case shows what can go wrong and the serious consequences that can accrue, when trustees do not keep proper records.  Where was the attorney for the estate and trust when Sandra died, and did the attorney properly advise Kathleen how to document for an accounting?  It is mind-boggling to me that she thought she didn't have to do that (when it is spelled out black and white in the statute), even to the point of arguing that to the appellate court.

For Families With Young Children - The case also stands as an example to keep in mind when parents of young children are writing their estate plans and considering who to name in these important fiduciary roles of executor, trustee, and guardian, and just how important those decisions are.  First, having a will and naming someone at all, rather than leaving it up to a judge, and second the importance of naming the right person or professional fiduciary.

Nate Hinch is an attorney and partner at the law firm of Mueller, Reece & Hinch, LLC.  He has offices at 404 N. Hershey Road, Suite C, Bloomington, IL 61704, and 809 Detweiller Drive, Peoria, IL 61615, and can be reached by phone at (309) 827-4055 and email at nhinch@mrh-law.com.

Tuesday, August 8, 2017

Does That Linkedin Post Violate Your Non-Compete?

A recent Illinois appellate court decision chimed in on an interesting twist on the enforcement of non-compete agreements and when social media activity might cross the line and pose a violation. In Bankers Life and Casualty Co. v. American Senior Benefits, LLC, Bankers Life sued several former employees who had left the company and joined a competitor, allegedly in violation of their non-compete agreements.  The appeal resulted from a summary judgment award in favor of one particular employee, who was a sales manager in a Rhode Island office of the company, and focuses primarily on that employee's situation.

A non-compete agreement must be reasonable in its time and territory restrictions to be enforceable at law.  In this case, the non-compete agreement provided that the employee would not compete with the company for two years after termination, within the sales territory of the Rhode Island office.  

From the appellate court opinion's summary of the allegations, the company argued that one way the employee had violated his non-compete was by inviting other company employees to connect on Linkedin and, once they were connected, the other employees would click on his profile page, and see job postings for the competitor company.  The former employee argued that he had not breached his non-compete because he did not solicit anyone on Linkedin, but merely sent them generic professional networking connection requests, and they in turn of their own accord viewed his page and the job postings.  The trial court agreed and awarded him summary judgment, and the appellate court affirmed.

The opinion also provides a useful reference of other, previous cases on the issue, a summary of the facts at issue in these cases, and how the courts ruled--some finding a non-compete violation and some not. Cases referenced as finding no violation include:
  1. A CT case of a web designer who posted on Linkedin inviting viewers generally to check out a website he made for his new company, without any evidence of the former company employees having actually done so, nor any evidence of a company policy on Linkedin use.
  2. An IN case finding that a job opportunity posting on Linkedin was not a solicitation.
  3. A MA case finding that sending a former client a Facebook friend request did not inherently violate a non-compete.
  4. An OK case finding that a former employee's Facebook post touting his new company's product, and viewed by other employees of the former company, did not violate his agreement not to solicit company employees. 
Cases referenced in which the court found a non-compete violation are:
  1. A U.S. 3rd Circuit Appellate Court ruling upholding a preliminary injunction, in which the non-compete was part of a business (asset) sale agreement, not just employment.  In this case, shortly before the non-compete was up, the seller set up a new business and posted online publicly that his non-compete was about to expire and encouraging professionals to apply to his new company.  
  2. A MI case in which the former employee made website / blog posts encouraging other company employees to leave, stating "if you knew what I knew, you would do what I do."   
The Bankers Life case itself and the court's recitation of other case law on the topic, provide a very useful insight for employers and employees into non-compete enforceability in the age of social media.  

Nate Hinch is an attorney and partner at the law firm of Mueller, Reece & Hinch, LLC.  He has offices at 404 N. Hershey Road, Suite C, Bloomington, IL 61704, and 809 Detweiller Drive, Peoria, IL 61615, and can be reached by phone at (309) 827-4055 and email at nhinch@mrh-law.com.

Saturday, July 22, 2017

Illinois Supreme Court Clarifies POA Fiduciary Duties

The recent ruling of the Illinois Supreme Court, In re Estate of Thomas F. Shelton, presents the sad tale of a dispute between siblings over a family farm, and the fiduciary duties required of power of attorney agents.  Mr. and Mrs. Shelton both passed away in 2012.  Each named their daughter as executor of their estates, but in a "divide and conquer" approach to naming fiduciaries that is not uncommon for those with more than one adult child, Mr. and Mrs. Shelton named each other as primary agent for Power of Attorney for Property or financial matters, and their son as backup agent (the daughter was named as the second backup). (The opinion does not specify, but it is likely they each named each other as first choice for executor, but the backup order was reversed as to the son and daughter). 

The POAs were signed in 2005, using the "statutory short form" POA for Property.  Fast forward then to late 2011, approximately one year before the death of both Mr. and Mrs. Shelton - Mr. Shelton apparently signed two quit-claim deeds (one for himself and one as POA for Mrs. Shelton), conveying title to farm ground to their son and his wife.  After opening the estates, the sister as executor commenced an intra-probate proceeding called a "citation to recover assets, alleging that the quit claim to her brother was a fraudulent conveyance.

The estate had two alternative theories 1) the brother owed a fiduciary duty in his capacity as successor POA agent, and it is well established that there is a presumption of fraud when a POA agent benefits from a transaction on behalf of the principal; and 2) if that duty only applies to the primary, acting agent, the brother should be deemed to have been acting as primary at the time, because a doctor had issued a written statement in 2014 that Mrs. Shelton was incompetent in 2011 when the quit claim deed was signed.  If she was not competent at that time, then the brother's authority as successor agent would have been triggered, to make him primary agent for Mr. Shelton.

The Court first held that the presumption of fraud only applies to acting POA agents, and that a named successor agent who is not yet acting for a principal does not owe that principal a fiduciary duty.  On the second point, the Court considered the Statutory Short Form language as to triggering the successor's authority, and cited caselaw that this language was clear and unambiguous and must be strictly construed.  While it is true that the form language references a physician certification to demonstrate incompetency to trigger the successor's authority, the court found that the language indicated such certification was meant to serve as the triggering event, at that time.  The certification could not be applied retroactively.  For these reasons, the Supreme Court affirmed the circuit court ruling dismissing the citation.

The story is a sad case of fighting within the family after the parents passed, and for the nagging feeling that perhaps this situation could have been avoided with better estate planning, not to mention family communication.  The case is also a warning to acting POA agents. Be very aware of your fiduciary duty and the presumption of fraud that will apply if you personally benefit from transactions you conduct for the principal.  There could be a good reason for the transaction and it may very well be in the best interest of the principal, but you need to be prepared to explain and document that.  When possible, have an objective third party consider and confirm you are taking the right approach.  This may be your attorney, but it may also mean running the transaction by your sibling in advance.  If they object, it's better to have that argument in advance, before you take the questionable action, than in court after your parents have passed. 

Nate Hinch is an attorney and partner at the law firm of Mueller, Reece & Hinch, LLC.  He has offices at 404 N. Hershey Road, Suite C, Bloomington, IL 61704, and 809 Detweiller Drive, Peoria, IL 61615, and can be reached by phone at (309) 827-4055 and email at nhinch@mrh-law.com.