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. 

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.  

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. 

Friday, July 7, 2017

No, You Can't Sign as the Witness on a Power of Attorney Appointing Yourself as Agent!

I recently received a call on behalf of a former client who had apparently suffered some serious medical issues.  The gentleman who called informed me that, since I last communicated with the former client, he had signed a new Power of Attorney for Property ("POA") appointing the caller his agent.  He told me that they had not worked with an attorney in preparing this new POA but just "found one online." The agent sought to review/obtain a copy of the former client's file at my office, including his estate planning documents.  I asked the agent to send me a copy of the new POA so I could take a look at it.

When I reviewed the new POA document, I saw the typewritten provision where the former client named the caller his agent.  I then checked to ensure the document had been signed by the principal, witnessed and notarized properly.   There were two attesting witnesses who signed the document - the named agent himself and his spouse (the spouse was also named as successor agent).

I pointed this out to the agent and explained that the statute does not allow the named agent or their spouse to serve as the attesting witnesses.  See 755 ILCS 45/3-3.6.  I explained that in my opinion the document was therefore not valid, and that I could not release the former client's file documents to the purported POA agent.

He called again about a week later, to inform me that he had provided the POA document to the former client's bank and financial adviser/broker, and they had accepted it without question.  He became agitated when I informed him my view had not changed, and he asked me, "Do you think you know more than ABC Bank and XYZ Financial?!"  (both of which are large, well known financial institutions).  I explained to him that not only did I believe I was right, but I also believed it would be unethical for me to turn over the former client's file to him under the circumstances, and I declined to do so.

The statute is quite clear on this issue.  But I share this story to make one particular point - IT IS A VERY BAD IDEA TO SIGN AS WITNESS ON A POA APPOINTING YOU AGENT.  For the person agreeing to serve as agent, by doing so you are taking on fiduciary duty obligations and exposing yourself to potential legal liability for violating that duty.  If you yourself sign as witness, it creates an inherent appearance of impropriety, that could be used against you later if there is ever an allegation you violated your duty, even if you always tried to do the right thing.

And a related point - WHETHER OR NOT A BANK CHALLENGES THE POA IS NOT PROOF OF ITS VALIDITY.  You have to understand, when you present a POA to a bank as basis for you to access funds as agent on behalf of the principal, YOU are the one with the primary legal obligation to actually have the legal authority you claim.  It is up to YOU to have the valid POA; it is not primarily up to the bank to catch an invalid POA.  To put it bluntly, you are potentially committing fraud by doing this, even if you have the best of intentions.

Thursday, June 15, 2017

Changes to Illinois LLC Act - Members With Authority

Get ready for changes to the Illinois LLC Act.  Last year a bill to amend the statute was signed into law, but with its effective date deferred to July 1, 2017, and is now less than a month away.  This is a significant update to the statute and may potentially affect existing LLCs; it is worth taking a look at an LLC's current Operating Agreement in light of the changes, to see if any updates are in order.  For a complete review of all the changes, see the text/markup of the statute here.

There are many changes to the statute, but I'd like to focus on one, particularly significant change.  LLCs will now be able to designate certain members having authority to act for the company.  This is a very significant change; existing LLCs may wish to revisit their management structure and operating agreements to see whether they could benefit by utilizing this new process.

As part of the application to file Articles of Organization, Illinois LLCs are required to designate to the State whether the LLC will be managed by its members (the owners), or by a "manager."  The Manager referenced in the statute is not merely the person managing the day to day business, but is defined as the "person vested with authority" under Section 13-5 of the statute, which has to do with the law of agency.

Under general agency law and Section 13-5 of the LLC Act, each member (owner) is considered an agent and has authority to act on behalf of the LLC, unless the LLC elects to be "manager-managed" and designates one or more persons as "manager."  Currently, in a "member-managed" LLC, any member, regardless of their percentage of ownership, could sign contracts committing the LLC to obligations.  Some member-managed LLCs attempt to control this by having restrictions in the Operating Agreement, restricting who can act for the LLC and under what circumstances.  That is helpful and provides some recourse against a member who acts in violation, but the Operating Agreement is not binding on a third party who in good faith signs a contract with the rogue member.  Unless the third party "knew or had notice" that the rogue member did not have authority, the company would be required to honor this contract.

The July 1 changes to the LLC Act create a new, optional form, called a "Statement of Authority," that can be filed with the Illinois Secretary of State to satisfy the notice requirement and help member-managed LLCs protect against this rogue member scenario.  When filling out the form, the LLC will indicate which of the members have the authority to act for the LLC.  Any third party will then be deemed to have "constructive notice" of this; in other words, the third party will be presumed to have checked with the Secretary of State (or required the LLC to provide proof) to ensure that the person signing for the LLC actually had authority to sign.  In the rogue member scenario, if the LLC had filed a Statement of Authority designating only other members, then the rogue member's signature on the contract would not be effective to bind the LLC to honor it.

The Statement of Authority form is not yet available on the Secretary of State website as I write this, because it is not yet July 1, but after July 1, the form should be included with the other LLC filing forms, here.

If you have a "member-managed" Illinois LLC, the Statement of Authority may be an important document to consider filing after July 1, to protect your interests.  You would also be well advised to at the same time dust off your Operating Agreement and particularly read over the section about management of the company, and who has authority to act for the LLC.  If a Statement of Authority is filed, this section of the Operating Agreement should be revised to be consistent with that.

Wednesday, December 7, 2016

Just in Time for the Holidays, another Court Ruling About Snow Liability!

Last winter I wrote about the First District Appellate court decision in  Murphy Hylton v. Lieberman Management Services, Inc. Here is that previous post.  After that decision, one of the parties petitioned the Illinois Supreme Court to hear the case, and the court granted the petition.  In the spirit of the season, the Illinois Supreme Court last week issued its decision, affirming the First District ruling. 

My previous post went through the case and potential liability and immunity under the Snow and Ice Removal Act; I will not repeat that all here.  But essentially, the ruling (at both courts) finds that the Act, which provides immunity and limits liability for negligent removal of naturally accumulated snow and ice, does NOT apply to limit liability for negligently creating an unnatural condition that causes ice to accumulate.  In this case, the plaintiff alleged that a faulty downspout installation caused the ice accumulation.  The Court is distinguishing between liability for shoddy shoveling or salting, as opposed to allowing water to pool and ice over on a sidewalk when no snow or ice would otherwise be present.  The former is covered by the Act.  The latter is not.

The procedural context of the ruling is also important to remember.  The original appeal arose when the trial court granted summary judgment to the defense; no trial had yet occurred.  Both court opinions start their analysis by appropriately noting this procedural context and the resulting appropriate standard of review, and that at the trial court level the standard for awarding summary judgment is that their must be "no genuine issue of material fact" and that therefore the moving party is entitled to judgment as a matter of law.  In other words, even considering the non-moving parties' position favorably, there is no point in having a trial because they cannot win as a matter of law. That is what the trial court ruling meant when it awarded summary judgment to the defense.  These appeal rulings mean that it is possible for plaintiff to win, if she proves at trial the case she has alleged. She will get her "day in court" at trial (unless of course the case settles, which is entirely possible). 

Sunday, August 14, 2016

Wills and Probate - As the Client, Your Choice of Attorney is ALWAYS Up to You and Your Executor!

I recently met with some new clients (a married couple aged 60-70) to review their estate plan.  They had met with another attorney who prepared wills for them within the past year.  As we went over their estate planning goals and their previous wills, the first thing we discovered is that the wills they had prepared did not provide the bequest and specific gift terms they were looking for, and which they thought had been written into their wills. 

The second thing that stood out was a paragraph like this that the clients did not realize had been written into their wills (I'm paraphrasing):

"Joe and Jane Testators have retained Larry Lawyer to prepare their wills, and they want Ed Executor and their family to continue to retain Larry Lawyer to handle probate of their estates."

Now don't get me wrong, obviously when I help clients with estate planning, I certainly hope to be able to continue to help their families with probate and other legal issues that arise when the clients pass away.  But that decision is entirely up to the clients.  (So long as your chosen attorney chooses to accept you as a client in turn). In the estate context, when the original client herself passes away, that means the choice of attorney is up to her executor. 

Generally speaking, it would seem to make sense that the executor continue to retain the deceased client's lawyer for probate and related matters, because that lawyer is most familiar with the client's estate plan.  But that may not always be the case.  And in any event, it would take a lot of gall for any lawyer to pressure the executor to hire him, on the basis that that's what the deceased client wanted, let alone to actually write that into the client's will!! Needless to say, it is not enforceable.  In fact, I'd love to see the lawyer in that situation "double down" and try to enforce the provision in probate court. Any guesses how a probate judge is going to rule on that one?