Fall 2004 News

DLE WELCOMES NEW ATTORNEYS
Deutsch, Levy & Engel is pleased to announce that Leo Aubel and Catherine Glenn Joelson have joined the firm. Mr. Aubel has joined the firm as Principal and concentrates his practice real estate transaction and financing. Ms. Joelson is an associate in the litigation department and also focuses on environmental matters.

DL&E ATTORNEYS SPEAK ON MEDIA ISSUES
DL&E Principals Paul M. Levy and Phillip J. Zisook, both of whom practice in the firm's First Amendment and Defamation area, recently spoke on First Amendment issues. Mr. Levy spoke to the University of Chicago Graduate School of Business of the commercial speech issues raised by the California Supreme Court decision in Nike v. Kasky, in which Nike was sued under California's consumer fraud for alleging making false statements in its public relations campaign.

Phil Zisook made a presentation at Roosevelt University, Schaumburg Campus, on the topic of On Air Speech: Radio Personalities and the law of defamation. Mr. Zisook also recently addressed the Chicago Bar Association, Civil Rights Committee, on the topic of plaintiff's recouping attorneys' fees in the wake of the United State Supreme Court decision in Buchannon Board & Care Home, Inc. v. W. Va. Dept. of Health & Human Servc., which narrowed the definition of a "successful plaintiff" entitled to fees.

BUY SELL AGREEMENTS FOR SMALL BUSINESSES
The transfer of ownership interests in a small business should take into account all of the considerations that make each business, and especially a family owned business, unique. The vehicle for accomplishing the transfer is usually called a buy sell agreement. Its name barely begins to describe the buy sell agreement's various purposes. With professional advice, the agreement can be tailored to meet the objectives of each small business, whether the business is in the form of a close corporation, partnership, limited liability company, or some other structure.

By creating a market for the ownership interest of a shareholder who has retired, become disabled, or died, a buy sell agreement insures that such an interest can be converted into cash when cash is more important than having shares in the company. Since small businesses often pay out most or all of their profits in salaries, an equity interest in the business would be much less valuable if its owner was not assured of being able to sell that interest back to the business or to other shareholders.

Valuation of the Business
When a triggering event in a buy sell agreement causes the interest of one owner of a business to be purchased by other owners, or by the business as an entity, a critical issue is placing a dollar value on that interest. It is difficult to set a market value for shares in closely held corporations, whose stock by its nature has little or no liquidity. An agreement can set the price for shares according to a predetermined formula, value as shown on the company's books, an appraisal by a third party, or some other method. In any event, it is important that the provisions on the valuation and purchase price of shares in the company be kept current.

Orderly Transition of Ownership
A buy sell agreement also may serve as an orderly method for maintaining control over the company despite a change in the composition of its owners. In a family owned business, this may mean a clause in the agreement effectively keeping the business in the family by allowing remaining family members to buy the interest of a departing owner. For children who decide not to carry on in the business, cash, perhaps generated by life insurance on a senior owner, might be an alternative to inheriting part of the business.

A typical buy sell agreement for a family business provides that, on the death or departure of one shareholder, the remaining shareholders have the right to purchase his or her shares. Those participating in the buyout usually acquire those shares in an amount commensurate with their holdings. An alternative could give the corporation itself the right to purchase the shares. However, this option may bring into play laws for the protection of creditors that limit the power of corporations to purchase their own shares. A hybrid approach sometimes used in buy sell agreements allows the business to buy its own shares, only to the extent permitted by relevant statutes, but the remaining shareholders could then purchase any shares not acquired by the corporation.

Avoid Conflicting Terms
Since one of the triggers for application of a buy sell agreement is a shareholder's death, shareholders should avoid conflicts between the terms of the agreement and their estate plans. When the terms of an agreement and a will cannot easily be reconciled, the odds increase for litigation, rather than the smooth transition for which the agreement was designed. If a will predates the agreement, it may be necessary to draft a new will that is consistent with the agreement. A less-complicated approach is to amend the will with a codicil providing that business interests are to be disposed of according to the buy sell agreement.

Consistency between an estate plan and a buy sell agreement is important not only as to disposition of shares, but also as to voting or management rights in the company. A shareholder should determine whether his estate or heirs should have such rights, and then be sure that the documents accurately reflect the shareholder's wishes. Similarly, a shareholder should consider whether limits on his executor's voting rights are desirable, so as to avoid the possibility that the executor will act to frustrate the shareholder's intent.

One purpose of any contract is to avoid future disputes between the parties by establishing rights and duties for future contingencies. Aside from dealing with the substantive issues raised by transferred ownership, a buy sell agreement also can head off conflict, or at least help solve it, by providing for a form of alternative dispute resolution or mediation.

REVIEW YOUR CREDIT REPORT
When the time comes for an important transaction for an individual, such as buying insurance, taking out a mortgage, or applying for a job, having good credit can be critical. Second only to having good credit is being able to prove it in writing, in a consumer report compiled by one of the credit reporting agencies (CRAs) that have credit information on millions of Americans. If you have ever applied for a credit card, insurance, or a personal loan, one or more of the three major CRAs has a file on you.

By law a consumer has the right to request a copy of a report from a CRA, and that right should be exercised annually to check on the accuracy of the report's contents. Such oversight has added significance if a major purchase is being considered. Rectifying any errors ahead of time, which itself can be time consuming, can shorten the waiting period for loan approval.

A CRA must divulge everything that is in a consumer report including, in most instances, the source of the information. The consumer also has the right to know who has requested the report during the preceding year, or two years if the request is related to employment. Aside from reports prompted only by the consumer's initiative, a report can be requested when a consumer is notified that a company has turned down the consumer's application for credit. That notice, including the CRA's name, address, and phone number, is required by law.

If you detect errors in your report, the process of setting the record straight involves contacting both the CRA and the provider of the information in dispute. A consumer's rights concerning errors in a consumer report are as follows: * If disputed information cannot be verified, the CRA must delete it; * If there is inaccurate information, the CRA must correct it; * If there is incomplete information, such as a record that shows that a consumer made late payments but does not show that the consumer is current, the CRA must complete it; * The CRA, having changed or removed information after a reinvestigation, may not put it back in the file unless the information provider verifies the information and the CRA gives advance notice to the consumer; * The CRA must delete any account not belonging to the consumer; * If requested by the consumer, the CRA must send notices of a corrected report to anyone who received it in the preceding six months, or two years if received for employment purposes.

If the credit story told by a consumer report is sad but true, the best ally for a consumer who has changed his ways is the passage of time. As a general rule, accurate negative information in a report can stay there for only seven years. There are some exceptions, for which the Ashelf life@ of negative information is extended. For example, bankruptcy information may be reported for ten years, and there is no time limit for information on criminal convictions. Similarly, there is no time limit for credit information stemming from an application for a job paying more than $75,000, or an application for more than $150,000 worth of credit or life insurance.

WHEN NONCOMPETITION AGREEMENTS CROSS STATE LINES
It is a common practice for an employer to require an employee to sign an agreement preventing the employee from competing with the employer for a certain period of time and in a designated geographic area. For many years, interpretation and enforcement of these noncompetition agreements or covenants not to compete, as they sometimes are called, have led to lawsuits. When an ex employer attempts to enforce an agreement in another state, which happens more often in today's economy, special issues arise because of the variations in how receptive or hostile the different states are to the anticompetitive effects of these agreements.

Dueling Lawsuits
When Mark was hired in Minnesota to work for a manufacturer of medical devices, he signed an agreement not to compete with the employer, for two years after leaving, and in any area where the employer marketed its products. In a typical Achoice of law@ clause, the agreement also said that it was governed by the laws of the state where the employee last worked for the employer.

After five years, Mark resigned and moved to California to take a job with a company that was competing head to head with his ex employer. Correctly anticipating a fight, and wanting to reach the courthouse first, Mark and his new employer sued his former employer in a California court on the same day he started his new job. Except in limited circumstances, California law prohibits anticompetition agreements, so Mark asked for a declaration that the agreement he had signed was void and unenforceable against him in California. More than that, he also asked the court to prohibit the ex employer from taking any action outside of the California court to enforce the agreement. At about the same time, the former employer did, in fact, sue in a Minnesota court, which issued a preliminary order to enforce the terms of the agreement.

A stalemate ensued, with each side having obtained a ruling in its favor, and purporting to prevent pursuit of the litigation in the other state. When the California case was appealed to that state's highest court, it ruled against any interference with the pending litigation in Minnesota. At the same time, the court recognized California's aversion to noncompetition agreements and allowed Mark's California case to proceed unless and until any Minnesota judgment became binding on the parties. In short, the race to a favorable judgment continued.

Georgia on His Mind
In another similar case, James signed a noncompetition agreement with a company in Ohio that gave computer support services to providers of wireless communications. Later, he left and relocated to Georgia, which does not prohibit noncompetition clauses outright but does subject them to close scrutiny. The agreement had provided that Ohio law was controlling.

Like Mark in the California case, James went to work for a competitor in his new state and sued there to invalidate the covenant not to compete. Unlike the California case, however, there were no dueling lawsuits in different states because James had misrepresented to his first employer that he was leaving to become a stockbroker.

James's lawsuit in Georgia to rid himself of the agreement was partially successful. The agreement was too broad and restrictive to pass muster under Georgia law, so it could not be enforced there, even though the agreement itself referred to Ohio law. James was relieved of the agreement, but only while working in Georgia, because, as the court put it, Athe public policy of Georgia is not that way everywhere.

DEBTORS AND CREDITORS
Personal Guarantees Nondischargeable Stanley and his wife, Kay, owned and operated a travel agency. To facilitate the business of selling airline tickets, the agency entered into an agreement with an airline ticket broker. The broker acted on behalf of airline carriers, issuing tickets and collecting payments from travel agents. The travel agency maintained a trust account for holding customer payments owed to the broker. Part of the deal was that the couple signed personal guarantees for any debts owed by their agency to the broker.

When the travel agency began experiencing financial trouble, it also began to fail to deposit the proceeds of ticket sales into the trust account. As the broker tried to draw from the trust account, the checks started to bounce. The agency's fortunes continued to decline and it went into bankruptcy. The broker then sued Stanley and Kay on their personal guarantees, claiming that, because the debtors had violated their fiduciary duty, the debt owed to the broker was not dischargeable in bankruptcy. The Bankruptcy Code provides that a debt is not dischargeable if it is for failure to meet an obligation while acting in a fiduciary capacity. In general terms, a fiduciary is one who undertakes to act primarily for another's benefit, such as in managing money or property.

Stanley and Kay maintained that only their agency had a fiduciary duty to the broker, so that whatever debt they owed because of the personal guarantees could be discharged in bankruptcy. A federal court disagreed. It was true that, by itself, the fact that the couple had personally guaranteed the agency's debt to the broker did not put them in a fiduciary relationship with the broker. The critical factor was that Stanley's and Kay's personal actions had created the debt owed by the agency to the broker. They had withheld money that should have gone into the trust account and had depleted that account to the point that checks were returned for insufficient funds. The court refused to allow Stanley and Kay to use bankruptcy to avoid the consequences of their own misconduct.

ESTATE PLANNING WITH LONG TERM CARE INSURANCE
Longer life expectancies and the coming surge in the retirement age population have increased the demand for long term care, as well as for insurance as one means of paying for that care. Long term care encompasses a broad range of services for those with a prolonged illness, disability, or mental disorder. Unlike the focus of traditional medical care exclusively on certain medical problems, the goal of long term care is the maintenance of an individual's level of functioning.

Types of Care
The two main types of care are skilled care, provided by medical personnel for medical conditions according to a treatment plan, and personal care. Personal care, sometimes called custodial care, is assistance with the activities of daily living that can be provided in many settings, including nursing homes, adult day care centers, or the individual's own home.

Whether the purchase of long term care insurance makes sense for a particular individual depends on age, health status, overall retirement objectives, and income. As with any type of insurance, it is critical to understand what is and is not covered among the types of long term care services that are available. Exclusions and limitations are common. Equally important is knowing where services are covered. Some policies cover care in any state licensed facility, but others may specifically include or exclude particular types of facilities.

Key Features
Since the amount of coverage is dictated by the type of service, coverage amounts will vary depending on the service. Most policies have a Atotal lifetime benefit@ for the duration of a policy. In addition, benefits are often payable up to maximum amounts per day, week, month, or year.

A provision on when benefits are payable, sometimes called a Abenefit trigger,@ is another key feature that can vary significantly among policies. Some states have legislated benefit trigger requirements, making it a good idea to check with state insurance departments. Typically, benefits become payable because of the insured's inability to perform a certain number of the activities of daily living. Policy language on mental incapacity also allows for benefits when the insured fails mental functioning tests. Such a benefit trigger is especially important for those afflicted with Alzheimer's, even though most states prohibit the outright exclusion of coverage for that disease.

Although they can add to the cost of a policy, there are optional policy provisions that can help to tailor a policy to individual circumstances. Third party notification authorizes the insurer to notify a designated third party, such as a relative or friend, if the policy is about to lapse for nonpayment of the premium. A waiver of premium clause allows the insured to stop paying premiums once he or she is in a nursing home and the insurer has begun to pay benefits. Nonforfeiture benefits return some of the investment in the policy if coverage is dropped. If an insured has paid premiums for a certain number of years, some policies allow a death benefit to the estate consisting of a refund of premiums, minus any benefits the company has paid.

Tax Implications
Premiums paid for long term care insurance are deductible as a medical expense, as long as all medical expenses exceed 7.5% of adjusted gross income. Since premiums on average increase more than tenfold between the ages of 40 and 70, this deduction increases substantially with age. The maximum long term care premium you can add to your other deductible medical expenses is based on your age at the end of each tax year.

Employer contributions to long term care insurance for their employees are tax deductible for the employer, and premium payments are not taxable income to the employees. Benefits from a long term care plan are excluded from income up to the lesser of the actual costs incurred or $63,875 per year. The annual limitation will increase with inflation in future years.

AJUST SAY NO@ TO UNSOLICITED CREDIT CARD OFFERS
If you want to stop the flow of unsolicited credit card offers, there is a way. Under the federal Fair Credit Reporting Act, consumers have the right to stop credit bureaus from providing their names and addresses for marketing lists.

As required in the federal legislation, the major credit bureaus have set up a toll free number (888 5 OPT OUTC888 567 8688) that is required to be provided with the offer of credit. When you call, you can either opt out by telephone for two years or request a form you can use to opt out permanently. By calling the same number, you can also be put back on marketing lists after having been removed from them. In cases of joint credit, both parties may be required to opt out before the solicitations will stop.

COMMERCIAL LANDLORD MUST MITIGATE DAMAGES
A state supreme court has ruled that a commercial landlord has a duty to mitigate damages when a tenant breaks the lease by leaving the property. A bookstore agreed to a ten year lease in a shopping center. Citing lost profits due to competition from a new bookstore in the same mall, the tenant abandoned its store space with only six months left on the lease. For the rest of the lease term, the tenant paid no rent and the landlord did not rent the space to anyone else. When the landlord sued for the rent due under the lease, the tenant argued that the landlord should have reduced its damages by leasing the space to a new tenant.

A lease is a hybrid under the law, having aspects of property law and contract law. As originally conceived, leases were viewed primarily as transfers of an interest in property. If the tenant abandoned the property, he was seen as simply having given up that interest. The landlord could stand by and do nothing but demand the rent, which was due as a fixed obligation.

On the other hand, when seen mainly as a contract to convey an interest in property, a lease, like any other contract, carries with it the duty to mitigate damages. The injured party is expected to make efforts to avoid the consequences of the breach by the other party. The landlord need not accept just any new tenant, however, and only reasonable efforts are required. In the context of a shopping center, it may well be reasonable for the landlord to hold out for a tenant that will restore the overall balance of stores that existed before one tenant abandoned the premises.

The goal is to put the injured party in as good a position had the contract not been breached, at the least cost to the defaulting party. Some courts also have reasoned that requiring the landlord to mitigate damages encourages the productive use of land and decreases the likelihood of physical damage to the property.

In deciding that the shopping center landlord had been under an obligation to mitigate damages by attempting to re rent the store space, the court was joining a modern trend that treats leases more as contracts for the use of property than transfers of property. The court also declined to make an exception for commercial leases. It is true that a commercial landlord has a special interest in maintaining the right mix of tenants in a shopping center. That interest is protected, however, not by relieving the landlord of the duty to mitigate damages, but by allowing the landlord to recover not just lost rent, but such other financial losses as may have been caused by the breach of the lease.