TIF – A Development Tool for New and Expanding Businesses

TIF – A Development Tool for New and Expanding Businesses

My litigation practice has taken me into many areas of law in my career, including handling matters for both municipal and business clients that involve tax incremental financing (TIF.) Despite these turbulent economic times, new and existing businesses as well as municipalities are still searching for ways to move forward. TIF may be one very useful tool for a successful public-private partnership.

TIF is a mechanism for financing development from taxes that are generated from a tax incremental district (TID.)  TIDs, governed by state law, have been in existence for decades. In simple terms, a TID is a geographic area that is created to advance development within the district for a limited time. The tax revenue generated on property within the TID at the time of creation will continue to be shared with overlying tax entities. However, tax revenue generated from new development within the TID will be retained entirely by the TID to finance further development during its life.

Financing can come in many forms. Cash grants to new and expanding businesses to incentivize development may be one such form. Pay-as-you-go incentives, which involve developers retaining tax revenue generated by their own specific development, may be another form. Hybrid arrangements of these two financing tools are another potential.

For new businesses especially, TIF can serve as added security for a lender. Moreover, TIF may often work in combination with private financing, other state incentives and gap financing to make a new business venture a reality and a win-win for business and local taxpayers in the long run.

However, a win-win situation starts with understanding the options available, the typical municipal processes to go through and ultimately structuring a strong development agreement.  Poorly drafted development agreements can lead to litigation from both sides.  Securing TIF advice from municipal counsel early in the process can pay dividends and avoid problems on either side down the line.

 

The First Ruling on Issue Finds No Insurance Coverage for Business Interruption Due to COVID-19

The First Ruling on Issue Finds No Insurance Coverage for Business Interruption Due to COVID-19

This article is a follow-up to my article of May 4, 2020, which addressed litigation and claims involving business losses as a result of COVID-19. Hundreds of lawsuits have been filed throughout the country by business owners who have been forced to close their doors or restrict their operations due to mandated governmental orders and closures due to the spread of the COVID-19 virus.

On July 2, 2020, the first court to make a substantive ruling on these insurance coverage issues held in favor of the insurance company and denied coverage under the business owner’s insurance policy under the “business interruption” coverage provision. In Gavrilides Management Company, et al. v. Michigan Insurance Company, the owner of the Soup Spoon Café and The Bistro in Lansing, Michigan filed a $650,000.00 claim with its insurance company for damages it incurred as a result of the government mandated closure of the inside dining in its restaurants due to COVID-19.

The restaurant owner argued that the government order restricted the operations of the restaurant and this amounted to a “direct physical loss” under the terms of the policy because the order blocked public entry to the property. The restaurant owner also argued that the “virus exclusion” in the policy did not apply because the loss of access was caused by the government order, not the virus. The Michigan court rejected both arguments and held that there has to be something that physically alters the integrity of the property and there has to be some tangible, physical damage to the property in order for it to be a “direct physical loss” which could provide coverage. The court further held that the virus exclusion in the policy excluded coverage caused by the impact of COVID-19.

While this case is not binding precedent on Wisconsin courts, because it is the first court to address the substantive provisions of business interruption insurance coverage in light of the COVID-19 virus, this case will likely be cited by insurance companies in all of the other pending cases throughout the country. Only time will tell if other jurisdictions will follow the reasoning of the Michigan court, or if it will take an alternative approach. It should be noted that each insurance policy must be evaluated based upon its particular language that is in effect, as well as the particular facts of the business owner’s circumstances. Therefore, simply because one court ruled in favor of the insurance company does not mean that this will be the same result in every other claim brought by a business owner who suffered losses as a result of the mandated government closures during the COVID-19 pandemic.

 

Is My Contract Enforceable During an Emergency?

Is My Contract Enforceable During an Emergency?

As a result of forced closures and disruptions to supply chains connected with the Covid-19 pandemic, many businesses are facing the reality that they will not be able to complete obligations agreed to in contracts entered into prior to the crisis. This has brought new attention to an often-overlooked portion of contract law: force majeure clauses.

Sometimes referred to as “Act of God” clauses, force majeure provisions lay out the rules for how contract obligations will be affected if defined events outside of the parties’ control hinder their ability to comply with the contract. Typically, when a party fails to comply with the terms of a contract, they are in “breach,” and the non-breaching party may sue them for the damages caused by the breach or other damages laid out in the contract itself. Force majeure literally translates to “superior force” and fittingly is intended to protect a party who cannot complete the terms of the contract because of intervening forces outside of their control. To be effective for this purpose, the clause must be (1) enforceable, (2) successfully triggered, and (3) provide an adequate remedy or alternative.

States vary in the enforceability requirements for force majeure clauses. Some states require certain formalities to be made and vary in how they interpret terms like “unforeseeable.” It is important to make sure you understand how your state interprets any contracts you enter into and which state law will be used when settling disputes related to the contract. Another aspect of enforceability is whether the procedure for using the provision was properly followed. Some contracts require notices be delivered of the intent to rely on the force majeure clause. Failing to follow the procedure outlined in the contract may result in forfeiting the benefits of the force majeure clause.

To trigger the protections afforded by force majeure provisions, an event described in the clause must occur. Courts tend to use strict contractual analysis when interpreting the clauses, meaning that the exact phrasing in the contract will usually control and courts will be reluctant to read in provisions not explicitly included in the text. Common trigger events include natural disasters like floods, hurricanes and earthquakes, acts of terrorism, war, riots, and publicly declared states of emergency. When the term “Act of God” is used, the commonly accepted definition is any event which may be attributed entirely to nature without human interference. Economic hardship or shifts in the markets are unlikely to trigger a force majeure clause, as these risks are present in every contract and courts typically assume the parties have factored them in when entering into the agreement.

Many of these clauses are already written to expressly include epidemics and pandemics. Even without explicit reference to epidemics or pandemics, it is possible such events may fall under references. For example, a force majeure clause including terms for governmental action or restrictions may allow the clause to trigger not because of the pandemic itself, but because of state and federal actions taken to combat it. It is likely that in years to come, more clauses will be written to explicitly include these triggers to avoid any room for doubt over whether they qualify.

When successfully triggered, a force majeure clause usually will allow for the obligations of the contract to be terminated outright, altered in some way, or delayed. These remedies need to be considered carefully when drafting the clause to ensure the protection provided is a good fit for the subject matter and facts related to the contract. For example, a clause allowing either party to unilaterally terminate the contract when triggered may not be in your best interest if the transaction in the contract is beneficial to you, but you just need more time to complete it. What happens to money paid in advance and how partial performance will be treated are also things to consider when drafting the remedy section of the clause.

In the absence of an enforceable force majeure clause, there may be other options which allow a breaching party to escape liability for breaking the contract. The common law doctrines of impossibility and frustration of purpose may also provide relief from a contract’s terms in times of unforeseen emergency. While beyond the scope of this article, in short, these defenses to a breach of contract cover situations where an unforeseen event, not reasonably anticipated by the parties, either makes compliance impossible, or results in the original purpose of the contract to be so undermined that the actual objective sought to be gained by the contract actions is no longer possible. Even with the potential availability of these common law doctrines, it is preferable to rely on clear contractual language rather than asserting common law defenses.

If you have questions about how the force majeure clause in your contract will be applied, you should speak with an attorney. You may also want to review your insurance policies for provisions limiting their liability for damages caused by such force majeure events. These limitations are common but may deny you coverage at the time you need it the most. Current events may also serve as a prompt for you to be proactive in preparing for whatever the next disaster may be. If your company contracts do not already contain a force majeure clause, or if you believe it is time the existing language be reviewed with greater attention, an attorney will be able to help your business be better prepared to weather future disruptions.

 

The First Ruling on Issue Finds No Insurance Coverage for Business Interruption Due to COVID-19

Is Your Business Protected from Business Interruption During the COVID-19 Pandemic?

With the COVID-19 pandemic occurring, many states, including Wisconsin, have ordered all nonessential businesses, including restaurants and bars, to close their doors.  Unfortunately, there will be a substantial amount of revenue lost by these businesses for as long as their businesses are required to remain closed.  A significant question is whether these businesses will have any recourse under any of their business insurance policies to recoup lost revenue based upon the coronavirus and/or whether there is coverage triggered by government-mandated closures.  The answers to these questions require a detailed analysis of each individual insurance policy, as well as the circumstances surrounding the losses of each business.

Coverage for business interruption is typically an endorsement to the insured’s property insurance policy and designed to protect the insured for losses of business income it sustains as a result of the direct loss, damage, or destruction to insured property by a covered peril.  A typical clause in an insurance policy reads as follows (although there are variations to this depending on the insurance company):

“We will pay for the actual loss of business income you sustain due to the necessary suspension of your operations during the period of restoration.  The suspension must be caused by the direct physical loss, damage, or destruction to property.  The loss or damage must be caused by or result from a covered cause of loss.”

Usually, in order to recover under this policy provision, a business owner will need to demonstrate that (1) the business sustained physical damage to the insured property; (2) this damage was caused by a peril covered under the policy; (3) which resulted in quantifiable losses because of the business interruption, and (4) that these losses occurred during the time period needed to restore property that was damaged.

There are presently many lawsuits pending throughout this country in which businesses are attempting to enforce business interruption coverage under business insurance policies and to seek a determination by the courts of whether the coronavirus can be deemed to cause physical damage by infecting surfaces in the business, similar to gaseous fumes which have been found in some cases to constitute a physical loss.

In addition to determining whether the coronavirus may be deemed to be a physical loss under the business interruption policy, each insurance policy must be analyzed to determine whether any language provides coverage for business interruption due to civil authority – such as mandated closures by local, state, or the federal governments.

Each policy’s specific language and endorsements must be individually analyzed.   These provisions must also be evaluated in light of any exclusions in the policy and within the specific context of each business owner’s circumstances. Business owners financially impacted by this unprecedented pandemic should timely consult with an experienced attorney to determine whether or not there may be a valid claim under their insurance policy to pursue significant losses of revenue.  The attorneys at Anderson O’Brien are here to assist you with an insurance coverage analysis or other legal issues that may arise out of any business losses you sustain during these difficult times.

 

Best Practices for Using Volunteers in Your Wisconsin Non-Profit.

Best Practices for Using Volunteers in Your Wisconsin Non-Profit.

The great majority of work performed by non-profits comes from unpaid volunteers. While volunteers can be vital to helping a non-profit reach its goals, their presence raises certain risks that leaders of non-profit organizations should be aware of to craft effective policies for their recruitment, management and retention.

The typical non-profit organization in Wisconsin is simultaneously subject to two sets of laws. The entity is organized under state law, specifically Chapter 181 of the Wisconsin Statutes, titled “Nonstock Corporations.” However, an organization’s tax-free status is controlled by federal law, specifically Section 501(c)(3) of the U.S. Internal Revenue Code, which generally requires the organization be operated for the sole purpose of pursuing one of several listed causes recognized as deserving tax-free treatment. The many requirements of these laws are beyond the scope of this article, but they affect certain aspects of volunteer management practices.

Recruitment:

Before you can manage your volunteers, you must recruit them. Consider how potential volunteers are screened and appropriate policies are put in place. A bad fit can be more trouble than they are worth, and someone with bad intent or ulterior motives can be disastrous both to the organization and to the cause it is trying to help. Outside of the damage an ill-intended individual can cause directly, bad press from being associated with that person can do lasting damage to an organization’s reputation.

The screening process can be as simple as an application form and/or interview asking relevant questions. A more thorough screening may also include background checks. The extent of the screening process should be commensurate to the level of trust that will be placed in that person. Volunteers entrusted with responsibility over expensive goods which can be stolen or vulnerable people who can be abused should be screened with extra caution. These concerns must be balanced with making volunteering as simple and easy as possible, so volunteers do not lose interest when faced with a daunting application process.

During recruitment, take steps to ensure no improper biases or discrimination are applied to volunteer selection. Discrimination against protected classes is generally illegal, even for non-profits. Among the classes protected by anti-discrimination laws are: age, sex, religion, national origin, race, disability or genetic status. Many of these laws are written with the employment context in mind, but there is legal precedent for their application to unpaid volunteers in certain circumstances. Although the law is unclear in many cases, the safest route is to assume anti-discrimination laws will apply. Some types of organizations have limited exceptions to these rules. For example, religious organizations have a narrow window allowing discrimination on the basis of religion. Discrimination laws are complex and you should consult with an attorney if you believe a decision or practice could potentially expose the non-profit to legal action. Even if a form of discrimination is technically allowed under current law, an organization known to discriminate against certain groups may lose moral credibility, which can translate to reduced donations. Additionally, the non-profit risks losing out on federal funding or contracts.

Another concern with incoming volunteers is their classification within the organization itself. Non-profits in Wisconsin can either have members or not have members. If you are unsure whether a non-profit has members, the Articles of Incorporation filed with the State of Wisconsin will indicate the classification. If an organization has members, they may have voting and other rights to control the organization. If the non-profit is a member organization, be careful to be clear who is a member with these rights, and who is a volunteer.

Training and Supervision:

Once a non-profit has recruited volunteers, they must be trained and supervised to perform their duties. A volunteer orientation process promotes consistent training among volunteers and can ensure vital information is passed to everyone working on behalf of the organization. Key policies and procedures, as well as a mechanism for volunteers to get answers to any questions that may arise during the course of their duties, should be implemented and addressed. While certain training procedures should be uniform across all volunteers, job specific training should also be given based on the task the volunteer will be performing. Job duties may change over time, so updates and refresher training will likely be necessary, even for frequent volunteers.

In addition to initial training, a volunteer handbook can serve as a reference for important procedures and rules for volunteers. Detailed handbooks can also help protect the organization from liability should a volunteer do something against the organization’s policy. Some things a volunteer handbook should include are: non-discrimination and non-harassment policies, confidentiality rules, policies and permission statements for information and images of volunteers in promotional materials, policies for working with certain vulnerable groups, attendance, scheduling, conduct expectations and emergency procedures. This list is non-exhaustive and most non-profits will have unique policies to address their specific functions and organizational structure. It is important the handbook reflect current practices for the non-profit. Thus, it should be reviewed and updated regularly. Changes should be identified to existing volunteers so they are aware of the new expectations and they should be provided with the new handbook.

As discussed in the above “Recruitment” section, a non-profit should exercise care to avoid discrimination against or by volunteers. Monitor both supervisors and other volunteers for signs of discrimination or harassment. Harassment can include continuous jokes or jeers directed at a volunteer’s expense, or otherwise creating a hostile environment for them to perform their volunteer duties. Outside of legal concerns, not allowing such behavior can help keep volunteers eager to return and be productive in their duties.

Liability Protection:

When a volunteer makes a mistake, becomes injured, or otherwise takes action which gives rise to a legal claim, there are two major sources of protection for the organization and the volunteers themselves: state law and insurance.

In Wisconsin, a volunteer who provides services to a non-profit has limited liability under state statutes for damages arising from their acts as a volunteer, subject to certain exceptions including, but not limited to, violations of criminal law, willful misconduct if they are also an employee of the non-profit, or if the act was in their capacity as an officer or director of the organization.

Given the long list of exceptions, it is safest to procure insurance. Insurance also can help pay for the expenses of a volunteer who is injured while performing their volunteer duties. Many organizations purchase volunteer liability coverage to protect themselves and their volunteers from the costs of personal injury or property damages stemming from their volunteer duties. Auto insurance should also be considered if the volunteers will either be driving or riding in a vehicle as part of their volunteer duties. Wisconsin has minimum insurance requirements for all drivers, but these amounts are not nearly enough to cover expenses incurred in all but minor accidents.

Incentives:

By definition, volunteers should not expect payment in return for their services. Regardless, many non-profits desire to reward their loyal volunteers with some token of appreciation for their hard work. This can create issues with accidently classifying the volunteers as “employees,” or with the tax-exemption of the organization under federal law.

The tax-free status of an organization can be revoked if the organization is providing a “private” rather an “public” benefit. This can happen if monetary or other valuable rewards are given to volunteers. Likewise, the classification of a volunteer versus an employee is in part based on whether they receive anything in exchange for their work. Non-cash benefits to volunteers are allowed to a point, but beyond this hard to define threshold, problems can quickly accumulate. One thing is clear, avoid giving cash or gift cards to volunteers if the non-profit is looking for ways to reward its volunteers.

The laws regarding volunteering and Wisconsin non-profits can be complex and you should consult with an attorney if have questions about recruitment, training and supervision, liability protection and incentives for your non-profit.

 

A Business Check-up Checklist

A Business Check-up Checklist

If you are a business owner, then you, no doubt, have or will go through the process of finalizing your financial statements and gathering your other accounting records and tax documents for your CPA. I encourage you to take time to also locate your company record book and critical legal documents. Having your legal house in order is an important part of business risk management and planning. A basic business check-up should include the following:

1.) Corporate/Company Record Book Review.
Make sure you can locate your company record book and that it is up-to-date, including the ownership records. There are statutory requirements as to certain minimum records that must be kept by certain types of companies. For a detailed list of the records that must be kept, refer to the following article: Statutory Requirements for Record Books.

2.) Organizational Document Review.
A company’s organizational documents contain the rules that should be followed in carrying out business operations. For corporations, the controlling document is the Articles of Incorporation. For limited liability companies, the controlling document is the Articles of Organization. Usually both of these documents contain relatively few provisions. However, whatever provisions they do contain will control if other documents contain conflicting provisions. Watch out for particular limitations or restrictions on ownership. Sometimes restrictions that once made sense are no longer applicable. If those restrictions are in your Articles, they will still be binding!

After reviewing the Articles, you should review the Bylaws (for corporations) and Operating Agreement (for LLCs). These documents should contain more specific details regarding the management and general operations of the business. Review the documents for specific restrictions placed on the authority of managers, officers and directors. Are you acting in compliance with these restrictions? This can be especially critical if you are not the sole owner of the business; however, even if you are the sole owner, it is still important to understand what “position” has what authority.

In addition to reviewing the basic organizational documents, now is the time to review your meeting minutes or resolutions. Some businesses will hold formal meetings to conduct business at the shareholder, member, director and manager levels. Other businesses opt to use “informal action resolutions” or other forms of written consent to document important decisions. In either case, it is important that your records are accurate and kept up-to-date. Remember, if you want others to respect your company as a distinct legal entity, then you must respect it too.

3.) Buy-Sell Agreements.
If you are in business with someone other than your spouse, take a few minutes to review the following article written by my colleague, Steven Thompson: Buy-Sell Agreements: Working for the Best and Planning for the Worst. This article discusses the value of a buy-sell agreement to your business.

4.) Key Contract Review.
Review your key contracts, including leases, customer contracts and vendor agreements. Calendaring important dates from each contract can help you avoid costly mistakes. Many contracts will automatically renew each year or at the end of the term unless some advance notice is given. This may be a good or bad thing, depending on your perspective on any given contract. What it should not be is a surprise!

I find that most owners have a pretty good handle on the “business terms” of their contracts but the standard legal terminology and provisions are often a mystery. Such standardized legal language is known as “legal boilerplate.” Those “boilerplate” terms, however, are often the most important. For example, look at the “assignment” provisions to understand if your contract could be assigned to another person. If you are planning to sell, then assignability of a key customer contract could be crucial. Other often overlooked terms include limitations on liability, indemnification and insurance requirements. While these provisions may mean little if all goes well, they could be the most important provisions if there is a problem. Ask yourself if those provisions are both fair and adequately protect your business.

5.) Insurance Review.
Forming an LLC, corporation, or other business entity can be a critical part of your business risk management and control. However, forming a business entity alone is not sufficient. Proper liability and property insurance coverage is critical. Hopefully you meet at least annually with your insurance agent or broker to review coverage. If it has been a while, then you should take time now to review what you have in place. Consider the following:

  • General commercial liability and products liability.
  • Fire and extended insurance coverage for your business assets.
  • Worker’s compensation insurance as required by law.
  • Insurance for business vehicles (liability, collision and comprehensive).
  • Non-owned and hired vehicle insurance coverage.
  • Theft, vandalism and malicious mischief.
  • Bonding for employees handling funds of business and required bonding for fiduciaries of qualified retirement plans.
  • Any insurance required of you under a lease arrangement.
  • Make sure that owners and your subsidiary companies are included as additional insured parties or are covered on their own policies and include necessary parties (like landlords or mortgagees) as additional insured parties or as loss payees, if required in your leases, contracts or mortgages.

Make reviewing these basic business records part of your normal routine! Reviewing these types of business records routinely puts your business in a safer and more productive state. If, during your review, you have questions or need assistance, contact the skilled attorneys at the Anderson O’Brien Law Firm.

 

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