Noncompete Agreement Update Early-2017

Reasonableness was once a common misconception amongst commercial noncompetes. The Michigan Supreme Court in Innovation Ventures, LLC v Liquid Mfg LLC, 499 Mich 491 (2016) has resolved this confusion once and for all by making it clear, employee noncompetes must be reasonable to be valid, while commercial noncompetes are invalid only if they fail the “rule of reason” within the antitrust (a much higher standard).

Employee noncompetes must be reasonable: limited in “duration, geographical area, and the type of employment or line of business” (scope) and only so necessary as to protect the employer’s legitimate competitive interest (“competitive business interests”) MCL 445.774a. Reasonableness underscores the enforceability. This means from a lawyers perspective, drafting an enforceable employee noncompete is a challenge, it means you should not use a form, and the agreement should consider the particular employee and the particular interest being protected. The literal language of an agreement may not even define the enforceability of the noncompete. Employees have a general freedom to change employment and maximize the value of their labor (it sort-of violates public policy, for societal harm, to tie a productive employees hands behind their back).

Employee noncompetes should be standalone signed agreements (not in the handbook). Multi-jurisdicational employers should consider which state law will control (California and North Dakota prohibit certain noncompetes and Illinois requires a duration of employment). Will the employee be preforming services in other states from where the employer is located, where does the employee live (domicile)?

The noncompete must protect a legitimate business interest and competition is not a legitimate business interest. A reasonable geography could be a few miles, state, or world. Reasonable duration varies as well, a fast pace industry may only support a few months, where as a corporations long term strategy may be supported for years. And the restrictions are employment must be limited to only those jobs where the competitors could benefit from the employer’s proprietary information. Legal consideration is required in all noncompetes (value in exchange for covenant).

Commercial noncompetes may be broad and so long as they do not have an adverse impact on the competition in the relevant market they will generally be enforceable. More time is often spent on these noncompetes since the parties to the contract will consult with a lawyer and are sophisticated enough to consider the commercial implications of unreasonable terms.

 

Michigan Liquor Licenses

The Michigan Liquor Control Commission is a panel of five governor appointed commissioners that issues liquor licenses (MCL 436.1201 et seq); the commission has the “sole, right, power, and duty to control the alcoholic beverage traffic… within the state”.  And holders of these liquor licenses and liquor producers naturally employ thousands of people in various establishments (wineries, bars, restaurants, theaters, etc.). A single violation, by the employee or the holder, may jeopardize the business or the other employee’s jobs. It is important that a license holder is diligent in complying with the requirements of the commission.

Common violations, include:
• Right to inspect and search for liquor violation(s)
• Licensee receive aid or assistance (rebate, gift, loan)
• Misdemeanor to sell or furnish alcohol to a minor
• Sell, or serve or allow intoxicated person to consume or loiter
• 
Licensee or employee intoxicated on premises
• Allow person under 21 to consume or posses
• Employ person under 18 years of age
• 
Sell or furnish alcohol to a minor or intoxicated person
• 
Selling alcohol without a license
• 
Gambling or possession of gambling equipment
• 
Unlawful consumption of alcoholic liquor on unlicensed premises
• 
Dancing or entertainment without permit
• Adulterated, misbranded or refilled spirits
• 
Selling or purchasing on credit
• 
Allow alcoholic liquor sold for on-premise consumption to be removed from the premises
• Giving away alcoholic liquor on unlicensed premises
• 
Selling before noon on Sunday without permit
• 
Illegal act on premises
• 
Licensee convicted of a felony, OUIL, etc.
• 
Failure to cooperate with law officers (obstruction)
• 
Knowingly allow soliciting/prostitution
• 
Allowing fights on/in licensed premises
• Controlled substances/narcotics paraphernalia
• Improper or no display of liquor license/permits
• No contests allowed using alcoholic liquor as the prize
• Alteration, sale or transfer portion of premises without permission
• Sales, service, consumption during license suspension
• Illegal use and benefit of a liquor license
• Operation other than legal hours/days

See: Michigan LARA

Michigan Builders Trust Fund Act

 A little known statute, the MCL 570.151 et seq. commonly referred to as the Michigan Builders’ Trust Fund Act (“MBTFA”) is a statute that imposes a trust on any monies paid to a contractor; the benefit of the person making the payment and for persons whom the money is to be paid. It was designed to eliminate a common practice at the beginning of the 20th century where a builder would take money to pay for another job’s expenses. Which ultimately if things go wrong, the persons at the end of the ‘passing expenses on’ chain, lose. The Michigan legislature believed this to be such a problem that it created this as a criminal statute as a right of prosecution.

Contractors are automatic trustees. In re Certified Question from U. S. Dist. Court for Eastern Dist. of Michigan, 411 Mich. 727, 311 N.W.2d 731 (1981). The MBTFA imposes a duty upon the trustee, “The appropriation by a contractor, or any subcontractor, of any moneys paid to him for building operations before the payment by him of all moneys due or so to become due [to the trust beneficiaries], shall be evidence of intent to defraud” (see MCL 570.153). Any trustee who, with such intent to defraud, retains or uses the proceeds, or any portion thereof, for any purpose other than first paying trust beneficiaries is guilty of a felony for appropriating such funds (see MCL 570.152). Although this is a criminal statute, Michigan courts have long recognized that the MBTFA creates a private cause of action for civil redress (see Reiter v. Kuhlman, 59 Mich. App. 54, 57, 228 N.W.2d 830 (1975); and, Livonia Bldg. Materials Co. v. Harrison Const. Co. 276 Mich.App. 514 (2007)).

So what does this mean to a contractor, owner, subcontractor?

Money paid to a contractor can only be used for the owner’s project. If for example, an owner pays a contractor $5,000, that money is held in ‘trust’ by the contractor (knowingly or not). If the owner preforms $2,500 worth of work and materials, and then gets fired before the job is completed, the contractor must return the $2,500. Furthermore, this money falls outside of bankruptcy, since it is not part of the contractors estate.

No debt is dischargeable in bankruptcy that was incurred by larceny, embezzlement, fraud, or defalcation whilst acting in a fiduciary capacity (see 11 U.S.C.A. § 523(a)(4)). And a violation of the MBTFFA is an act of defalcation while acting in a fiduciary capacity within the meaning of section 523(a)(4) of the Bankruptcy Code. (see In re Strickfaden, 421 B.R. 802, 62 Collier Bankr. Cas. 2d (MB) 1602 (Bankr. E.D. Mich. 2009), aff’d, 2010 WL 3583427 (E.D. Mich. 2010)). Note, an objective standard exists for determining defalcation, which does not require a debtor to know the laws or possess an intent or motive to violate the laws (see In re Johnson, 691 F.2d 249, 255, 7 Collier Bankr. Cas. 2d (MB) 685, Bankr. L. Rep. (CCH) P 68874 (6th Cir. 1982), citing Citizens Mut. Auto. Ins. Co. v. Gardner, 315 Mich. 689, 696–699, 24 N.W.2d 410 (1946)). The In re Johnson court further noted that this position is consistent with the standard for liability imposed by MCL 570.153.

A sole shareholder, director, or corporate officer who oversees the day-to-day financial affairs of the company is personally liable for the corporation’s breach of its fiduciary duty to the beneficiary under the MBTFA. (see In re Kriegish, 275 B.R. 838, Bankr. L. Rep. (CCH) P 78701 (E.D. Mich. 2002), aff’d, 97 Fed. Appx. 4 (6th Cir. 2004)). Corporate officers who control the distribution of trust funds are personally liable for the corporation’s breach of its fiduciary duty. People v. Brown, 239 Mich. App. 735, 743, 610 N.W.2d 234 (2000) (criminal liability); and, Au Bon Pain Corp. v. Artect, Inc., 653 F.2d 61, 65, 31 Fed. R. Serv. 2d 1615 (2d Cir. 1981) (civil liability)). It has been acknowledged in Whipple, that in most cases it is practically impossible to prove exactly how a contractor spent the construction funds. Rather, a reasonable inference of appropriation arises from the payment of constructions funds to a contractor and the subsequent failure of the contractor to pay those entitled to payment under the statute (see People v. Whipple, 202 Mich. App. 428, 435–436, 509 N.W.2d 837 (1993); and expanded by, H.A. Smith Lumber & Hardware Co. v. Decina, 258 Mich. App. 419, 670 N.W.2d 729 (2003), judgment vacated in part on other grounds, appeal denied in part, 471 Mich. 925, 689 N.W.2d 227 (2004)).

The Sixth Circuit Court of Appeals considered the issue of an ‘estate’ in bankruptcy and held that a Michigan building contractor does not have sufficient beneficial interest in funds impressed with the statutory trust to constitute property of the bankruptcy estate (see Selby v. Ford Motor Co., 590 F.2d 642, 647, 19 C.B.C. 466, 1 Collier Bankr. Cas. 2d (MB) 42, Bankr. L. Rep. (CCH) P 67033 (6th Cir. 1979)). Thus, trust funds held by the debtor contractor at the time of filing the bankruptcy petition will not be available for distribution to creditors in the bankruptcy proceeding (see Huizinga v. U.S., 68 F.3d 139, Unempl. Ins. Rep. (CCH) P 14834B, 95-2 U.S. Tax Cas. (CCH) P 50574, 76 A.F.T.R.2d 95-7025, 1995 FED App. 0315P (6th Cir. 1995)).

In an ideal world, a contractor should hold any money they receive in a segregated account, however if they do not, the owner and subcontractors have a method through criminal and civil prosecution to get paid (or paid back).

Litigation and Personal Jurisdiction

Personal jurisdiction is the courts power to hear a case, the power to decide a case over a defendant (and plaintiff, but its not usually a plaintiff’s issue). If a defendant files a motion to dismiss for lack of personal jurisdiction (MCR 2.116(C)(1)), the plaintiff bears the burden of establishing that the court does indeed have personal jurisdiction over such defendant. However, the burden is only prima facie.

In Michigan, when analyzing a summary-disposition motion pursuant to MCR 2.116(C)(1) the “complaint must be accepted as true unless specifically contradicted by affidavits or other evidence submitted by the parties.” Yoost v. Caspari, 295 Mich.App 209, 221 (2012). Therefore, the Court must draw the facts from the Plaintiff’s complaint in the first instance, but modify the allegations in the complaint if evidence is presented by the parties that contradicts those allegations. The analysis takes a two-fold test: (1) do the defendant’s acts fall within the applicable long-arm statute, and (2) does the exercise of jurisdiction over the defendant comport with the requirements of due process.” See W.H. Froh, Inc. v. Domanski, 252 Mich. App. 220, 226 (2002).

Every state has a long-arm statute, and every attorney who filed a complaint has preformed a test to determine of personal jurisdiction exists under the long-arm statute of the state, although under most circumstances it is a very simple and obvious answer. On occasion, it is not. The general five relationships that are briefly tested are: (1) [t]he transaction of any business within the state; (2) [t]he doing or causing any act to be done, or consequences to occur, in the state resulting in an action for tort; (3) [t]he ownership, use, or possession of any real or tangible personal property situated within the state; (4) [c]ontracting to insure any person, property, or risk located within this state at the time of contracting; (5) [e]ntering into a contract for services to be performed or for materials to be furnished in the state by the defendant. MCL 600.725(1)-(5) …  et seq…

If the long-arm statute is satisfied, the constitutional requirements of due-process may limit jurisdiction even if the statute permits. Under most circumstances a lawyer will only apply these tests in cases where jurisdiction is a true issue (99.9% of filed cases, in a statistic we made up, jurisdiction is a non-issue).

“The Due Process Clause of the Fourteenth Amendment ‘does not contemplate that a state may make binding a judgment in personam against an individual or a corporate defendant with which the state has no contacts, ties, or relations.'” Witbeck v. Bill Cody’s Ranch Inn, 428 Mich. 659, 666 (1987). “For a State to exercise jurisdiction consistent with due process, the defendant’s suit-related conduct must create a substantial connection with the forum State.” Walden v. Fiore, 134 S.Ct 1115, 1121 (2014). First, the relationship must arise out of contacts that the defendant himself creates with the forum State. Burger King Corp. v. Rudzewicz, 471 U.S. 462, 475 (1985). Second, the “minimum contacts” analysis looks to the defendant’s contacts with the forum State itself, not the defendant’s contacts with persons who reside there. Walden, 134 S.Ct at 1122. If the question is whether an individual’s contract with an out-of-state party alone can automatically establish sufficient minimum contacts in the other party’s home forum, we believe the answer clearly is that it cannot. Kulko v. Superior Court of Cal., City and County of San Francisco, 436 U.S. 84, 93 (1978)). Due process requires that a defendant be haled into court in a forum State based on his own affiliation with the State, not based on the ‘random, fortuitous, or attenuated’ contacts he makes by interacting with other persons affiliated with the State.

From there the analysis is broken down in greater detail balanced between purposeful availment and substantial fairness. And this matters in particular, because if you attempt to sue someone in Michigan for an action that only vaguely touched Michigan, you might get thrown out of court.

Lawyers in Residential Real Estate Transactions

Nearly everyone who has sold or bought at least one commercial real estate property without an attorney, know to hire an attorney, the next time. However many people may undergo several residential real estate transactions and never speak with an attorney. The reasons for this touch on these factors: (1) the nature of how persons perceive buying a home versus buying investment property; (2) the typical buyer of a home versus investment property; and, (3) confirmation bias. The truth is, some of the most “unfair” rulings involve real property. Whether it is a family farm passed down through the generations, ‘taken’ by the ‘evil’ non-blood-spouse through the early death of the blood-related member (before or after children), or an ‘innocent’ mistake by a real estate broker allowing the son of a trustee sign on a purchase agreement costing the buyer hundreds of thousands of dollars, avoidable mistakes happen all the time.

In fact it is estimated, by a survey of lawyers, that 99% of real estate transactions contain ‘serious errors’ that would certainly result in serious monetary damage (below $15,000) if discovered or if not corrected, and a significant majority of those errors are considered ‘fatal errors’ that could result in the transaction being reversed or monetary damage greater than $14,999.99. Obviously the time when a lawyer is involved, the lawyer will notice the errors and correct them, and person who hire lawyers might do so when they already suspect something might not be right, but the prevalence of error is unlikely to change significantly.

But first…

Real Property
Personal property is virtually everything that isn’t nailed down to land. Real property is land and virtually everything nailed to it. In Michigan, the majority of law governing real property and personal property is common law. Common law, is essentially a combination of public policy and precedent set by judicial rulings. Common law are the pieces that hold statutes together and is the lens through-which most statutes, particularly property (real or personal) statutes, are viewed. Without getting overly technical, estates in land are possessory interests. They may be presently possessory, or they could also become possessory in the future. There are also interests that don’t give ownership (leases), and there are ownership interests that are nonpossessory interests (easements, profits, etc.).

Transfer of Real Property
Likely the largest investment/purchase any person will ever make will be owning real property. It is a huge responsibly and it is an investment that must be taken seriously. It doesn’t matter whether you are investing thousands of dollars or millions of dollars in a house that you hope will become your “home”, care and careful planning needs to be scrutinized for your legal protection.

In residential transactions, buyers and sellers oftentimes only employ real estate agents at 3-6% to help them buy or sell their home.  While it shouldn’t be argued that real estate agents don’t provide a valuable service, their licensed permits them to present documents. Non-lawyer real estate professionals are not permitted to provide anyone with legal advice, thus, they are unable to provide you with legal protection if something goes wrong in your transaction.  It is important to take note that a real estate agent simply acts to get the transaction completed; they are not there to consider the legal aspects and consequences involved in the transaction.

Attorneys have heard from some real estate persons over and over “buyer wants to buy, seller wants to sell, what’s the problem?” That is obviously a worst case scenario, and not all brokers and agents are so cavalier with their client’s assets. But it shows that these particular persons have one goal in mind, 3% at their clients expense.

How can a real estate attorney help you?
First, attorneys owe a duty to the client, their only concern is their client. If that means advising their client to back out, they will, if that means delaying they will. Also if that means making sure the purchase agreement is followed to the letter, or the settlement statement is allocated accurately, the closing lawyer advocates on behalf of their client.

In Michigan, you will need an attorney to carefully examine and review all the contracts involved. Not all real estate contracts are the same and they are all highly advanced documents that can appear quite simple. But they are controlled by common law, zoning laws, ordinances, home owners associations and they control: when closing takes place (and what happens if it doesn’t), what is a permitted or not permitted use of the property, who pays for what and when, what happens if there is something wrong with the property. And even worse through no fault of the seller or real estate person, a lurking creditor waiting in line pursuant to a lien might claim a share.

Real estate agents cannot do legal research on the property to issue spot. Occasionally real estate agents will employ lawyers, and advertise that they have lawyers looking over all the contracts. However, since this lawyer is employed by the real estate company, they owe a duty to their client (the real estate company) and not you! Never rely on the advice of a lawyer working for someone other than you.

A lawyer should represent the buyer and a lawyer should represent the seller in every transaction. Contact a lawyer in your area or the law offices of Zamzow Fabian for experience and security.