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Aug 29, 2024

More Legal Challenges to FinCEN BOI Reporting

 From Thompson Reuters: 

Pushback Against Corporate Transparency Act Filing Requirements Continues



"On July 29, yet another case challenging the constitutionality of the Corporate Transparency Act was filed — this time in the US District Court for the District of Utah. (Taylor v. Yellen, No. 2:24-cv-00527) The case was brought by Utah business owner Phillip Taylor and the nonprofits The People Restored, Ranchers Cattlemen Action Legal Fund United Stockgrowers of America, and Utah OSR Land Cooperative. The plaintiffs’ complaint echoes those filed in other federal district courts that contend the Corporate Transparency Act violates plaintiffs’ Fourth Amendment rights against unreasonable search and seizure, privacy rights, and due process rights, and that Congress exceeded its authority in passing the law."

Jul 15, 2024

NEW Reporting Requirement for ALL ENTITIES in the US (unless exempt) - FinCEN BOI Report

 WHAT IS THIS NEW FINCEN BOI REPORTING ALL ABOUT?

The United States Government, Department of Treasury Financial Crimes Enforcement Network (FinCEN) is attempting to determine who owns which small business entities throughout the entire country. This effort is required by the Corporate Transparency Act (CTA) which was promulgated as part the larger National Defense Authorization Act of 2020 (NDAA). Congress passed the NDAA and overrode then-President Trump's veto of the act in January of 2021 with an effective date of January 1, 2024.

The Corporate Transparency Act requires business entities (each defined as a “reporting company”) to file, in the absence of an exemption, information on their “beneficial owners” with the Financial Crimes Enforcement Network (“FinCEN”) of the U.S. Department of Treasury (“Treasury”). The information is not supposed to be publicly available, but FinCEN is authorized to disclose filed information to U.S. federal law enforcement agencies, prosecutors, judges and other enforcement agencies and to financial institutions and their regulators.

*PLEASE NOTE: This legislation is new, the process is new, and there is substantial uncertainty as to how this will play out in practice. We will attempt to update information as it develops, but do NOT substitute this general discussion for specific information and advice from your legal and tax advisor(s).



Is my entity a “Reporting Company”?

Short answer: Yes, it probably is. Generally, any and all entities created by filing a document with a government office, (such as an LLC, corporation, LLP, association, and possibly an unincorporated association) is a “reporting company” and must comply with the CTA requirements. There are exemptions for large companies (20+ employees and $5M+ in gross receipts), banks, credit unions, insurance companies, certain types of tax-exempt entities, and several other exemptions that likely do not apply to you.

What is a Beneficial Ownership Information Report (BOIR)?

Each reporting company must identify for Dept of Treasury every “Beneficial Owner” including their “full legal name, date of birth, current residential address (or business address for a company applicant if in the business of forming entities), and an ‘identifying number’ and ‘image’ from documents like a U.S. Passport or driver's license along with information about the reporting company including its name, any dba, its address and its EIN.

Who is a “Beneficial Owner?”

A “beneficial owner” is not necessarily an owner of a reporting company. A “beneficial owner” is any individual who, directly or indirectly, (1) exercises substantial control over a reporting company or (2) owns or controls at least 25 percent of the ownership interests of the reporting company.

When must I file the FinCEN BOI Report?

The deadline depends upon when the reporting company was created. Companies created before January 1, 2024 have a deadline of January 1, 2025 to file a BOIR. Companies created between January 1, 2024, and January 1, 2025 have a deadline of 90 days after formation. Companies formed after January 1, 2025, have 30-days after creation to file the BOIR.

How is the FinCEN BOI Report filed?

There are two methods which can be used to file the BOIR, a .pdf filing version and an online form. Both are found at https://boiefiling.fincen.gov/fileboir.

What happens if I don't file?

Companies that fail to comply with the BOIR reporting requirements (filing a BOIR, updating a BOIR due to changes) face civil and criminal penalties, including fines and imprisonment. Individuals who willfully provide false or misleading information may also be subject to penalties. Any person violating the reporting requirements of the Corporate Transparency Act is liable for civil penalties of not more than $500 for each day that the violation continues and criminal penalties of imprisonment of up to two years and fines of up to $10,000. 31 U.S.C. § 5336(h)(3)(A).

Is this new FinCEN BOI reporting permanent?

There are likely to be challenges to the CTA including whether it is constitutionally permissible. As of the writing of this post, the law remains in effect, but one federal district court has ruled it unconstitutional and there are several other pending cases.


.....................................................................

See American Bar Association. “The Corporate Transparency Act—Preparing for the Federal Database of Beneficial Ownership Information.” https://www.americanbar.org/groups/business_law/resources/business-law-today/2021-may/the-corporate-transparency-act/

See US Dept of Treasury, An Introduction to Beneficial Ownership Information Reporting, https://www.fincen.gov/sites/default/files/shared/BOI-Informational-Brochure-April-2024.pdf

Mar 29, 2024

U.S. District Court rules CTA’s BOI reporting requirements unconstitutional

"A federal district court in Alabama held that the Corporate Transparency Act (CTA), P.L. 116-283, which requires the reporting of beneficial ownership information (BOI) by businesses, is unconstitutional.

The district court granted the plaintiffs' motion for summary judgment Friday in the case of National Small Business United v. Yellen, No. 5:22-cv-1448-LCB (N.D. Ala. 3/1/24)."


https://www.journalofaccountancy.com/news/2024/mar/federal-court-holds-corporate-transparency-act-unconstitutional.html


May 26, 2022

City Requiring Property Owner To Install Public Improvements Is Unconstitutional Exaction

The City of Brookfield conditioned approval of a property subdivision (3 lot division) upon the owner's agreement to construct and dedicate a new public street. The court of appeals affirmed the circuit court's  conclusion that this exaction was an unconstitutional taking and ordered approval of Fassett’s proposed property division. 

 https://www.wicourts.gov/ca/opinion/DisplayDocument.pdf?content=pdf&seqNo=511962

Oct 3, 2021

Wisconsin now has a 40 year statute of limitation to re-record easements

893.33(6) Actions to enforce easements, or covenants restricting the use of real estate, set forth in any recorded instrument shall not be barred by this section for a period of 40 years after the date of recording such instrument, and the timely recording of an instrument expressly referring to the easements or covenants or of notices pursuant to this section shall extend such time for 40-year periods from the recording.

https://docs.legis.wisconsin.gov/statutes/statutes/893/iii/33

May 5, 2021

Eviction Ban Ruled Unlawful

ALABAMA ASSOCIATION OF REALTORS, et al., Plaintiffs, v. UNITED STATES DEPARTMENT OF HEALTH AND HUMAN SERVICES, et al., Defendants No. 20-cv-3377 (DLF) UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA


" The major questions doctrine is based on the same principle: courts “expect Congress to speak clearly if it wishes to assign to an agency decisions of vast ‘economic and political significance.’” Util. Air Regul. Grp. v. EPA, 573 U.S. 302, 324 (2014) (quoting FDA v. Brown & Williamson Tobacco Corp., 529 U.S. 120, 133 (2000) (emphasis added)); Am. Lung Ass’n v. EPA, 985 F.3d 914, 959 (D.C. Cir. 2021) (collecting cases). There is no question that the decision to impose a nationwide moratorium on evictions is one “of vast economic and political significance.” Util. Air Regul. Grp., 573 U.S. at 324 (internal quotation marks omitted). Case 1:20-cv-03377-DLF Document 54 Filed 05/05/21 Page 14 of 20 15 Not only does the moratorium have substantial economic effects,4 eviction moratoria have been the subject of “earnest and profound debate across the country,” Gonzales v. Oregon, 546 U.S. 243, 267 (2006) (internal quotation marks omitted). At least forty-three states and the District of Columbia have imposed state-based eviction moratoria at some point during the COVID-19 pandemic, see 86 Fed. Reg. 16,731, 16,734, though, as the CDC noted in its most recent extension of the CDC Order, these protections either “have expired or are set to expire in many jurisdictions,” id. at 16,737 n.35. Congress itself has twice addressed the moratorium on a nationwide-level—once through the CARES Act, see Pub. L. No. 116-136, § 4024, 134 Stat. 281 (2020), and again through the Consolidated Appropriations Act, see Pub. L. No. 116-260, § 502, 134 Stat. 1182 (2020). Accepting the Department’s expansive interpretation of the Act would mean that Congress delegated to the Secretary the authority to resolve not only this important question, but endless others that are also subject to “earnest and profound debate across the country.” Gonzales, 546 U.S. at 267 (internal quotation marks omitted). Under its reading, so long as the Secretary can make a determination that a given measure is “necessary” to combat the interstate or international spread of disease, there is no limit to the reach of his authority. 

...

In sum, the Public Health Service Act authorizes the Department to combat the spread of disease through a range of measures, but these measures plainly do not encompass the nationwide eviction moratorium set forth in the CDC Order

May 1, 2021

Legal uses of property become legal non-conforming uses which may be continued after change in zoning

Village of Slinger v. Polk Properties, LLC, 957 NW 2d 229 - Wis: Supreme Court 2021

 

Generally, when the zoning restrictions applicable to a property are changed, property owners may continue to use their property in a manner that was allowed under the prior zoning ordinance. See Wis. Stat. § 62.23(7)(h) (2017-18).[10] Although prohibited under the newly applicable zoning ordinance, the existing use becomes a lawful nonconforming use. "Land use qualifies as `nonconforming' if there is an active and actual use of the land and buildings which existed prior to the commencement of the zoning ordinance and which has continued in the same or a related use until the present." Waukesha Cnty. v. Seitz, 140 Wis. 2d 111, 115, 409 N.W.2d 403 (Ct. App. 1987) (citation omitted). Section 62.23(7)(h) provides:

Nonconforming uses. The continued lawful use of a building, premises, structure, or fixture existing at the time of the adoption or amendment of a zoning ordinance may not be prohibited although the use does not conform with the provisions of the ordinance. The nonconforming use may not be extended. . . 



https://scholar.google.com/scholar_case?case=5803006789917064782&hl=en&as_sdt=6,50 

Sep 11, 2020

Why not give the seller the "right to cure?"

When buying a residence, most home buyers understand the benefit to hiring an independent home inspector to inspect the property.  When using the standard form offer to purchase in Wisconsin (WB-11 or WB-14), the buyer typically includes an inspection contingency.  One of the decisions the buyer must make in completing this form is whether to provide the seller with "the right to cure."  (Note: there are alternatives which can be written into any particular contract.  Your attorney can craft particular language which completely changes the way the inspection process will work.  This discussion relates solely to the unmodified form offer to purchase).

My recommendation to buyers invariably is that they should not provide the right to cure.  Why not?  Shouldn't a seller have a fair opportunity to fix problems with the property?

In order to understand my recommendation, one must understand both the form language and the practice of buyers and sellers which is not included in the form.  As to the form language, the standard offer inspection contingency states:
This Offer is contingent upon a Wisconsin registered home inspector performing a home inspection of the Property which discloses no Defects.
The offer then provides a timeframe within which the buyer must deliver notice of any defects.  Otherwise, the contingency is satisfied merely by the deadline passing.  In a case in which the buyer serves notice of defects, what happens next is governed by whether the seller has the right to cure.  If the seller has the right to cure, the seller can elect to kill the deal or the seller can elect to cure the defects.  If the seller does not have the right to cure, the buyer elects to kill the deal by serving the notice.

In case either party has elected to kill the deal, the deal may not be dead.  Obviously the parties are free to renegotiate a new offer.

In the case where the seller has the right to cure and elects to cure, the seller is supposed to cure the defect  in a good and workmanlike manner and then deliver to the buyer a written report detailing the work done within 3 days prior to closing.  Note that the buyer has no input into how the defect is cured.

What is the practice of buyers and sellers after the inspection?  The vast majority of the time, when the inspection reveals "issues," (note I did not say "defects," because we don't necessarily have to determine whether the issues arise to the level of a defect in most cases), the buyer proposes an amendment as to how to resolve the issues.  The seller either agrees or proposes an alternative.  And back and forth until the buyer and the seller agree on how to resolve the issues.  Then, the parties execute an amendment.  Neither the notice of defect nor the right to cure are specifically implicated.

TYPICALLY, IT IS ONLY WHEN THE BUYER AND THE SELLER DO NOT AGREE ON THE CURE THAT THE NOTICE OF DEFECT IS ACTIVATED.  Given this understanding, it should be obvious why the Buyer does not want to give the Seller the right to cure.  Whatever the Seller is proposing as the cure must be unacceptable to the Buyer, otherwise the parties will simply execute an amendment.  When the Seller's proposed cure is not satisfactory to the Buyer, the Buyer does NOT want the Seller to have the right to force an unacceptable cure.

For this reason, Buyer clients typically are advised NOT to give the seller the right to cure.  A buyer should not be forced to purchase a property after discovering a defect that will be addressed in an unsatisfactory manner.    

Jul 26, 2019

Home Seller Disclosure

There are 5 key points that a home seller in Wisconsin needs to understand about real estate disclosure:

#1 - The law, the industry and the marketplace all assume that most home sellers will complete a real estate condition report.  According to Wisconsin statutes, the seller of a property shall furnish a RECR (or may substitute a professional written report).  See sec. 709.02, Stats, reads:
709.02 Disclosure.
(1)  In regard to transfers described in s. 709.01, the owner of the property shall furnish, not later than 10 days after acceptance of a contract of sale or option contract, to the prospective buyer of the property a completed copy of the report under s. 709.03 or 709.033, whichever is applicable, subject to s. 709.035, except that the owner may substitute for any entry information supplied by a licensed engineer, professional land surveyor, as defined in s. 443.01 (7m), or structural pest control operator, by an individual who is a qualified 3rd party, or by a contractor about matters within the scope of the contractor's occupation, if the information is in writing and is furnished on time and if the entry to which it relates is identified, and except that the owner may substitute for any entry information supplied by a public agency. Information that substitutes for an entry on the report under s. 709.03 or 709.033 and that is supplied by a person specified in this section may be submitted and certified on a supplemental report prepared by the person, as long as the information otherwise satisfies the requirements under this section. A prospective buyer who does not receive a report within the 10 days may, within 2 business days after the end of that 10-day period, rescind the contract of sale or option contract by delivering a written notice of recision to the owner or to the owner's agent.
  Per 709.05,  the buyer may rescind in writing a contract of sale or option contract if a defect is disclosed in a RECR received after the contract.  Note, "The right to rescind under this section is the only remedy under this chapter."

#2 - The buyer can waive receipt of a real estate condition report.
709.08 Waiver. A buyer may waive in writing the right to rescind under s. 709.05. If a buyer proceeds to closing, the buyer's right to rescind under s. 709.05 is terminated. A buyer may waive in writing the right to receive the report required under s. 709.02.
#3 - The two key sources of liability for home sellers after closing are claims of title defects and claims alleging misrepresentation/failure to disclose adverse conditions.  There is no way to absolutely limit a seller's liability after closing.  However, wise sellers try to reduce the likelihood of getting sued after closing.  Title searching and title insurance are used to reduce the likelihood of title defect claims.  

This leaves the type of claim brought against the vast majority of sellers who get sued after closing - misrepresentation.  Misrepresentation claims against sellers often arise from the real estate condition report (which typically is incorporated by reference into the contract).  Remember that misrepresentations can occur through what is stated affirmatively as well as through what is not stated (misrepresentation by omission).  

To make matters worse for Sellers, Wisconsin has a false advertising statute which may apply to someone who makes a false or misleading statement to induce a buyer to purchase a home. Under § 100.18(11)(a), a successful buyer may be awarded their monetary loss (potentially doubled) plus costs and attorney fees.  The longer the seller defends against the claim, the greater the seller's exposure in the event of losing the case. 

#4 - While an "as-is" provision may provide some protection and certainly would be better than the standard form in terms of defending against alleged seller misrepresentation, an "as-is" provision may not entirely remove the risk of a suit arising from an undisclosed condition.  For example, in Green Spring Farms v. Spring Green Farms, 172 Wis. 2d 28 (Wis. App. 1992), some calves on the property had been killed by salmonella bacteria. The seller apparently believed that the problem had been alleviated and did not disclose the condition.  The seller sold the property "as-is," the buyer later experienced problems with the salmonella contamination, and the buyer sued the seller.  The Court held that the seller had a duty to fully disclose material adverse conditions even though the transaction was "as-is." The rationale is that the seller has this material information and the buyer is not able to discover the information.

#5 - The standard form real estate condition report asks the seller to disclose defects which are "known" as well as defects about which the seller has "notice."  What does "notice" of a defect mean?  The simple answer is we don't know.  We know it means something different than actual knowledge.  But we don't know whether the seller had "notice" of a later-discovered defect until the jury answers that question after a long and expensive legal battle.  

Consider a buyer who learns after closing of damaged shingles on the roof.  The buyer sues the seller seeking the cost of the new roof and claiming that the seller misrepresented the condition of the roof by checking "No" to the question "I am aware of a defect in the roof."  The seller checked "no" because the seller did not know about any defect.  But, again, the form actually is asking whether the person has "notice or knowledge."  Under deposition, the seller will be asked, "Were you not aware that there was a hail storm in 20__?"  "Did you not know that several of your neighbors suffered hail damage such that their roofs were replaced?"  "Did that not provide you with notice of the fact that your roof may have been damaged?"  

One might respond that the seller should have told the buyer about the hail storm in 20__.  But consider all of the myriad of facts that could provide some notice of a problem with any of the various components of a home.     

If a seller is going to disclose ANYTHING, the seller should disclose EVERYTHING.  If a seller is going to make any disclosure whatsoever, the seller should discuss any known or suspected property conditions which might arguably provide notice of a potential defect.

Because of the risks relating to allegations of purported misrepresentation, it may be advisable for a seller to refuse to disclose anything and to refuse to permit buyers to rely upon the seller for information about the condition of the property.  "What are you trying to hide?" and "Why not just be honest?" are two typical responses.  However, note that there are many people who have been sued for alleged misrepresentations who thought were were completely honest and forthright.  If the buyer feels as though information was withheld, they may allege that the disclosure was misleading.  

It is possible, though not common, for a seller to indicate that the seller will not complete a RECR, the buyer must waive receipt, and the buyer is not entitled to and must not rely upon any seller representations relating to the condition of the property.  The reason this is rarely done is that it makes marketing/selling more difficult.  The trade-off in giving a sales pitch is that one might later be said to have misrepresented something.  But a seller should be aware of the risks associated with making less than a complete disclosure.

If you are going to say anything, say everything.

RESOURCES: 
See, Fricano v Bank of America, NA, 875 NW 2d 143 - Wis: Court of Appeals 2015.  

Garvey v Krueger, 2018 WI App 39 - Wis: Court of Appeals, 2nd Dist. 2018


Young, Mark C., and Gregg C. Hagopian. "Protecting the Residential Seller." Wisconsin
Lawyer, vol. 66, no. 5, May 1993, pp. 18-56. HeinOnline.




Attorney James N. Graham of Accession Law LLC is providing a general answer which does not establish an attorney/client relationship and which is not legal advice. Contact attorney James N. Graham in order to discuss the terms of retainer and the information needed in order to obtain a legal opinion, recommendation, or advice. The first inquiry for an attorney is to know only the parties involved in order to check for conflicts of interest with current or former clients.



Jul 2, 2019

Interview for "Smart Choices" series

Interview with James N. Graham, attorney with offices in Madison and Blanchardville serving Dane, Green, Iowa, Lafayette, and Rock Counties in Wisconsin.

Q: Attorney James N. Graham is our guest to discuss real estate law and what people often do not understand when buying or selling a home.  What are some common misconceptions about selling or buying a home?
A: There are many and a wide variety of aspects that people misunderstand.  I tend to put misconceptions into a few broad categories such as first that real estate transactions are simple, second that the system for transferring real estate is transparent, intuitive, and fair, and third that people understand and properly address risks in their real estate deals.  There also is a common misunderstanding of the relationship between Realtors, brokers, real estate licensees, clients, customers and attorneys.  There also is a surprising refusal to accept black letter legal concepts such as the statute of frauds, time is of the essence, and unenforceability due to vagueness and uncertainty.  Where do you want to start?

Q:  Let's start with the idea that it is easy to buy a house.  Isn't that true?
A:  That can be true, but the misconception has a few angles.  First, most people won't buy more than a few homes.  Despite the fact that these are among the largest deals creating the greatest impact on their lives, they have an unusual confidence in their ability to foresee, understand and appreciate the issues inherent in a real estate transaction.  Once they've bought or sold 4 or 5 homes, they feel like they've seen it all.  Many of these people haven't even completely read, let alone understood the contracts and very few people have studied contract law in general as well as the legal authority interpreting the specific contracts and the issues that are or can be raised.  In order to make an informed decision, you need to understand the contract, you need to understand the law, and you be sensitive to problem areas in each.  I've personally been involved with over 800 real estate transactions, and I still see new issues and angles every year.      

Q:  You don't need to understand real estate law to buy a house, do you?
A:  Well somebody on your behalf had better understand the contracts, the law, the stakes and the multitude of complications.  Again, these are deals involving hundreds of thousands or even millions of dollars.  Contrast income tax preparation.  Most people with a positive net worth hire a CPA or other tax professional to prepare their tax returns.  A tax return is something done each and every year, and the most likely consequences if a person makes a mistake is that they'll owe a few hundred dollars in interest or penalties.  Yet they hire a professional to prepare tax returns rather than trying to do it on their own.  Most people do not buy or sell a home more than once a year and the ramifications on their net worth can be devastating.  Yet many people do it themselves because they've been through it once or twice before. Others rely upon salespeople for advice.  Isn't that remarkable?

Q:  But most people don't need an attorney to get the deal closed.
A:  That is my point.  People are taking more risk with greater stakes than they understand and appreciate.  They trust a system that they think they understand.  They don't know what they don't know.  They base their decision on the fact that they or people that they know have managed to close a transaction without hiring an attorney.  If they understood and were generally aware of the problems that arise, they would be much less confident.  People should be wary, skeptical and sensitive to the fact that problems can and do arise.     

Q:  The problems that arise, aren't those rare?  Most people are comfortable because deals usually go fine, their agent takes care of everything, and when there is a problem, it seems to be almost inevitable or accidental.
A:  Think about my tax return analogy.  An audit is fairly rare.  But that doesn't mean that one doesn't get value from having professional help.  You want someone who has done it many times, who knows the subject matter, and who can spot issues and answer questions.  They get the job done better, cleaner, with less risk of audit and with more likelihood of taking advantage of opportunities available in the system.  And you don't want to get tax advice from someone whose fee is contingent upon your tax return.  You asked whether problems are rare.  That depends upon what you mean by a problem in a real estate deal? 

Q:  Perhaps you can explain what you mean by a problem?
A:  There are many.  Read the Wisconsin reported cases involving real estate disputes.  Each of those disputes arose from a problem.  But there are problems that aren't even disputes.  For example, many times people are not properly assessing and addressing risks, often out of ignorance or a lack of advice.  I consider that a  problem.  Or a more specific example - a client comes to me because they have accepted an offer to purchase which is contingent upon a few items.  The items are entirely within the control of the buyer.  What the seller has done, I explain, is to give the buyer an option.  That means the buyer can purchase, but the seller can't force the buyer to purchase.  An option has value.  In any other financial market, the party giving an option expects to receive consideration for that option value.  However, in real estate, sellers commonly give buyers free options.  Why?  

Q:  Why?
A:  I can explain why, but the more important point is that the client should understand and make a knowledgeable decision rather than just going along because that is the way things usually are done.  I don't necessarily recommend against it if the terms are fair and reasonable, but I do insist on having the seller understand what they are doing.  I have had many clients come to me after having signed an offer to purchase which was really an unreasonably long free option.  They simply did not understand what they were doing and their agent wasn't about to explain it for fear of losing the possibility of a deal.

Q:  OK, let's move on, what was the next area of misconception, something about the systemic unfairness?
A:  Well we are nowhere near done with the complexity issues, but another of these is that the system may appear to be more fair and transparent than it really is.  People often don't understand even the basic definitions of the systemic players:  They think a real estate broker is an agent is a Realtor.  They think the Realtor they are working with is their agent.  They believe statements and representations by an agent and then sign a contract that they haven't read with a broker that they haven't met.  There is an ignorance of contract law and an assumption that the forms must be fair and reasonable and therefore that any deal using those forms should be fair and reasonable.  It is really strange to me that people who would read the fine print on a $10 grocery store rebate offer will simply trust a real estate salesperson to deal fairly with them when the implications involve thousands and tens of thousands of dollars.  Most consumers also have no idea about the differences between the requirements of law and the requirements of the Realtor's code and contracts and how these may affect the consumer.  

Q:  And how may it affect them, the law or the forms or the Realtor rules?
A:  I'll give 2 simple examples.  Regarding the forms, many home sellers are shocked to learn that the form listing contract, approved by the State of Wisconsin, provides that the broker earns a commission even in some cases where the home isn't sold.  I have talked to dozens of sellers who had no idea that they could end up owing a commission even if they didn't sell their house.    Regarding the Realtor rules, many sellers do not understand the fact that they may owe a commission to a Realtor that they have never heard of, that they did not know was involved in their transaction, and that is arguably owed a commission based upon their offer of compensation via the MLS.  There are many instances of brokers suing their clients for a commission on a transaction that never closed.  Run a CCAP search on your favorite real estate entity and see how often they've been involved in litigation.  Are those cases against their "clients?"  Pull the case files, and see what you find.  There also are instances where a Realtor has claimed to be owed a commission from a flat fee MLS seller when the seller had no idea that the Realtor was involved in the transaction whatsoever.  I would bet in those cases that the seller did not expect that result when he or she signed the listing agreement.  

Q:  Are you recommending that people not use Realtors?
A:  No, I am recommending that people not rely upon Realtors or other real estate sales people for recommendations or advice on contract matters, on risks, on ways to address risks, on rights, on responsibilities, or on their best interests.  I have been a broker in the past and was a member of the Realtors.  I also had other sales jobs during my life.  Sales people provide valuable assistance at selling.  If you need help marketing a property, it makes sense to get the assistance of someone with sales experience.  Do not rely upon the sales person for contract advice.  It is especially unwise to rely upon the sales person to advise you on the advisability of the contract between you and the sales person's employing broker.  I would think this would be obvious, but it must not be obvious to many people who sign up with brokers based upon the recommendation of a sales person and without considering the ramifications of the listing agreement.

Q:  You think home sellers should hire a Realtor and a lawyer?
A:  Home sellers should hire an experienced lawyer who will provide independent advice and who will look out solely for their best interest.  As for how to market the property, some of my clients sell for-sale-by-owner, some use a limited service listing on the MLS, and some use a full service real estate broker.  Which of these is best for a person to market their property depends upon many factors, and they are all good options for some people depending upon considerations such as cost, time availability and comfort level with showings, and ways offered to expose the listing to the market.  

Q:  What about home buyers?
A:  Home buyers likewise need independent advice.  They may or may not need the advice of a buyer agent on what is available in the market.  The mistake is in mixing up the two functions.  There is the common misimpression that a Realtor can do it all, that advice is rolled into their fees.  Although state law prohibits real estate sales people from discouraging the use of an attorney, they may say something to the effect that, "most transactions in Wisconsin do not involve an attorney."  The implication is that an attorney is an extra and unnecessary expense.  If unnecessary, who is going to provide independent legal advice in the absence of an attorney?  The sales person?  Obviously not, they are neither qualified nor permitted to do so.      

Q:  And you don't think people can do it themselves?
A:  I know that they can, I just don't think they should.  The last time I looked, we had over 2000 appellate case decisions in Wisconsin involving real estate matters.  First, consider that amount of legal authority that a person should at least read if not study.  More importantly, realize that 2000 disputes isn't even the tip of the iceberg showing the things that can go wrong.  The vast majority of mistakes never get litigated and the vast majority of those that do never reach the Court of Appeals.  Mistakes happen every day.  Attorneys commonly are called to solve problems after other people have screwed up the situation.  It is that professional experience even more than reading 2000 cases that cannot be obtained except through hiring an attorney.

Q:  How much does it cost to hire an attorney:
A:  It varies, some charge an hourly rate and some charge a flat fee.  I offer either option, but if you look at the numbers, the typical attorney fee is a bargain.   Let's look at an example:  Assume a $300,000 house considering a 6% listing.  That is $18,000.  There are many attorneys in our market who will represent the seller on a flat fee for less than $1,000.  If the attorney can negotiate the listing to a 4% listing, pay the brokers $12,000 and the attorney $1,000 and you've still saved $5,000 and gotten independent legal advice.  What did it cost?  Nothing, in that instance you gained $5,000.  People may fear that they get less service for 3% than they would for 6%.  With the assistance of your attorney, you should negotiate what you want done, what you will pay for it, and under what terms.    

Q: Any final tips?
A: Buy low, sell high.  Get good advisors and pay them enough to keep them happy.  Don't take wooden bitcoins.  That should about cover it.

Apr 2, 2019

Advertising Real Estate in Wisconsin

For the following discussion relating to the advertisement of interests in real estate and Wisconsin real estate practice law, consider that those conducting advertising relating to interests in real estate may include 1) people who are not required to have a license, or 2) people who have a real estate license (licensees, licensed brokers), or 3) people required to have a license but who have failed to become properly licensed.  (Figuring out which classification applies to a particular circumstance is the subject of other discussions).

FRAUDULENT MISREPRESENTATION BY ANYONE:
All persons (all 3 classes) conducting advertising may be liable for misrepresentation.

Statutory fraudulent representation claims.
100.18  Fraudulent representations. (1) No person, firm, corporation or association, or agent or employee thereof, with intent to sell, distribute, increase the consumption of or in any wise dispose of any real estate ...  or with intent to induce the public in any manner to enter into any contract or obligation ... shall make ... an advertisement, announcement, statement or representation of any kind to the public  ... which advertisement, announcement, statement or representation contains any assertion, representation or statement of fact which is untrue, deceptive or misleading.
There are numerous deceptive advertising practices defined by statute.  For example, it is a deceptive practice to fail to "affirmatively and unmistakably" indicate when a transaction involves someone engaged in a business rather than by a private party not engaged in a business.  100.18(3), Stats.  Another deceptive practice involves misleading advertising as to the plan or scheme involved in a transaction.  100.18(9), Stats.  Finally, and more generally, any material representation or statement of fact relating to a transaction which is untrue, deceptive or misleading may be actionable.

Violation of sec. 100.18, Stats., will subject the violator to an action for civil damages plus attorney fees (sec. 100.18(11)(b) (except a real estate licensee isn't liable for attorney fees) and forfeitures, fines, and possible imprisonment (sec. 100.26).

Common law misrepresentation claims.

There also remain additional, cumulative common law claims which can arise from the same facts.  A statement made by someone who knew or should have known it was false and which was (reasonably) relied upon by another to their detriment can give rise to a tort claim for negligent misrepresentation. 

A false statement also may give rise to a strict liability misrepresentation claim. The elements of strict liability misrepresentation are: (1) statement of fact made by the defendant on personal knowledge or where he should have known whether the statement was true (2) which is false (3) that the injured party believed and relied upon to his detriment (reasonableness of reliance may or may not be an element) (4) in circumstances in which the defendant had an economic interest.  Kailin v. Armstrong, 2002 WI 70, 252 Wis.2d 676, 643 N.W.2d 132, 148, fn. 23.


A person making statements in advertising relating to a real estate transaction could be liable under several different theories if the statements are not true.  Further, the law recognizes that misrepresentation can occur by omission,  In other words, the failure to make a statement of fact in circumstances where silence misleads the other party can be a misrepresentation.

FALSE ADVERTISING BY A LICENSEE

Real estate licensees are further restricted by REEB 24.04
 Advertising.
 (1)  False advertising. Licensees shall not advertise in a manner which is false, deceptive, or misleading.
 (2) Disclosure of name. (a) Except for advertisements for the rental of real estate owned by the broker, a broker shall in all advertising disclose the broker's name exactly as printed on the broker's license or disclose a trade name previously filed with the department, as required by s. REEB 23.03, and in either case clearly indicate that the broker is a business concern and not a private party. (b) Except for advertisements for the rental of real estate owned by the licensee, a licensee employed by a broker shall advertise under the supervision of and in the name of the employing broker. (c) A licensee may advertise the occasional sale of real estate owned by the licensee or the solicitation of real estate for purchase by the licensee without complying with pars. (a) and (b), provided that the licensee clearly identifies himself, herself or itself as a real estate licensee in the advertisement.
(3) Advertising without authority prohibited. Brokers shall not advertise property without the consent of the owner.
 (4) Advertised price. Brokers shall not advertise property at a price other than that agreed upon with the owner; however, the price may be stated as a range or in general terms if it reflects the agreed upon price.

FALSE ADVERTISING BY AN UNLICENSED BROKER

A person who should be but is not licensed as a broker has numerous liability concerns in addition to the sec. 100.18 fraudulent representation liability noted above.

Certain types of advertising activity relating to interests in real estate falls within the definition of the activity of a "broker" under sec. 452.01, Stats.,  The fact that the broker is not licensed obviously would not provide any liability shield.  Instead, the person would stand exposed to liability for violating the law relating to the practice of real estate.  Penalties can include forfeitures, fines and imprisonment. Sec. 452.17.

In addition, any contract agreeing to compensate an unlicensed broker is void at inception.  Badger III Ltd. v. Howard, Needles, Tammen & Bergendoff, 196 Wis. 2d 891539 N.W.2d 904 (Ct. App. 1995), 94-2531  The unlicensed broker is not entitled to compensation.

For example, a "broker" includes anyone who, for another and for consideration, offers or promotes an interest in real estate.  This paragraph does not apply to a person who only publishes or disseminates verbatim information provided by another person.  So some advertisement may be done for "another" provided that the advertiser is only publishing or disseminating verbatim information. 

This exception for publishers would not seem to apply to a company that seeks out owners, contracts with them to obtain an option of some type on the property, and then advertises the property for sale, lease, lease option, land contract, etc.  That activity almost certainly constitutes acting as a "broker."

A "broker" also includes anyone engaged in the business of selling real estate interests.  There is a presumption that 5 sales in 1 year or 10 sales in 5 years shows that one is engaged in the business. A person engaging in such practice without a license

Note that a "broker" has a host of statutory duties.  See, ex. 452.133, Stats.  These duties do not apply only to licensed brokers.  Rather, a broker who violates a duty and is unlicensed is violating 2 laws instead of one.

Advertising by an unlicensed "broker" almost certainly will not contain the disclosures required of brokers by Wisconsin law.  Presumably the "broker" does not realize that they need to obtain a license to do what they are doing.


CONCLUSION
There are a host of varieties of misrepresentation that can arise in the advertisement of real estate.  There also are considerations as to what must be said depending upon whether the person making the statements is an owner, a licensed broker, or a "broker" who should be licensed.

Oct 13, 2018

LLC - Why form an entity?

The Limited Liability Company, from a lawyer's perspective.  Absent transaction and administrative costs, a lawyer would recommend that each and every activity and asset be owned by a separate limited liability entity.  In most cases, that entity would be an LLC.  Why? Here are a few of the reasons.

The reasons to have activities separated arise primarily from the desire to have only the creditors associated with that activity able to collect from the activity.  Consider instead the following hypothetical:  An LLC owns 5 properties.  A tenant or guest at one of the properties is injured in some manner which is either not covered by insurance or not fully covered by insurance.  Perhaps the damages exceed the limits.  Perhaps the LLC had a homeowner's policy instead of a landlord policy.  Perhaps the claim was otherwise excluded for some reason (water, mold, etc).  The plaintiff sues and gets a judgment against the LLC.  The plaintiff now has the potential of collecting that judgment from all 5 properties including the 4 that had nothing to do with the claim.  Contrast the case where each property was owned separately.  A creditor of one LLC has no right to collect against another LLC, it is a separate owner.  The strategy is to protect each asset so that its equity is only subject to attack by creditors of that asset.

Note, there are some caveats to this strategy.  First, it is critical to maintain the entities as separate and distinct and to maintain the "corporate formalities" for each.  Likewise, it is important to disclose to creditors including the general public that they are dealing with a limited liability entity.  Advertising, forms, notices, cards, etc should make clear that the owner is "123 Main St LLC" and not the individual owners of the LLC.  Further, an LLC owner can voluntarily agree to create joint and several liability among its LLCs.  Many creditors such as lenders will insist upon cross-collateralization of assets.  For obvious reasons the bank would like as many assets as possible to secure its loan, and often the lender will request that the borrower agree that its loan is secured by its assets and by the assets of other unrelated LLCs.  The borrower must assess whether it is willing to create this "can of worms" in order to obtain the loan.

The primary reason for creating a limited liability entity is to limit the liability.  This means to shield the assets of the owner from attack by creditors of the entity.  The entity also will attempt to reduce the ability of creditors of the owner(s) to disrupt the entity's operations.  An LLC operating agreement, for example, typically will include provisions relating to a charging order for creditors of the owners.

There are a variety of limited liability entities which could be used.  Absent special circumstances which are unusual with our clients, we typically use an LLC because it is the most flexible form of entity.  An LLC can choose to be taxed as a partnership or an S-Corp (or a disregarded entity in the case of a single member LLC).  The operating agreement is very flexible in terms of ownership rights for management, control, and operations.  The LLC is easy to set up and not difficult to maintain.






Sep 21, 2018

Landlord Tenant Laws in Wisconsin Change Again

Landlords should be aware that Landlord-Tenant statute 704 has been changed yet again effective April 2018. Among the changes, there are new provisions relating to eviction hearings, limits on tenant abatement of rent for non-habitability, and electronic document delivery provisions. Please review http://docs.legis.wisconsin.gov/statutes/statutes/704.pdf

Feb 10, 2018

"As-is" clause in offer to purchase contract doesn't shield seller from misrepresentation claim

Catherine Fricano v. Bank of America NA No. 2015AP20 (WI App. Dec. 23, 2015)

The Wisconsin Court of Appeals upheld a jury verdict for damages against Bank of America NA in a claim filed by a home purchaser against the bank which had acquired the home in foreclosure.  Like most REO sales, the bank required the buyer to include an “as-is” clause in the purchase contract whereby the buyer acknowledged that the property was being acquired without any representation or warranty by the seller as to its condition.  When the buyer discovered after closing that there was a substantial mold problem and that the bank’s real estate agent knew about the mold problem, the buyer filed a fraudulent misrepresentation action under sec. 100.18, Stats.  The buyer alleged that the bank misrepresented the condition of the home and misrepresented its knowledge regarding the condition of the home.

Despite the fact that the buyer, her fiance’, and her real estate agent admitted that they all saw mold and noted a musty odor, and despite the fact that the buyer hired an inspector to determine the extent of the mold, and despite the fact that the buyer apparently retained a mold specialist consultant about mold removal, the buyer nonetheless claimed that the extent of the mold was unknown to the buyer and that the seller misrepresented its lack of knowledge about the problem.  The buyer alleged that this constituted a fraudulent misrepresentation.


A jury agreed and awarded damages to the buyer.  On appeal, among other arguments, Bank of America argued that the contractual “as is” clause barred the plaintiff’s claims.  The court of appeals affirmed the trial court’s determination that the “as-is” clause is not a complete bar when a claim is based on sec. 100.18, Stats.  Because the bank made affirmative untrue statements, (basically stating “we know nothing” when the bank did know something), the plaintiff was deceived in violation of sec. 100.18, Stats.

Note:  A sec. 100.18, Stats., misrepresentation claim permits the plaintiff to recover their damages and attorney fees.

Feb 1, 2018

Update - What do I need to prepare a home purchase offer?

I often am contacted by someone who wants to buy a home who asks me, "What information do you need to put the offer together?"  Below is a list of the questions I need answered.  Please recognize that this list is not intended to be comprehensive for all transactions.  While I need this information for most or all transactions, there may be additional information needed for a particular transaction.

  1. Who is the seller and how do I contact them (email address??)?  The first thing a lawyer should do is to check for conflicts of interest.  I need to make sure the seller is not my client.  I also search past clients to see whether the seller is someone who I've represented in an unrelated matter.  While it may be possible to obtain the seller's waiver of any conflict of interest, my practice is simply to avoid these situations and to refer the buyer elsewhere.
  2. What is the property?  I need the address, and it is helpful to know what other information you have about the property, so any MLS data sheets, marketing materials, condition reports, or other information you have received is helpful.  Note that, in some instances, the property address is inadequate/incomplete information.  For example, a street address to a house might currently include 40 acres, but the seller may be only selling 2 acres.  One cannot tell the difference in those two cases by street address alone.  
  3. What else do you expect to have included?  The WB-11 form offer includes the real estate and "fixtures."  What about other items which may not be "fixtures" such as a refrigerator, range/oven, dishwasher, washer, dryer, freezer etc?  Is there an alarm system, a water softener, an LP tank, or any other "rented" appliances?
  4. When do you want to close?  
  5. Do you need to borrow funds for the purchase?  Do you have a prequalification or preapproval letter from a lender?  Approximately how much do you expect to borrow?    
  6. Do you need to sell a property?
  7. Any other "contingencies" meaning other events that will affect the purchase?  We almost always include an inspection contingency giving the buyer the right to an inspection.  We also may include a financing contingency, an appraisal contingency, well and septic inspection, survey contingency, use of property contingency etc depending upon the circumstances.
  8. What price would you like to offer, what is your target price, and what is the most you would pay?
Real estate is not a commodity, and it is a mistake to think that you can reduce the decision to a matter of price alone.

Jan 24, 2018

First Weber Group, Inc., Plaintiff, v. Jonathan H. Horsfall,

Case No. 10-12596, Adv. No. 10-00179.
In re: Jonathan H. Horsfall, Chapter 7, Debtor. First Weber Group, Inc., Plaintiff, v. Jonathan H. Horsfall, Defendant.
United States Bankruptcy Court, W.D. Wisconsin.
November 17, 2011.
MEMORANDUM DECISION
ROBERT D. MARTIN, Bankruptcy Judge.
After a trial on April 13, 2011, I held that the debt owed to the plaintiff ("First Weber") was discharged. First Weber has appealed, and that appeal is pending. On May 14, 2011, the defendant filed a motion for sanctions under Bankruptcy Rule 9011(b). In turn, First Weber filed a Motion for Sanctions on May 31, 2011. A hearing was held August 24, 2011 to consider both sanctions motions.
The facts of the underlying dispute are set out in my Memorandum Decision, First Weber Group, Inc. v. Jonathan H. Horsfall, Case No. 10-00179 (April 26, 2011). While they provide useful background, they are not the basis of the present motions.
Throughout the trial. Attorney Moermond, counsel for First Weber,1 asked redundant questions that were objected to as irrelevant. Nearly all the objections were sustained. Mr. Moermond was given numerous directives to limit the scope of his questions to the issue at trial, which he consistently failed to heed. He doggedly repeated his irrelevant questions. He frequently rolled his eyes. Though not fully audible, nor recorded, he made constant sotto vocc comments (some vulgar) during the trial, which were heard by court staff and visitors to the courtroom. Attorney Moermond's conduct was rude, petulant, immature and disrespectful.
In its Motion for Sanctions under Bankruptcy Rule 9011, the defendant argues that the plaintiff fded its complaint for an improper purpose. The defendant contends that the allegation in the complaint that Jonathan H. Horsfall willfully and maliciously injured plaintiff "was without any evidentiary support whatsoever," and that the claim of nondischargeability was not warranted by law.
First Weber argues that the defendant's sanctions motion should be denied because it does not describe the specific conduct that allegedly violates Bankruptcy Rule 9011, and the motion itself is therefore baseless and frivolous. First Weber also moves for sanctions under Bankruptcy Rule 9011(b)(4), alleging that the defendant made and failed to amend repeated unwarranted denials in its Answer. First Weber contends that the denials were made despite clearly documented facts in the underlying record or in the defendant's own statements. First Weber's attorney emailed the defendant's attorney on December 13, 2010 to inform the defendant of the unwarranted denials of "numerous facts and documents which your client has, or which were found as facts, and which are in the State Court's file in the underlying Dane County Case." (Moermond Aff., Doc. 56-2, at 16.) It does not appear that the defendant's attorney ever addressed the unwarranted denials. In its Summary Judgment Brief. First Weber pointed out various denials the defendant made in his Answer that First Weber believed were established (and thus, contradicted) by the defendant's Answer or Amended Answer, or were documented in another place. (PL's Br. Supp. Mot. Summ. J., Doc. 24, at. 2-6.) First Weber now asks this court to sanction the defendant, alleging that the defendant's violation of Bankruptcy Rule 9011 (b)(4) forced First Weber to undertake additional expense and created additional complexity and confusion on the record.
At the hearing on the motions for sanctions, I noted that although I had never had a more unpleasant day in court than the day this trial was held, the truculent conduct on the part of Attorney Moermond does not necessarily give rise to Rule 11 sanctions. That rule addresses some, but not all, offensive conduct.
In a brief tiled after the sanctions hearing, the defendant pointed to the appellant brief that First Weber filed in the district court to argue that First Weber acknowledged it would not have received full commission had the deal originally closed. The defendant argues that First Weber therefore had no true economic motive for this litigation because First Weber received approximately the economic value of the transaction as a distribution from the bankruptcy estate in payment of its claim. The defendant further argues that since there was no true economic motive for this litigation, it must have been filed for an improper purpose — to harass and intimidate the defendant by forcing him to engage in expensive litigation. First Weber responded that the original deal did not close because the defendant left First Weber, so the defendant's hypothetical argument is irrelevant. First Weber contends that it commenced this adversary proceeding because it believes it is entitled to relief by virtue of the state court judgment, and therefore, the bankruptcy court litigation was not pursued for an improper purpose.
A. Defendant's Motion for Sanctions
An attorney is subject to sanctions under Bankruptcy Rule 9011(b)2 when he submits a petition, pleading, written motion or other paper to the court that falls into one of four categories:
(1) the document was submitted for an improper purpose (i.e., to harass one's adversary or to delay or drive up the costs of litigation); (2) the claims contained in the document are frivolous because they lack support under existing law; (3) the allegations contained in the document lack evidentiary support or are unlikely to have evidentiary support upon further investigation; or (4) the denials in the document are unwarranted based on the evidence. Fed. R. Bankr. P. 901 l(b)(l)-(4); see also Fed. R. Civ. P. ll(b)(l)-(4).
A motion for sanctions under Rule 9011 must "describe the specific conduct alleged to violate subdivision (b)." Fed. R. Bankr. P. 9011(c)(1)(A); see also Fed. R. Civ. P. 11(c)(2). However, on its own initiative, the court may enter an order describing the specific conduct that appears to violate subdivision (b) and directing an attorney, law firm, or party to show cause why it has not violated subdivision (b) with respect thereto. Fed. R. Bankr. P. 9011(c)(1)(B); see also Fed. R. Civ. P. 11(c)(3).
Once a court determines that a person violated Bankruptcy Rule 9011(b), it may impose an "appropriate sanction," The appropriateness of a sanction is judged by "what is sufficient to deter repetition of such conduct or comparable conduct by others similarly situated." Fed. R. Bankr. P. 9011(c)(2). The rule itself provides for a variety of options, including" directives of a nonmonetary nature, an order to pay a penalty into court, or, if imposed on motion and warranted for effective deterrence, an order directing payment to the movant of some or all of the reasonable attorneys' fees and other expenses incurred as a direct result of the violation." Id.
A motion for sanctions under Bankruptcy Rule 9011 is subject to a 21-day safe harbor provision. Busson-Sokolik v. Milwaukee Seh. of Eng'g (In re Busson-Sokolik), 635 F.3d 261, 269 (7th Cir. 2011). The safe harbor provision in Bankruptcy Rule 9011(c)(1)(A) requires the moving party to serve the opposing side with the motion and provide the opposing side with an adequate opportunity (21 days) to withdraw and correct the contested portions of the challenged paper, claim, defense, contention, allegation, or denial before the motion is presented to the court. In the Seventh Circuit, a court that imposes sanctions requested by motion without adhering to the twenty-one day "safe harbor" provision abuses its discretion. Divane v. Krull Elec. Co., Inc., 200 F.3d 1020, 1025 (7th Cir. 1999). However, the Seventh Circuit Court of Appeals has also held that a letter informing opposing counsel of the possible imposition of Rule 11 sanctions adequately satisfied the safe harbor requirement. Matrix IV, Inc. v. Am. Nal'l Bank & Trust Co., 2011 U.S. App. LEXIS 15537, 552-53 (7th Cir. 2011). Here, the defendant and First Weber exchanged emails early in the case where they each implied they would file Rule 11 sanctions against the other party. Neither party has objected to the other's motion for sanctions on the ground that it violates the safe harbor provision. Both sanctions motions came at the conclusion of trial, and each party informed the other early in litigation that he may file sanctions. Therefore, the motions need not be denied on the basis of the safe harbor provision.
Turning to the relevant substantive requirements of the rule, under Bankruptcy Rule 9011 (b)(1), the "improper purpose" prong, "the court's focus should be on what the party intended, and on what the party knew or should have known — both factually and legally — on the day the document was filed." In re Snyder, 2011 Bankr. LEXIS 630, *2 (Bankr. E.D. Wis. Feb. 11,2011). When determining whether the claim was supported in law or in fact, the proper inquiry is not whether the claim itself was frivolous, but whether the plaintiff conducted an adequate inquiry into the facts and the law before he filed the claim. Matter of Excello Press, Inc., 967 F.2d 1109, 1112 (7th Cir. 1992) (citing Mars Steel Corp. v. Continental Bank, N.A., 880 F.2d 928, 932 (7th Cir.1989)).
The purpose of the sanctions remedy under Bankruptcy Rule 9011 is to discourage unnecessary filings, prevent the assertion of frivolous pleadings, and require good faith filings. In re Firnhaber, 2004 WL 2211686, *3 (Bkrtcy. S.D. Ill. 2004) (not reported) (citing Szabo Food Service, Inc. v. Canteen Corp., 823 F.2d 1073. 1077 (7th Cir. 1987), cert, dismissed, 485 U.S. 901 (1988)). The rule is not intended to function as a fee shifting statute which would require the losing party to pay costs. Id. (citing Mars Steel Corp., 880 F.2d at 932), Thus, the Rule focuses on the conduct of the parties and not on the results of the litigation. Id. For example, in Firnhaber, Judge Fines remarked that "[although the Court stated at close of trial on September 3, 2004, that this was the weakest case under 11 U.S.C. § 523(a)(1 5) that it had seen, the Court cannot find that sanctions are appropriate pursuant to Rule 9011(b)." In re Firnhaber, 2004 WL 2211686 at *4. The court found that there was insufficient evidence to establish that the complaint was filed for an improper purpose. Id. Judge Fines remarked that sanctions pursuant to Rule 9011(b) "cannot be entered lightly and must be reserved for only those circumstances where pleadings are clearly frivolous and a lack of good faith has been shown." Id.
While no court within the Seventh Circuit has imposed Rule 11 or Rule 9011 sanctions for reasons of an attorney's courtroom behavior, courts within this circuit have found this a basis for Rule 37 sanctions. Rule 37 requires attorneys to cooperate and make appropriate disclosures during discovery. Courts may dismiss cases under Rule 37 "when there is a clear record of delay or contumacious conduct, or when other less drastic sanctions have proven unavailing." Powers v. Chicago Transit Authority, 890 F.2d 1355, 1362 (7th Cir. Ill. 1989). In Reyiblatt, an attorney willfully ignored direct court orders to make Rule 26(a) disclosures, and continuously refused to follow the Local Rules of the Northern District of Illinois, as the attorney believed the case was erroneously transferred from Connecticut to Illinois. Reyiblatt v.Illinois Inst of Tech., 1999 U.S. Dist. LEXIS 4073, 7-8 (N.D. Ill. Mar. 19, 1999). The district court found that the attorney's "obdurate refusal to accede to this court's rulings is an inappropriate and unacceptable way for a litigant to act in a federal court." Id. at 9. In addition to this inappropriate conduct, the court found the attorney's behavior toward Magistrate Judge Rosemond to have been "utterly inappropriate." Id. at 19. The court remarked that plaintiffs treatment of Judge Rosemond — "yelling in court, accusing him of wrongdoing, threatening to drag him into court as a hostile witness — is contumacious." Id. The court found that dismissal was appropriate because" there is a clear record of delay or contumacious conduct [and] other less drastic sanctions have proven unavailing." Id. at 18 (quoting Powers v. Chicago Transit Authority, 890 F.2d 1355, 1362 (7th Cir. 1989)). "Delay or contumacious conduct" is not a standard that the Seventh Circuit Court of Appeals has used for Rule 11 sanctions.
Rule 11 motions are intended to "deter unnecessary filings, prevent the assertion of frivolous pleadings, and require good faith filings," In re Firnhaber, 2004 WL 2211686 at 3. In this case, the defendant does offer some evidence to establish that First Weber commenced this action for an improper purpose. But that evidence is scant, and a creditor's reasons for seeking to have a debt declared non-dischargeable in bankruptcy are generally self-evident. The defendant provides little evidence that First Weber filed the adversary proceeding without an adequate inquiry into the facts and the law. Though the defendant argues that First Weber's alleged lack of economic motive can only mean that the original complaint was fded for an improper purpose, no authority supports this reason alone as a basis for Rule 11 sanctions. The defendant's oral argument and subsequently fded brief also fail to point to specific evidence of fding for an improper purpose. First Weber's case was weak, but that in itself is not enough to establish an improper purpose on the part of First Weber. Therefore, Rule 9011 sanctions are not appropriate.
Still, one could infer that First Weber did not do an adequate inquiry into the facts to support a "willful and malicious" injury under § 523(a)(6) before it commenced its adversary proceeding. Based on Attorney Moermond's Original Complaint and appellant brief, it appears that First Weber believed it would prevail on its motion for summary judgment based on the circuit court judgment that found the defendant liable for tortious interference with contract. The Original Complaint states § 523(a)(6) as a cause of action for nondischargcability, and it appears to rely heavily on the circuit court judgment as a basis for willful and malicious injury. Had Attorney Moermond done a more thorough search into the underlying law, it may have been clear that the case for willful and malicious injury was very weak. This inference may support the conclusion that First Weber did not adequately inquire whether it had a basis in law in fact before it initiated the adversary proceeding, but it also in part refutes the defendant's argument that the complaint was filed simply to harass the defendant. First Weber believed that it would prevail on its motion for summary judgment. Because these are tenuous inferences, the tacts as they stand do not support that the pleadings were frivolous or filed for an improper purpose.
Finally, Attorney Moermond's conduct at trial may have been truculent and disrespectful and his competence in the courtroom inadequate, but this does not rise to the level of inappropriateness that would warrant sanctions. His conduct was of the sort that is usually censured by social mores and discouraged by public (or private) embarrassment, not by legal sanctions. It is remarkable that neither he nor his client (a firm seemingly dependent on favorable public image) were not sufficiently self-controlled nor embarrassed enough to modify the shameful performance. Unlike the Rule 37 case described above, Attorney Moermond was not yelling at the court and blatantly disobeying direct orders from the court. His inappropriate behavior, while reprehensible, is not enough to trigger Rule 9011 sanctions.
B. First Weber's Motion for Sanctions
In its motion, First Weber first argues that the defendant's motion for sanctions should be denied because it does not describe the specific conduct that allegedly violates Bankruptcy Rule 9011, and the motion is therefore baseless and frivolous. A bankruptcy court can impose sanctions when a party files a frivolous motion for sanctions. In re Hasek, 1997 WL 1050829, 7 (N.D. III. 1997) (not reported) (citing In re Express America, Inc., 132 B.R. 542 (Bankr. W.D. Pa. 1991)). In In re Hasek, Judge Ginsberg found grounds for sanctions because, "despite the requirements of Rule 9011, [the party] made no inquiry into the reasonableness of his actions and advanced no credible evidence or argument in support of his motion for sanctions against [the nonmovant]." Id. In this ease, the defendant may have filed his motion for sanctions without giving any evidence in support of his motion, but he later gave support for it in oral argument and a brief. While the defendant's support is unpersuasive, it is not frivolous. First Weber's case was weak, and Attorney Moermond's conduct at trial was egregious enough for the court to put its displeasure on the record. Therefore, the defendant's motion for sanctions was not frivolous, and sanctioning the defendant for filing the motion for sanctions is not warranted.
First Weber also seeks sanctions, alleging that the defendant made and failed to amend repeated unwarranted denials in its Answer. Under Bankruptcy Rule 9011, when a party files a pleading, it is certifying to the court that "the denials of factual contentions are warranted on the evidence or, if specifically so identified, are reasonably based on a lack of information or belief." Fed. R. Bankr. P. 9011(b)(4). Case law addressing Rule 9011(b)(4) motions is limited. In this case, First Weber notified the defendant's attorney of the alleged unwarranted denials in the defendant's Answer on December 13, 2010. (Moermond Aff, Doc. 56-2, at 16.) Attorney Moermond informed the defendant's attorney that the denial of certain facts in the Answer were found as facts by the State Court or that the defendant acknowledged as facts, and it does not appear that the defendant's responded to these deficiencies. Id. The defendant's attorney certainly had actual notice of these deficiencies, but First Weber did not file this motion for sanctions until the conclusion of the trial. There is no way the defendant can remove and correct the specific pleadings that First Weber contends violated Bankruptcy Rule 9011(b)(4).
While post-judgment motions for sanctions are allowed in the Seventh Circuit, they still must comply with the procedural requirements. The defendant's post-judgment motion for sanctions was appropriate because the defendant claims the whole case was filed for an improper purpose. The court of appeals has found that in circumstances where "the lack of evidentiary support for defendant's counterclaim could not have been determined until trial was completed," the interest in deterring further frivolous post-judgment motions by the same litigants or in deterring future litigants may be promoted by a post-judgment request for sanctions. Divane v. Krull Elec. Ctt, 200 F.3d 1020, 1025 (7th Cir. Ill. 1999). Unlike the defendant's motion for sanctions, which was appropriately brought after judgment, First Weber's motion to strike specific pleadings from the answer should have been brought in the early stages of litigation when the defendant would have been able to make changes to the pleadings. Filing a sanctions motion in reaction to the opposing party's non-frivolous sanctions motion is not appropriate, First Weber's motion for sanctions must be denied.
C. Other Bases for Sanctions
I. Authority under 11 U.S.C. § 105, 28 U.S.C. § 1927
11 U.S.C. § 105 gives bankruptcy courts the power to "issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title." Under § 105, a bankruptcy court may take "any action or [make] any determination necessary or appropriate to enforce or implement court orders or rules, or to prevent an abuse of process." While the court's power under this statute is broad, a sanctioning court must exercise caution when invoking this power, and should ordinarily rely on available authority conferred by statutes and procedural rules if the available sources of authority would be adequate. Chambers v. NASCO, Inc., 501 U.S. 32, 50, 111 S.Ct. 2123 (1991).
28 U.S.C. § 1927 provides that "any attorney or other person admitted to conduct cases in any court of the United States or any Territory thereof who so multiplies the proceedings in any case unreasonably and vexatiously may be required by the court to satisfy personally the excess costs, expenses, and attorneys' fees reasonably incurred because of such conduct." Courts are split on whether bankruptcy courts have authority to impose sanctions under § 1927. See In re Jazz Photo Corp., 312 B.R. 524, 541 & n.26 (Bankr. D. N.I 2004). The authority to issue sanctions is not a core proceeding under § 157, but courts may issue sanctions related to matters that are core proceedings. See Volpert v. Ellis, (In re Volperi), 177 B.R. 81, 89 (Bankr. N.D. Ill. 1995).
The Seventh Circuit Court of Appeals tentatively supports a bankruptcy court's imposition of § 1927 sanctions. In 1985, the court of appeals affirmed this court's decision to impose fees under § 1927. In re TCI Ltd., 769 F.2d 441 (7th Cir. 1985). Judge Easter brook noted that "Judge Martin had the authority to award the fees incurred right from the beginning." In re TCI, Ltd., 769 F.2d at 448. However, in affirming this decision, the court of appeals did not discuss whether § 1927 applies to bankruptcy courts. Matter of Volpert, 110 F.3d 494, 497 (7th Cir. 1997). In Volpert v. Ellis, Judge Schmetterer held that a bankruptcy court as a judicial officer of the district court may impose § 1927 sanctions as to a matter within its core or related jurisdiction. Volpert v. Ellis, (In re Volpert), 177 B.R. 81, 88-89 (Bankr. N.D. Ill. 1995). On appeal, the district court took the view that bankruptcy courts are not "court[s] of the United States" under 28 U.S.C. § 151, but nevertheless held that bankruptcy courts are empowered as a unit of the district court to impose sanctions under § 1927. Matter of Volpert, 110 F.3d at 496.
The Seventh Circuit Court of Appeals declined to explicitly affirm the imposition of sanctions under § 1927. Id. at 501. The court concluded that bankruptcy courts can impose sanctions under § 1927 only if they can exercise the powers that are conferred upon the "court[s] of the United States or any Territory thereof." Id. at 497. The court of appeals held that the language of § 105 gives bankruptcy courts ample authority to sanction conduct that abuses the judicial process, including conduct that unreasonably and vexatiously multiplies bankruptcy proceedings. Id. at 501. This holding in Volpert was authoritative until Adair v. Sherman, 230 F.3d 890 (7th Cir. 2000). In Adair, the court of appeals stated in a footnote that a bankruptcy judge could sanction an attorney under authority of 28 U.S.C. § 1927. Id. at 895 & n.8. However, the opinion relied on Volpert as precedent, making it unclear if a bankruptcy court's authority to sanction for vexatiously multiplying proceedings stems from 28 U.S.C. § 1927 or 11 U.S.C. § 105. Id.
The United States Supreme Court's recent holding in Stern v. Marshall curtailed bankruptcy court jurisdiction, and may move circuit courts in the direction of allowing bankruptcy courts to issue orders only in matters that are clearly core. Stem v. Marshall, 131 S.Ct. 2594, 2601 (2011). The implications of this decision remain to be determined by the Seventh Circuit courts.
While the Stern decision may have had an impact on the way courts interpret a bankruptcy court's authority to issue sanctions under § 1927, the holding does not directly affect the issues in this case. Unlike § 157(b)(2)(C), § 1927 arguably does not "confer Article III power on a bankruptcy court" because it only references "courts of the United States," which, depending on the interpretation, may not include bankruptcy courts. The question is whether bankruptcy courts have erroneously exercised authority to sanction attorneys when § 1927 arguably does not allow them to do so. This issue has not come before the Seventh Circuit Court of Appeals post-Stem, and the law in the Seventh Circuit as it currently stands is that bankruptcy courts may impose § 1927 sanctions through its authority under § 105. Therefore, if § 1927 sanctions are warranted, this court may impose them.
2. Application
Attorneys may be sanctioned under § 1927 if they unreasonably and vexatiously multiply proceedings in any case. 28 U.S.C. § 1927. This statute permits a party to recoup fees and costs when an attorney acts in an objectively unreasonable manner and with either subjective or objective bad faith. Kotsilieris v. Chalmers, 966 F.2d 1181, 1184 (7th Cir. 1992); Alexander v. United States, 121 F.3d 312, 316 (7th Cir. 1997) (holding that sanctions are also appropriate when objectively unreasonable litigation-multiplying conduct continues despite a warning to desist.); see, e.g., Ordower v. Feldman, 826 F.2d 1569, 1574 (7th Cir.1987) (indicating that intentional ill will or reckless conduct constitutes vexatious conduct).
While § 1927 sanctions are penal in nature and should be construed strictly, sanctions may be warranted when counsel displays laxity in prosecuting the adversary proceeding or drags out the pleadings process, "thus causing more expensive litigation, and obstructed discovery." In re Kitchin, 327 B.R. 337, 368-69 (Bankr. N.D. Ill. 2005). The principle underlying § 1927 is that in a system requiring each party to bear its own costs and fees, courts must ensure that each party really does bear the costs and does not foist expenses off on its adversaries. Id. at 372 (citing In re TCI Lid., 769 F.2d 441 (7th Cir. 1985)). When a party recklessly creates needless costs, the other side is entitled to relief. Id,
In Volpert, the appellant repeatedly filed untimely responsive proceedings and repeatedly failed to give notice of pleadings to opposing counsel. Id. at 495. The court of appeals noted that the appellant did not dispute that, for six months, he unreasonably and vcxatiously multiplied the proceedings before the bankruptcy court. Id. at 500. Even absent that concession, die bankruptcy court determined independently that the appellant's conduct in the case at bar "could only be described as an abuse of the judicial process." Id. (citing Volpert v. Ellis (In re Volpert), 177 B.R. at 91). The bankruptcy court found that the appellant "flagrantly] disregard[ed] ... the Federal Rules of Civil Procedure," ... "reflected] contempt for the law, the Court, and opposing counsel," and . . . "bedeviled opposing counsel with studied misconduct obviously intended to harass him and avoid proper service upon him." Id. The court concluded that "the ability to prevent the type of behavior exhibited in this case is necessary if the bankruptcy courts are to carry out efficiently and effectively the duties assigned to them by Congress." Id.
In this case, Attorney Moermond unreasonably prolonged the trial by repeatedly asking irrelevant questions despite the Federal Rules of Evidence and the court's directives. This caused countless objections and delays throughout the trial. However, prolonging a trial is not the same as vexatiously multiplying proceedings, and therefore, this alone does not warrant sanctions under § 1927. Attorney Moremund also questioned the court's ruling on the objections, and argued after being told to move on to another question. He also made many sotto voce comments and behaved in a disrespectful manner. This conduct may constitute "contempt for the law, the court, and opposing counsel." Given his unprofessional conduct and flagrant disregard for the Federal Rules of Evidence, there may be a basis to impose § 1927 sanctions. However, in the aggregate, his conduct does not fall squarely within the type that § 1927 is trying to prevent. Weighing the circumstances as a whole, sanctions are not appropriate in this case.
While the conduct in this case does not warrant sanctions, the attorneys must be reminded to observe the Seventh Circuit's Standards for Professional Conduct.3 Two predominant standards outlined by the Seventh Circuit Court of Appeals are as follows:
Lawyers' Duties to Other Counsel
1. We will practice our profession with a continuing awareness that our role is to advance the legitimate interests of our clients. In our dealings with others we will not reflect the ill feelings of our clients. We will treat all other counsel, parties, and witnesses in a civil and courteous manner, not only in court, but also in all other written and oral communications. Lawyers' Duties to the Court 1. We will speak and write civilly and respectfully in all communications with the court.
The attorneys here should further be reminded of the Preamble to the Standards for Professional Conduct: that conduct "should be characterized at all times by personal courtesy and professional integrity in the fullest sense of those terms." Lawyers should refrain from conduct that is "uncivil, abrasive, abusive, hostile, or obstructive," as any conduct of this type tends to "delay and often deny justice." The Court of Appeals for the Seventh Circuit expects judges and lawyers to make a mutual and firm commitment to these standards, which encourage us to meet our obligations to each other, to litigants and to the system of justice, and thereby achieve the twin goals of civility and professionalism, both of which are hallmarks of a learned profession dedicated to public service.
For the reasons outlined above, both motions for sanctions are DENIED. It will be so ordered.
FootNotes

1. Mr. Moermond appears to be general counsel or in-house counsel for First Weber, and as such, an employee of First Weber.
2. The language of Federal Rule of Civil Procedure 11 is virtually identical to Rule 9011. In re Victoria, 1993 U.S. Dist. LEXIS 20803 (E.D. Wis. June 9, 1993).

3. Standards for Professional Conduct Within the Seventh Federal Judicial Circuit available at: http://www.ca7.uscourts.gov/rules/rules.htm.