$14.7M use tax case: What is the value of employee feedback?

How much is employee feedback valued?

Is it a pointless exercise or a useful tool? There are endless debates around the water cooler and in the boardroom about this one.

How much is employee feedback valued for tax purposes?

The Michigan Department of Treasury and Ford Motor Co. are duking this one out in court.

Our story:

Ford Motor Co. leased vehicles to its own employees and retirees, and those of Ford’s subsidiaries.

Here’s how it worked in the late 1990s and early 2000s: Ford sold vehicles to its financing arm, Ford Credit. Ford Credit, in turn, leased the vehicles back to Ford at a yearly lease rate of 28.8 percent of the wholesale delivered price. Ford then subleased the vehicles to the employees and retirees at 20.8 percent of the wholesale delivered price.

But along with the apparently good deal the sublessees were getting, there was a small obligation.

Every now and then, they had to fill out a vehicle quality and performance report, a checklist of 35 items that took a few minutes to complete. The leases required this. The leases also stated that if you didn’t fill out the form when requested, you’d be in default of the lease.

Ford said most of the employed sublessees filled out the reports on company time.

Ford was required to pay Michigan use tax on the lease program based on the vehicles’ prices. The treasury department figured the price at the 28.8 percent lease rate. Ford claimed the 20.8 percent rate applied.

The version of the Use Tax Act in effect at the time, MCL 205.92(f) (later amended by 2004 PA 172), defined “price” as “the aggregate value in money of anything paid or delivered, or promised to be paid or delivered, by a consumer to a seller in the consummation and complete performance of the transaction by which tangible personal property or services are purchased or rented for storage, use, or other consumption in this state … ”

In other words, the sublessees were providing some value by filling out the required reports, and that value was part of the vehicle’s price.

But what’s the value?

It’s peanuts, said Ford in the Court of Claims. It shouldn’t even figure into the price. There’s virtually no effort involved in filling out the report. But, if you insist on a value, let’s have a hearing to figure it out.

It’s $14,727,220.41, said the treasury department. That’s the difference between the 28.8 percent and the 20.8 percent lease rates. No need for a hearing, just do the math.

The Court of Claims liked the treasury department’s approach better.

Not so fast, said the Michigan Court of Appeals. Both positions are wrong.

The use tax act, said the COA, plainly requires us to put a price tag on filling out the vehicle reports. That can’t be ignored.

But figuring the price on the difference between the lease rates isn’t the way to do it:

When the services required under the sublease agreements are given a monetary value equal to the difference between the lease and the sublease rates, an illogical result is reached: because the lease and sublease rates are a percentage of the wholesale delivery prices of the vehicles, identical services provided by the sublessees receive different monetary values.

In other words, it is illogical that the services provided by a sublessee of a luxury vehicle would have a significantly higher monetary value than the services provided by a sublessee of an economy car. …

For example, the difference between the lease rate and the sublease rate for an $86,000 Range Rover is $6,880, while the difference between the lease rate and the sublease rate for an $8,653 Ford Focus is $692.

So, how much is employee feedback valued?

We’ll find out on remand.

The case is Ford Motor Co. v. Dep’t of Treasury.

SBM director waxes on effects of ‘beyond bad’ state of state at annual meeting

In her report to attendees of the 2010 Solo & Small Firm Institute — as part of the 2010 State Bar of Michigan annual meeting in Grand Rapids — Janet Welch, executive director of the State Bar of Michigan, was upfront about having bad news and good news.

First, the bad, which is the “beyond bad” state of the state, something that affects the court system and, in turn, lawyers.

The state’s per average capital income is the best way to measure how things stand in Michigan, she said, but there are grim numbers involved. In 1970, Michigan was 13th in the nation, but in 2000 it dropped to 19th, and in 2008, sank to 38th.

And citing the House Fiscal Agency’s ranking of Michigan in income growth, “We’re not only dead last, but we’re so far beyond 49th, we can’t even see 49th.”

For that, she turned to the SBM’s Judicial Crossroads Taskforce, a 13-month-old initiative to study and recommend ways for the court system to be saved and advanced in the wake of declining state revenues.

Though the task force’s final meeting isn’t for another few weeks, and the report’s results aren’t public yet, Welch weighed in on what could be recommended.

“In broadest terms, I think their report will call for a court system that’s simpler, more flexible, and more based on evidence-based results,” she said. “It will recognize that in some areas of the states we have more judges than needed, and in other areas, we don’t have enough. And it will say that we will need to measure that by an objective, evidence-based measure.”

One question the task force has asked is whether there’s something the court system can do to handle business disputes that can be perceived as friendly to the business community to help them feel better about staying in Michigan and, in effect, encourage other businesses to come here.

For that, she said, one committee in the task force is recommended a three-year private business docket in three of the biggest Michigan counties, where two or three judges would handle all business cases. She noted that other states that have tried such a program have had great results.

Finally, she said that the task force believes cost savings can only happen with better information systems in court, particularly via statewide e-filing in all state courts.

“The tools exist right now to make the court system more convenient, more accessible, more efficient … . We’re wasting money by not spending money to make that happen,” she said.

So, wasn’t there something mentioned about good news?

Well, Welch did say that the state of the SBM is “good — truly good.”

Given the reserves that SBM has built up by managing the way it delivers services to its members, and based on the current rate of consumption, she said that the SBM won’t have to raise dues for another eight more years.

That’s relief for a state where more and more lawyers are struggling professionally, but where dues are in the bottom percentage compared to other states. Welch pointed to that the fact there is no mandatory continuing legal education requirements as another advantage of practicing in Michigan.

She said the secret is being tech savvy, thus saving administrative costs where they count, and SBM members’ volunteer time helping offset things. An example of the latter, she added, is the launch of the Master Lawyer Section, which will replace the Senior Lawyers Section, and will allow the more experienced members of the bar to participate in pro bono programs and mentoring for younger attorneys.

Also, something she said that’s of “critical” importance is the upcoming triennial economics of law practice survey, which will be sent to bar members in October via e-mail and the SBM website.

Welch pointed to the Michigan Supreme Court’s 2008 Smith v. Khouri attorney fee ruling, for which the Court said the SBM’s previous survey was the most important resource in determining award of attorney fees.

But the Court also cited limitations within the survey, so Welch said the SBM has streamlined the new survey, which will be tailored in two different forms — one for private practice members, the other for all other members. The results will be published in early 2011, and there will be drawings and giveaways to help bolster participation.

Check back on our blog for more from the 2010 State Bar meeting.

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In their opinions

Instead of carving out an exception to this exclusion, this theory of interpretation would create a virtual, if not complete, exclusion of the exclusion.

6th U.S. Circuit Court of Appeals Judge Jeffrey S. Sutton’s response in TMW Enterprises, Inc. v. Federal Insurance Co. to an insurance claimant’s argument that coverage was due for water damage, which was not an excluded peril, caused by faulty workmanship, for which coverage was excluded.

TMW bought a condominium building. As later discovered by TMW’s renovators, it needed some work, $3.9 million worth, to fix structural problems caused when the original builder “improperly constructed exterior walls, leaving them vulnerable to water infiltration.”

No problem, said TMW as it filed an insurance claim against its $10 million policy with Federal.

Problem, Federal replied. The policy excludes damages for faulty workmanship.

No problem, said TMW. It wasn’t the workmanship that caused the damage, it was the water that came into the building due to the faulty workmanship. And, we notice, water damage is not an excluded peril, so please pay up.

Problem, said Sutton.

As an “all-risk” policy, this insurance policy basically covers everything unless specifically excluded. That means the number of possibilities for last-in-time “but for” causes of damage are limited only by the imagination of the reader.

What if a roof contains a flawed design (think Frank Lloyd Wright, see Essex Ins. Co. v. Fidelity & Guar. Ins. Underwriters, Inc., 282 F. App’x 406, 409 (6th Cir. 2008)), and it leaks water into the house, which ruins one of the floors? But for the water, no damage to the floor would have occurred. Yet the contract does not exclude damages caused by “water.” Coverage?

What if faulty construction allows humid summer air to enter the building, which rusts metal fixtures? But for the exposure to the summer air, no damage to the fixtures would have occurred. Yet the contract does not exclude damages caused by “air.” Coverage?

What if a poorly constructed ceiling beam falls, smashing the floor below? But for the force of gravity, no damage to the floor would have occurred. Yet the contract does not exclude damages caused by “gravity.” Coverage?

As in each of these examples, so too here: The very risk raised by the flawed construction of a building came to pass.

To say that the risk was not covered because other elements or natural forces were the last causative agents of the damage, though to be sure utterly foreseeable causes of the damages, is to eliminate the exclusion.
It is exceedingly strange to “think that a single phenomenon that is clearly an excluded risk under the policy was meant to become compensable because in a philosophical sense it can also be classified as water damage.” Aetna Cas. & Sur. Co. v. Yates, 344 F.2d 939, 941 (5th Cir. 1965) (Friendly, J., sitting by designation).

But all is not lost for TMW, said Sutton.

As the district court viewed the dispute, the identification of the faulty workmanship exclusion, together with undisputed factual evidence that there was a “but for” causal relationship between the damages and this exclusion, meant that summary judgment for Federal was in order.

In view of the reality that the “ensuing loss” clause, under either way of looking at it, does not permit Federal to deny coverage for losses not proximately caused by faulty workmanship, and in view of the fact that TMW did not appear to have an opportunity to seek coverage for such losses, we think TMW should be given an opportunity to do so on remand.

Dickinson Wright doubles up with chair election

Are two heads better than one? That’s what one of Michigan’s largest law firms is thinking.

On Tuesday, Dickinson Wright PLLC announced that Edward H. Pappas and James A. Samborn were elected co-chairmen of the firm, succeeding Dennis W. Acher.

Both Pappas and Samborn come to the table with a fairly recent canon of leadership — the former was the 2008-09 president of the State Bar of Michigan, while the latter capped 10 years as Dickinson Wright’s CEO.

We can’t help but notice that both of them specialize in commercial litigation and ADR –meaning that they could, if they wanted to, sue each other over office space, then hire one another as mediators.

Take me out to the law game

Cooley Law School StadiumThe Cooley Law School Stadium is the new home-field name for the Lansing Lugnuts, the capital’s Class “A” minor-league baseball affiliate of the Toronto Blue Jays.

The ubiquitous law school, the nation’s largest with 3,600 students on four campuses in Michigan, bought the naming rights for the ball park in an 11-year, $1,485,000 sponsorship deal announced yesterday.

Naming rights for the field, formerly known as Oldsmobile Park, went on the market when General Motors gave up its sponsorship during the automaker’s bankruptcy reorganization last year.

The ball club and the city of Lansing will evenly split the revenue from Cooley’s sponsorship.

House Judiciary Committee takes up molders’ lien measures

A package of bills before the House Judiciary Committee would allow industrial mold and special tool manufactures that haven’t been paid to repossess their products 30 days after asserting a lien and demanding payment from their customers and end users.

The committee will take testimony on HB 4356, 4357, 4358 and 4359 on Wednesday, Feb. 17.

The measures supplement a ruling by the Michigan Court of Appeals in Delta Engineered Plastics v. Autolign Manufacturing Group, that a mold manufacturer’s possessory lien trumped a lender’s secured interest in plastic injection molds.

Check out a Michigan Lawyers Weekly story about the case.

Largest verdict of 2009 settles for $500M, leads to new business deal

On the eve of the second of three major trials, one of the largest business lawsuits in Michigan history has settled for $500 million.

Livonia-based Valassis Communications, Inc. reached an agreement to settle its outstanding lawsuits against News America Marketing (NAM), a division of Rupert Murdoch’s News Corp.

U.S. District Court, Eastern District of Michigan Judge Arthur Tarnow OK’d the agreement, which would have prevented a Feb. 2 trial in asserting violations of the Sherman Act. If Valassis had prevailed in this suit — as it did in a $300 million July 23, 2009, trial asserting unfair competition and tortious interference — the damages would have been trebled.

Besides paying Valassis $500 million, NAM also will enter into a 10-year shared mail distribution agreement with Valassis Direct Mail, a Valassis subsidiary. In addition, the judge will issue a permanent injunction related to certain business practices at issue in the lawsuits, and Valassis also will drop a pending state court case in California.

“It has become evident to our legal advisors from pre-trial proceedings over the past couple of weeks that significant risks were developing in presenting this case to a jury,” said News Corp. Deputy Chairman, President and Chief Operating Officer Chase Carey in a statement. “That … led us to believe it was in the best interests of the Company and its stockholders to agree to a settlement.”

Valassis asserted that, over a six-year period, NAM tried to monopolize the free-standing coupon insert (FSI) market. Valassis contended that, by 2006, NAM had more than 60 percent of the FSI market, and did so by illegally bundling deals on its FSIs with its other consumer marketing division, in-store and point-of-purchase media.

Valassis was represented by Gregory L. Curtner and A. Michael Palizzi of Miller, Canfield, Paddock and Stone, P.L.C., and David Mendelson of Birmingham-based Law Offices of David Mendelson.

The $300 million verdict was the highest 2009 verdict reported in Michigan Lawyers Weekly. By comparison, the top verdict in 2008 was $9.1 million — a difference of 97 percent.