Business
Crisis Management – Lessons from the Law, Aviation and Real Life
Originally posted on 03/04/2020, content updated on 03/04/2023 Crises are often self-inflicted, such as the Boeing 737 Max crisis in which Boeing’s executives apparently ignored the very people inside Boeing who knew of the Max’s problems – the pilots. “After the crash, Boeing issued a bulletin disclosing that this line of planes, known as the 737 Max 8, was equipped with a new type of software as part of the plane’s automated functions. Some pilots were furious that they were not told about the new software when the plane was unveiled.”[1] “Boeing Pilot Complained of ‘Egregious’ Issue With 737 Max in 2016” was a headline in the New York Times.[2] Too often a crisis in the cockpit is so urgent that time does not allow for taking out the paper or electronic flight manual to help analyze and solve the problem. Student pilots are taught the “4 C’s” -- when faced with difficulty, “Climb, Communicate, Confess and Comply with instructions.”[3] In addition to learning what’s in the flight manual for the aircraft being flown, the 4 C’s are part of every pilot’s proficiency check ride. “A pilot goes through four stages of proficiency when learning a new airplane, a new set of skills, or working in a new environment. Those stages are Cautious, Compliant (or Current), Confident and Complacent. The last of these can kill you.”[4] Boeing as an institution seems to have gotten “complacent” when it came to Max’s safety because, it appears, those in the C-suite knew better than the pilots in the trenches. Once a self-inflicted crisis due to whatever cause, such as complacency, escalates, the 4 C’s come into play – Climb to safety, Communicate the problem, Confess what you did and what the problem is, and Comply with instructions from the higher authority of air traffic control. Boeing did what the Iranians did in the crash of a Ukrainian Boeing 737-800 (not a Max). The Iranians denied there was a problem and blamed someone else. Boeing blamed pilot error and the Iranians blamed mechanical failure. The two Boeing Max crashes occurred when foreign pilots were in control of new Boeing Max jets maintained and operated by foreign airlines. The Iranians did what some say they do best – invoke the big lie. The Iranians had no access to the black box or to cockpit information; there was no distress call; and in lying the Iranians were effectively faulting Ukraine’s pilots, mechanics, and pilot training even though Ukraine has one of the best safety records in terms of aircraft maintenance and pilot training. Only days later did the Iranians admit their military “unintentionally” shot down the Ukrainian airliner.[5] Even when “confessing,” the Iranians continued to lie – the missile was fired intentionally at an ascending aircraft, not at a descending incoming anything, and the Iranian’s Russian missile homed in on the airliner’s transponder which is what those missiles are supposed to do to hit their targets. The “unintentional” word was intended to excuse the incompetence and stupidity of the Iranian missile defense personnel. Bill Clinton in the Monica Lewinsky affair invoked only part of the 4 C’s -- he Climbed by telling America he had to get back to work as President of the United States, and he certainly Communicated that position. He also did the big lie when he denied he had had “sex with that woman.” In telling America, “It depends on what the meaning of ‘is’ is,”[6] President Clinton made every American parent of a daughter cringe. Boeing, Iran and President Clinton created these crises, and all mismanaged them. While it would seem axiomatic that a self-inflicted crisis can be managed more easily than an unexpected crisis, that unfortunately appears not to be the case. In unexpected crises, these rules of aviation also apply. The obituary of one of America’s foremost crisis management experts, Harold Burson, said: “Mr. Burson advised corporate C.E.O.s to get bad news out quickly and fully, making it a one-day story rather than letting it drag out. He urged them to be candid, and refused to take clients who could not be. He held staff seminars to promote Burson-Marsteller’s ‘vision and values.’ He was less interested in hiring reporters with contacts than he was in finding good writers who could capture the essence of a client. As business and financial news reporting improved in the 1970s and ’80s, he sought writers adept at detailed analysis, not the old puffery about chief executives and companies.”[7] [Emphasis added] Boeing, Iran and President Clinton could have used and heeded this advice which looks similar to the 4 C’s As a lawyer for over 50 years, I have had the privilege of having clients trust my judgment when a crisis occurs. Sometimes those have been “bet-the-company” crises. Boeing’s Max crisis was potentially a “bet-the-company” crisis. The Iranian shoot-down of a passenger plane and killing all 176 aboard was nothing more than a seeming “public relations” crisis to the Iranian regime.[8] And the Clinton crisis was a “Bet-the-Presidency” crisis that turned on a 50-50 Senate vote. “Over the years, I learned that the traditional advice of a lawyer to avoid public comment during a legal crisis had become outdated, especially with the impact of the Internet at the turn of the twenty-first century. . . . It was no longer viable for a lawyer to tell a client, ‘We’ll win it in the courtroom—we won’t litigate this in the media.’ There were too many ways for the judge and the jury to be influenced by public opinion, consciously or unconsciously; too many ways for prosecutors and regulators to be persuaded by adverse media coverage to launch an investigation or to bring a case, as broadcast news, once a day, became 24/7 cable, and then within just a few years, the Internet led to websites and then some blogs and then the blogosphere and then Google, Twitter, YouTube, WiFi, and social networks. Everything that follows ineffective crisis management – developing a simple message, rapid response to correct misinformation that could hurt a client’s reputation, share values or outcome in the courtroom – and, in the long-term, repairing the damage begins with the need to get the facts, all the facts, good and bad – not just those that attorneys are ready to tell a non-attorney crisis manager or public relations, consultant. And that means getting access to all the facts, first with the protection of attorney-client privilege.”[9] While the author of that advice was one of President Clinton’s advisers in the Paula Jones and Monica Lewinsky matters, his words of today, which may be ironic given what happened some 25 years ago, are valuable: “The first rule of Crisis Management is to get all the facts.”[10] Some law firms have created crisis management practices, sometimes within their government investigations practices. One firm “advocates a multifront approach to crisis management. Whether the situation stems from internal problems or external events, we enable our clients to maintain focus on their business objectives while managing a crisis to its best outcome.”[11] In aviation terms, this law firm is telling clients to continue to fly the airplane – continue to run their businesses, which is the “Climb” mandate of the 4 C’s, and the lawyers will gather the facts and engage other professionals such as public relations or crisis management firms, under the umbrella of the attorney-client privilege, and then advise the client on potential courses of action. An Above-the-Law article explains the critical importance of learning the facts: A hospital manager’s lost laptop with protected patient information on it meant the focus had to be not first on what the potential damage for a HIPAA violation could be, but first on making sure the “fact” the laptop was lost was accurate. “[T]he only ‘wise’ decision I made that day was to turn over the reins of our response to my colleague who suggested we first ask the manager to retrace her steps over the previous day. And as luck would have it, her laptop turned up in a rarely used conference room a few minutes later. Safe and sound, and most importantly, no violation of HIPAA or our patients’ information.”[12] There is no substitute for learning the facts as quickly and as accurately as possible. Another aviation crisis management lesson taught to all student pilots and repeated at all phases of pilot training is to “Aviate, Navigate, Communicate.”[13] The “Aviate and Navigate” part of this mandate is the “Climb” part of the 4 C’s. The “Communicate” element is shorthand for the “Communicate, Confess and Comply with instructions” part of the 4 C’s. The client must always Aviate and Climb – run the business. The Confess part is usually where things get dicey in terms of whether the client will come clean with the lawyers. Boeing apparently did not. The global media were the lawyers in the case of the Iranian shoot-down of the Ukrainian aircraft. And we do not know whether President Clinton Confessed to his advisers at the time all of the facts regarding Paula Jones, Monica Lewinsky and other women accusers. I chose the aviation analogy to crisis management for business because as a licensed pilot for more than 40 years and having owned my own single engine aircraft for more than 38 years, I have had my share of difficult situations just as every plot does. Having a landing light blow out on approach to an unfamiliar non-tower controlled airport after a multi-hour night cross country to work on an acquisition in Maine; having a very large Seagull dive towards my windscreen and hit my right wing over the New Jersey Turnpike at 500 feet on approach to my home airport; and getting lost when encountering an unexpected snow squall in Western Pennsylvania, many occurring in my aircraft’s pre-GPS days, were all manageable because of my recurrent pilot training to prepare for those potential crises. While the possible crises in aviation are seemingly endless, especially the more complicated the aircraft, training and more training proves the adage that “practice makes perfect.” There are some crises that cannot be practiced in an aircraft and need to be practiced in a simulator, especially when flying more complicated aircraft. An airplane is a machine with parts, systems, passengers and crew that can malfunction. What we do as student pilots and then as pilots is train for contingencies. Training for a crisis in business is not as easy as training for a crisis in aviation because training for crises is usually not part of a business’s agenda. Contingency planning can be urged by insurers, and some companies’ management will have risk managers who do engage in contingency planning. Unenlightened management will often view costly contingency planning as an expense without a quantifiable immediate benefit. How often do we roll our eyes at fire drills in high rise office buildings? This is contingency planning and practice, or recurrent training, no different from what we do as pilots. “If you see fire or smoke, follow the four ACES of high rise building fire safety: 1. ACTIVATE the fire alarm immediately by pulling the nearest Fire Alarm Box . . . . If you cannot pull the Fire Alarm, call 911. 2. COMMUNICATE with the Fire Warden Team and other colleagues on your floor. 3. EVACUATE by using the stairs . . . . DO NOT USE THE ELEVATORS. Members of the Fire Warden team will lead the evacuation down two or more floors for re-entry (or if there is the need to evacuate the building completely . . .). 4. SELF-ESCAPE Stay calm, don’t panic. Stay low in smoke conditions, and close doors to confine fire and smoke. Feel doors before opening them; if they’re hot, don’t open!”[14] Isn’t this really a tenant’s variant on “Climb, Communicate, Confess and Comply with instructions?” “I have written before about the necessity of contingency plans, but what if there is simply no time to pull out the book and turn to page 63? You are in a state of emergency, your stomach is in a knot, and the CEO is asking you some very difficult questions. Grab the canoe. Take a breath and do your best.”[15] The canoe is the business or the aviate and navigate/fly the plane part of dealing with an aviation crisis. “First, you must ‘grab the canoe’ and get back to floating; only then can you assess what else might be wrong (missing possessions, food, wet socks, etc.). Things are going to go screwy during your tenure as an attorney — they just will. You cannot possibly plan for everything, but you can remember the mantra of ‘grab the canoe.’ The canoe is a metaphor for the stasis that usually surrounds your job. You are first and foremost representing an entity. . . . The entity is what keeps you and the other employees afloat. During a crisis, all of the happenings within the entity are to be worried about after first taking care to right your primary client, the business. Some things that occur in an emergency, or a quickly moving negotiation, can be left behind, such as obsolete contractual language. Other issues are absolutely necessary in a publicly-traded company — reporting requirements, for instance. And in the time it takes to read this column, some of these issues can overturn your company’s sense of balance, and leave you drifting.”[16] “Of course we are not saving lives, or curing dread disease. We practice law. The key is in the word “practice.” As you practice, answers become ingrained, and your expertise begins to grow. After years of “practice,” you enable yourself to right tipped canoes, and assist stressed CEOs quickly, efficiently, and appropriately. But in the recesses of your mind, you must always be aware of the possibilities for crisis. Remember that in the moment you will rely on what you know and keep the primary focus on staying afloat. You can allow yourself to let the what-ifs creep in once you are past the crisis and are happily ensconced at the third seat at the bar, with a martini safely in hand.”[17] Crises can be big or small. And they can sometimes involve saving lives. It is not often we as lawyers are called upon to help clients deal with “Bet-the-Company” or life-and-death crises. Our “practice” for these crisis events usually comes on the job and our performance often turns on the judgment we have developed from experience, from observing more experienced lawyers, from reading as much as we can about as much as possible, and most of all from thinking and analyzing what we read, see and hear and all the what-if’s that never cease in our daily law practices. In my law practice, I have had a few “Bet-the-Company” crises to help clients through. Fortunately, all turned out fine. One involved consumer product tampering and the other involved a brother-in-law’s attempt to misappropriate my client’s business. The Product Tampering Crisis: The CEO of my branded consumer product client called in a panic, telling me a supermarket executive notified the client and FBI that one of its stores had received a call from someone claiming to have put poison in a container of the client's product. The client asked whether he should issue a product recall. I have used this example in interviewing job applicants. I ascertained the facts by speaking with the client’s CEO, COO and plant manager and by liaising with the FBI. I learned that wiretaps had been placed on the supermarket's telephone lines and that the FBI agent’s experience was more often than not these were hoaxes. My advice to the client was to wait, not rush to issue a product recall, and instead to withdraw the product just from the stores in the local area, to test the withdrawn product, and to replace the product with new product produced at a different plant. That was done and testing proved negative. We waited. This was in the days before computer real-time inventory could tell us how much product had been purchased at each location. If no poisoned product was out there and the client issued a recall, the company and its brand would have been severely and possibly irreparably damaged. If a poisoned container was already out there in commerce to an unsuspecting consumer, the company would be severely damaged, and a recall would necessarily follow. The FBI agent and I thought the odds of a just-purchased container being consumed and harming or killing someone were fairly low. The supermarket received a second call from the same caller a few hours later. The FBI wiretap led to an arrest that day of a disgruntled teenage supermarket employee who confessed to the hoax. A public product recall was avoided, and no one was hurt. The Brother-In-Law Crisis: A prospective client was referred to me to discuss estate planning and his desire to leave his hotel business to his adult child who had joined the business and opened an on-premises restaurant. The client believed this hotel was “his,” as the client ran this hotel and his brother-in-law ran two other hotels that all four in-laws owned. I needed to know what the client owned, not what the client told me he owned. After reading the relevant documents, I learned that the client did not own or control the business he thought he did, and he would not be able to leave the business to his heir. The client owned 26% of a limited partnership that owned the business, and he was one of two general partners, the other being his brother-in-law, a very controlling and domineering person. The brother-in-law conditioned his okay for the client’s adult child to open the restaurant on the restaurant providing, at its expense, free breakfasts to the hotel’s guests. The client's then-lawyer and then-accountant were among the dozen or so family and friends limited partners. The partnership's term was contractually scheduled to expire some years earlier, but the brother-in-law, attorney and accountant had advised the client to extend the partnership's term because if the business was sold, they would all have to pay taxes. It was not a coincidence that each limited partner's original investment was yielding an annual 700% cash return, all while the assets of the business had appreciated significantly. Because the client was the nicest person I had ever met and was the kind of man one would choose as your father if that was a matter of choice, the client was not confrontational and did not want to sue despite what I thought were good claims against some of the actors here. I devised a non-litigation strategy that included the partnership not distributing cash to its partners so the partnership could use its cash for acquisitions and other business matters. That resulted in the partners having taxable income without cash being distributed to them. The client offered to buy out the limited partners who rejected the offer, commenced arbitration, and sued for an injunction to compel cash distributions. Although the client would not sue, he would defend himself quite vigorously. The injunction was denied. The case proceeded to pre-arbitration mediation. Relying on their own "expertise," the former lawyer and former accountant chose not to obtain an appraisal and agreed on behalf of the limited partners to a buy-out at a particular partnership valuation. I arranged for a bank client to make a loan to the partnership in an amount greater than the buy-out value of the limited partners’ 48%. The bank's appraised value of the business turned out to be about 50% greater than the buy-out value. After some intra-family transactions, this crisis was resolved with my client owning 100% of his business and having the ability to leave his very valuable asset to his heir. The client said that the decision to make me his attorney was the most significant business decision of his life. It is critical to ascertain the facts in any crisis situation, both for the lawyer and the client, and the lawyer must be able to communicate those facts clearly to the client and ultimately to others involved in the crisis. “’We are advocates,’ Mr. Burson told The New York Times in 1984. ‘We are being paid to tell our clients’ side of the story. We are in the business of changing and molding attitudes, and we aren’t successful unless we move the needle, get people to do something. But we are also a client’s conscience, and we have to do what is in the public interest.”[18] While we are advocates to the world outside the client, we need to be truth-tellers to and questioners of the client. “When cyanide-laced capsules of Tylenol, the pain medication, killed seven people in the Chicago area in 1982, its manufacturer, Johnson & Johnson, made the best of a bad situation. After consulting Mr. Burson, the company’s chief, James E. Burke, announced a recall, ordered new tamper-resistant caplets and packaging seals, and mounted a campaign that acknowledged the facts, stressed safety measures and eventually restored his company’s credibility. ‘Basically, I served to help him think through problems and reinforce his own instincts,’ Mr. Burson said of Mr. Burke. It was not modesty. P.R. people have always tried to keep their hands invisible, allowing clients to take credit and blame, and the Tylenol case is often cited as a textbook model of corporate responsibility in a crisis. No one was ever prosecuted for the tampering, or for an isolated 1986 recurrence.”[19] (Coincidentally, I advised a pharmaceutical packaging company client at that time that repackaged Tylenol in tamper-evident packaging following that crisis.) Sometimes, identifying and articulating the facts suggests a solution. In my examples, each business needed to continue to be operated while these crisis situations played out and resolved. “Climb, Communicate, Confess and Comply with instructions” is the client’s job in a crisis. Our role as lawyers is to focus the client on running the business and ascertaining the facts as rapidly and as accurately as possible, evaluate options with the client, and then together arrive at the solution that makes the most sense for the client and the client’s constituencies. "Never let a good crisis go to waste" has been attributed to Winston Churchill[20] and to others.[21] No matter the outcome of a crisis, there is always a lesson to be learned. [1] https://www.washingtonpost.com/business/economy/new-software-in-boeing-737-max-planes-under-scrutinty-after-second-crash/2019/03/13/06716fda-45c7-11e9-90f0-0ccfeec87a61_story.html[2] https://www.nytimes.com/2019/10/18/business/boeing-flight-simulator-text-message.html [3] https://airfactsjournal.com/2018/09/the-other-4-cs-of-aviation/ [4] https://airfactsjournal.com/2018/09/the-other-4-cs-of-aviation/ [5] https://www.nbcnews.com/news/world/iranian-military-says-it-unintentionally-shot-down-ukrainian-plane-n1113996 [6] https://en.wikipedia.org/wiki/Impeachment_of_Bill_Clinton [7] Harold Burson, a Giant in Public Relations, Dies at 98 https://www.nytimes.com/2020/01/10/business/media/harold-burson-dead.html [8] https://en.wikipedia.org/wiki/Ukraine_International_Airlines_Flight_752 [9] Lanny J. Davis, Why Lawyers Are Best At Crisis Management http://www.lannyjdavis.com/why-lawyers-are-best-at-crisis-management/ [10] http://www.lannyjdavis.com/why-lawyers-are-best-at-crisis-management/ [11] https://www.steptoe.com/en/services/practices/criminal-defense-investigations/crisis-management.html [12] https://abovethelaw.com/2017/05/counseling-through-an-in-house-crisis/ [13] For much more on this topic, see https://idea.library.drexel.edu › idea:6094 › datastream › OBJ › download). [14] https://finance.columbia.edu/content/building-evacuation-procedures [15] https://abovethelaw.com/2013/07/grabbing-the-canoe-or-reflections-on-crisis-management/ [16] https://abovethelaw.com/2013/07/grabbing-the-canoe-or-reflections-on-crisis-management/?rf=1 [17] https://abovethelaw.com/2013/07/grabbing-the-canoe-or-reflections-on-crisis-management/?rf=1 [18] https://www.nytimes.com/2020/01/10/business/media/harold-burson-dead.html [19] https://www.nytimes.com/2020/01/10/business/media/harold-burson-dead.html [20] https://realbusiness.co.uk/as-said-by-winston-churchill-never-waste-a-good-crisis/ [21] http://freakonomics.com/2009/08/13/quotes-uncovered-who-said-no-crisis-should-go-to-waste/
March 4, 2023
Labor and Employment
Adhering to Laws of Every State in Which Employees Are Working Remotely
As I’ve written before, the employment laws of the states where an employer hires employees are applicable to the employment relationship. If you missed that blog, you can access it here. I am listing more types of laws to consider. Sexual harassment policies: It may be legally required to adopt a policy against sexual harassment and provide notice of the policy at certain times. Workplace safety laws: Enough said. Non-competition agreements in an employment relationship: Severely limited or forbidden in some states and may soon be federally banned. Please look at my previous blog on this topic and the proposed legislation. Mini-COBRA laws: There are some state laws applying the COBRA requirements to employers with less than 20 employees. Voting leave: In certain cases, employers are required to provide leave to vote for a certain length of time and be paid for this. Lie detector tests: Requiring or requesting one is unlawful in some locations. Requiring the use of certain surnames: In some states, it’s illegal for employers to require employees to use, because of such individual's sex or marital status, any surname other than the one by which such individual is generally known. Veterans’ Day & Memorial Day leave: Employers in some locations must grant unpaid leave to a veteran or a member of a Department of War veteran who desires to participate in a Memorial Day exercise, parade, or service in the employee's community of residence. Volunteer emergency responders’ leave: Employers can’t take any disciplinary action against any employee of some states because they fail to report for work at the commencement of their regular working hours, where such failure is due to his responding to an emergency in their capacity as a volunteer member of a fire or ambulance department. This list is not exhaustive. I will continue the list in my next blog. I’m able to advise on employment laws applicable in other states, as needed.
March 3, 2023
Estates and Trusts
Three Reasons a Lawyer Should Settle Your Estate
When a loved one has died, the shock and sorrow of their loss may quickly lead to another emotional jolt—the prospect of having to settle their estate. Being named personal representative (executor) under someone’s will is both an honor and a burden. The process usually takes several months. There will likely be financial accounts to marshal, real estate to deal with, bills and taxes to pay, and probate filings to prepare—all at an emotionally difficult time. For many personal representatives, their first question is “How can I get out of this?” The good news is that a probate attorney can provide the necessary support and expertise to ensure that the estate is managed efficiently. In fact, an experienced lawyer can handle most of the tasks the personal representative would otherwise be responsible for. After passing these administrative duties over a member of the bar, the personal representative may well feel that a great burden has been lifted from their shoulders. When it comes time to have your own will prepared, you can name a probate attorney as your personal representative and spare your loved ones the burden of settling your estate. Especially for those of us in the LGBTQ community, this can be an attractive option for three important reasons. A lawyer can help ensure that your wishes are respected. First, in addition to providing legal expertise, a lawyer can help ensure that your wishes are respected. Settling an estate often triggers disputes among family members. This can be especially true in families with strained relations. Animosity might stem from a parent or other relative’s homophobia, or from simple family dysfunction. Either way, a lawyer can help prevent disputes by acting as a buffer between members of your family and other beneficiaries. And as a point of contact for the estate, the attorney can explain the administration process and how the assets will be distributed—all without the emotional baggage that frequently exists between blood relations. The result is often a smoother and less contentious administration process than when a family member serves as personal representative. Second, naming a probate lawyer as your personal representative can also save time and reduce stress for your loved ones. Estate administration can be a long and burdensome process, and a non-lawyer will likely find it physically and emotionally draining. A lawyer can help streamline the process and handle the difficult legal aspects of the job, allowing your loved ones to focus on grieving and self-care. Most people who settle an estate do so only once in their life. While learning on the job, they may naturally make mistakes and missteps along the way. By contrast, a probate lawyer will be intimately familiar with every aspect of serving as personal representative. With the help of a team of legal assistants and paralegals, they can streamline the process and handle any challenges that may arise. Third, a lawyer can help avoid costly mistakes. Estate administration involves many important decisions, such as deciding what assets to liquidate, whether to improve a house before selling it, and choosing a fiscal tax year. At each step along the way, making the wrong choice can have significant financial consequences. By drawing on years of experience, a lawyer can help prevent expensive misjudgments and ensure that your estate is settled in the most economical manner possible. Settling an estate can be a complicated and emotionally challenging process. Fortunately, there is a way out. Put an experienced probate lawyer in charge and make life easier for the people you care about most. Contact an Estates & Trusts attorney today to get started.
March 2, 2023
Bankruptcy
How Not to Violate the Automatic Stay
The automatic stay is "one of the fundamental debtor protections provided by the bankruptcy laws" of this country.”[1]. It is viewed as a very broad protection that "stops all collection efforts, all harassment, and all foreclosure actions . . . meant to provide “complete, immediate, albeit temporary relief to the debtor from creditors, and also to prevent dissipation of the debtor's assets before orderly distribution to creditors can be effected.”[2] Certain actions (like bringing or continuing a breach of contract action against the debtor) fit neatly in the prohibitions of the Bankruptcy Code while some more nuanced circumstances prove trickier to label as violations, yet they can put a creditor or a counterparty on the naughty list. Here are five examples: 1. The automatic stay applies outside of U.S. geographical borders. A declaration of a setoff and a foreign creditor’s refusal to return the receivables to the debtors upon request was an improper exercise of control over the property of the Debtor's estate, and thus a violation of Section 362(a)(3) of the Bankruptcy Code. [3] 2. The enforcement of provisions in a condominium's bylaws that prohibit a chapter 11 debtor with a pre-petition delinquency in the payment of condominium fees from voting at an annual meeting or holding office as a director of the condominium association violates the automatic stay.[4] 3. A lender proceeding with a foreclosure sale against a limited liability company in which the debtor held 99% of the equity willfully violates the automatic stay under Section 362(a)(1), and to the enforcement of an earlier judgment in that proceeding or action, under Section 362(a)(2) when the foreclosure action named both the company and the debtor as parties in the proceeding.[5] 4. A mortgage company’s attempt to perfect lien against estate property by registering a deed of trust on the debtor’s property, when the stay had not been lifted by the bankruptcy court and when the mortgage company and its counsel had actual knowledge of the bankruptcy filing is a willful violation of the automatic stay.[6] 5. Threatening a debtor with criminal prosecution is a willful violation of the automatic stay. In a case involving a landlord in Tennessee, the Sixth Circuit affirmed the bankruptcy court and the district court in finding that the landlord cannot hide behind the criminal prosecution exception to the automatic stay in Section 362(b)(1).[7] Before the commencement of the bankruptcy case, the debtor had written to the landlord a check that bounced. After the debtor filed for bankruptcy, the landlord wrote letters to the debtor and her mother, claiming he was not attempting to collect back rent but threatened that he would initiate criminal proceedings for the bounced check. __________________ [1] Melanotic Nat'l Bank v. N.J. Dep't of Envtl. Prot., 474 U.S. 494, 503 106 S.Ct. 755, 88 L.Ed.2d 859 (1986) (quoting S. Rep. No. 95-989, at 54-55 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5840, 5963, 6296) [2][2] SEC v. Brennan, 230 F.3d 65, 70 (2d Cir. 2000). [3] In re Arcapita Bank B.S.C.(c), 628 B.R. 414, 480 (Bankr. S.D.N.Y. 2021), aff'd sub nom. In re Arcapita Bank B.S.C.(C), 640 B.R. 604 (S.D.N.Y. 2022); Section 362(a)(3) of the Bankruptcy Code provides that a filed bankruptcy petition filed operates as a stay, applicable to all entities, of any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate. 11 U.S.C. § 362(a)(3). [4] In re Gordon Properties, LLC, 460 B.R. 681, 685 (Bankr. E.D. Va. 2011). [5] Bayview Loan Servicing LLC v. Fogarty (In re Fogarty), 39 F.4th 62 (2d Cir. 2022). Section 362(a)(1) bars the commencement or continuation ... of a judicial, administrative, or other action or proceeding against the debtor ... to recover a claim against the debtor that arose before the commencement of the case. [6] In re Medlin, 201 B.R. 188 (Bankr. E.D. Tenn. 1996). [7] Weary v. Poteat, No. 15-5159, 2015 WL 5712191 (6th Cir. Sept. 30, 2015).
February 28, 2023
Labor and Employment
Consider Labor Laws When Hiring in Other States
Please be aware that the employment laws of the states where an employer hires employees are applicable to the employment relationship. Many companies continue to hire remotely without this consideration. Some states have very complex laws favoring employees, and employers should be alert to this issue. I am mentioning some types of laws to consider so that employers can review this list when considering hires in other states. This is a rather lengthy list to be continued. Written notices: This is a commonly overlooked legal requirement. Check to be sure which legal notices must be provided in each state. Anti-discrimination laws based on protected status: There are various classifications on which an employer may not legally discriminate. These might include the classes protected by federal law or exceed them. For instance, it is illegal in Delaware to discriminate against an employee because they are a firefighter. Disability accommodations: In some states, it’s illegal for an employer to require documentation from an appropriate health care or rehabilitation professional in certain situations, such as a request to lift less than 20 pounds. Pregnancy accommodations: In some states, employers must grant reasonable accommodations requested by employees for their pregnancy or related conditions unless employers can show that these accommodations would impose an undue hardship on their business. Parental leave & sick leave: Some states’ laws grant employees parental leave, unpaid sick leave, or paid sick leave. To be continued next blog. In the meanwhile, if you have questions, please reach out.
February 24, 2023
Business
FTC Seeks to Ban Non-compete Clauses: What This Really Means for Your Business
Today we will cover how the FTC seeks to ban non-compete clauses and what this means for your business. On January 5, 2023, the Federal Trade Commission (“FTC”) proposed a new rule banning employers from imposing non-competes on their workers. The rule is undoubtedly politically motivated as it was issued in response to President Biden’s Executive Order that encouraged the FTC to “curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.” The FTC believes a non-compete is a “widespread and often exploitative practice that suppresses wages, hampers innovation, and blocks entrepreneurs from starting new businesses.” By stopping this practice, the FTC erroneously estimates wages would increase by nearly $300 billion per year, and it would expand career opportunities for 30 million Americans. By stopping this practice, the FTC erroneously estimates wages would increase by nearly $300 billion per year, and it would expand career opportunities for 30 million Americans. Scope of Proposed Rule to Ban Non-compete Clauses The FTC’s proposed rule would prohibit employers from using non-compete clauses – i.e., any contractual term between an employer and a worker that prevents the worker from seeking or accepting employment with a person, or operating a business, within a specific geographic area and period of time after the conclusion of the worker’s employment with the employer. It would make it illegal for an employer to: enter into or attempt to enter into a non-compete with a worker; maintain a non-compete with a worker; or represent to a worker, under certain circumstances, that the worker is subject to a non-compete. The proposed rule would apply to “workers,” broadly defined by the FTC to include employees, individuals classified as independent contractors, externs, interns, volunteers, apprentices, and sole proprietors who provide a service to a client or customer. The rule also includes a “functional test” for determining what constitutes a “de facto” non-compete clause that has the same effect as an express non-compete clause – the same test employed by courts in states that already have express prohibitions on non-compete clauses. Effective Date of Proposed Rule Importantly, this is a proposed rule that is not in effect. The proposed rule is in a comment period until March 20, 2023. We do not believe it will go into effect, if at all, until after a lengthy court battle ending with a ruling from the United State Supreme Court. Then, even if the proposed ban becomes law, employers will have 180 days to revise their agreements to conform with the law. Moreover, there are a variety of tools, such as reasonably tailored non-disclosure agreements and confidentiality provisions, employers can use to accomplish their goals without violating the proposed ban. The proposed rule is the first step in a long process that will take years to complete. We expect the FTC will receive thousands or hundreds of thousands of comments to consider. Based on the comments, the rule will be revised. It could take the FTC until late 2023 or even the end of 2024 to issue a final rule. After the final rule is set forth, it will be subject to a legal challenge (or challenges); this will undoubtedly delay the effective date into 2025 or later, assuming the final rule survives any legal hurdles it faces. During this challenging period, a presidential election will occur, and the political winds will likely change, potentially further reversing the course of the FTC. Criticism of the Proposed Rule The U.S. Chamber of Commerce has opined that the FTC lacks the authority to issue the rule and ignores the benefits of non-competes. A senior vice president for the U.S. Chamber of Commerce has stated: “Attempting to ban non-compete clauses in all employment circumstances overturns well-established state laws which had long governed their use and ignores the fact that, when appropriately used, non-compete agreements are an important tool in fostering innovation and preserving competition.” An FTC Commissioner issued a dissenting statement when the proposed ban was announced. The dissenting statement outlined potential legal challenges noting the FTC lacks the legal authority to issue the ban, and the rule is barred by a recent United Supreme Court decision. Even if the FTC has authority, it is an impermissible delegation of that authority. The proposed rule must overcome extensive case law upholding the use of non-compete clauses that are determined to be reasonable unless they are unreasonable as to time or geographic scope. Even if the FTC has authority, it is an impermissible delegation of that authority. Exemptions to Proposed Rule to Ban Non-compete Clauses The proposed rule would exempt non-compete agreements that a person entered in connection with the sale of a business, but only if that person owned 25% or more of that business. The FTC is also seeking comments as to whether: non-compete clauses between employers and senior executives should be subject to a different standard; the rule should apply uniformly to all workers; and the rule should impose a categorical ban on non-compete clauses. Alternatives to Non-compete Clauses Employers are not without options. The FTC’s proposed rule’s definition of a non-compete clause does not include other types of covenants. Accordingly, employers should begin analyzing their confidentiality clauses, non-solicitation, and non-disclosure provisions. Carefully drafted provisions can ensure that employers are able to protect confidential information and customer relationships, as well as the poaching of current employees by former employees. Employers should also use this as an opportunity to strengthen trade secret protection plans. Employers should also use this as an opportunity to strengthen trade secret protection plans. What Should I Do as an Employer? There is no need to panic. The proposed rule will not go into law in its final form, if at all. However, now is the time to implement proper planning techniques into agreements with employees. As noted previously, with proper legal counsel, non-compete, non-solicitation (vertically and horizontally), confidentiality, non-disclosure, and other restrictive covenants can be used to accomplish the goals of employers, most of which are not within the scope of the current version of the proposed rule. With proper legal counsel, non-compete, non-solicitation, confidentiality, non-disclosure, and other restrictive covenants can be used to accomplish the goals of employers. Conclusion Thank you for reading our blog on how the FTC seeks to ban non-compete clauses and what this means for your business. Please contact us immediately so that we can assist you in your planning and contract drafting process to properly implement such restrictions to protect your business. Charles McCauley can be reached at cmccauley@offitkurman.com or 484-531-1712, and Sarah Goodman can be reached at sarah.goodman@offitkurman.com or 267-338-1319.
February 24, 2023
Intellectual Property
Does the First Amendment Protect the Use of Parody for Commercial Purposes?
The US Supreme Court Will Decide On March 22, the US Supreme Court will hear arguments in Jack Daniel's Properties, Inc. v. VIP Products LLC. In a case that pits trademark rights against free speech claims, Jack Daniel's has sued VIP Products for trademark infringement due to VIP Products' sale of a dog chew toy in the shape of a Jack Daniel's bottle with a label replacing "Jack Daniel's" with "Bad Spaniels" and engaging in other parodying of the Jack Daniel's label in a manner referring to dog defecation. VIP Products takes the position that its parody should be protected under the First Amendment Freedom of Speech Clause. Jack Daniel's view is that a company selling a commercial product that makes humorous use of the Jack Daniel's brand should not be entitled to First Amendment protection. I discovered in a store in Colorado that "Bad Spaniels" is just one of a line of dog toys parodying liquor brands. Although it may be that Jack Daniel's is the only brand worked up enough about this to bring a lawsuit (and take it all the way to the Supreme Court), several third parties have filed briefs in support of Jack Daniel's position, including Campbell Soup Company, Nike, and several trade associations. The Supreme Court's decision will likely issue in June.
February 23, 2023
Business
Does Litigation Risk Loss of Potential Insurance for Environmental Harm? New Jersey Court Weighs In
Businesses risk losing potential insurance coverage for investigation and remediation of environmental contamination if they pursue claims against third parties without carefully considering and preserving available coverage. In fact, in recent ligation in New Jersey with implications nationwide, two insurance companies tried to avoid providing coverage for environmental expenses incurred by the owner of the contaminated property by arguing that the property owner’s claims were barred by New Jersey’s “entire controversy” doctrine as a result of prior litigation between the property owner and its former tenant and the tenant’s insurance company. See Industrial Corner Corp. v. Public Serv. Mut. Ins. Co., Docket No. 20-06677 (D.N.J. February 8, 2023). New Jersey’s “entire controversy” doctrine is a unique formulation of the more typical doctrine of “res judicata,” which generally bars claims that could have and should have been brought in prior litigation. However, based on the specific facts at issue, the New Jersey federal district court allowed the property owner to continue to pursue insurance coverage from the insurers despite the prior litigation. That is, the property owner has owned the New Jersey property at issue since 1971. From 1971 through 2008, the property owner leased the property to a tenant conducting manufacturing. The tenant discharged perchloroethylene (“PCE”), a solvent used to clean metal and dry-clean fabric, through its operations and thereby contaminated the property. After learning of the contamination, the property owner sued the tenant and the tenant’s insurance company in separate litigation for damages under the terms of the lease and the applicable insurance policies. The property owner successfully obtained compensation from these parties but was unable to recover all of its costs. As a result, following the conclusion of this litigation, the property owner sought coverage from its own insurance providers. As noted above, the providers responded by arguing that the property owner’s claims were barred by New Jersey’s “entire controversy” doctrine. In evaluating the applicability of the “entire controversy” doctrine, the court determined that two of the three elements of the doctrine weighed in favor of dismissing the property owner’s claims. However, the third and final element was not satisfied. In particular, the court determined that the “entire controversy” doctrine did not apply because the claims by the property owner and its insurance providers did not arise from the same transaction or occurrence as the prior litigation against the former tenant and the tenant’s insurer. The court weighed several factors and determined that, even though all of the claims arise from the PCE contamination, the claims differ in certain key regards. The court also found it dispositive that the property owner could not have brought all of the claims in the same action because they were not yet ripe, i.e., because its insurance providers had not yet refused to provide coverage. While this decision is helpful to insureds, it is easy to formulate a set of facts where the property owner’s insurers could have escaped liability based on the “entire controversy” doctrine or otherwise. As such, this decision provides a necessary warning to parties, whether located in New Jersey or beyond: carefully evaluate all potential recovery options, including private parties and insurance providers, before instituting litigation and take precautions to preserve and maintain all recovery options.
February 22, 2023
Labor and Employment
Is an Individual with a Workers’ Compensation Injury Protected Under the ADA?
Companies operating in the logistics industry, whether it be as contractors for DHL, FedEx, Amazon, or the like, are all too familiar with the challenges of having a workforce that relies primarily on physical ability and the challenges associated with employees who suffer from injuries on the job that impact their ability to perform their job duties and potentially create unsafe working conditions. With physically demanding jobs comes the increased chance for accommodation requests under the Americans with Disabilities Act (ADA). When an employee is injured on the job, contractors are often quick to ensure they follow proper protocols for any potential workers’ compensation claims. However, they often overlook the application of the Americans with Disabilities Act, which may cover the injured worker if the employee meets the definition of disability. The ADA applies to employers with 15 or more employees. It prohibits employers from discriminating against qualified disabled individuals and requires that such employers provide reasonable accommodations that allow them to perform the essential functions of their job or to enjoy benefits and privileges of employment equal to those without a disability. An individual has a disability and is subject to protection if they have a physical or mental impairment that substantially limits major life activities. Crucially, the ADA does not require a showing of long-term effects to qualify, and short-term impairments are covered if they are considerably limiting. Often, employers mistakenly believe that employees struggling with short-term impairments due to a workplace injury do not qualify for protection under the ADA and are too focused on the initial worker’s compensation assessment to realize they also need to consider the implications of the ADA. If an employee asks for accommodation after a workplace injury, the ADA may apply, and the company must perform an individualized assessment to determine whether the individual meets the ADA definition of disabled, and if they do, assess what reasonable accommodations to grant based to help the employee perform their job duties. An accommodation request in the logistics industry can take many forms, including: requests for light duty, including limiting hours worked and weight lifted; requests for periodic unpaid leave or an alternative work schedule to attend physical therapy appointments; increased breaks; and reassignment to a less physically demanding position. While an employer is not obligated to grant the exact accommodation an employee requests, it must assess the request and engage in the interactive process with the employee to determine the employee’s limitations and needs, whether the accommodation requested is appropriate, and what other accommodations are needed. Employers’ obligations under the ADA are complex and fact specific. So complicated, in fact, that the U.S. Equal Employment Opportunity Commission’s (EEOC) guidance is seventy-six pages long. Employers must have a clear and compliant ADA policy that includes instructions for employees on pursuing an accommodation request.
February 22, 2023
Immigration Law
Policy U-Turn: US Visas to be Issued in DC
On February 9th Bloomberg Law reported on an interview they conducted with Julie Stufft, Deputy Assistant Secretary for Visa Services at the Bureau of Consular Affairs, in which Ms. Stufft outlined a Department of State (DOS) plan to restore stateside visa renewals. Which means that eligible nonimmigrants would be able to renew their visa stamps without leaving the country. This marks the turning point in the DOS policy on stateside visa renewals, which were largely discontinued in 2004 except for diplomats and international organization employees. It is great news for H and L visa holders who will be included in the trial program. Details are currently vague, but it will likely include a limited subset of those visa holders. The Covid-19 pandemic brought the policy into the forefront, with multiple organizations seeking assistance from the DOS in accepting stateside visa renewals. This was requested as the pandemic had led to the global closure of embassies and consulates worldwide, which in turn prevented thousands of individuals from traveling abroad with the fear they would not be able to return as there was no mechanism to renew their visa. Further, The Trump administration policies to ban certain visa issuances and strip the DOS of staff still have legacy impacts to the visa processing process. The many voices calling for stateside visa issuance fail to grasp the reality of implementing such a complex and massive undertaking. The DOS certainly has the capabilities to set up such a program, but the resources and procedures are vast, ranging from detailed security screening to secure document handling, possibly including online visa interviews with applicants and a myriad of additional complexities. Ms. Stufft alluded in her interview that the expansion of stateside visa processing would require setting up a new consular division in Washington, D.C. The main point of contention that ended the vast majority of stateside visa processing was the biometric requirements for visas required in 2004. How the DOS plans to address this is vague right now. Still, there are many national biometric screening centers operated by the United States Citizenship and Immigration Services (USCIS). We could see an expansion of use of these centers or the reliance on previously obtained biometrics – a policy implemented by the USCIS during the Covid-19 pandemic. Although the details provided are vague, this change in policy provides another level of protection for nonimmigrant visa holders and hopefully provide more certainty for international travel as visa wait times continue to suffer worldwide. The DOS has continued to highlight their programs to address worldwide visa backlogs, which have included expanded waivers for interviews, special programs to assist individuals affected by the trump administration policies and increased appointments. Further steps recommended to the DOS by a variety of groups include adding additional missions, allowing online visa appointments and streamlining the interview waiver process to cut wait times. If you’d like to discuss further, please reach out to Michael.Freestone@OffitKurman.com.
February 17, 2023
Litigation
Virginia’s 2023 Wage Hike – New Year, New Minimum!
Virginia is one of nine jurisdictions en route to a $15 minimum wage (or higher) by 2026. As it is, Virginia is one of nearly 30 states to affect an increase this year. The first of the year saw the Commonwealth’s previous minimum of $11 per hour -- which had only gone into effect at the beginning of 2022! -- bump up by another $1 to $12 per hour. By comparison here in the “DMV,” Virginia continues to lag its neighboring jurisdictions, Maryland and D.C., with the first of the year, Maryland’s minimum jumped from $12.50 to $13.25 per hour (for companies of certain minimum size – i.e., 15 or more employees), while D.C.’s $16.10 hourly rate comes in higher than all fifty states, many of which still abide by the federal minimum of $7.25, which has remained unchanged since 2009. Virginia’s increase is the latest in a series of step-ups scheduled to take effect in the Commonwealth between now and 2026. The minimum wage rate in Virginia recently climbed $1.50 per hour in 2021 and, after this year’s additional $1 per hour, is slated to increase again to $13.50 per hour in 2025 before reaching the targeted $15 per hour in 2026. That is, of course, so long as the most recent changes to Virginia’s Minimum Wage Act are not repealed or otherwise limited by the now Republican-controlled General Assembly. Keep a watchful eye out for attempted changes this legislative session to Code Section 40.1-28.10 as attempts are anticipated to try to walk back the increases or at least to “slow the roll.” Tipped employees, such as restaurant wait staff, continue to face a meager $2.13 per hour minimum but, with tips factored in, must meet the $12 per hour minimum rate. If you are a small business owner with questions about the new laws and your obligations regarding them, Offit Kurman has the resources to help. Not sure whether your workers are independent contractors or employees subject to the minimum wage requirements? Choosing to do nothing is still making a choice – and the wrong one could prove very costly in this context. If you’re uncertain whether and/or how this or any other new law (recreational cannabis, for instance?) might impact you or your business, let me get you connected with someone who can help.
February 15, 2023
Labor and Employment
Secure 2.0 Act of 2022
Attorneys Sarah Sawyer and Scott Tippett discuss extensive changes to the 2019 Secure Act, collectively called the Secure 2.0 Act of 2022. The Secure 2.0 Act increases the options for employers and employees regarding retirement plans and outcomes and adds additional compliance considerations for companies. In this informative legal update, Sarah and Scott discuss: Automatic enrollment requirements Increased age for mandatory distributions for IRAs The new inclusion of student loan payments as contributions for matching purposes Tax credit for military spouses Timing considerations for implementing and complying with the Act Sarah and Scott also discuss the importance of understanding the nuances of the Act and being proactive. Listen to learn more!
February 15, 2023
One Minute of Overtime
Deductions from Salaries
Welcome to One Minute of Overtime, where I will share insights on Labor and Employment Law topics, mostly related to minimum wage and overtime compliance issues. Compliance in this area of law is nuanced and technical, so it is critical for employers to audit and adjust their practices to remain compliant, so stop by to stay up-to-date and in-the-know. An employer is permitted to withhold a portion of an exempt employee’s salary in limited circumstances, such as when the employee is absent from work for one or more full days for personal reasons other than sickness or disability; for absences of one or more full days due to sickness or disability if the deduction is made in accordance with a bona fide plan, policy or practice of providing compensation for salary lost due to illness; to offset amounts employees receive as jury or witness fees, or for military pay; for penalties imposed in good faith for infractions of safety rules of major significance; or for unpaid disciplinary suspensions of one or more full days imposed in good faith for workplace conduct rule infractions.
February 15, 2023
Business
Ninth Circuit Court of Appeals Submits Second Certified Question to California Supreme Court On COVID-19 Related Insurance Coverage
On February 7, 2023, the Ninth U.S. Circuit Court of Appeals (“9th Circuit”) sent a certified question to the California Supreme Court on an issue in a pending case relating to insurance coverage for COVID-19-related business shutdowns. This is the second time within the past 45 days that the 9th Circuit has done so, having submitted a different question to the California Supreme Court in another COVID-19 coverage case on December 28, 2022. The certified question sent on February 7, 2023, relating to a pending dispute between French Laundry Partners and its insurer, The Hartford, asks, “[i]s the virus exclusion in French Laundry’s insurance policy unenforceable because enforcing it would render illusory a limited virus coverage provision allowing for the possibility of coverage for business losses and extra expenses allegedly caused by the presence and impacts of COVID-19 at an insured’s properties, including the loss of business due to a civil authority closure order?” The certified question sent on December 28, 2022, relating to a pending dispute between concert organizer Another Planet Entertainment and its insurer Vigilant Insurance Co., asks “[c]an the actual or potential presence of the COVID-19 virus on an insured’s premises constitute ‘direct physical loss or damage to property’ for purposes of coverage under a commercial property insurance policy?” The topics of the two certified questions are not the main points here. Instead, it is the uncertainty that remains as COVID-19-related insurance cases make their way through Courts – in California and elsewhere – that is paramount. Indeed, in its February 7, 2023, submission to the California Supreme Court, the 9th Circuit stressed: Courts at both the state and federal levels are grappling with the application of California insurance contract interpretation law to coverage for losses from business shutdowns due to government closure orders in response to COVID-19. While both state and federal courts have published opinions providing some guidance, there remains much uncertainty as to how California law applies in many scenarios. The prevalence of and uncertainty surrounding COVID-19 insurance litigation is underscored by our certification to the Supreme Court of California on December 28, 2022, in another case asking whether the actual or potential presence of the COVID-19 virus can constitute ‘direct physical loss or damage to property’ for the purposes of coverage under an insurance policy. The stakes are high in COVID-19 coverage cases, which center on an insured’s loss of business due to government closure orders. After more than two years of litigation across the nation, uncertainty remains. The 9th Circuit’s sending of two certified questions to the California Supreme Court in the past 45 days is a manifestation of this and an effort to, in the words of the 9th Circuit, “gain some efficiencies through concurrent consideration of our certification in [the French Laundry] case.” Time will tell what the California Supreme Court decides to do in these two instances and whether more certified questions will come from Federal Courts to State Supreme Courts as courts seek clarity and consistency in handling COVID-19-related insurance coverage cases. If you are still grappling with claims associated with losses due to government closure orders in response to COVID-19 or other comprehensive general liability or property insurance coverage issues, please feel free to contact us for a consultation.
February 14, 2023
Family Law
DIY Divorces Recap
There’s a lot to be said for embracing a do-it-yourself (DIY) ethos. DIYers develop useful skills, sometimes discover new hobbies, and often save a great deal of money. But while plenty of DIY projects can reduce upfront costs and bring personal fulfillment, there are some things you should never, ever do yourself. Giving your house a fresh coat of paint? Go for it! Brewing beer in your garage? Sure—why not? Handling your own divorce proceedings? Not a great idea. Looking to handle a divorce or another family legal matter in the best way possible? Don’t rely on a simple document retrieval service. Offit Kurman’s Family Law attorneys are dedicated to resolving conflicts and protecting your and your family’s interests in a fast, straightforward, and cost-effective manner. See for yourself what we can do for you.
February 13, 2023
Labor and Employment
New Federal Workforce Mobility Act Would Further Limit Non-Compete Agreements
Last week, politicians reintroduced the federal Workforce Mobility Act, a bipartisan bill intended to limit the use of non-compete agreements with U.S. employees. As the bill states, “economists now estimate that 1 in 5 workers is covered by a non-compete agreement.” It further finds that non-compete agreements are “blunt instruments that crudely protect employer interests and place a drag on national productivity by forcing covered workers to wither idle for long periods of time or leave the industries in which the workers have honed their skills altogether… [they] also reduce wages, restrict worker mobility, impinge on the freedom of a worker to maximize labor market potential, and slow the pace of innovation in the United States.” TheWorkforce Mobility Act would: Limit the use of non-competes to business sales and dissolution of partnerships; Require most employers to post a notice of the law for employees; Allow the Federal Trade Commission to bring an action to enforce the act according to the Federal Trade Commission Act; Direct the Department of Labor to investigate violations – confidentially - and allow it and state attorneys general to bring legal action against the employer who uses a non-compete; and Provide that employees may sue their employers or former employers to enforce the act, recovering both actual damages and attorney’s fees and costs. If this act passes, it will expose employers to a minefield of liabilities and enforcement actions. At this point, given both the proposed FTC rule banning non-competes, discussed in my previous blog, companies need to meet with their attorneys regarding protecting information, assets, and business by means of other agreements. Prediction from this litigator/ agreement drafter: if this bill passes, a great deal of litigation is coming. This bill doesn’t allow employees to agree to arbitrate any of these disputes. Employees will have little disincentive to file because they will recover their attorney’s fees and costs if they win the lawsuit. Looking forward, it will be more important than ever to craft an up-to-date agreement with employees to protect a business and its trade secrets.
February 9, 2023
Labor and Employment
New Harvard Wage Study Shows Employers Are Inflating Titles to Illegally Dodge Overtime
I am constantly reminded of employers’ mistakes in determining that their workers are exempt from overtime payments under the Fair Labor Standards Act. I recently came across a report of a new study from researchers at Harvard Business School and the University of Texas at Dallas. This study, covering 2011 – 2018, examined “title inflation,” misclassification of employees to avoid paying overtime, and the risk of U.S. Department of Labor/ USDOL suits. The report states, in part, "Our evidence indicates that firms strategically use job titles to exploit regulatory thresholds to avoid paying for overtime work … We find that [this practice] is also strongly associated with the usage of fake managerial titles and … thus can be used as a timely indicator of potential FLSA violations." The law requires that in order to classify an employee as exempt from overtime, the employee must earn a certain amount of salary, as well as perform the job duties of a non-exempt worker (for instance, managing others, professional duties based on a higher degree, and computer programming.) During the study’s time period, there was a 485% increase in managerial titles and pay that barely bumped workers over the minimum salary required to classify workers as exempt. Inflated titles are used to justify salary: researchers saw a barber called a “grooming manager” and a front desk clerk labeled as a “director of first impressions.” Overtime — or lack thereof — is prevalent in issues of wage theft. Nearly two-thirds of wage theft violations that resulted in fines involved overtime issues, according to the study's analysis of U.S. Department of Labor data from 2010 to 2021. Of all back wage fines levied by the agency, over 80% were for overtime. The USDOL has recovered millions of dollars in back pay for unpaid overtime. If just one employee blows the whistle – it costs employers dearly. Review the employee’s primary duties and then classify them correctly. If concerns arise about retention, know that the employee can retain the title (and salary); but watch hours closely to ensure overtime isn’t owed and set a policy requiring management’s permission to work overtime. Consult an experienced attorney for help to determine classification.
January 25, 2023
Contractor's Corner
The Utility of Non-Solicitation Agreements for FedEx Contractors
A restrictive covenant is an arrangement with employees that they will not engage in particular behavior after leaving your company. Non-competes[1], non-solicitations, and confidentiality provisions are all examples of restrictive covenants. Since these covenants restrict an employee's free movement in the marketplace, strict rules govern their enforceability. While determining the enforceability of these provisions is nuanced and can vary under state, federal, and local laws, a general rule of thumb is that the covenant should be no more restrictive than necessary to protect the interest of the employer's business interests. Given concerns around enforceability and whether an employee in a competitive labor market will agree to sign such restrictions, many contractors choose to refrain from utilizing restrictive covenants for employees. However, this is often a mistake and can lead to a fundamental member of a contractor's team leaving their employment with the company and taking several employees with them. A lack of understanding of the difference between a non-compete clause and a non-solicitation often results in contractors' failure to implement these safeguards. Non-compete clauses are more restrictive than non-solicitation clauses and generally prohibit employees from working with competing companies within a specific geographic area. In contrast, a non-solicitation provision provides that an employee who leaves their employment with their employer cannot encourage other employees to go with them or solicit the employees for a certain period after the employee leaves. Meaning a well-drafted non-solicitation provision does not restrict an employee from working for a competitor but prevents the employee from orchestrating a mass exodus or taking the employer's top talent. Given that non-solicitation provisions are far more limited in scope than non-competes, they are generally easier to enforce, and employers face fewer challenges when presenting them to employees. For contractors, non-solicitation agreements are vital to preventing an employee, especially a manager, from leaving to work for another contractor in the terminal and taking several of a contractor's best employees with them. Because of the challenges with finding and retaining qualified drivers, it is common for other contractors to hire another contractor's employee and encourage them to bring others along. It is also common for a manager to leave to work for another contractor or take on their own routes and attempt to take their critical drivers with them. Ultimately, a well-drafted non-solicitation agreement can be a helpful tool for contractors. However, the key to ensuring maximum benefit is to ensure that the non-solicitation provision is in a contract, not in your handbook, and drafted in an enforceable way. For more information, please feel free to contact me at sarah.sawyer@offitkurman.com. [1] The Federal Trade Commission has proposed a rule to ban all non-competes nationwide. The rule is pending, and employers should monitor the progress. [Nationwide Non-Compete Ban Makes Important Step Forward]
January 23, 2023
Elder Law and Advocacy
Significant Increase in New York Medicaid Income and Resource Limits to Protect Individuals 65 and Over and Disabled Adults
In the past, Medicaid recipients who received MAGI Medicaid benefits (individuals under the age of 65) could lose their Medicaid benefits when they reached age 65. Once an individual reached 65, he had to reapply for non-MAGI Medicaid benefits with strict income and resource limits. In 2022, Medicaid’s monthly income limit was $934 for an individual and $1,367 for a couple; the resource limit was $16,800 for an individual and $28,133 for a couple. As a result, an individual with a monthly income of $1,500 and assets totaling $25,000 would lose his Medicaid benefits when he turned 65 because he was over the income and resource limits. While his income and resource had no significant increase, he has suffered a significant loss of benefit. Governor Hochul recently expanded coverage for older New Yorkers and disabled adults by increasing the income limits to match the income limits of MAGI Medicaid recipients under the Affordable Care Act, which takes effect this year. As a result of this expansion, the same individual with a monthly income of $1,500 and savings of $25,000 would not lose his benefits once he turned 65. Starting January 1, 2023, the monthly income limit for a single individual is $1,563 (a significant increase from $934), and for a couple, $2,106 (from $1,367 in 2022). The 2023 resource limit for an individual is $28,133 (up from $16,800 in 2022), and for a couple, $37,902 (up from $28,133 in 2022). For those already receiving Medicaid benefits and utilizing pooled income trusts to protect their excess income, they may continue with their current spend-down plan until Recertification. The increased income limits will apply upon the Medicaid recipients’ renewal. Those Medicaid recipients who prefer not to await rebudgeting upon Recertification may request a rebudgeting of income with the local Department of Social Services or, in New York City, Human Resources Administration. It is important to note that this expansion not only protects those who are currently receiving Medicaid benefits but also allows low-income New Yorkers who have been unable to qualify for non-MAGI Medicaid benefits in the past due to the strict income and resource limits to apply now and qualify for the benefits they need. If you or your loved ones have questions about how these recent significant changes may impact you, please feel free to contact me with any questions and to discuss your options.
January 20, 2023
Labor and Employment
Alert: The Paycheck Protection Program Is Now Accepting First Draw and Second Draw Applications
This blog post may contain information that was accurate at the time of publication but could become outdated over time. We strive to provide relevant and timely content, but circumstances, facts, and data can change. Users are encouraged to verify the current status of any information presented and seek updated guidance where necessary. Originally posted on 1/20/2021, no content changes. The Small Business Administration (“SBA”) reopened the Paycheck Protection Program (“PPP”) for First Draw PPP loans and is now also accepting applications for Second Draw PPP loans. The PPP now allows certain eligible borrowers that previously received a PPP loan to apply for a Second Draw PPP loan with the same general loan terms as their First Draw PPP loan. Second Draw PPP loans can be used for payroll costs and benefits. Loan proceeds can also be used to pay for mortgage interest, rent, utilities, worker protection costs related to COVID-19, uninsured property damage costs caused by looting or vandalism during 2020, and certain supplier costs and expenses for operations. Loan Amount. For most borrowers, the maximum loan amount of a Second Draw PPP loan is 2.5 multiplied by the average monthly payroll costs up to $2 million. Loan amounts may be based on payroll costs for the calendar year 2019, the calendar year 2020, or the actual trailing 12-month period before the application. Qualification Requirements. To qualify for a Second Draw PPP loan, the borrower must have: Previously received a First Draw PPP Loan and will or has used the full amount only for authorized uses; Have no more than 300 employees; and Demonstrate a decline in gross receipts of 25 percent in any quarter of 2020 over the corresponding quarter or submit tax returns showing a 25 percent decline in 2020 revenue over 2019. Gross receipts include all revenue in whatever form received in accordance with the borrower’s accounting method. Eligible Entities. Eligible Second Draw PPP entities include businesses, certain non-profit organizations, housing cooperatives, veterans’ organizations, tribal businesses, self-employed individuals, sole proprietors, independent contractors, and small agricultural co-operatives. Expansion of Allowable and Forgivable Uses. The Second Draw PPP expands the scope of payroll costs to include group insurance benefit payments, covered operations expenditures, covered property damage costs, covered supplier costs, and covered worker protection expenditures. By way of further explanation, Second Draw PPP funds may be used for the following allowable and forgivable uses: Covered operations expenditures include payment for any software, cloud computing, and other human resources and accounting needs. Covered property damage costs include expenses related to property damage due to public disturbances that occurred during 2020 that are not covered by insurance. Covered supplier costs include expenditures to a supplier pursuant to a contract, purchase order, or order for goods in effect prior to taking out the loan that is essential to the recipient’s operations at the time at which the expenditure was made. Supplier costs of perishable goods can be made before or during the life of the loan. Covered worker protection expenditures include personal protective equipment and adaptive investments to help a loan recipient comply with federal health and safety guidelines or any equivalent State and local guidance related to COVID-19 during the period between March 1, 2020, and the end of the national emergency declaration. Forgiveness Covered Period. A Second Draw PPP borrower can elect a forgiveness covered period of any duration from eight to 24 weeks. Additional Loan Terms and Qualifications. Seasonal employers may calculate their maximum loan amount based on a 12-week period beginning February 15, 2019, through February 15, 2020. Entities in industries assigned to NAICS code 72 (Accommodation and Food Services) may receive loans of up to 3.5X average monthly payroll costs. Certain businesses with multiple locations that are eligible entities under the initial PPP requirements may employ not more than 300 employees per physical location. An eligible borrower may only receive one PPP second draw loan. Fees are waived for both borrowers and lenders to encourage participation. For loans of not more than $150,000, the borrower may submit a certification attesting that the borrower meets the revenue loss requirements on or before the date the borrower submits their loan forgiveness application, and non-profit and veterans organizations may utilize gross receipts to calculate their revenue loss standard. Tax Deductible Expenses. With the reopening of PPP, the SBA, in conjunction with the Treasury, also reversed prior guidance, and now there is an income tax deduction available for expenses paid with PPP loan proceeds. For most borrowers, this will result in substantial extra cash (not including PPP loan proceeds) available for business operations, to pay down loans, or to even make distributions to business owners. This article is not intended to provide legal advice as the SBA continually updates, modifies, reverses and changes its PPP loan program guidance. Moreover, all borrowers have different concerns and face different qualification issues for a PPP First Draw and/or Second Draw Loan. If you have questions or concerns regarding a PPP loan or need legal guidance, please contact the author of this article – Charles “Max” McCauley at cmccauley@offitkurman.com or 484-531-1712.
January 20, 2023
Labor and Employment
The FTC Has Issued a Proposed Rule Making Non-Competes Unlawful
On January 5th, the FTC issued a proposed rule prohibiting businesses from entering into or maintaining non-compete agreements with workers (employees or independent contractors). While non-disclosure agreements and non-solicitation (of customer and employee) agreements are generally, permitted under the proposed rule, the FTC intends to take a functional approach to enforcement. So, even restrictions that are not denominated as non-competes but effectively restrict an employee’s ability to seek or accept employment will be prohibited. Significantly, the new rule would require employers to rescind existing non-competes and actively inform workers that they are no longer in effect. The only exception contained in the proposed rule is for persons selling a business or their entire interest in a business or persons owning at least 25% of a business as to which all or substantially all of the assets are being sold. The FTC has solicited comments on the proposed rule – which may be filed through March 10th, 2023. Please reach out to me or my colleagues at Offit Kurman regarding questions about the proposed rule or any other employment matter.
January 19, 2023
Labor and Employment
Federal Trade Commission Proposes Rule Banning Non-compete Agreements Between Employers and Workers
As I mentioned in a 2022 post, the Federal Trade Commission (FTC) has been considering a rule banning non-competes for a while now; President Biden has publicly voiced his support for the ban. The current proposal is based on the FTC’s belief that non-competes violate anti-competition laws. The rule would supersede all state, local, and federal laws on this subject. The rule has a sweeping definition of a non-compete: “a contractual term … that prevents the worker from seeking or accepting employment with a person, or operating a business, after the conclusion of the worker’s employment.” The rule outlaws other provisions which are not labeled “non-competes,” too: if an agreement not to solicit the employer’s customers or not to disclose the employer’s information functions as a non-compete, it is illegal. The FTC rule also intends to forbid employee promises such as repayment of the employer’s training costs if the employee worked for less than a certain period of time, where the repayment is not “reasonably related” to the employer’s actual training costs. The proposed rule would become final 60 days after it’s published in the Federal Register. Employers would have 180 days after publication to comply. The rule states that employers would have until that time to rescind any existing non-competes (including those applicable to ex-employees). This rule would upend centuries of state common law. Many of my clients have agreements that would disappear or change drastically. Drafting agreements to protect business and confidential information would become a whole different game. If you are in Delaware and would like to attend an in-person roundtable at which I’ll speak about this topic, please reply to this email, and I will send you an invitation. If you can’t attend, I am planning to record it; contact me for a copy of my remarks.
January 18, 2023
One Minute of Overtime
Professional Exemption
Welcome to One Minute of Overtime, where I will share insights on Labor and Employment Law topics, mostly related to minimum wage and overtime compliance issues. Compliance in this area of law is nuanced and technical, so it is critical for employers to audit and adjust their practices to remain compliant, so stop by to stay up-to-date and in-the-know. An employee is exempt pursuant to the administrative exemption, and not subject to the minimum wage and overtime requirements, if the employee is paid consistent with the salary basis test (or, in some cases, a sufficient hourly rate) and their primary duty is the performance of work requiring advanced knowledge (predominantly intellectual in character) and which includes work requiring the consistent exercise of discretion and judgment where the advanced knowledge is in a field of science or learning and the advanced knowledge is customarily acquired by a prolonged course of specialized intellectual instruction.
January 18, 2023
Litigation
The Virginia Consumer Data Protection Act: Is your Business Ready?
Following California’s lead, Virginia became the second state to enact a data privacy statute. VA Senate Bill 1392. The Virginia Consumer Data Protection Act (VCDPA) went into effect on January 1, 2023. Here’s what you need to know. Personal Consumer Data Rights Each individual Virginia resident may exercise the following data privacy rights: Confirmation: The right to confirm whether or not an entity or individual is processing your personal information and to access such personal data; Correction: The right to correct inaccuracies in your consumer personal data, taking into account the nature of the personal data and the purposes of the processing of your consumer personal data; Deletion: The right to delete personal data provided by or obtained about you; Copies: The right to obtain a copy of your consumer personal data that you previously provided to a Data Processor in a portable and readily usable format; and Opt-out: The right to opt out of any processing of personal data for (i) targeted advertising, (ii) the sale of personal data, or (iii) profiling in furtherance of decisions that produce legal or similarly significant effects concerning you. Who is Subject to the VCDPA? Controllers: a person or entity that determines the purpose and means of processing personal data Processors: a person or entity that processes personal data on behalf of a controller Data Controller Obligations: Limitations: Must limit collection of personal data to that which is adequate, relevant and reasonably necessary; Disclosure: Cannot collect personal data for purposes inconsistent with the disclosed purposes for which data is collected; Data Security: Must establish and maintain reasonable data security practices Anti-Discrimination: Prohibited from discriminating against consumers in processing data, including a consumer’s exercise of rights under the VDCPA Consent: Obtain consumer consent before processing sensitive data Privacy Policy: must be reasonably accessibly and inform consumers of their rights, among other requirements Online Submission: must establish a system for consumers to submit data rights requests. Appeals: consumers have the right to appeal decisions regarding consumer data rights requests if action is not taken in response to a request. Controllers need to establish a system to determine appeals. How is the VCDPA Enforced? Exclusive enforcement by the Attorney General of Virginia Enforcement actions authorized; damages of up to $7,500.00 per violation No private right of action. Individuals and entities cannot sue under the VCDPA. Exceptions and Exemptions A controller or processor is not subject to the VDCPA unless itControls or processes personal data of at least 100,000 Virginia residents; or Controls or processes personal data of at least 25,000 Virginia residents and derives over 50 percent of gross revenue from the sale of personal. Financial institutions regulated by the Gramm Leach Bliley Act are exempt. These are just a few of the requirements of the VDCPA, which could change as Virginia begins its 2023 legislative season. If you or your organization may be subject to the VCDPA, reach out to Anders Sleight | Offit Kurman today to discuss your obligations and compliance management.
January 16, 2023
Family Law
What is Dissipation and How Does the Court Handle It?
Under Maryland Law, and in most jurisdictions, dissipation is the expenditure of marital assets for the principal purpose of reducing the funds available for equitable distribution. It usually occurs when one spouse uses marital property for their own benefit for a purpose unrelated to the marriage at a time when the marriage is undergoing an "irreconcilable breakdown."' The Courts generally do not find dissipation when marital funds are used to pay attorneys' fees. Usually, dissipation is found when one party uses marital funds for things like: a prostitute, gifts for a paramour, or extravagance far more than what would be normal family expenses. The burden of proof in most jurisdictions, both expenditures themselves, as well as the persuasion that the funds were used in a manner that deprived the other spouse in such a way that the court may make that determination, lies with the party making the allegation of dissipation. Generally, the court has great discretion in making that determination.
January 13, 2023
Family Law
My Spouse is an Alcoholic. How Will This Impact My Custody Case?
The goal is to keep the children safe while still maintaining a relationship with their alcoholic parent. Ideally, both parents and their attorneys are on the same page with implementing safety precautions for the sake of the children. These may include the alcoholic parent enrolling into a sobriety program and maintaining a treatment plan for sobriety through therapy, support groups, etc. Subscribing to a live-time breathalyzer like Soberlink to ensure they are sober while the children are in their care is another helpful tool. Some parents have interlock devices on their vehicles to avoid driving while intoxicated. The age of the child(ren) is also a factor. As children get older, they can call 911 should they need help, but younger children are at more risk with an alcoholic parent because they can’t simply call for help. If the alcoholic is in denial, things get more complex, and you will need to strategize with your lawyer how to best protect the child(ren). The goal is not to punish the alcoholic but to keep the children physically and emotionally safe.
January 11, 2023
Business
How Long Did You Say I Need to Keep My Tax Records?
I get this question a lot, and not just from non-lawyers. The answer, as with any question you ask a lawyer, is it depends. Several different statutes of limitation apply regarding how much time the IRS has within which to audit your return. The basic period is three years from the due date of the return or the date of its filing, whichever is later. So, if you only recently filed your 2015 return, the three-year clock starts to run on the date your 2015 return was filed. Had you filed your 2015 return early, say on March 1, 2016, the three-year clock started to run on April 15, 2016 (the due date of your 2015 return (for individuals), March 15, 2016 (for businesses)). This means when your 2015 return is selected for audit, you need to be able to produce records that are now seven years old to substantiate any deductions taken. Records get lost and destroyed. Houses and businesses suffer casualty damage, people move, and dogs eat things. The IRS has heard it all and frankly doesn’t care. If the IRS thinks you have understated your income or overstated your basis by more than twenty-five percent (25%), then the Service has six years (computed from the dates like the three-year statute discussed in the preceding paragraph) to audit your return. If the IRS thinks the omission was fraudulent, they have forever. Likewise, if you never file your return, then the statute never starts to run. If you have foreign accounts or have signature authority over foreign accounts and are required to file a FBAR and Form 8938, the IRS deems those tax years open until those forms are filed! So, if you had a foreign account that you should have but forgot to disclose on your 2010 return, the IRS can still go back and audit that return in 2022 because the filing was never completed because all the required forms were not filed, so the return was never filed to start the clock running. The hits just keep on coming. Recently the Tax Court upheld a Notice of Deficiency (NOD) against a taxpayer based on a net operating loss she incurred in 1999 and had been carrying forward every year. Under IRC 172, an individual taxpayer can carry a NOL forward indefinitely until the NOL is completely used. In this case, that’s what the taxpayer did. The taxpayer had a large loss (initially more than $5,000,000.00) from a failed franchise. She first claimed the loss on her 1999 return, which the IRS promptly audited and found no deficiency, i.e., the NOL was proper and fully substantiated. The taxpayer (a CPA) dutifully carried forward and claimed the adjusted NOL each year (she used up a little bit each year), including 2014 and 2015. The Service then challenges the 2014 and 2015 returns and denies the NOL. Yes, this is the same NOL on the previously audited 1999 and 2000 returns that the IRS said passed muster. So, the CPA goes to Tax Court. This is where is really gets good. In Tax Court, the taxpayer introduced the 1999 and 2000 returns to which the Court held-get this-the taxpayer’s “proof to be insufficient to substantiate a taxpayer's entitlement to a loss carryforward.” Amos v. Commissioner, TC Memo. 2022-109. The Court noted, “The prior tax returns show only that [the taxpayers] claimed NOL carryforward deductions. They do not provide evidence that [the taxpayers] are entitled to them.” Amos v. Commissioner. So, even when the IRS audits your return and agrees with your return, if the return is for the first year you are claiming a NOL that will likely be carried forward for years to come, you better hang onto those records that document and establish the NOL. Currently, many of us rely on online banking, online tax payments (property and state income (in states that have a state income tax)), online brokerage activity, and a whole host of other things. Each year, as you prepare your taxes, you should print out and retain copies of any online reports you rely on in determining your federal and state income tax liability. Many service providers purge information after a few years, so it may not necessarily be available should you need it in response to an audit. Retain copies (a personal scanner works great) to scan documents regarding basis information and expense deductions. Setting aside the soundbites coming from both sides of the aisle, the practical reality of increased funding for the Internal Revenue Service is audits will increase. As you may know, a return can be “selected” for audit in one of three ways: (1) the computer flags the return because certain figures or ratios of figures trip its algorithms; (2) the return is randomly selected for audit (nothing triggered the audit, it was just the taxpayer’s unlucky day); and (3) an examiner flags the return (more common in the estate and gift tax area, and other specialized returns, less so, but still possible, for individual returns). Several years ago, the IRS openly announced audits were decreasing because the Service lacked personnel. That will soon change, and with that change comes the need for heightened vigilance by taxpayers regarding record keeping and record retention so that if your return is selected for audit, you have the records to come out of the audit relatively unscathed. Because an audit starts with the IRS denying all deductions you took on the returns, to claim the deductions, you must prove to the revenue officer’s satisfaction that you have kept proper records substantiating the deduction. If you can’t prove it, you can’t take it. This means starting from ground zero, and therein lies the problem with old records. So, depending on your tax situation, you may want to hang onto those records a little longer. Scott Tippett is a principal with Offit Kurman’s Business Law Transactions group. Offit/Kurman PA counsels clients on business and matters, including representing clients before the Internal Revenue Service, Office of Appeals, and United States Tax Court, as well as state and local tax authorities. We counsel clients regarding personal and business tax planning matters and issues and assist with the formation and structuring of entities to maximize tax savings and tax credits. The views expressed herein are solely those of the author, and are not intended as, and do not constitute, legal or tax advice.
January 9, 2023
Bankruptcy
Foreign Proceedings: When is Chapter 15 Out of Reach for Foreign Liquidators?
This article provides an update on trends in the case law recognition of foreign insolvency proceedings under Bankruptcy law. Global Cord Blood Corp. (the “Company”) is a company registered in the Cayman Islands with headquarters in Hong Kong and primary operations in the People’s Republic of China (“PRC”). The Company is in the business of collecting and storing umbilical cord blood for the stem cells. Two major shareholders had differences about a transaction the Company entered. One of these shareholders challenged the transaction, which purported to transfer millions of new shares of stock and over $600 million in corporate funds to two other companies. The objecting shareholder commenced a proceeding before the Grand Court of the Cayman Islands to challenge the transaction. The Grand Court appointed Joint Provisional Liquidators (“JPLs”) as fiduciaries to investigate and, if appropriate, seek to recover misappropriated funds. Among other things, the petition to the Grand Court asked that the Company be wound up pursuant to section 92(e) of the Companies Act if winding up was “just and equitable.” The order appointing the JPLs authorized them to take any action as may be necessary to obtain recognition of their appointment in the PRC and in any other relevant jurisdiction and to make applications to the courts of such jurisdictions for that purpose or for the purpose of obtaining information to assist them in their investigations. While the proceeding before the Grand Court was pending, the shareholder that petitioned the Cayman Island Court filed an application with the United States District Court for the Southern District of Texas seeking judicial assistance pursuant to 28 U.S.C. § 1782.[1] The Texas Court granted the application, but the transferee of the Company’s funds and shares moved to vacate the order. Shortly thereafter, the JPLs petitioned the Bankruptcy Court for the Southern District of New York for recognition of the proceeding pending in the Grand Court of the Cayman Islands as a foreign main proceeding. The JPLs also sought related relief, including authorization to conduct discovery in the United States in connection with assertedly fraudulent misconduct, including what the JPLs assert was a possible misappropriation of more than $600 million in corporate funds. Judge Jones answered this question in a 2022 opinion in the In this case of Global Blood Cord Corporation; Judge Jones of the Southern District of New York denied recognition of the foreign proceeding under Chapter 15 [2] because he found that the proceeding in the Cayman Islands at that stage fell outside the range of types of proceedings that had been found eligible for assistance under Chapter 15 and outside the meaning of applicable provisions of the Bankruptcy Code. In re Glob. Cord Blood Corp., No. 22-11347 (DSJ), 2022 WL 17478530, at *1 (Bankr. S.D.N.Y. Dec. 5, 2022). At the time of the petition, the JPLs had not taken any steps to wind up the company and no steps related to classification, adjustment, or resolution of specific debts. Accordingly, Judge Jones held that the Cayman Islands proceeding lacked two essential characteristics of a “foreign proceeding” pursuant to Section 101(23). It was not a collective proceeding, and it was not a proceeding for fixing or adjusting debts or creditors rights. The JPLs were not seeking to identify creditors, quantify and classify Global Cord Blood Corp.’s debts, or determine a scheme of distribution to creditors on account of those debts. The creditor body had not even received formal notice of the Cayman Proceeding, and no claim submission or review process was in place. Considering the nature of their appointment, i.e., the investigation of officers and directors conduct in connection with the transaction subject to attack, it appears that pursuing 1782 discovery would be the only avenue for the JPLs at this stage of the Cayman Island Proceedings. For more information about seeking recognition of foreign insolvency proceedings in the U.S. or seeking to collect evidence in the U.S., please contact a member of Offit Kurman’s Creditors’ Rights, Reorganization and Bankruptcy Group. For further information, please feel free to reach out to Albena Petrakov. ___________________________________________ [1] Section 1782 provides foreign parties litigating outside of the U.S. unique access to U.S.-style discovery. Under 28 U.S.C. section 1782 (section 1782), an “interested person” may request that a district court authorize discovery in the United States “for use in” foreign litigation even without the foreign tribunal’s knowledge or involvement. A district court has power to order section 1782 discovery where “(1) the person from whom discovery is sought reside[s] (or [is] found) in the district of the district court to which the application is made, (2) the discovery [is] for use in a proceeding before a foreign tribunal, and (3) the application [is] made by a foreign or international tribunal or ‘any interested person.”’ [2] Chapter 15, enacted pursuant to the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), incorporates the Model Law on Cross-Border Insolvency promulgated by the United Nations Commission on International Trade Law (UNCITRAL). 11 U.S.C. § 1501 (a) sets forth the objectives of chapter 15, i.e., cooperation between U.S. courts/authorities and those of foreign countries involved in cross-border insolvency cases, greater legal certainty for trade and investment, fair and efficient administration of cross-border insolvencies that protects the interests of all creditors, and other interested entities, including the debtor; protection and maximization of the value of the debtor’s assets and (5) facilitation of the rescue of financially troubled businesses, thereby protecting investment and preserving employment.
December 30, 2022
Labor and Employment
HUD Clarifies Dual Employment Limits
In Mortgagee Letter 2022-22, dated December 15, 2022, FHA Commissioner Julia Gordon has clarified FHA’s position on what dual employment and compensation is permitted for employees of FHA-approved lenders. The Mortgagee Letter outlines changes to the Handbook, which will now permit loan originators to have dual employment, including working as a real estate sales agent. Prior to the Mortgagee Letter, the Handbook provided that the Mortgagee’s employees had to work exclusively for the lender unless the company determined that the outside employment did not create conflict of interest. Further, employees were prohibited from having multiple roles or multiple sources of compensation from a single FHA transaction. Most FHA lenders concluded that this prohibited their loan officers from acting as an agent or receiving compensation as a real estate agent in an FHA transaction. Further, there was ambiguity as to whether the loan originator could act as a sales agent when even originating a conventional Fannie/Freddie loan. The prior Handbook, 4060.1, REV-2, Section 2-9(G), had clearly prohibited other outside employment in the mortgage lending, real estate or a related field. The Mortgagee Letter now provides that “[p]articipants that have a direct impact on the mortgage approval decision” are prohibited from having multiple roles or sources of compensation. These participants include underwriters, appraisers, inspectors and engineers. Participants that do not have a direct impact on the mortgage approval process are now permitted to have multiple roles and sources of compensation for services actually performed. Of course, a sales agent also acting as a loan originator will need to be properly licensed or registered to perform both activities. Further, the lender should ensure that dual employment is permitted by state law. Finally, any such employment must be treated consistent with RESPA requirements. The Mortgagee Letter is effective immediately for case numbers assigned after the date of the Mortgagee Letter. For more information about this topic, contact Wayne Watkinson.
December 27, 2022
Family Law
New D.C. Law Will Remove Divorce Waiting Requirements
The Council of the District of Columbia has passed a law that will eliminate the requirement that spouses live separate and apart without cohabitation before filing for divorce. On December 3, 2023, the Council passed D.C. Act 25-322, which deletes from the D.C. Code the requirement that spouses either be separated for six months if the separation is mutual and voluntary or for one year if the separation is not mutual and voluntary. The bill is awaiting congressional review and should be approved in early 2024. After the bill is approved by Congress, parties seeking divorce need only establish that they no longer wish to remain married. The new legislation is significant because it will allow parties to seek court intervention immediately rather than having to wait six months or a year before filing for divorce. D.C. Act 25-322 is also significant because it adds a new requirement that the Court take into consideration the history of physical, emotional, and financial abuse by one party against the other in awarding alimony and distributing marital property and debt. Finally, the legislation adds a provision to the D.C. Code that gives the court discretion to award exclusive use of the family home or any other dwelling unit available for use as a residence while the divorce case is pending. A copy of D.C. Act 25-322 is available online at B25-0042 – Grounds for Divorce, Legal Separation, and Annulment Amendment Act of 2023 (dccouncil.gov).
December 18, 2022
Page 28 of 35
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