Friday, June 19, 2015

A Checklist for Reviewing and Drafting Deeds of Trust

By: Bruce B. May

What follows is a checklist of the matters that must or should be addressed in a Deed of Trust to insure that it complies with Arizona law and addresses the larger issues.  The list does not purport to be complete.  Obviously, there is a host of other issues which should be addressed, e.g. maintenance, insurance, condemnation and environmental issues.  Moreover, the Deed of Trust is often not a “stand alone” document but part of a loan transaction the terms of which must be reflected in its content.  In many transactions, the Deed of Trust is treated as just another standard form, but it is not, and before the borrower signs or lender accepts it, the document should be reviewed by qualified legal counsel.

  1. Is the lender subject to statutes regulating mortgage bankers or mortgage brokers
  2. If the trustor or beneficiary acts as an agent or trustee, does the Deed of Trust comply with the Blind Trust Act?
  3. Is a legal description attached to the Deed of Trust?
  4. Is the legal description in proper form for recording?
  5. Does the Deed of Trust comply with the requirements from the recording statutes? (a) Proper form of notary? (b) Proper signature? (c) Instrument properly identified in its title and caption? (if applicable, is it referenced as a Deed of Trust, Assignment of Rents, Security Agreement and Fixture Filing) (d) Are the form requirements satisfied?
  6. Is the trust property conveyed to a trustee?  
  7. Is there a granting clause in favor of the trustee for the benefit of the beneficiary?
  8. Does the granting clause contain a reference to “power of sale”?
  9. Is the trustee qualified to act in that capacity?
  10. Does the instrument improperly encumber real property located in other states?  
  11. Does the Deed of Trust secure the performance of a contract or contracts? 
  12. Are mailing addresses of the trustor, beneficiary and trustee specified in the Deed of Trust?
  13. Is the nature of the trustor’s real property interest set forth in the Deed of Trust?
  14. Is the trustor also the borrower?  If not, have appropriate pledgor provisions been included in the Deed of Trust?
  15. Is there a recitation of the obligations or obligation secured?
  16. Are the remedial provisions of the Deed of Trust consistent with Arizona law?  Does it recite that it can take possession or obtain a receiver without demonstrating that security is inadequate.  Are the proceeds of sale distributed properly?
  17. Are anti-deficiency provisions applicable?
  18. Is there a prohibition of CFD’s?
  19. Is an absolute assignment of rents contained in the Deed of Trust?
  20. Does the lender intend to obtain, in the Deed of Trust, a security interest in fixtures and personal property?  If so, are UCC Article 9 requirements satisfied?  Is the grant of the security interests in personal property to Beneficiary?  Does it provide that it is effective as a fixture filing?
  21. Is the Deed of Trust a construction mortgage?
  22. Are events of default set forth?
  23. Time of Essence
  24. Are there fraudulent conveyance or preference concerns?
  25. Are the return address instructions provided?
  26. Does the Deed of Trust recite that it is governed by Arizona law?

Friday, June 12, 2015

Kenneth C. Sundlof, Jr. Elected as Chairman of the Board of the Herberger Theater Center

Kenneth C. Sundlof, Jr.
PHOENIX, Ariz. (June 12, 2015) – Jennings, Strouss & Salmon, PLC, a leading Phoenix-based law firm, is pleased to announce that Kenneth C. Sundlof, Jr. has been elected as Chairman of the Board of the Herberger Theater Center. He will serve two-year term.
Opened in 1989, the Herberger Theater Center supports and fosters the growth of the arts in Phoenix as a premier performance venue, arts incubator and advocate. The Herberger is also host to several Valley theater and dance companies; and offers three theater venues – Center Stage, Stage West and The Kax Stage - an art gallery, outdoor performance areas, and rentable space for a variety of community events.
“I am excited and honored to have the opportunity to serve as the Board Chair,” stated Kenneth C. Sundlof Jr. “The promotion and incubation of artistic expression is vital to our community and to downtown Phoenix. I look forward to working with the Board and staff to further and expand the mission of the theater.”
Sundlof has over thirty-five years of extensive experience in the utility industry, including the electric, telecommunications, natural gas, and water sectors. His experience extends to nearly all legal and regulatory needs of utilities and their customers. Sundlof advises clients on litigation and transactional matters, including business negotiations, contracts, procurement, licensing, real estate, banking, construction and insurance.
In addition to his involvement with the Herberger Theater Center, Sundlof serves as treasurer of the board of directors for Healthy Mothers Healthy Babies Maricopa. He has been listed in The Best Lawyers in America (2005-2015) in the areas of Energy Law (Public Utility, Transactions), and recognized as a “Top Lawyer” for energy and natural resources by Arizona Business Magazine (2014).
About Jennings, Strouss & Salmon, PLC
Jennings, Strouss & Salmon, PLC, has been providing legal counsel for over 70 years through its offices in Phoenix, Peoria, and Yuma, Arizona; and Washington, D.C. The firm's primary areas of practice include agribusiness; bankruptcy, reorganization and creditors’ rights; construction; corporate and securities; employee benefits and pensions; energy; family law and domestic relations; health care; intellectual property; labor and employment; legal ethics; litigation; professional liability defense; real estate; surety and fidelity; tax; and trust and estates. For additional information please visit and follow us on LinkedIn, Facebook and Twitter.
The firm’s affiliate, B3 Strategies, assists clients with lobbying and public policy strategy at the local, state, and federal levels. For more information please visit
Contact:  Dawn O. Anderson || 602.495.2806

Wednesday, June 10, 2015

Understanding Cumulative v. Non-Cumulative CAM Caps in Commercial Leases

Alan P. Christenson
Commercial leases for shopping centers and office buildings will often require the tenant to pay a share of common area maintenance (CAM) expenses, which are also frequently referred to as operating expenses. Tenants generally want to put a cap on CAM expenses, which leads to negotiations as to whether this cap will be cumulative or non-cumulative. So, what is the difference between cumulative and non-cumulative CAM caps?
Cumulative Caps
Landlords prefer cumulative caps, as they want maximum flexibility in deciding what costs will benefit their shopping center or office building. A cumulative cap sets a ceiling on the annual increases in CAM expenses that can be passed on to a tenant. The “cumulative” nature of this cap allows the landlord to recover any unused increases from prior years. For example, let’s say that the landlord and tenant agree to a 5% cumulative cap. If CAM expenses increase by 2% in year 1, then the tenant would pay the 2% increase. If CAM expenses increase by 10% in year 2, then the tenant would pay an 8% increase. This is because, in addition to the 5% cap, the landlord can recover the 3% increase that went unused in year 1.
Non-Cumulative Caps
Tenants prefer non-cumulative caps, as they want to budget and avoid unexpected increases in CAM expenses. A non-cumulative cap sets a ceiling on annual increases in CAM expenses and does not allow the landlord to recover any unused increases from prior years. For example, if the landlord and tenant agree to a 5% non-cumulative cap in the example above, the tenant would pay the 2% increase in year one and just a 5% increase in year 2.
During lease negotiations, landlords and tenants should pay close attention to whether the other party is proposing a cumulative or non-cumulative cap. The parties should also be careful to understand the other factors that go into negotiating a CAM cap, such as determining what costs will be included and excluded from the cap. The failure to do so can make a big difference down the road.

Thursday, June 4, 2015

Small Business Real Estate Series, Part II: Commercial Lease Negotiations

By David Brnilovich

Part I of the Small Business Real Estate Series focused on the due diligence a small business owner should conduct when evaluating commercial locations. Once you have decided on the location that best suits the needs of your business and budget, the next phase is to negotiate the commercial lease. Even if you, as Tenant, employ the assistance of a leasing agent, you are ultimately responsible for complying with the terms of the lease. It is important to ensure you are entering into a lease that you fully understand and is acceptable. It is possible to have the landlord’s leasing agent represent you as well. You will be required to sign an agency agreement, and the leasing agent will have duties to both you and the landlord. The implications of dual agency will be the subject of a future discussion in this series. This discussion will assume the tenant is employing his or her own leasing agent for the negotiation.

At the beginning of the negotiation process, you will receive a lot of information from either the landlord or its leasing agent. Although much of the information will be general in nature, there will also be information a prospective tenant should consider carefully before entering into a lease. It is important that you keep very good notes about the specific representations being made by the landlord and its leasing agent, and have them incorporated into the lease. As a general rule, any verbal statements or representations made by the landlord or its agent prior to the signing of the lease are not enforceable. If the statements and representations are important, they must be part of the lease. Should a conflict arise and end up in court, judges are not likely to consider verbal statements made during lease negotiations that are not expressly set forth in the signed lease agreement. No matter how harsh the terms of the commercial lease, the courts will enforce the lease regardless of whether the tenant believes he or she is being treated unfairly.

It is up to you and your leasing agent to try and negotiate the terms of the lease. The landlord will draft a lease that favors its own interests, not yours. Be aware of the “standard” pre-printed form presented by landlord’s agent as the “accepted“ industry form. It requires as much careful review as the form the landlord has prepared for its own use. Be sure you can live with the terms of the lease. If you feel strongly that something is not right, and the landlord is unwilling to be accommodating, do not sign the lease. It is better to walk away than be intimidated into signing an agreement you are not comfortable with.

Commercial leases are typically extensive, including dozens of pages of terms with numerous exhibits, addenda, rules and regulations. They may also include sign criteria and “work letters” with a schedule of improvements for the landlord and the tenant to complete. It is critical that you read and understand each and every term and condition of the lease, its exhibits, addenda, and other provisions, such as subordination, attornment, insurance, subrogation, relocation, indemnity, waivers and remedies. It is important that you understand the potential consequences of every section of the lease. Otherwise, you may have a rude awakening should there be an issue with the landlord down the road. Also, landlords and tenants tend to file away the lease agreement and ignore it until it is up for renewal or an issue arises. It is always a good idea to review your lease often and ensure both you and the landlord are in compliance.

Given the complexity of commercial leases, many terms of which cannot be understood without expert assistance, it is wise to seek legal advice from an experienced real estate attorney to ensure your interests are represented fairly in the agreement before it is signed.

The next topic of the Small Business Real Estate Series is the continuing personal guarantee, which is one of the most important, yet least understood, attachments to a commercial lease.

Wednesday, June 3, 2015

U.S. Supreme Court Questions Abercrombie & Fitch’s “Look Policy”

On June 1, 2015, the Supreme Court of the United States (“SCOTUS”) issued its decision reversing the Tenth Circuit’s award of summary judgment in favor of Abercrombie & Fitch Stores, Inc. in the closely watched employment discrimination case.  Title VII of the Civil Rights Act of 1964 as amended (“Title VII”) provides for two types of religious discrimination in employment claims: (i) disparate treatment, also known as “intentional discrimination”; and (ii) disparate impact.  In the opinion written by Justice Scalia and joined by six other justices, the SCOTUS clarified the scope of a disparate treatment claim under Title VII, based on an employer’s failure to accommodate an applicant’s religious practice.  The SCOTUS determined that an employer may not make an applicant’s religious practice, known to the employer or otherwise, a factor in employment decisions.  The decision is a cautionary tale for employers who maintain dress code policies.
The Equal Employment Opportunity Commission (“EEOC”) sued Abercrombie on behalf of Samantha Elauf, a practicing Muslim, who applied for a position in an Abercrombie store and was denied the position because she wore a headscarf.  Abercrombie maintains a “Look Policy” for its employees with the intent of projecting a certain image in its stores.  The Look Policy prohibits employees from wearing “caps” (a term that is not defined by the policy) because they are too informal for the company’s preferred image.
The assistant manager who interviewed Elauf determined Elauf was qualified to be hired, but she was concerned that Elauf’s headscarf would violate the Look Policy.  Ultimately, Abercrombie’s district manager concluded that the headscarf and all other headwear (religious or otherwise) violated the policy, and he directed the assistant manager not to hire Elauf.
At issue before the SCOTUS was whether an applicant must have informed an employer of her need for a religious practice accommodation to establish a “disparate treatment” claim under Title VII.  The District Court entered summary judgment in favor of the EEOC, and the Tenth Circuit reversed.  The Tenth Circuit concluded that usually an employer cannot be held liable under Title VII for failing to accommodate a religious practice until the applicant or employee provides the employer with “actual knowledge” of her need for an accommodation. 
The SCOTUS disagreed and emphasized that the employer’s motive behind its employment decision is the central issue, not its knowledge about the applicant’s need for an accommodation.  It stated, “an employer who acts with the motive of avoiding an accommodation may violate Title VII even if he has no more than an unsubstantiated suspicion that accommodation would be needed.”  The Court further clarified that Title VII does not demand “mere neutrality” with respect to religious practices, but instead it gives such practices “favored treatment”, which affirmatively obligates employers not to fail to hire or to discharge an individual because of her religious observance and practice.  The SCOTUS remanded the case back to the Tenth Circuit to consider, among other things, the issue of Abercrombie’s motive in not hiring Elauf.
The decision raises big questions about the enforcement of dress code policies.  Employers should review their employment policies and their enforcement of those policies to ensure they comply with Title VII.  Employers may also consider seeking the assistance of employment attorneys who can help navigate these complex issues.

Kami M. Hoskins is an Arizona native dedicated to creating and implementing effective resolutions to complex legal issues for a variety of clients. She focuses her practice on two primary areas: 1) Bankruptcy, Reorganization and Creditors’ Rights Law; and 2) Labor and Employment. Ms. Hoskins is also the Chair of Jennings, Strouss & Salmon’s Diversity Action Committee, and she helps lead the firm’s diversity and inclusion strategic initiatives.


Tuesday, June 2, 2015

Guarantors, Unlike Borrowers, Can Waive Antideficiency Protections

Two years ago, in Parkway Bank & Trust Co. v. Zivkovic, the Arizona Court of Appeals held that borrowers cannot prospectively waive Arizona’s antideficiency protections.  In doing so, however, the Court expressly declined to consider whether guarantors receive similar protection.

On May 28, 2015, the Arizona Court of Appeals answered this decades-old question in Arizona Bank & Trust v. James R. Barrons Trust, et al., holding that guarantors, unlike borrowers, can waive the antideficiency protections of A.R.S. § 33-814(G).  The decision is consistent with the stated purpose of Arizona’s antideficiency statutes—“to protect ‘homeowners’ from deficiency judgments,” not guarantors of business loans, Long v. Corbet, and brings further clarity to the real-estate lending industry.

But questions remain.  For example, what about guarantors who haven’t waived antideficiency protections?  Can lenders pursue deficiency judgments against them?  Barrons Trust doesn’t answer those questions.  In its analysis, the Barrons Trust court assumed, without deciding, that guarantors qualify for antideficiency protections under A.R.S. § 33-814(G).  And what about the “resident guarantor” scenario, i.e., where an LLC acts as borrower, but its sole member (or members) guarantee the loan to the LLC and then reside in the house that serves as the collateral for the loan?  Barrons Trust doesn’t address this potential scenario.  Would it make a difference?  In light of these and other unanswered questions, there is little doubt that Arizona’s antideficiency statutes, and the cases interpreting them, will continue to generate litigation in the years to come.  

Friday, May 29, 2015

Things to Consider When Doing Business in Arizona: Unique Aspects of Arizona Law – From Cumulative Voting to Blue Pencils, Blind Trusts and Guns at Work

By Richard Lieberman and Bruce B. May

Arizona is a great place to do business. It boasts an excellent regulatory environment, envious climate, skilled workers, fair tax rates, good transportation facilities, and a growing pool of consumers. In addition, CNBC ranked Arizona among the top fifteen of its “America's Top States for Business 2014” list, giving it high marks for a growing and independent workforce, good access to capital, and a solid infrastructure.

Companies seeking to do business in Arizona should understand some key differences about Arizona law that might surprise them. Below are some highlights and links to important resources.

Forming a Company:

The Arizona Corporation Commission (ACC) regulates and approves the formations of Arizona’s corporations and limited liability companies. Filings with the ACC can be made by fax, and good standing certificates are generally available online. Information and simple forms are available through the ACC’s website (, but those forms do not often contain all the provisions advisable for business owners to consider for their organizational documents.

Partnerships are under the auspices of the Arizona Secretary of State’s office ( The Secretary of State’s office requires original signatures, so it does not permit online or fax filings.

For Arizona corporations, note that:
  • cumulative voting is mandatory in the election of directors, per the state’s constitution. This cannot be waived by the shareholders.
  • actions by consent without a meeting of the directors or the shareholders currently require unanimous consent.
Limited liability companies formed in Arizona do not have the same restrictions.

Company Relocation Assistance:

Businesses seeking to relocate to Arizona may wish to contact the Arizona Commerce Authority (, which spearheads the state's efforts to attract new business and expand businesses already existing in the state. The Greater Phoenix Economic Council ( assists with development efforts in the greater Phoenix metropolitan area, while the Tucson Regional Economic Organization ( does so in the Tucson region.

Arizona and local entities provide a variety of tax incentives that may be available for companies seeking to relocate to or expand in Arizona. Public incentives, however, must pass muster under the Arizona constitution’s prohibition on public gifts, by demonstrating sufficient public benefits.

Capital Formation:

Arizona laws on capital formation resemble those of most other states with respect to exemptions from the registration requirements under the securities laws, including having a “Regulation D” exemption known as “Rule 126” of the state’s securities regulations. Arizona recently adopted a “crowdfunding” statute that will exempt those offerings from the registration requirements once effective this summer.

Persons being compensated for assisting in the offer or sale of securities may be required to register as a securities dealer or salesman, and issuers may be subject to those requirements if the securities are not sold in a private exempt offering.

In connection with the offer or sale of securities from or within Arizona, each participant in that offering may have joint and several liability for any material misstatements or omissions made. Accordingly, care should be taken to prepare appropriate disclosures and offering materials and to comply with the applicable offering restrictions.

Additional information on Arizona’s securities laws and available exemptions is also available at

Employment Law:

Arizona’s minimum wage is higher than the Federal rate. It is currently $8.05 per hour, which is a favorable to that of many other states, however.

Arizona law prohibits the employment of unauthorized immigrants, and mandates the use of the federal “E-Verify” system. Employers that violate these provisions face stringent penalties imposed by the state, which may include revocation of license(s) to do business and criminal charges, among other sanctions.

Arizona, per its constitution, is a “right to work” state, meaning no worker can be forced to join a union. As a result, Arizona has a low percentage of unionized workers.

Arizona has laws permitting workers to bring weapons to their workplace, with some exceptions, so long as they are locked in a vehicle and out of sight. Employers may designate certain areas where those vehicles must be parked.

Arizona has also authorized, by voter initiative, the use of medical marijuana. The impact of that statute in the workplace continues to evolve.

Non-compete agreements can generally be enforced if they are reasonable in restricting the kind of work, the geographic scope, and the time limits on those restrictions. Because it is a “facts and circumstances” type of test, case law can help determine what may be a reasonable restriction, but the enforceability of those restrictions may be subject to the discretion of a trier of fact.

Of special note, not just for non-compete agreements, but for all Arizona contracts, is what is commonly known as the “Blue Pencil Rule.” That “rule” of judicial interpretation provides that an Arizona court will not rewrite language in a contract that is invalid. Instead, the court will cross out the invalid part (with its proverbial blue pencil) and attempt to construe the remainder of the text. If it can be enforced with that deletion, the provision (and contract) can stand. If not, the provision, and perhaps the whole agreement, may be invalid. Counsel can advise as to potential methods for addressing these issues.

Arizona law permits employers to require that employees notify them of “intolerable working conditions,” and to give the company time to remedy the situation. Failure to comply with those provisions can bar a suit for state law violations.

Finance and Banking Issues:

For commercial loans, parties can agree in writing on the applicable rate of interest.

Arizona is a “community property” state. To bind the marital community to any guaranty and suretyship obligations or with respect to any transaction for the acquisition, disposition, or encumbrance of an interest in real property (other than unpatented mining claims), both spouses must sign that obligation. Otherwise, the guaranty is binding only on the sole and separate property of the spouse signing that document.

Real Estate:

Real estate liens are typically documented through a deed of trust, rather than a mortgage. For foreclosure actions under a deed of trust, the borrower has a right to reinstate the loan up until the day preceding the sale, upon payment of the amounts then due, plus accrued costs and expenses as permitted by law. Judicial foreclosure actions do not have the same reinstatement rights, but a significant disadvantage of those actions is the longer time typically required to complete the judicial foreclosure process, and the borrower will have a redemption period following the sale.

Arizona has a “blind trust act,” which applies to deeds or conveyances of an interest in real property by a trustee. That act requires disclosure of the name and address of the beneficiaries for whom a grantor or grantee holds an interest in that property, among other items.

Note the provisions discussed in “Finance and Banking” above with respect to community property issues for their impact on real estate transactions.

Arizona law prohibits “deficiency actions” against borrowers for property up to 2.5 acres that is used for one or two family dwellings, and the property is sold pursuant to a deed of trust. If it is sold pursuant to the judicial foreclosure statutes, a deficiency action is prohibited if the loan was to purchase the property (including a refinance without any “cash out” features).

Real property transactions are typically handled through third-party title and escrow companies. Title insurance is issued by Arizona licensed underwriters in accordance with posted rates.

Arizona law prohibits certain liens, claims or encumbrances recorded against property that are determined to be without a “colorable” basis. Violation of that statute imposes, among other things, no less than treble damages.

Documents to be recorded with the county recorders must exclude certain personally identifiable numbers, like social security numbers, as well as to meet other formatting requirements.

Arizona prohibits the sale of the subdivided property, generally defined as six or more lots, without notice to the Arizona Real Estate Department, issuance of a Public Report and delivery of the Public Report to a prospective purchaser.

Arizona’s laws governing subdivisions is sufficiently comprehensive that it is deemed “substantially equivalent” to the Interstate Land Sales Full Disclosure Act. Arizona also regulates, among other things, condominiums, time shares, cemetery sales, residential landlord/tenant relations and master planned communities.

Any party receiving any commission, fee or compensation for services in the sale of real estate as a “broker” or “finder” (broadly defined) must be licensed in Arizona. The exception for seller-owned property is narrowly construed. There is no reciprocity with other state licensed brokers.

In construction contracts, Arizona law restricts the ability to alter the statutorily mandated payment procedures for contractors and subcontractors, unless required disclosures are made in the contracts and construction plans.

Arizona has a rich Native American history, and relics, historical sites, burial grounds and funerary objects are subject to regulation at all levels of government. Encountering those items can impede development.

Contractors, suppliers, laborers and others, including certain other professionals engaged in construction, have lien rights with super-priority.

Municipalities have the power to encourage development with certain tax reductions and abatements under the Government Property Lease Excise Tax (GPLET) statutes and tax rebates and other inducements provided they can satisfy certain constitutional constraints, including the gift clause noted above. Development can also be aided by the use of community facilities districts.

Commercial leases are subject to termination by the tenant in the event of certain circumstances that would render the premises uninhabitable, unless the lease contains alternative provisions.

Rents or other sums collected under commercial and other leases are subject to a “transaction privilege tax” as referenced below (generally understood as a “rent tax”). There are mechanisms for the landlord to avoid successor liability.

Estate Planning:

Arizona is a community property state, which can have implications on how assets are titled and treated upon disposition.

Arizona allows holographic wills and codicils meeting certain requirements.

“Do Not Resuscitate” or DNR instructions must be on orange paper and be either wallet or letter-sized to be enforceable.


Arizona state courts have adopted a streamlined disclosure and discovery system that helps expedite the time it takes to conclude a matter. In addition, each of the county court systems has implemented a mandatory, but non-binding arbitration program for matters with amounts in controversy under a specified threshold established for the respective county in which the litigation is filed.

Legal Opinions:

Arizona practices in rendering legal opinions typically follow national trends, although Arizona practitioners frequently add certain additional assumptions, qualifications, and limitations in those opinions to address unique areas of the law. For example, Arizona firms often include an assumption that the documents on which the opinion is being rendered contain the mutual intent of the parties and that there are no verbal statements that modify those documents. This is in light of the Darner Motors v. Universal Underwriter’s case and its progeny. Practitioners from other jurisdictions often inquire as to the need for that qualification. Additional information on typical Arizona practice for legal opinions can be found in the amended report of the State Bar of Arizona’s Business Law Section on Opinions in Business Transactions, at 38 Ariz. Law Journal 47.

Tax Issues:

Arizona taxes income, property, and sales/use of goods, but does not have a sales (transaction privilege) tax on services. Rates are considered to be fairly favorable to those of many other states, and a plethora of sales tax exemptions exist for many industries, such as health care, mining, and film production. Information on taxes is available through the Arizona Department of Revenue (

Note that business asset purchasers may be liable for certain unpaid state taxes of the former business, including unpaid transaction privilege taxes.

Arizona and many municipal jurisdictions impose transaction privilege taxes on the sale of commercial real property within two years of its improvement or substantial renovations for additional improvement. Because those amounts can be significant, owners are encouraged to evaluate those issues in connection with proposed transactions. This tax is often referred to as the “speculative builder’s tax.”

The foregoing are examples of the variety of ways in which Arizona law presents a unique approach to commercial and other areas of the law. Before conducting business in Arizona, a company should seek legal counsel. The attorneys of Jennings, Strouss & Salmon, PLC welcome the opportunity to provide additional guidance to those seeking to do business in our state.

The information in this article is of a general nature and is for informational purposes only. It is not intended to serve as legal advice for any particular circumstances, which could result in different conclusions, and does not constitute a client/attorney relationship. If you would like additional information or to discuss a particular legal issue, please contact the author at or 602-262-5935.

Wednesday, May 20, 2015

FERC Approves Gas Modernization Policy November 2014, the Federal Energy Regulatory Commission (“FERC”) proposed a PolicyStatement on Cost Recovery Mechanisms for Modernization of Natural GasFacilities in Docket No. PL15-1 that would allow interstate pipelines to recover the costs of modernizing their facilities through an approved cost tracker or surcharge mechanism. Following its review of substantial initial and reply comments, FERC issued an order on April 15, 2015 implementing the Policy Statement effective October 1, 2015.
The various filed comments demonstrated a sharp disagreement between the pipelines and their customers regarding: (1) whether pipelines should receive a financial incentive for complying with EPA and PHMSA safety and environmental regulations; (2) whether the proposed policy was premature, since EPA and PHMSA have not implemented any regulations and there is considerable uncertainty about the effects of this type of tracker; and (3) whether the tracker would contravene the need for traditional Section 4 rate cases. Despite the contrasting views within the industry, FERC approved the Policy Statement with little modification.
In the final Policy Statement, FERC recognized that although its general policy is to prohibit cost trackers, this tracker was justified in order for pipelines to have a mechanism by which to recover costs of replacing “aging, unsafe and leak-prone facilities.” Under the Policy Statement, FERC will require each pipeline requesting a tracker to satisfy five standards:
  1. Review of Existing Rates: The pipeline must demonstrate that its existing rates are just and reasonable. FERC declined to require that the rate review be conducted through a Section 4 proceeding. It instead stated that pipelines could propose alternative approaches for rate justification. FERC encouraged a full exchange of information with the pipeline’s customers to ensure justification of its base rates, and stated that it will establish appropriate procedures on a case-by-case basis to resolve any issues of material fact based on the substantial evidence on the record.
  1. Defined Eligible Costs: The pipeline must specifically define the costs that it intends to recover through the tracker mechanism. However, this list of costs could be modified at a later date. FERC found that by requiring pipelines to clearly define their included costs, rate transparency will be ensured. The pipeline must also demonstrate that the costs that it seeks to recover are limited to one-time capital costs that are either necessary to comply with federal or state regulations or are necessary to improve pipeline facility efficiency. Reoccurring maintenance costs or testing costs to identify upgrades must be excluded from the mechanism. FERC suggested, however, that a pipeline could include a provision in its proposed tracker that explicitly excludes an amount representing its ordinary system costs.
  1. Avoidance of Cost Shifting: A pipeline must design its mechanism to protect its captive customers from cost shifts in the event that shippers leave the system. To do so, FERC suggested that a pipeline might agree to set a floor on the billing determinants that it uses to design the surcharge. FERC stated that it would review the billing determinants used by each pipeline on a case-by-case basis.
  1. Periodic Review: A pipeline must provide for periodic review of its mechanism to ensure that it and the underlying base rates remain just and reasonable. To meet this goal, FERC suggested that pipelines make their trackers temporary. If the mechanism terminates before recovering its costs, the pipeline could either seek to recover remaining costs in its next Section 4 rate case or file to extend the tracker. FERC stated that it will not require pipelines to file a full Section 4 rate case to review the mechanism; rather that it “remains open” to reasonable proposals for achieving such review.
  1. Shipper Support: A pipeline must work collaboratively with its shippers to seek support for its cost recovery proposal, but FERC declined to require a minimum level of customer support to warrant implementation. Instead FERC found that, as long as a pipeline demonstrates that its proposed mechanism is just and reasonable under Section 4 and meets the Policy Statement guidelines, the proposal may be accepted, even if some customers voice opposition.
Although FERC found that compliance with these five factors should protect shippers from being exposed to excessive costs, the final Policy Statement clearly sided with the pipelines’ requests for flexibility. Thus, affected shippers will need to be vigilant in reviewing the justness and reasonableness of a pipeline’s proposal beginning at the pre-filing collaborative stage. Given the ability of pipelines to submit their tracker mechanism filings on October 1, 2015, we expect that some pipelines will commence pre-filing discussions with their shippers as early as this summer. If you have questions or would like more information on the issues discussed in this article, please feel free to contact us.

Wednesday, May 13, 2015

Jennings, Strouss & Salmon Elects John C. Norling as Managing Attorney

PHOENIX, Ariz. (May 13, 2015) – Jennings, Strouss & Salmon, P.L.C., a leading Phoenix-based law firm, is pleased to announce that John C. Norling has been elected Managing Attorney. Norling succeeds J. Scott Rhodes, who stepped down from the position after six years to focus on his thriving legal ethics and professional responsibility practice. Rhodes will also resume the position as the firm’s General Counsel, which he held prior to being elected as Managing Attorney in 2009.
“During my tenure as Managing Attorney, I have seen the firm grow and flourish. We are in a great position to expand our services to clients, while continuing to provide exceptional and cost-effective legal work,” said Rhodes. “I strongly believe that leadership change is essential to the evolution of any law firm. John Norling has the insight and innovation to guide the firm’s future.”
Norling has held numerous leadership roles in the firm, including serving as a member of the Management Committee and as chair of the Corporate, Securities and Finance Department. As Managing Attorney, he will oversee all firm operations and focus on maintaining Jennings, Strouss & Salmon’s long-lasting reputation as a leader in the Arizona legal, business and non-profit communities. Norling will also support the growth of the firm’s Washington, D.C. office and its thriving energy and utilities law practice.
“I am honored to have been elected as the Managing Attorney of a firm with the reputation and esteemed history of Jennings Strouss,” stated Norling. “I have the utmost respect for Scott Rhodes and thank him for the remarkable leadership and service he has devoted to our firm. Scott has been, and will continue to be, a tremendous asset for Jennings Strouss. We are well-positioned for the future and I look forward to working with each and every member of the firm as we continue to grow and expand the services offered to our clients.”
Prior to joining Jennings, Strouss & Salmon in 2013, Norling served as Member-in-Charge of Clark Hill’s Arizona office. He was also a partner at Norling, Kolsrud, Sifferman & Davis PLC.
A Phoenix native, Norling’s legal practice is focused on advising clients on all aspects of their operations, including commercial transactions, real estate, business organizations, corporate law, mergers and acquisitions, federal and administrative compliance, business contract negotiations and advertising law. He serves as the de facto outside General Counsel for many of his clients, providing advice on issues ranging from day-to-day operations to strategic planning.
Norling is also recognized as an industry leader in the representation of automobile dealerships. He advises dealer clients on the legal, regulatory and practical aspects of the operation of a retail automotive dealership. As part of his practice, Norling serves as General Counsel to the Arizona Automobile Dealers’ Association and several dealer advertising associations.
About Jennings, Strouss & Salmon, PLC
Jennings, Strouss & Salmon, PLC, has been providing legal counsel for over 70 years through its offices in Phoenix, Peoria, and Yuma, Arizona; and Washington, D.C. The firm's primary areas of practice include agribusiness; bankruptcy, reorganization and creditors’ rights; construction; corporate and securities; employee benefits and pensions; energy; family law and domestic relations; health care; intellectual property; labor and employment; legal ethics; litigation; professional liability defense; real estate; surety and fidelity; tax; and trust and estates. For additional information please visit and follow us on LinkedIn, Facebook and Twitter.
The firm’s affiliate, B3 Strategies, assists clients with lobbying and public policy strategy at the local, state, and federal levels. For more information please visit

Monday, May 11, 2015

An Innocuous Audit That Has The Potential to Create Enormous Liability: Arizona’s Department of Economic Security’s Employment Audits Can Have Expensive Repercussions

A tax audit letter from a government agency can sink even the hardiest of business owner’s stomach. Yet, a tax audit letter from the Department of Economic Security (DES) may not create the same sense of dread. These audits typically involve low dollar amounts, which may lure business owners into a false sense of security. However, a DES audit should put business owners on high alert. Although the dollar amounts may be low, a determination by DES that a business’ independent contractors are actually employees creates precedent that can lead to additional scrutiny at the state and federal level. Such a determination may be used against the business by Arizona’s Department of Revenue, the Department of Labor, the Internal Revenue Service, and even a disgruntled worker claiming unpaid overtime. In short, ignore that audit letter at your peril.
The crux of the audit will likely be whether DES concludes that a business’ independent contractors are actually employees. That test involves looking at the substance of the parties’ relationship and the hiring party’s degree of direction, rule or control. The regulations on the matter provide twelve indicia of direction, rule or control, which are:
(1)        Whether the hiring party has any authority over a contractors’ assistants;
(2)        The extent of the contractors compliance with the hiring party’s instruction;
(3)        Whether the hiring party requires any oral or written reports;
(4)        Whether the hiring party requires the work to be performed at a specific location;
(5)        Whether the hiring party requires that a specific individual perform the service;
(6)        Whether the hiring party establishes the work sequence / order that the work is performed;
(7)        Whether the hiring party has the right to discharge the contractor;
(8)        Whether the hiring party sets the hours of work;
(9)        Whether the hiring party provides any training;
(10)     The amount of time the contractor spends working with the hiring party;
(11)     Whether the hiring party provides the contractor with tools and materials; and
(12)     Whether the hiring party reimburses the contractors’ expenses.
The regulations also provide six additional factors that tend to show independent contractor status. These factors are:
(1)        Whether the contractor makes him or herself available to the public;
(2)        Whether the compensation is tied on a per project basis;
(3)        Whether the contractor can realize a profit or a loss;
(4)        Whether the contractor is contractually obligated to perform a project; and
(5)        Whether the contractor has simultaneous contracts with other hiring parties.
In analyzing these factors, DES will review documents, interview contractors, and interview the hiring party’s principals and employees. DES may even visit the hiring party’s place of business. It is critical that DES receives accurate information during this process. Loyal employees may provide incorrect information because they are “only trying to help,” and the independent contractors may be less than honest because they have a vested interest in being reclassified as employees. Audits, and even appeals, have been adjudicated based on an incomplete or incorrect statement from a principal, contractor, or employee.
When contacted by DES, Arizona business owners should seek the advice of competent legal counsel to prevent a small problem from multiplying into a business-threatening concern.