Jennings Strouss - Attorneys at Law

LLC Compensation Classifications: Member Distributions vs. Salary: Beware the Unintended Consequences

2012-01-27T15:02:00.000-08:00

Those who do business through a closely-held limited liability company (LLC) often get tax advice about the advantages of receiving compensation in the form of member distributions instead of salary or guaranteed payments. They may be advised, for example, that member distributions do not require the withholding of payroll taxes.[1] What they may not realize, however, is that compensating LLC members in the form of distributions instead of salary may impair the limited liability protection otherwise afforded to LLC members and expose them to creditors’ claims, at least where the LLC engages in activities with a high risk of liability and/or becomes insolvent.

While there may be tax reasons for choosing to pay compensation as member distributions instead of salary, there are potential risks to the LLC’s members from a creditor standpoint. A.R.S. § 29-706 provides that a limited liability company “shall not make a distribution to its members to the extent that at the time of the distribution, after giving effect to the distribution, all liabilities of the limited liability company would exceed the fair value of the assets of the limited liability company….” Liability is imposed on each member who receives such distributions for the amount of such distributions.[2]

Take, for example, a medical practice which conducts its affairs as a professional limited liability company[3] and for which there has been a large malpractice claim. If the medical practice thereafter continues to pay compensation to its doctor members in the form of distributions instead of salary or guaranteed payments, each member potentially can be personally liable for distributions received at any point after the company’s liabilities exceed its assets.

Other legal doctrines[4] can lead to the same result; and similar rules can apply in the context of corporations[5] and limited partnerships.[6] Thus, while there may be certain valid tax reasons for classifying compensation as distributions instead of salary or guaranteed payments, beware the unintended consequences of doing so: it may adversely affect the limited liability protection otherwise afforded an LLC’s members.

[1] LLC members who receive members distributions may still be liable for self-employment taxes at the personal level.

[2] Subsection D provides:

If a member receives a distribution with respect to his interest in a limited liability company in violation of this chapter or an operating agreement, he is liable to the limited liability company for a period of six years thereafter for the amount of the wrongful distribution.

[3] A.R.S. § 29-706 is made applicable to professional limited liability companies through A.R.S. § 29-843.

[4] In Hullet v. Cousin, 32 P.3d 44 (Div. 1 2001), for example, the Arizona Court of Appeals applied fraudulent transfer law. There, after a limited partnership sold its only asset (an apartment complex), it distributed the net proceeds to its partners. A creditor later sued the limited partnership for claims related to the apartment complex. The creditor obtained a default judgment against the partnership, but the judgment was uncollectible because there were no assets remaining in the partnership. The creditor then sued the limited partners, arguing that the limited partnership's transfer of assets to them was voidable as fraudulent pursuant to Arizona Revised Statutes "A.R.S." sections 44-1004 and 44-1005. The Arizona Court of Appeals directed that judgment be entered in favor of the creditor on his fraudulent transfer claim against the limited partners. In so holding, the Court (citing to the functional equivalent of A.R.S. §29-706 as respects limited partnerships), recognized that a “limited partner is not entitled to distribution from a limited partnership to the extent that it would cause the liabilities of the limited partnership, other than those to partners on account of their partnership interests, to exceed the fair value of the limited partnership's assets. A.R.S. § 29-337 (1998).”

[5] A.R.S. §10-640(C).

[6] A.R.S. § 29-337.

Renowned Sports Law Attorney Travis Leach Joins the Phoenix Office of Jennings, Strouss & Salmon

2012-01-18T13:28:00.000-08:00

PHOENIX, Ariz. (January 18, 2012) – Jennings, Strouss & Salmon, PLC, a leading Phoenix-based law firm, is pleased to announce that Travis J. Leach has joined the firm as a Member in the Phoenix office.

“Travis is a talented attorney with extensive experience in the areas of securities, mergers and acquisitions, and corporate governance,” states Richard Lieberman, Chair of the firm’s corporate, securities and finance department. “As a certified contract advisor by the NFL, he also brings a substantial professional sports practice, which will enhance the firm’s growing sports and entertainment group.”

Leach will focus his practice in the area of securities, including public offerings, private placements, corporate governance matters (including Sarbanes-Oxley compliance), SEC reporting obligations, and mergers and acquisitions. He will also help lead the firm's Sports and Entertainment practice. As such, he will counsel professional athletes, coaches and ownership groups in contract and licensing negotiations and a variety of other individual and collaborative business ventures. His experience supplements the firm’s ability to advise professional athletes and entertainers in all their personal and business legal matters.

“It is an honor to join such a dynamic team of attorneys and I look forward to helping the firm grow its footprint in the sports industry,” said Leach. “Jennings Strouss is a firm with creative and talented attorneys who have solid reputations for delivering great client service; characteristics that provide positive synergies with clients in the sports and entertainment industry.”

Leach is certified as a Contract Advisor by the National Football League Players’ Association and the Canadian Football Players’ Association. He earned a J.D. from University of Miami Law School and a B.S. from Arizona State University.

Jennings, Strouss & Salmon Elects Bradley V. Martorana as a New Member

2012-01-12T13:10:00.000-08:00

PHOENIX, Ariz. (January 12, 2012) – Jennings, Strouss & Salmon, P.L.C., a leading Phoenix-based law firm, is pleased to announce that Bradley V. Martorana has been elected a Member (Partner) of the firm, effective January 1, 2012.

“Brad’s success with clients in a wide-range of industries has been impressive and we are proud to have him join us as a Member of the firm,” said Richard Lieberman, Chair of Jennings, Strouss & Salmon’s Corporate, Securities and Finance department.

Mr. Martorana focuses his practice on advising businesses and their owners in structuring, negotiating and documenting a wide range of business transactions and relationships. Mr. Martorana has previously practiced at a large firm in Baltimore, Maryland, and is a certified public accountant (CPA) with experience at a “big four” accounting firm. He has earned a B.S. in Accounting and Finance from Georgetown University’s McDonough School of Business, a J.D. from The University of Maryland School of Law, and an M.B.A. from Arizona State University. Mr. Martorana is licensed in Arizona, California, Maryland and Washington, D.C.

Jennings, Strouss & Salmon Expands Phoenix Office with the Addition of Adam M. Romney

2012-01-10T12:45:00.000-08:00

PHOENIX, Ariz. (January 10, 2012) – Jennings, Strouss & Salmon, PLC, a leading Phoenix-based law firm, is pleased to announce that Adam M. Romney has joined the firm as a litigation associate in the Phoenix office.

“Adam’s experience in the technology and health care sectors is a great addition to our growing commercial litigation group. He is an excellent litigator with a keen grasp of highly technical issues, which gives him an advantage in serving clients in negotiations and in court,” states Frederick M. Cummings Chair of the firm’s litigation department.

Romney will focus his practice in the areas of commercial litigation, breach of contract claims, internal investigations, white collar criminal defense, and other business tort cases.

“Jennings Strouss is a top-notch firm with talented attorneys,” said Romney. “I am delighted to be a part of such a strong team of litigators and look forward to working with the firm’s impressive roster of clients.”

Romney earned a J.D. from Vanderbilt University Law School and a B.A. from Emory University.

Arizona Court of Appeals Expands Arizona Anti-Deficiency Protection to Unfinished Homes with Intent to Occupy Upon Completion

2012-01-10T08:25:00.000-08:00

The Arizona Court of Appeals in M&I Marshall & Ilsley Bank v Mueller, 1 CA-CV 10-0804 (December 27, 2011), has expanded the scope of the Arizona anti-deficiency statute to include: (i) trust properties of two and one-half acres or less; (ii) which are limited to a single one-family or a single two-family dwelling; (iii) where construction of the house has not been completed; and (iv) the property was purchased by the borrower with the purpose of occupying the dwelling upon its completion (emphasis added).

A.R.S. § 33-814(G) (the “Statute”) provides and Arizona case law has held that the property must be “utilized” as a dwelling unit in order for the Statute to apply and preclude a deficiency action by a lender against a borrower after a non-judicial foreclosure of the property.

The Court of Appeals distinguished the Mueller facts from the Arizona Supreme Court case of Mid Kansas Federal Savings & Loan Association of Wichita v. Dynamic Development Corp., 167 Ariz. 122, 804 P. 2d 1310, in that the borrower in Mueller intended to live in the single-family home upon its completion, whereas in Mid Kansas, the borrower was a corporation that never intended to occupy the property. The Court of Appeals further stated that the primary purpose of the Arizona anti-deficiency statutes is to protect “homeowners” from deficiency judgments – not to afford protection to commercial homebuilders and that its interpretation of Mid Kansas was consistent with the intent of the Arizona legislature to protect homeowners.

Thus, the Court of Appeals in dismissing the lender’s deficiency claim against the borrowers held that the borrowers were entitled to anti-deficiency protection under the Statute even when the construction of the house is not completed and unoccupied where the borrower has the intent to occupy the house upon its completion.

Each case a business or individual may face is unique and may require legal advice. If you would like additional information regarding the content of this article, please contact the author, David Elston, or the Chair of our Real Estate Department, Lee Esch.

Arizona's Minimum Wage Increases January 1, 2012

2011-12-30T10:58:00.000-08:00

On January 1, 2012, Arizona’s minimum wage will increase by 30 cents to $7.65 per hour. Arizona’s minimum wage is higher than the federal minimum wage, which is currently $7.25 per hour.

In 2006, Arizona voters enacted a voter initiative, known originally as the “Raise the Minimum Wage for Working Arizonans Act” (the “Arizona Minimum Wage Act”). The Arizona Minimum Wage Act, which became effective January 1, 2007, established an Arizona minimum wage and also provided that the minimum wage was subject to an annual increase based on the increase in the cost of living. The cost of living is measured by the federal Consumer Price Index for All Urban Consumers, U.S. City Average, for all items during the 12 months ending each August 31. Pursuant to the authority granted by this law, the Industrial Commission reviewed the cost of living information and determined that Arizona’s minimum wage would be increased for calendar year 2011. In October 2011, the Industrial Commission of Arizona determined that the state’s hourly wage should increase based on a 3.8 percent increase in the federal Consumer Price Index this year.

Under federal law, a state may require a minimum wage that exceeds the federal wage. If there is a difference between the laws, the employer must follow the requirement that is the most beneficial to the employee. Thus, an Arizona employer that is subject to both the federal and state laws must pay the Arizona minimum wage rate. Further, Arizona employers must make sure they are in compliance with both the federal and the state laws. Our labor and employment attorneys can answer questions regarding the laws and regulations, and advise you on compliance issues. As you review your individual compliance, some further information regarding the Arizona Minimum Wage Act and regulations may be helpful.

Exceptions

The Arizona Minimum Wage Act provides only a few exceptions from its coverage. One exception is for small businesses that generate less than $500,000 in gross annual revenue, if that small business is not covered by the federal Fair Labor Standards Act (FLSA). From a practical standpoint, most employers are subject to the FLSA. Another exception applies to the state of Arizona and the U.S. government. Additionally, the Arizona Minimum Wage Act does not apply to any person who is employed by a parent or a sibling, or who is employed performing babysitting services in the employer’s home on a casual basis.

Each case a business or individual may face is unique and may require legal advice. If you would like additional information regarding the content of this article, please contact the author, Janet Hutchison, or the Chair of our Labor and Employment Department, John Egbert.

Jennings, Strouss & Salmon Expands Phoenix Office with the Addition of Kami M. Hoskins

2011-12-01T10:08:00.001-08:00

PHOENIX, Ariz. (November 30, 2011) - Jennings, Strouss & Salmon, PLC, a leading Phoenix-based law firm, is pleased to announce that Kami M. Hoskins has joined the firm as a bankruptcy associate in the Phoenix office.

"Kami is an excellent addition to our commercial bankruptcy group as she brings to us experience well beyond her years of law practice. Her previous skills in business and management and with people give her an advantage in dealing with clients and in her presentations to the Bankruptcy Court," stated Carolyn J. Johnsen, Chair of the firm's Business Restructuring and Reorganization department.

Hoskins will focus her practice in the areas of bankruptcy, commercial litigation and employment law, representing corporate, small business and individual clients by implementing effective resolutions to complex legal issues. Her experience includes the representation of an international technology firm involving a complex intellectual property dispute related to Chapter 7 bankruptcy; representation of both buyers and seller in litigation matters related to real estate purchases; and the representation of a Fortune 500 corporation in defense against an EEOC charge.

"This is an outstanding opportunity," stated Hoskins. "Jennings, Strouss & Salmon is an Arizona institution, and I am thrilled to be part of the team."

Hoskins earned a J.D. from the University of Arizona, James E. Rogers College of Law, an M.A from Arizona State University, and a B.A from the University of Arizona. She serves as Chair of the State Bar of Arizona Mentor Committee and is a member of the State Bar of Arizona Committee for Minorities and Women in Law. She currently resides in Glendale, Arizona.

EEOC Releases Opinion Letter Regarding Pre-Employment Inquiries into Arrests & Convictions

2011-11-04T15:05:00.000-07:00

The EEOC has released a letter outlining its general position with respect to employers using arrest and conviction records in pre-employment screening. Generally, the EEOC admonishes employers to distinguish between arrest and conviction records warning that arrest records are susceptible to errors and do not reflect whether the person was convicted of a crime. It also warned employers to tailor the use of conviction records to the position to be filled. Finally, if the use of conviction records results in a disparate impact on minorities, the employer should not use them. For more information on pre-employment inquiries regarding arrests and convictions from the EEOC, click here.

Each case a business or individual may face is unique and may require legal advice. If you would like additional information regarding the content of this article, please contact the author, Keith Overholt, or the Chair of our Labor and Employment Department, John Egbert.

Jennings, Strouss & Salmon Expands Phoenix Office with the Addition of Callie N. Parkinson

2011-10-14T09:07:00.000-07:00

PHOENIX, Ariz. (October 12, 2011) - Jennings, Strouss & Salmon, PLC, a leading Phoenix-based law firm, is pleased to announce that Callie N. Parkinson has joined the firm as a litigation associate in the Phoenix office.

"We are fortunate to have such an enthusiastic and accomplished person as Callie come on board," stated Frederick M. Cummings, Chair of the firm's Litigation department. "I anticipate a very bright future for her at the firm."

Parkinson will focus her practice in the areas of litigation, health care, and medical and professional liability defense.

"I am thrilled to join such a well-respected law firm and have the opportunity to work with the talented and experienced attorneys at Jennings Strouss," stated Parkinson. "I look forward to contributing to the firm, being involved in the business and legal communities, and building relationships with our clients to better assist with their needs."

Prior to joining the firm, Ms. Parkinson served as Law Clerk to the Honorable Ann Scott Timmer, Chief Judge of the Arizona Court of Appeals. She earned a J.D. from Arizona State University Sandra Day O'Connor College of Law and a B.A. from Arizona State University. While in law school, Parkinson was a Pedrick Scholar, President of the Federalist Society and a member of the Sandra Day O'Connor Inns of Court. She also completed over 100 hours of pro bono work through the Juvenile Legal Assistance Program. She currently resides in Scottsdale.

FASB Has Reissued its Accounting Standards Update

2011-10-04T14:05:00.000-07:00

We previously advised our friends and clients about the Financial Accounting Standards Board (FASB) decision to withdraw the requirement that an employer contributing to a multi-employer pension plan must include the employer's share of the plan's unfunded liability on its financial statement. FASB has now reissued its Accounting Standards Update (No. 2011-09). Although employers will not have to include a calculation of their share of a plan's unfunded liability, they will have to include funding information about multi-employer pension plans to which they are obligated to contribute. Employers should work with their counsel to determine how to obtain that information from the plans. The new rule applies to all nongovernmental employers contributing to multi-employer pension plans. It is effective for fiscal years ending after December 15, 2011 for publicly held employers, and for fiscal years ending after December 15, 2012 for non-publicly held employers. The Accounting Standards Update can be found here.

Each case a business or individual may face is unique and may require legal advice. If you would like additional information regarding the content of this article, please contact the author, Keith Overholt, or the Chair of our Labor and Employment Department, John Egbert.

NRLB Requires Employers to Post Notice Regarding Employee's Rights to Join a Union

2011-10-04T14:02:00.000-07:00

Effective November 14, 2011 virtually all employers which are not in the agricultural, railway or airline business will be required to post a notice advising their employees of their right to be represented by a labor union. If 20% or more of the employees speak a foreign language, the notice must be in the foreign language. It will be an unfair labor practice to fail to post the notice. Although the National Association of Manufacturers has filed a lawsuit in federal court in the District of Columbia to contest the NLRB's authority to require the notice, the regulation currently remains in effect. The notice can be obtained here and can be posted as one 11x7 notice or two 8x11 pages.

Each case a business or individual may face is unique and may require legal advice. If you would like additional information regarding the content of this article, please contact the author, Keith Overholt, or the Chair of our Labor and Employment Department, John Egbert.

Employers' Use of Independent Contractor Agreements Are Being Targeted

2011-09-21T14:43:00.000-07:00

On September 19, 2011, the U.S.Department of Labor (DOL) announced that it has entered into a memorandum of understanding with the IRS which permits these two agencies to share information about employers' use of independent contractors. The DOL's press release is available here.

Some individual states have entered into similar arrangements with the DOL. It is becoming very clear that the issue of whether a worker is properly classified as an independent contractor is a high regulatory priority. Employers should exercise caution when classifying its workers as independent contractors. A determination that certain workers are really employees, and not independent contractors, can have very significant financial consequences for the employer. The list of factors the IRS uses to determine whether a worker should be classified as an employee or independent contractor is available here.

Each case a business or individual may face is unique and may require legal advice. If you would like additional information regarding the content of this article, please contact the author, John Egbert, or another member of our Labor & Employment Department .

Department of Labor Announced it Will Re-Propose its Rule on the Definition of Fiduciary

2011-09-21T14:42:00.001-07:00

The Department of Labor announced today that it would "re-propose" its rule on the definition of a fiduciary with respect to providing investment advice to pension plan participants. The Department received 260 comments on its first proposed rule causing it to re-examine its effort to amend the existing 1975 regulation. The Department expects to issue its new proposed rule in early 2012.The announcement can be found here.

Each case a business or individual may face is unique and may require legal advice. If you would like additional information regarding the content of this article, please contact a member of our Labor and Employment Department.

26 Jennings Strouss Attorneys Recognized in the 2012 Edition of Best Lawyers in America®

2011-09-01T10:05:00.001-07:00

PHOENIX, Ariz. (August 31, 2011) - Jennings, Strouss & Salmon, PLC announced that 26 of the firm's attorneys have been selected for inclusion in Best Lawyers in America® 2012 published by Woodward/White, Inc. of Aiken, South Carolina.

The Jennings Strouss attorneys who were selected for inclusion in the 2012 edition of Best Lawyers in America^® are:

Gerald W. Alston - Arbitration, International Arbitration, Commercial Litigation, Construction Litigation, International Trade and Finance Law and Mediation
John R. Christian - Tax Law and Trusts and Estates
Frederick M. Cummings - Medical Malpractice Law, Personal Injury Litigation and Professional Malpractice Law
Richard K. Delo - Legal Malpractice Law and Medical Malpractice Law
John J. Egbert - Labor and Employment Law
Lee E. Esch - Real Estate Law
Jay A. Fradkin - Medical Malpractice Law and Personal Injury Litigation
Joel L. Greene - Energy Law
Carolyn J. Johnsen - Bankruptcy and Creditor-Debtor Rights/Insolvency and Reorganization Law and Bankruptcy Litigation
Gary G. Keltner - Bankruptcy and Creditor-Debtor Rights/Insolvency and Reorganization Law, Bankruptcy Litigation, and Real Estate Law
Richard L. Lassen - Trust and Estates
Stephen E. Lee - Tax Law
Richard Lieberman - Corporate Governance Law and Mergers & Acquisitions Law
Bruce B. May - Real Estate Law
Michael J. O'Connor - Commercial Litigation and Personal Injury Litigation
Russell Rea - Eminent Domain and Condemnation Law
J. Scott Rhodes - Administrative/Regulatory Law, Ethics and Professional Responsibility Law, and Legal Malpractice Law
Alan I. Robbins - Energy Law
Jack N. Rudel - Corporate Law
John G. Sestak, Jr. - Administrative/Regulatory Law, Commercial Litigation, Banking & Finance Litigation, Construction Litigation, Labor and Employment Litigation, and Real Estate Litigation
Wayne A. Smith - Real Estate Law
Brian N. Spector - Bankruptcy and Creditor-Debtor Rights/Insolvency and Reorganization Law and Bankruptcy Litigation
George C. Spilsbury - Public Finance Law
Bradley J. Stevens - Bankruptcy and Creditor-Debtor Rights/Insolvency and Reorganization Law
Kenneth C. Sundlof, Jr. - Energy Law
Douglas G. Zimmerman - Eminent Domain and Condemnation Law

About Best Lawyers

Since its inception in 1983, Best Lawyers has become universally regarded as the definitive guide to legal excellence. Best Lawyers is based on exhaustive peer-review surveys in which more than 25,000 leading attorneys cast 3.1 million votes on the legal abilities of other lawyers in their specialties.

Jennings, Strouss & Salmon Expands Washington, D.C. Office

2011-08-30T15:22:00.001-07:00

PHOENIX, Ariz. (August 30, 2011) - Jennings, Strouss & Salmon, PLC, a leading Phoenix-based law firm, is pleased to announce that Alan J. Rukin has joined the firm as an associate in the firm's Washington, D.C. office.

"We are excited to have Alan join our energy and corporate practice groups," stated Debra D. Roby, chair of the firm's energy department. "His background and enthusiasm will be a great asset to us as we continue to grow our practice. It is a pleasure to have him on our team."

As a member of the firm's Energy and Corporate, Securities and Finance departments, Rukin will utilize his engineering and legal background to enhance the services offered to clients.

"The Jennings Strouss tradition of excellence led me to join this team, along with the outstanding reputation of the attorneys who are part of the firm's national energy practice. I look forward to working alongside these professionals as we address critical issues in the traditional and alternative energy industries," stated Rukin.

Prior to attending law school, Rukin worked in the engineering operations division of a coal-fired generating station owned and operated by a rural electric cooperative. While earning his law degrees, he worked for a self regulatory organization in the securities industry and several positions within the federal government. Rukin also taught constitutional law and appellate arguments to high school students in the District of Columbia Public School System.

Rukin earned a J.D. from American University Washington College of Law, an LL.M. in Securities and Financial Regulation from Georgetown University Law Center, and a B.S. and M.E. in Civil Engineering from the University of Florida. He is admitted to practice in the District of Columbia and Florida, and is a member of the Energy Bar Association and the American Bar Association's Business Law and Environment, Energy and Resources Sections. Rukin currently resides in Arlington, VA.

Jennings Strouss Foundation Receives ICARECORPS Partnership Award

2011-08-23T11:37:00.001-07:00

PHOENIX, Ariz. (August 23, 2011) - Jennings, Strouss & Salmon, PLC, a leading Phoenix-based law firm, is pleased to announce that the Jennings Strouss Foundation (JS Foundation) received the ICARECORPS Partnership Award from Gateway School for the 2010-2011 school year. The award was presented at the Creighton District Recognition Awards Celebration at Creighton School in Phoenix on Wednesday, August 17^th.

"We are very grateful and appreciative for the support of the Jennings Strouss Foundation. There are so many families who benefit from the generosity of firm and its employees," stated Nancy Uxa, principal of Gateway Elementary School. "Every donation they make goes a long way in helping our students have a brighter future."

Gateway School is a primary school in the Creighton School District, serving over 850 students in grades kindergarten through 8. Gateway has a 98 percent minority enrollment, with 90 percent of the students on the free or reduced fee lunch program.

"On behalf of the JS Foundation and the employees of Jennings Strouss, I am delighted to accept this award. We are pleased to partner with Gateway Elementary School and the Creighton School District on projects that benefit the students of Gateway. Our projects have brought much satisfaction to those in association with Jennings Strouss and we hope that our efforts have aided in the school's educational goals," said Janet B. Hutchison, JS Foundation President and an attorney in the Phoenix office of Jennings, Strouss & Salmon.

The JS Foundation was established to accommodate the desire many Jennings, Strouss & Salmon employees had to give back to the community. While many contribute their own personal resources to worthy causes, they felt that the need to make a more significant impact by as group to address issues in underserved communities. This goal was achieved through the formation of the foundation, which has maximized employees' efforts and allowed the firm to express its commitment to community through social responsibility and philanthropic causes.

The current focus of the JS Foundation is to meet the educational needs of disadvantaged individuals, adults and/or children, in the communities in which the firm operates. This goal is reached through the collective efforts - whether financial, in-kind donation, or volunteer work - of Jennings, Strouss & Salmon employees, families and friends.

The JS Foundation's mission is to not only serve the immediate needs of its beneficiaries, but to also pave the way towards a better future for all.

Salt River Project Icon Richard H. Silverman Joins Jennings, Strouss & Salmon

2011-08-22T11:12:00.000-07:00

PHOENIX, Ariz. (August 22, 2011) - Jennings, Strouss & Salmon, PLC, a leading Phoenix-based law firm, is pleased to announce that Richard H. Silverman, former General Manager of Salt River Project (SRP), has joined the firm as Of Counsel.

"Dick's reputation and standing in Arizona and the national electric industry will enhance not only our energy practice, but our tradition of community involvement," said J. Scott Rhodes, Managing Attorney of Jennings, Strouss & Salmon.

Silverman began his career with SRP in 1966 as an attorney and, over the years, held various legal and managerial roles, including Associate General Manager of Law and Administrative Services. In 1994, Silverman was named General Manager of SRP. His many accomplishments include the 2011 President's Award, J.D. Power & Associates; 2011 Lifetime Achievement Award, the Agri-Business Council of Arizona; 2011 Lifetime Achievement Award, Most Admired Executives, Phoenix Business Journal; and the Whitney M. Young, Jr. Individual Award, Greater Phoenix Urban League.

"Having worked in the utility business my entire career, it seemed appropriate to associate with a firm enjoying a strong energy and utility practice, where knowledge and experience would be mutually beneficial," said Silverman, former general manager of Salt River Project. "For nearly seven decades, Jennings Strouss has demonstrated excellence and leadership in the legal field, and I am pleased to begin another career with such a respected firm."

Silverman is a well-recognized and respected professional in the energy industry, in Arizona and on a national level. He is past Chair of the board of directors for the Electric Power Research Institute; past Chair and former steering committee member of the Large Public Power Council; and former executive committee member of the board of directors for the American Public Power Association.

As Of Counsel at Jennings, Strouss & Salmon, Silverman will continue his active involvement with Arizona civic organizations and will also work closely with the firm's Washington, D.C.-based energy practice, which focuses on representing the business and regulatory needs of electric, natural gas, telecommunications and water utilities.

Silverman is active in a number of community organizations, including Greater Phoenix Leadership, the University of Arizona Foundation and the Translational Genomics Research Institute. He serves as Chair of the Governor's Arizona Medical Education Oversight Task Force and is a member of the Governor's Arizona Centennial Commission and Centennial Foundation.

He earned both his J.D. and B.S. in Business from the University of Arizona. Silverman currently resides in Phoenix with his wife Susan.

National Labor Relations Board Limits Undocumented Workers' Remedies

2011-08-18T15:00:00.000-07:00

Legal Watch Series: Topic 9 - Employees' Privacy Rights When Using Company Computers

2011-08-18T14:38:00.000-07:00

Michael R. Palumbo

8.17.11

Introduction: This is the ninth article in a continuing series of short informational pieces relating to one of the hottest topics in litigation, e-discovery. The purpose of these articles is to provide your business with some guidelines on how to most efficiently prepare for e-discovery. If you are new to our distribution, or if you would like to view previous articles in this series, please visit our website.

Employers who provide computers to employees for company business should not assume that they have unlimited rights to inspect or conduct wholesale discovery of an employee's personal data on company computers, even if they have a policy that states employees should not use the company computer for personal use.

City of Ontario, CA v. Quon, 130 S. Ct. 2619 (2010) involved a City of Ontario SWAT team member who used his employer-issued PDA for personal communications. The City's policy did not prohibit the personal use of the communications device, but did indicate that such use could be monitored; however, there was an unwritten practice that such use would not be monitored as long as the employee paid for excess charges. When Quon's supervisor asked to see the text messages on Quon's PDA, he refused and sued under various federal statutory and United States constitutional privacy theories. The Ninth Circuit Court of Appeals held that the employee had a "reasonable expectation of privacy" as defined in the Fourth Amendment of the Constitution, and that the supervisor's request to search the PDA was unreasonable.

The Supreme Court disagreed. Its opinion was narrowly based on Quon's reasonable expectation of privacy. The Supreme Court avoided the Fourth Amendment constitutional issue due to its concern that the implications of the emerging technology were still developing.

In Sprenger v. Rector and Board of Visitors of Va. Tech., -- F. Supp. 2d ---, 2008 WL 2465236 (WD Va. 2008), Sprenger, a state employee, sued her employer, Virginia Polytechnic Institute and State University (Virginia Tech), claiming violations of the Americans with Disabilities Act (ADA) and Family Medical Leave Act (FMLA). During discovery, the University subpoenaed the "electronically stored information" on the computer used by Sprenger's husband. The defense was specifically interested in obtaining e-mails concerning the lawsuit and those sent between Sprenger and her husband. Sprenger was successful in quashing the subpoena, asserting that the information on her husband's computer was protected by marital privilege, even though the University had a computer policy that stated no user should have any expectation of privacy in any e-mail sent or received, and that all e-mails were subject to monitoring. The Court found that Virginia Tech failed to present evidence that the policy was regularly enforced and that the Sprengers had received notice of the policy.

This was not the case in United States v. Etkin, 2008 WL 482281 (S.D.N.Y. 2008), where the United States District Court for the Southern District of New York held that the defendant did not have a reasonable expectation of privacy in e-mails sent from his office computer because each time he logged on, a "flash screen warning" appeared stating that the employer may monitor or inspect the computers at any time; therefore, an expectation of privacy was "entirely unreasonable."

Other notable cases include, Curto v. Med. World Communications, Inc., 2006 WL 1318387 (E.D.N.Y. 2006)(plaintiff could not claim an expectation of privacy, although e-mails with her attorney from a company computer were privileged); Leventhal v. Knapek, 266 F.3d 64(2^nd Cir 2001) (investigatory searches on a state-owned computer did not violate an employee's fourth amendment rights, since the employer had reasonable grounds to believe that the searches would uncover evidence of the misconduct); United States v. Slanina, 283 F.3d 670 (5^thCir. 2002) (absence of a city policy placing the defendant on notice that his company computer usage was monitored, and the lack of any indication that other employees had routine access to his computer, provided the defendant with a reasonable expectation of privacy); Long v. Marubeni Am. Corp., 2006 WL 2998671 (S.D.N.Y. 2006) (plaintiff waived the attorney-client privilege even though he, in communicating with his counsel, used a personal, password-protected email account).

In Stengart v. Loving Care Agency, Inc., 990 A. 2d 650 (NJ 2010), Marina Stengart filed suit against her former employer, after her employer performed a forensic image of the hard drive from the laptop that she had returned, discovering privileged, password-protected correspondence between Stengart and her attorney made through her web-based e-mail account.

The employer argued that the e-mail messages were not protected because its written policy stated that the company may access "all matters on the company's media systems and services at any time." The trial court found in favor of the employer; but was reversed on appeal because of ambiguities in the employer's electronic communications policy that supported a reasonable expectation of privacy. In addition, the court concluded that the defense had violated professional conduct rules by failing to alert plaintiff's counsel that it had discovered the messages prior to reading them. The decision was affirmed by the New Jersey Supreme Court, but it should also be noted that, unlike most states, New Jersey's constitution recognizes a right to "informational privacy."

A similar issue was raised in a California case, Holmes v. Petrovich Development Co., 119 Cal. Rptr. 878 (App. 2011), which involved employment discrimination as defined by California law. Contrary to the New Jersey decision, the California Court of Appeals held that e-mails between an employee and her personal attorney, sent from a company-owned computer using a private, password-protected account, were not "confidential," thus, no reasonable expectation of privacy existed and the communications were not protected by the attorney-client privilege. The court's decision was influenced by the fact that the messages were in violation of the company policy prohibiting personal use of company computers, stating that the computers are for business purposes only and subject to monitoring. The employer also had procedures in place to support the fact that employees are made aware of such policies. The court commented that using the computer under the circumstances was "akin to consulting her attorney in one of [the employer's] conference rooms, in a loud voice, with the door open, yet unreasonably expecting that the conversation overheard by [the employer] would be privileged." California does not have a constitutional right to "informational privacy."

In conclusion, unless a state has a unique constitutional provision, employers must implement and reasonably enforce comprehensive policies concerning company computer usage, and ensure procedures are in place to document that employees are aware of such policies in order to access and/or use an employee's personal data.

If your company needs assistance in formulating a company computer usage policy, or would like to further discuss issues related to e-discovery in the work place, please contact Michael Palumbo, 602-262-5931 or Valerie Walker, 602-262-5844.

______________________________________________

About the Author
For more information or questions regarding E-Discovery and the Rules for Electronically Stored Information Management, contact Michael R. Palumbo.

Michael R. Palumbo focuses his practice on commercial and real estate litigation. Particular areas of experience include banking (UCC Articles 3 & 4) litigation; title insurance, escrow agent and Deed of Trust litigation; and quiet title, adverse possession, homeowners' associations and real estate agent disputes. He has participated in more than 50 trials in the Superior Courts of Arizona and District Court of Arizona, in most of which he was lead counsel. Mr. Palumbo can be reached at 602.262.5931 or mpalumbo@jsslaw.com.

JS Foundation Holds Successful Back-to-School SupplyDrive

2011-08-16T11:27:00.000-07:00

Summer 2011

The Jennings Strouss Foundation held a successful back-to-school drive for Gateway Elementary in the Creighton School District. To help alleviate financial burdens due to budget cuts, the JS Foundation committed to supporting the school, which educates a number of children from low-income families, by providing 30 first grade students with the necessary tools to begin the new school year.

Items donated included backpacks, pencils, erasers, pencil sharpeners, crayons, pencil boxes, glue sticks, rulers, scissors and addition/subtraction math facts flash cards. Through the generous assistance of Jennings Strouss personnel, the JS Foundation was able to donate 32 fully stocked backpacks and provide additional supplies to first grade teacher, Teresa Colonna Nelson. In addition, donated supplies, including notebooks and binders, were provided to the school.

The JS Foundation Board Members and volunteer, Mike Hutchison, delivered the supplies to Gateway Elementary on Friday, August 5, 2011, just in time for the first day of school on August 8th. The Gateway Elementary School representatives present to accept the donations included Janet Chapin-Walden (Title I Director), Dr. Nancy Uxa (Principal), and Teresa Colonna Nelson (Teacher).

Department of Labor Proposes Changes to Persuader Reporting Requirements

2011-07-26T11:30:00.000-07:00

The Department of Labor has proposed changes to, and seeks public comment regarding its interpretation of, the persuader reporting requirements set forth in Section 203 of the Labor-Management Reporting and Disclosure Act (LMRDA). Section 203 currently requires employers to disclose arrangements with any third-party to directly or indirectly persuade their employees as to their collective bargaining rights,or to obtain information about the activities of a labor organization involved in a labor dispute with the employer.

There has always been an exception to this reporting requirement for any "advice" given to the employer. In the past, this exception has excluded arrangements where the third-party does not have any direct contact with employees, such as drafting or reviewing documents, letters, or speeches presented to employees during an organizing drive or in anticipation of an NLRB election. These activities were deemed "advice," therefore, there was no need to disclose.

Should the Department of Labor's proposal become effective, the term "advice" will be limited to "oral or written recommendations regarding a decision or course of conduct," outside of representing the employer in a court, administrative, or arbitration proceeding. The term "persuader activity" would include training or directing supervisors and other management representatives to engage in persuader activity; establishing antiunion committees composed of employees; planning employee meetings; deciding which employees to target for persuader activity or discipline; creating employer policies and practices designed to prevent organizing; and determining the timing and sequencing of persuader tactics and strategies. In these instances, the Department of Labor believes the third-party has gone beyond mere recommendation and has engaged in actions, conduct, or communications with the object to persuade employees, either directly or indirectly, about the employees' protected, concerted activity. As such, the duty to report will be triggered.

The full text of the proposed interpretation can be found in the Federal Register. Electronic comments may be submitted here. Comments must be received by August 22, 2011.

Each case a business or individual may face is unique and may require legal advice. If you would like additional information regarding the content of this article, please contact a member of our Labor and Employment Department.

Department of Homeland Security Embarks on a Major Compliance Effort

2011-07-21T10:07:00.000-07:00

The Department of Homeland Security (DHS) is embarking on a major compliance effort to audit I-9 and related records of thousands of employers.Employers throughout Arizona and other southwestern states are receiving notices that they must produce I-9 and related information, such as unemployment insurance tax returns, payroll registers and 1099 forms for contract laborers. Employers are required to provide the requested information within three days of receiving the notice.

The DHS is entitled under the law to request that you relinquish your original Form I-9s along with copies of the other requested records. If you receive such a notice, the first thing you should do is seek legal counsel. Next, contact the local DHS office in your area to verify the identity of the auditor making the request to ensure that he or she is, in fact, a DHS employee. Once this is done, you should be prepared to comply with the auditor's request for information. By law, you are required to maintain, and the auditor will ask to see, a Form I-9 for all current employees, as well as those who have left employment within the prior 12 months. It is advised that you retain copies of all records you provide to the auditor along with a signed, itemized receipt. In addition to the I-9 records, the DHS will request copies of your company's key ownership information, business licenses and organizational documents.Remember, when the auditor arrives at your place of business, be sure to carefully review credentials to confirm he or she is the authorized auditor before you produce any information.

Below is the contact information for the Arizona Department of Homeland Security:
1700 W. Washington St.
Phoenix, AZ 85007
602-542-7030
http://www.azdohs.gov/

Each case a business or individual may face is unique and may require legal advice. If you would like additional information regarding the content of this article, please contact a member of our Labor and Employment Department.

Jennings Strouss Client Recognized in Top 10 Civil Verdicts for 2010

2011-07-12T16:10:00.001-07:00

Arizona Attorney magazine included Mesa Bank v. Thomas Alexander, Sandra Stevens, Bobbie Jo Johnson, American Mortgage Funding, Inc, Capital Title Agency, and American Mortgage Specialists, Inc. as one of the Top 10 Civil Verdicts of 2010. Jennings, Strouss & Salmon represented, and obtained the second highest verdict for a plaintiff in 2010 for, Mesa Bank (now Sunrise Bank of Arizona) against six defendants for a total of approximately $71.6 million in compensatory and punitive damages in connection with a fraudulent scheme to obtain real estate loans.

Jennings Strouss Client Recognized in Top 10 Civil Verdicts for 2010

2011-07-12T16:09:00.001-07:00

Arizona Attorney magazine included Albert Pellegrini v. L.A. Fitness sports Club, L.L.C. and Brunswick Corporation as one of "Arizona's significant Defense verdicts in 2010." Jennings, Strouss & Salmon represented, and obtained a favorable decision for, Brunswick Corporation.

Tracking the Implementation of the Dodd-Frank Act

2011-06-23T13:17:00.000-07:00

Robert J. Novak

The Dodd–Frank Wall Street Reform and Consumer Protection Act was enacted into law on July 21, 2010. Designed to become effective in stages, many of the Act’s provisions require regulatory implementation through various rulemakings and studies. The implementation process is complex and evolving, and tracking its status can be challenging for even those governmental and industry insiders who are actively involved in it. So how can bank directors and officers—those who are most impacted by the Act and who will be held responsible for understanding and adhering to it—follow along?

While there are many online resources available to bank directors and officers, one that we’ve found to be a good resource for following the latest developments concerning the implementation of the Act is the ABA’s “Dodd-Frank Tracker” website, available here. Three features of this website, in particular, are worth highlighting. First, the Dodd-Frank calendar. This calendar tracks (i) all relevant legislative and regulatory hearings and meetings, (ii) the deadlines to comment on proposed rules, and (iii) the various effective dates of the Act and the regulations implementing it. It also provides hyperlinks to the proposals at issue and other relevant information, for those interested in learning more. Second, the topical webpages. The ABA has organized much of the site’s content around discrete Dodd-Frank topics. This allows visitors to click on a specific topical link, such as Interchange Fees, and view a webpage containing posts related exclusively to that topic. Like the Dodd-Frank calendar, the topical webpages are all embedded with hyperlinks to further reading, which include, among other things, regulatory announcements and congressional statements concerning the topic. Finally, the topical subscriptions. Visitors can sign up to receive information via email, as it becomes available, on any one or more of the Dodd-Frank topics or even the Dodd-Frank Tracker as a whole. The benefits of this feature are obvious, especially to those whose time must be focused primarily on other things—like running a bank. Subscription links appear throughout the Dodd-Frank Tracker website.

The Jennings Strouss Foundation's Lastest Project

2011-06-17T13:44:00.000-07:00

The Learning Garden
Spring 2011

The Jennings Strouss Foundation’s Spring 2011 project was “The Learning Garden.” Through this project, the JS Foundation focused on providing hands-on learning opportunities to students at Gateway School.¹

The “Learning Garden” project involved providing “gardening” materials for a 2nd grade class at Gateway. As part of an earth science unit, this class was learning about the different kinds of soil and the composition of soil. The class then studied rocks and minerals, and how the earth is a resource. In the last quarter, the class planned to study butterflies and their cycle. With assistance from parents and teachers, the class prepared a garden in a school courtyard and planted flowers to attract butterflies. This hands-on project was not only an important part of the learning process but also encourage parent participation.

The “Learning Garden” project raised funds to allow the JS Foundation to provide mulch, plant vitamins, and honeysuckle plants for the garden, and spades and gloves for the “gardeners.” The enthusiastic gardeners were anxiously awaiting butterflies in their new garden area.

Read one of the student letters

¹ Gateway School is a primary school in the Creighton School District, serving over 850 students in grades kindergarten through 8. Gateway has a 98 percent minority enrollment with 90 percent of the students on the free or reduced fee lunch program.

Legal Watch Series: Topic 8 - Social Media and the Workplace

2011-06-17T11:15:00.000-07:00

Michael R. Palumbo

6.17.11

Introduction: This is the eighth article in a series of short informational pieces relating to one of the hottest topics in litigation over the past five years - electronic discovery. The purpose of these articles is to provide your business entity with some guidelines on how to most efficiently organize to deal with electronic discovery. The articles will continue to be emailed regularly over the next few months. If you are new to our distribution, or if you would like to view previous articles in this series relating to ESI, visit our website.

Facebook, My Space, LinkedIn, Plaxo, Twitter, Skype, YouTube, Blogs, etc...you name it; almost everyone is doing it. Social Networking that is.

A social networking site has been defined as a "web-based service...that allow[s] individuals to (1) construct a public or semi-public profile within a bounded system, (2) articulate a list of other users with whom they share a connection, and (3) view and traverse their list of connections and those made by others within the system." Boyd and Ellison, "Social Network Sites: Definition, History, and Scholarship," Journal of Computer Mediated Communication (2007).

POTENTIAL PROBLEMS

Social networks can be a Pandora's box for an employer. Significant risks are presented by the very nature of social networking sites.

Following are some situations where social networking has caused embarrassment to an employer, drawn regulatory attention, or led to negative litigation consequences:

In 2010 and 2011, the National Labor Relations Board (NLRB) brought several complaints against businesses that disciplined employees for posting comments about the company on social networks (See discussion below);
In April 2009, a Wall Street Journal article reported that the SEC is monitoring corporate communications made via Twitter to ensure trading rules are not violated;
In April 2009, a Domino's Pizza employee posted an allegedly humorous video about how pizzas are made. The video included unhygienic and rude behavior, as well as employees mocking customers.
In October 2008, Virgin Airlines flight attendants posted disparaging remarks about the company's airplanes and customers.

A major concern to employers is the admissibility of information posted on social media sites being presented as evidence during litigation proceedings. The discoverability of this information does not require a technology savvy attorney; it is simply out there for the taking.

On the other hand, an employer may benefit from discovery of information posted to social networks, as exemplified in the Indiana Federal District Court case, EEOC v. Simply Storage Management, Inc., (S.D. Ind. May 11, 2010) involving a claim for emotional injury by an employee. The court allowed Simply Storage Management to obtain discovery from the plaintiff's Facebook and MySpace accounts, noting "it is reasonable to expect severe emotional or mental injury to manifest itself in some [social networking] content."

Another possible risk regarding social media is being caught in untruths. Last year, a Canadian who had taken a leave of absence from her job to battle depression, announced that her insurance provider, Manulife, had revoked her health benefits after discovering photos on her Facebook page depicting her attending a Chippendales show, celebrating a birthday and enjoying a day at the beach.

An example of this from the legal world is the situation where a lawyer was found to have committed an ethical violation and to have incurred the wrath of a judge by making a false statement about the supposed death of her father in order to obtain a continuance of a deadline. The tech savvy judge logged on to her Facebook page and determined that she was out and about socially instead of participating in funeral related activities. This can just as easily happen in your business. Surely, employers want to minimize these types of problems, but, the question is how to effectively do that.

Policy Considerations

As noted above, there has been a rash of cases involving the limits of an employer's ability to control employee interaction on social networks. Although many companies have implemented social-media policies prohibiting employees from posting disparaging comments or sharing confidential company information on the Internet, policies that totally prohibit such postings have been called into question.

One of the complaints filed by the NLRB was against a Connecticut ambulance service company that terminated an employee for violating its social-media policy that stated "Employees are prohibited from making disparaging, discriminatory, or defamatory comments when discussing the Company or the employee's superiors, co-workers and/or competitors." Specifically, the employee posted a negative comment about her supervisor (she called him a "17", a term for a psychiatric patient, and a "scumbag" among other things ) on her personal Facebook page and co-workers thereafter posted similar comments. The Company suspended, and eventually terminated, the employee because the postings violated the Company's Internet policies. The NLRB Complaint alleged that the Company implemented and enforced an overly broad policy concerning blogging and Internet posting because it prohibited employees from making disparaging remarks when discussing the company or supervisors, and prohibited employees from depicting the company in any way over the Internet without company permission. The NLRB contended that the policy was too broad in that it interfered with the recognized employee right to discuss the terms and conditions of employment with co-workers and others. There was a settlement of this matter in January 2011, resulting in the employer's modification of its social networking policy specifically relating to personal internet communications regarding work-related issues.

As similar situation arose in May of this year (2011) when the NLRB filed a complaint against a Chicago BMW dealership that allegedly unlawfully fired a sales person for Facebook comments critical of the employer. The salesperson posted photos and commentary critical that only hot dogs and bottled water were offered to customers at a promotional event. The Complaint was based on the same rationale as the Connecticut case, discussed above. This matter has not been resolved one way or the other.

On the other hand, in a matter arising out of Tucson, Arizona, an Arizona Daily Star reporter was terminated for inappropriate and unprofessional tweets. The newspaper did not have a social networking policy and, in fact, urged its reporters to use social media on the job. The reporter in question was terminated for purportedly unprofessional, sexually inappropriate and pro-violence tweets, including one where he referred to TV station reporter as "stupid." The reporter filed an unfair labor practice charge with the NLRB; however, the NLRB dismissed the charge. It concluded that, since the comments did not relate to the conditions of employment, the termination was lawful.

Policy Suggestions

More and more business are learning that social networking, used properly, can be an effective business tool. Businesses are also learning that imposing significant restrictions on the use of social media are, not only possibly illegal, but often counterproductive to a dynamic work place. Nevertheless, employers still need to exert some control over the use of social networks, especially where employees are presenting themselves as representatives of the company or are discussing company related affairs. What follows are some suggestions that have been offered by commentators in this field:

The policy should include a statement that the company believes social networking is an important form of communication.
The policy should make it clear that social networking activities are not to interfere with the employee's primary job responsibilities.
The policy should contain a non-exclusive list of social networking risks posed to the company. Specifically, since most social network sites contain identifying information, including work information, the policy should emphasize that postings are likely to reflect on the company and its image. The policy should impress upon the employee that they need to take responsibility for representing the company in a professional manner.
The policy should describe what activities are and are not permitted, and what type of permission is necessary. Specifically, the policy should prohibit social networking communications relating to confidential, sensitive or legal matters.
The policy should state who is covered by the policy's mandates.
The policy should walk the fine line between protecting the company and respecting the rights of employees to freedom of speech.
The policy should include a reminder of existing policies, particularly those related to harassment, discrimination, confidentiality, privacy and disclosure, and should discuss training and dissemination of policy information.
The policy should emphasize the use of good judgment and mandates the use of a "personal opinion only" disclaimer.
The policy should reference the company's code of ethics (i.e., do not disrespect employees, competitors, business partners, etc.).

If your company needs assistance in formulating a social networking policy, or would like to further discuss issues related to a social networking issues in the work place, please contact Valerie Walker, 602-262-5844.

______________________________________________

In the next Legal Watch Series: Preparing for E-Discovery newsletter, we will be discussing the issue of an employee's expectation of privacy when using a company-issued computer, cell phone and/or pda.

About the Author
For more information or questions regarding E-Discovery and the Rules for Electronically Stored Information Management, contact Michael R. Palumbo.

Michael R. Palumbo focuses his practice on commercial and real estate litigation. Particular areas of experience include banking (UCC Articles 3 & 4) litigation; title insurance, escrow agent and Deed of Trust litigation; and quiet title, adverse possession, homeowners' associations and real estate agent disputes. He has participated in more than 50 trials in the Superior Courts of Arizona and District Court of Arizona, in most of which he was lead counsel. Mr. Palumbo can be reached at 602.262.5931 or mpalumbo@jsslaw.com.

Protecting Assets at Risk: Bankruptcy Options for Individual Investors and Other Business People

2011-06-16T15:18:00.000-07:00

The Great Recession has taken a toll on many individual investors and business owners. Declining real estate and other asset values, combined with weak business revenues, have eroded wealth and financial stability, forcing the cancellation or postponement of projects no longer feasible in the current economic landscape. That is especially so for those who borrowed or guaranteed debt to finance their businesses and investments. As a result, many borrowers ("debtors"), who previously stood on solid ground financially, have found themselves burdened with debt they can no longer afford to service.

For debtors in this situation, there are various avenues of recourse. For example, rather than waiting for creditors to initiate collection actions, debtors can be proactive by contacting their creditors to negotiate arrangements to resolve their troubled debt. Such agreements may include requesting that the creditor discount the debt, extend the term for repayment, or reduce the interest rate. Before considering such requests, creditors will likely insist that the debtor provide updated financial information on which any concessions will be based. These negotiations are sometimes referred to as "workouts" or "out-of-court restructurings."

Such workout discussions may or may not be successful. Negotiations can stagnate, for example, where (i) a creditor is asking for more than the debtor believes is appropriate or can reasonably pay; (ii) the debtor has multiple creditors or troubled loans and is unable to reach an agreement with respect to all of them; or (iii) the debtor has better options under the Bankruptcy Code (the "Code").

Diplomatically presented, the possibility of bankruptcy protection often can provide debtors valuable leverage in workout discussions; and pragmatic creditors may prefer a non-bankruptcy resolution; however, coercive threats of bankruptcy also may doom such discussions and end them. Creditors consider themselves justly owed the debt and may quickly, and sometimes irrevocably, dig in their heels at what they perceive as heavy-handed threats of bankruptcy in order to avoid payment.

Creditors know that bankruptcy can prevent them from proceeding with collection activities, likely will involve additional out-of-pocket costs and expenses to them, and can enable debtors to reduce, stretch out, or otherwise limit the recovery on their claims. Thus, pragmatic creditors may prefer a non-bankruptcy resolution.

It is paramount at the workout stage for debtors to fully consider and understand their options under Chapters 7, 11, and 13 of the Code, including the advantages, costs and risks associated with each. Only then can they assess the type of relief most likely to accomplish desired objectives, and how much they may want to offer their creditors in order to avoid bankruptcy altogether.

Chapter 7

In 2005, Congress, urged by the credit industry, passed changes to bankruptcy law making it more difficult for individuals to file for liquidation under Chapter 7, channeling them instead toward debt repayment plans pursuant to Chapters 11 or 13. Those changes included a "means test" for determining a debtor's financial ability to repay a greater portion of his or her debts over time.

Interestingly, the means test applies to those with "primarily" consumer debt. The courts have interpreted "primarily" to mean more than half in aggregate dollar amount of all debts. (1) The means test does not apply to those with primarily business or investment-related debt. Such persons may still file for Chapter 7 relief, regardless of their current income levels.

Debtors who file for Chapter 7 relief do so primarily to become discharged from personal liability on their debts. They are required to disclose their assets and debts, and it is then up to a bankruptcy trustee to determine whether there are any assets that can be liquidated to generate a distribution to creditors. That, in turn, requires (i) an estimate of asset values and (ii) a careful analysis of whether, and to what extent, certain assets are "exempt," or protected from creditors' claims under applicable law. In this article, the non-exempt, unencumbered portion of the assets is referred to as "Assets at Risk."

Chapter 7 debtors may still need to service debt secured by assets abandoned by the trustee that the debtor wishes to retain, such as the mortgage on the family home or a car loan. Otherwise, Chapter 7 debtors generally are able to shed their debts and are not obligated to make future payments to the unsecured creditors to whom they were indebted prior to filing for Chapter 7 relief.

Assuming a debtor has primarily business or investment-related debt, why, then, would he or she voluntarily choose to file under Chapter 11 or 13?

Chapters 11 and 13

Perhaps the most common reason for debtors to choose Chapters 11 or 13 over Chapter 7 is to retain Assets at Risk - assets that would be sold by the bankruptcy trustee or otherwise lost in Chapter 7 liquidation. The Assets at Risk may be a business interest or asset essential to the debtor's livelihood, or a real estate investment that generates income or has strong potential for appreciation. Chapter 11 or 13 debtors can propose a plan calling for the retention of those or other assets; however, what must they do to keep them?

In exchange for retaining assets, the debtor's plan must, at a minimum, provide (i) restructured debt payments to secured creditors on the secured portion of their claims and (ii) payment to unsecured creditors of at least as much as they would receive in a Chapter 7 liquidation. The former calls for a valuation of the secured creditor's collateral, whereas the latter calls for an analysis of the liquidation value of the Assets at Risk. The higher the liquidation value, the more that must be paid to unsecured creditors under the plan.

Another reason some debtors may prefer Chapters 11 or 13 over Chapter 7 is to restructure the repayment terms of secured debt. There are restrictions on doing so, however, over the creditor's objection where the debt is secured by the debtor's primary residence. (2) Even so, Chapter 11 or 13 debtors still may strip off a junior lien on a primary residence that has a value less than the senior liens.(3) This cannot be done in Chapter 7 and, absent a non-bankruptcy workout, can only be done through a Chapter 11 or 13 plan.

While a decision to restructure under Chapters 11 or 13 may be the best way for a debtor to retain Assets at Risk and restructure secured debt, it should not be made lightly. Restructuring can involve significant risk and expense, legal and otherwise. It also imposes and requires the debtor to perform special duties, including those of reporting and disclosure, (4) and transactions outside the debtor's ordinary course of business will require advance bankruptcy court approval.

A bankruptcy filing also will put the debtor and the debtor's past dealings in what one of our bankruptcy judges has termed "a fishbowl." It will provide creditors a forum in which to conduct discovery and otherwise obtain information from the debtor, question financial arrangements with insiders and affiliates, question and possibly attack the propriety of pre-bankruptcy transactions (including those involving family members and other insiders), seek adequate protection of any interests in collateral, seek relief from the bankruptcy stay to foreclose liens, and seek the appointment of an examiner to investigate and oversee or a trustee to operate the debtor's affairs. A bankruptcy filing also may result in the debtor's loss of credit, including credit cards; impair the debtor's ability to borrow; and increase the cost of credit. It also could adversely affect the amount a prospective buyer is willing to pay for the debtor's assets. Finally, the legal fees for Chapter 13, and especially Chapter 11, bankruptcies can be significant; and one or more aggressive creditors can greatly increase them.

With proper lead time and preparation, experienced counsel can help debtors appreciate these risks, evaluate Assets at Risk and available exemptions, avoid potential hazards, and increase the chances of successfully confirming a plan. Further, just as a good coach prepares a game plan before the competition begins, good counsel can help debtors, whenever possible, compose their plans before they file. Debtors who do so are more likely to successfully confirm a plan of their liking - in less time and at a lower expense - than if they had waited until the eleventh hour.

Creditor Involvement in the Plan Confirmation Process

In both Chapters 11 and 13, a number of requirements must be met before a plan can be confirmed; and creditors can object to confirmation of the plan if those requirements are not met. Two of the most significant confirmation requirements for individuals are that (i) unsecured creditors receive at least as much as they would in a Chapter 7 liquidation; and, if an unsecured creditor objects) that (ii) the debtors distribute an amount not less than their projected disposable income for a specified term (discussed further below).

Unlike Chapter 13, Chapter 11 is a semi-democratic process in which creditors have the right to vote on the plan. Thus, while some creditors and "creditor classes" (voting groups of creditors) may vote against the plan, Chapter 11 requires that at least one non-insider creditor class (the rights of which have been impaired or altered by the plan) vote in favor of it before it can be confirmed. (5) This encourages deal-making as part of the plan confirmation process. For example, a creditor that initially opposes the plan might be persuaded to support it if changes are made to improve that creditor's treatment. Any such improved treatment must, however, apply as well to all other creditors of the same class and cannot unfairly discriminate against creditors in other classes. The creditor voting requirement can complicate and add to the cost of an individual Chapter 11 case.

Choosing Between Chapters 11 and 13

Given that Chapter 11 cases can involve more reporting, creditor involvement and legal fees, why, then, would a debtor choose Chapter 11 over 13?

Reasons may include:

Eligibility. Some debtors are not eligible for Chapter 13 relief, which requires the debtor to have "regular income" and that the debtor's debt fall below certain levels (currently, unsecured debts must total less than $360,475 and secured debts must total less than $1,081,400). (6) If either (i) the debtor does not have "regular income" or (ii) either debt level is exceeded, Chapter 13 relief is not available.
Restructuring secured debt beyond five years. Debtors who seek to restructure a secured debt (including stripping off the undersecured portion of a partially secured claim) for repayment over more than five years must do so in Chapter 11. Chapter 13 does not allow such restructurings beyond five years. Instead, a Chapter 13 plan must provide for distribution of an amount not less than the secured portion of the claim in the form of equal monthly payments over the life of the plan. (7) If the secured portion of the claim is substantial, it may not be feasible to fully repay it within five years. In such situations, Chapter 13 is not a viable option.
Pace. Chapter 13 requires that the debtor file a plan at the beginning of the case and has a prescribed pace. For example, Chapter 13 debtors typically must file their plans when they file their case or within fourteen days thereafter. (8) Chapter 11 debtors, by comparison, have more flexibility regarding the pace. They generally have the exclusive right to file a plan at any time within the first four months of the case (the "exclusivity period"). That period might be extended for cause; and even after it expires, a plan can still be proposed, although others can then propose one as well or seek to dismiss the case. (9) Debtors desiring more flexibility thus might prefer Chapter 11.

Although Chapter 11 debtors have more flexibility to "take their time" - a practice prevalent for years in the District of Arizona - that may no longer be a good strategy for individual debtors. First, various requirements have been added to guard against delay. Additionally, for debtors who are short on resources or otherwise concerned about costs, longer cases translate into more expensive cases. Moreover, a slower pace might give the debtor's adversaries more time to get up to speed and mount a stronger opposition to the plan. Finally, all other things being equal, bankruptcy judges tend to view debtors more favorably if they move promptly towards reorganization than if they do not. Therefore, absent special circumstances justifying a more deliberate approach, individual debtors often will be better served if they move swiftly to confirm a restructuring plan.

Trustee and Trustee Fees. In Chapter 13, a trustee is automatically appointed. The Chapter 13 trustee reviews the plan and makes recommendations to the court as to whether or not it should be confirmed or modified. The Chapter 13 trustee also receives the payments under a confirmed plan and distributes them to creditors. For these efforts, the Chapter 13 trustee receives a fee that can be as much as "10% of the payments made under the plan." (10)

In Chapter 11, a trustee is not automatically appointed (11) and no such percentage-based fee is collected. Instead, the debtor typically continues "in possession." Chapter 11 debtors, however, must pay quarterly fees to the U.S. Trustee from the petition date through substantial consummation of the plan and entry of a final decree. The fees are based on the level of disbursements and currently are, for example, $325 per quarter in which quarterly disbursements total less than $15,000; and $650 per quarter in which they total $15,000-$75,000.

In summary, the types of trustee fees charged in Chapter 11 and 13 cases are different; and total fees in either case will depend upon various factors, such as the total amount of plan payments and the length of the case. Debtors who intend to propose lower plan payments might have lower trustee fees under Chapter 13, while trustee fees might be a neutral factor for debtors who expect to process a Chapter 11 case quickly and make higher total plan payments.
Projected Disposable Income Requirement. If an unsecured creditor objects to the plan (and assuming that the plan does not call for its claim to be fully paid), Chapter 11 and 13 debtors each must meet different requirements with respect to their projected disposable income (PDI). Chapter 13 debtors must propose to pay all of their PDI received during the "applicable commitment period" - five years for those with above-median income - to their unsecured creditors. (12) Chapter 11 debtors, by comparison, must show that the value of all of their plan distributions is at least equal to their PDI for the longer of five years or the life of the plan. (13) Thus, Chapter 11 debtors may be able to satisfy this requirement if all of their plan payments - to both secured and unsecured creditors - equals or exceeds their PDI.

PDI also is determined differently under Chapters 11 and 13. "Disposable income" is defined under both as the debtor's current monthly income (CMI) less amounts "reasonably necessary to be expended" for maintenance or support of the debtor and dependents, for domestic support obligations, for qualifying charitable contributions, and for business expenses. (14) CMI, in turn, is calculated by averaging the monthly income received by the debtor received from all sources (without regard to its taxability) during the six-month period preceding the commencement of the case. While this calculation presumptively determines CMI, it can be rebutted by evidence of a substantial change in the debtor's income at the time of plan confirmation. (15)

In Chapter 13, however, the expense limitations of the "means test" standards (which are derived from expense guidelines of the Internal Revenue Service and may be much lower than the actual living expenses of many potential Chapter 11 debtors) apply in determining what expenses are "reasonably necessary" for debtors with above-median incomes. Although there is a split of authority on this issue, there is support for the proposition that Chapter 11 debtors are not limited by the IRS expense guidelines and that the reasonableness of their expenses instead must be judicially determined. (16) Arguably, then, there is more flexibility in determining PDI in Chapter 11 cases; and debtors with higher expenses might fare better in Chapter 11.

Concluding Comments

Bankruptcy, particularly reorganization, can be an expensive, time consuming process. It should not be undertaken lightly. Before filing for bankruptcy relief, debtors should define and prioritize objectives, such as whether to retain Assets at Risk, shed burdensome debt, reduce future debt service obligations, or obtain a fresh start. Debtors also should work closely with legal counsel to develop those objectives and evaluate the best options for accomplishing them, including the possibility of staying out of bankruptcy altogether by negotiating a non-bankruptcy workout.

Careful evaluation, preparation, and planning increase the chances for achieving the desired results in the most expeditious and least expensive manner, whether that means avoiding bankruptcy altogether or filing for the type of bankruptcy relief and seeking confirmation of the type of plan that best accomplishes it. That can only occur with ample lead time, which permits the gathering, assimilation, analysis and discussion of information, objectives and alternatives.

(1) E.g., In re Kelly, 841 F. 2d 908 (9th Cir. 1988); In re Mohr, 425 B.R. 457 (Bankr. S.D. Ohio 2010; In re Shelley, 231 B.R. 317 (Bankr. D. Neb. 1999); Waites v. Braley, 110 B.R. 211 (Bankr. E.D. Va. 1990).
(2) See Code §1322(b)(2) and §1123(b)(5).
(3) E.g., In re Zimmer, 313 F. 2d 1220 (9th Cir. 2002).
(4) That is particularly so for Chapter 11 debtors. For example, Chapter 11 debtors must file monthly operating reports listing their monthly receipts and disbursements (Bankruptcy Rule 2015.3); periodic entity reports disclosing information about entities in which they have a substantial or controlling interest (Bankruptcy Rule 2015.3); and disclosure statements containing adequate information from which creditors can make an informed judgment about the plan. (Code §1122).
(5) The precise manner in which creditors may be classified and ballots are tallied is outside the scope of this article.
(6) Code §109(e).
(7) Code §1325(a)(5)(B). Additionally, see, e.g., In re Barnes, 32 F.3d 405 (9th Cir. 1994)(holding that plan, which called for restructuring of the secured claim over nineteen years and only proposed to repay sixty percent of it over the five-year plan period, did not comply with Code §1325(a)(5)(B)(ii).
(8) Bankruptcy Rule 3015(b).
(9) Code §1121. By waiting beyond the exclusivity period, however, they risk the chance that a creditor or other party in interest might file a competing plan. Code §1121(c).
(10) 28 U.S.C. §586(e)(1)(B).
(11) In Chapter 11, a trustee may be appointed for cause, however, including fraud, dishonesty, incompetence, gross mismanagement or where such appointment is in the interest of creditors.
(12) Code §1325(b)(1).
(13) Code §1129(a)(15)(A).
(14) Code §1325(b)(2) and §1129(a)(15)(A).
(15) In re Lanning, 560 U.S. __ (2010).
(16) See In re Roedemeier, 374 B.R. 264 (Bankr. D. Kan. 2007); and Section D.2. of 2005 Committee Note to Official Bankruptcy Forms 22A, 22B, and 22C, reprinted in Norton Bankruptcy Law and Practice 2d, Bankruptcy Rules, at 1146 (Thomson/West 2006-2007 ed.) See also 7 Colliers on Bankruptcy ¶ 1129.03[15][a] (describing such a reading of Code § 1129(a)(15)(B) as "flawed." As stated by the Roedemeier court, "in calculating an individual Chapter 11 debtor's projected disposable income, §1129(a)(15)(B) must be read to allow a judicial determination of the expenses that are reasonably necessary for the support of the debtor and his or her dependents." In re Roedemeier, 374 B.R. at 272-73.

Brian N. Spector
Member
T: 602.262.5977
F: 602.495.2654
bspector@jsslaw.com

Mr. Spector's practice focuses on debt resolution, bankruptcy, and collection matters, including receiverships, foreclosures, fraudulent transfer litigation, provisional remedies, guaranty claims, and other actions involving the collection of secured and unsecured debt. In the bankruptcy context, Mr. Spector has represented secured creditors, individual and business debtors, asset purchasers, landlords, and franchisors. He also has served as a Chapter 11 trustee and lead counsel for numerous unsecured creditors committees. Mr. Spector is a past Chair of the State Bar Bankruptcy Section and the Jennings Strouss Business Restructuring and Reorganization Section. He has served as a Judge Pro Tem for the Maricopa County Superior Court since 2005. Mr. Spector earned a J.D. from the University of Arizona College of Law and a B.A. from Stanford University. Since 2005, he has been included in The Best Lawyers in America© in the category of Bankruptcy and Creditor-Debtor Rights Law. Mr. Spector has also been listed, since 2007, in Southwest Super Lawyers Magazine for Bankruptcy & Creditor/Debtor Rights.

Robert J. Novak Named the Incoming President of the Board of Directors of The Crossroads, Inc.

2011-06-09T17:09:00.000-07:00

PHOENIX, Ariz. (June 9, 2011) – Jennings, Strouss & Salmon, PLC, a leading Phoenix-based law firm, announced that Robert J. Novak has been named the incoming President of the Board of Directors of The Crossroads, Inc.

Crossroads, Inc. is a non-profit charitable organization established in 1960. It provides transitional living programs for recovering adults who express a willingness and desire to learn a new way of life. Crossroads residents develop the skills and self-esteem to transition back into society as productive individuals. Crossroads has evolved a powerful, non-medical recovery discipline that significantly increases a person’s chances of recovery.

“I have had the opportunity to be involved with Crossroads for several years. The help and assistance they have provided to countless individuals, their families, businesses and the community is truly amazing.”

Novak is a Member at Jennings, Strouss & Salmon. He has been in practice since 1971 and has extensive experience representing clients in sophisticated financial transactions. He has represented savings & loans, banks in corporate governance, restructuring, sale, merger, and debtors and special creditor interests in large and complex bankruptcy proceedings. He also represents clients in restructuring of problem loans and real estate projects, as well as the sale, purchase and financing of all types of improved and unimproved real estate. He currently resides in Paradise Valley with his wife and son.

U.S. Supreme Court Upholds Legal Arizona Workers Act

2011-06-09T17:03:00.001-07:00

The United States Supreme Court has upheld the Legal Arizona Workers Act (Arizona Law). Under the Arizona Law, passed in 2007, the license(s) of an Arizona employer may be, and in certain circumstances must be, suspended or revoked, if the employer knowingly or intentionally employs an unauthorized alien. The Arizona Law also requires Arizona employers to use E-Verify (an internet based federal electronic verification system) to confirm the work authorization status of employees. Thus, if not already doing so, Arizona employers should register for, and be using, E-Verify to confirm work authorization.

Each case a business or individual may face is unique and may require legal advice. If you would like additional information or have questions about the Legal Arizona Workers Act, please contact a member of our Labor and Employment Department.

Arizona's Anti-Deficiency Laws

2011-06-08T10:49:00.000-07:00

by David Elston

This summary of the Arizona Anti-Deficiency Laws relating to obligations that are secured by liens on residential properties is not intended to be a definitive or exhaustive treatment of such laws, but, rather, will serve as a brief introduction to and discussion of certain issues in such legal area.

Arizona's anti-deficiency statutes were enacted in 1971. The purpose of the anti-deficiency statutes is to bar a homeowner's personal liability after losing a residential property to foreclosure under certain circumstances. The statutes prohibit execution against and attachment of a borrower's assets when the property foreclosed upon either judicially or through a trustee sale is (i) a qualified property and (ii) the debt is a qualified loan. See A.R.S. § 33-729 (applicable to mortgages and deeds of trust that are judicially foreclosed as mortgages) and A.R.S. § 33-814 (applicable to deeds of trusts that are enforced though a trustee sale).

(i) Qualified Property. A.R.S. § 33-814(G) states that if trust property of two and one-half acres or less which is limited to and utilized for either a single one-family or a single two-family dwelling is sold pursuant to a trustee's power of sale, no action may be maintained to recover any difference between the amount obtained for sale and the amount of the indebtedness and any interest, costs and expenses (the "Deficiency").

The Arizona Courts have broadly defined this requirement that the property be "utilized" as a dwelling. In Northern Arizona Properties v. Pinetop Properties Group, 151 Ariz. 9, 725 P.2d 501 (Ct. App. 1986), the Court of Appeals held that an investment condominium, which was occasionally occupied by the owners and third party renters, fell within the statutory definition. In deciding that the condominium was utilized as a dwelling, the Court employed the definition of a "dwelling" in Webster's Dictionary. In Mid Kansas Federal Savings and Loan Association of Wichita v. Dynamic Development Corporation, 167 Ariz. 122, 804 P.2d 1310 (1991), the Arizona Supreme Court held that commercial residential properties being constructed and for their eventual resale as dwellings are not "utilized" as dwellings when they are unfinished and have never been lived in. Thus, if the dwelling has at least occasionally been occupied by the owners or by third parties, then it most likely will qualify as having been utilized as a dwelling.

In the context of a mortgage, the applicable statutory provision, A.R.S. § 33-729 (A) applies and defines the qualified property in the same manner as the deed of trust statute cited above.

Qualified Property may include ownership in residential property held in a condominium unit or though stock in a housing cooperative, as well as outright fee interests.

(ii) Qualified Loan. This element requires that (except as otherwise discussed below) the mortgage or deed of trust must be a purchase money mortgage ("PMM"). A PMM is a mortgage or deed of trust given concurrently with the conveyance of the subject real property between a buyer and seller and given to secure the loan, the proceeds of which are used to purchase the real property.

In addition, a refinance of a PMM has also been held to be a PMM for purposes of the anti-deficiency statutes. The Court of Appeals in Bank One, Arizona, N.A. v. Edward R. Beauvais, 188 Ariz. 245, 934 P.2d 809 (Ct. App. 1997) held that a note that was an extension, renewal or refinancing by the same lender of an original PMM note retained its character as a purchase money note. A lien securing debt, the proceeds of which are used for improvements on the residential property, will most likely not be treated as a PMM.

It is noteworthy is that the court in Beauvais did not resolve the issue of whether a borrower who refinances a PMM note and borrows funds in addition to the unpaid balance of the original loan amount receives protection under the anti-deficiency statutes for the total amount of the new loan, or whether the amount can be bifurcated to determine which amount is a PMM and which amount is non PMM. In Beauvais, the borrower borrowed $75,000 from the bank to pay off an earlier loan which was wrapped into the new loan amount of $240,000 to purchase the new home for a total new consolidated loan of $315,000, and a new promissory note in this amount was executed by the borrower. The note was secured in part by a second lien deed of trust on the new home. Three years later, a new note (the "Workout Note") in the amount of $190,000 (the remaining balance due on the consolidated loan) was executed which was characterized by the bank as "renewal" of the $315,00 note and an extension of the earlier $75,000 loan. The Court of Appeals held that even though that bifurcation issue was raised in the trial court, the bank made no such argument on appeal concerning the bifurcation of the Workout Note, and, thus, the Court of Appeals did not consider this issue. While it is likely that this issue will be resolved in subsequent cases, it has not been resolved as of this writing.

As stated above, if the property is a qualified property and the loan is a qualified loan, the anti-deficiency statutes will prohibit a lender who forecloses judicially or non-judicially through a power of sale provision, to bring an action against the borrower for any deficiency resulting upon the sale of the property. It is also clear under Arizona law that if the mortgage or deed of trust is a PMM, the lender may not waive the lien and sue on the note. See Baker v. Gardner, 160 Ariz. 98, 770 P.2d 766 (1988).

Finally, a PMM that is assumed by a buyer in connection with the buyer's acquisition of the subject property does not retain its character as a PMM as to that buyer. Southwest Savings and Loan Association v. Ludi, 122 Ariz. 226, 594 P.2d 92 (1979). See also Cely v. DeConcini, McDonald, Brammer, Yetwin & Lacy, P.C., 166 Ariz. 500, 803 P.2d 911 (Ct. App. 1990).

(iii) Protections where a Non-PMM Is Foreclosed Non-Judicially. Generally, if the debt or loan secured by a deed of trust is not a PMM, the anti-deficiency statute will apply and prohibit an action against the borrower for any deficiency if the qualified property is sold through the power of sale provision at a trustee sale. See Mid Kansas, 167 Ariz. at 124, 804 P.2d at 1313. However, a lender can obtain a deficiency judgment on a non-PMM if the lender elects to sue the borrower on the note and forecloses judicially; or, except as discussed above in the case of a PMM, the lender may elect to waive the lien and sue on the note. Thus, the holder of a non-PMM secured by a junior lien can sue on the note where the senior lienholder forecloses non-judicially pursuant to a power of sale provision and the second lien is eliminated by the trustee sale.

Corporate Governance Lessons from the 2008 Financial Crisis: Assessing the Effectiveness of Corporate Governance Through a Look at Troubled Companies

2011-06-08T10:33:00.001-07:00

I. Introduction

Everyone loves a scapegoat. The financial crisis of 2008 is no exception. When share values plunged around the world, companies closed and millions lost their jobs, homes and savings. Shareholders, the public and politicians pointed fingers everywhere. Directors of troubled companies found themselves directly in the line of fire, regardless of whether their companies were the "cause" of the problem, or were simply caught in the general economic decline.

Criticism leveled at Boards of Directors (Boards) included allegations that they were too complacent in:

allowing their executives to engage in risky behavior;
adopting compensation programs (prepared by management) that encouraged risky behavior;
succumbing to pressure from shareholders to exceed prior results, which led to cost-cutting measures and other risky behavior; and
failing to assure that they had the necessary expertise and information needed to monitor the business and assess its risk profile.

Query, however, whether it is appropriate to blame directors for failing to predict and prevent these troubles. Directors serve on their Boards as a part-time endeavor. They necessarily rely on professional advice from consultants and independent auditors in addition to information provided by management. Is it fair to assume that they could have predicted the most severe economic downturn since the Great Depression of the 1930s, let alone directed their companies to take steps to ameliorate its effects?

Commentators have split on these issues. Grant Kirkpatrick, for example, believes that corporate governance failed in significant respects in preventing the latest financial crisis. (1) In contrast, Professor Brian Cheffins believes that corporate governance mechanisms performed their intended functions in important respects during the most recent financial downturn, so there is not a significant need for reforming corporate governance. Professor Cheffins studied the thirty seven companies that were removed from the S&P 500 index during 2008. (2)

While commentators may debate the extent to which corporate governance was to blame for the latest financial crisis, it is helpful to review common governance mechanisms and to assess how these mechanisms performed during these troubled times. This analysis is anecdotal only, due to the difficulty of obtaining detailed information about the existing governance mechanisms in place and due to the confidentiality of Board proceedings. Nevertheless, important lessons can be gleaned from this assessment, as discussed more fully below.

While companies can always improve their corporate governance, it appears that the existing structures should suffice to protect most companies, provided that Boards and their management actively perform those functions in a meaningful way.

The importance of this proviso, however, cannot be overstated. In many of the major failures over the past decade, Boards may have had appropriate mechanisms in place that should have recognized and prevented the troubles, yet they failed to exercise independent judgment and oversight. Accordingly, the problems that arose could fairly be blamed to a large extent on implementation, rather than the need for additional governance regulation.

Similarly, in assessing the need for additional reforms, it is important to remember that directors do not have a duty to be omniscient, but rather should exercise their sound judgment after careful analysis of the information available to them. Blame for the general economic decline resulting from the latest financial crisis should be limited to the few firms that aggressively engaged in unduly risky behavior without adequate analysis and mitigation of risk.

This article reviews some of the more common methods of addressing corporate governance. Some of the procedures are mandatory in various jurisdictions due to government regulation or stock exchange listing requirements. Others are adopted on a voluntary basis. Each company should consider which of these procedures are best suited to its particular circumstances. Recommendations for Boards to consider appear at the end of this analysis.

In reviewing these governance mechanisms, keep in mind that, in recent decades, a large part of the emphasis in corporate governance has been designed to align the interests of the Board and executives with that of the equity owners. While that goal is generally laudable, it is important to remember that seeking current returns and profitability should be balanced with also preserving those equity interests. Executives often feel pressured to produce short-term profitability, which may result in a liquidity crisis that could jeopardize the entire long-term ownership interests of the shareholders. Notable failures, like Enron, The FINOVA Group, Inc., and Lehman Brothers serve to remind us of those dangers.

II. Existing Corporate Governance Procedures

A. Introduction

Following the financial crisis of 2000, Congress enacted the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley). (3) Sarbanes-Oxley required important new governance mechanisms, including increased:

audit committee membership and responsibilities; (4)
financial expert requirements; (5)
certifications of public reports by CEOs and CF0s; (6)
performance of a risk analysis; (7) and
tightening the standards for auditing requirements/independence. (8)

These reforms, among others, became mandatory for public companies, with certain exceptions. Other existing governance mechanisms that are commonly used or may impact the Sarbanes-Oxley requirements include:

splitting the Chairman and CEO functions;
enhancing director qualifications (through selection and training);
Board independence and replacement of executives;
presence of independent advisors for the Board (e.g., as to legal, risk, compensation, business, and/or financial);
legal liability;
institutional shareholder activism;
shareholder rights (elections and meetings); and
regulatory authority.

The foregoing mechanisms have received varying levels of criticism following the latest financial crisis. After reviewing the reports of Kirkpatrick and Cheffins, (9) and reflecting my own experience and observations, this article offers an assessment of these governance methods.

B. Audit Committees and Financial Experts

The presence of independent members of the audit committees, especially financial experts, has helped to strengthen the performance of those committees. Those directors, however, need to rely to a large extent on the advice of financial professionals, including the company's auditors, to advise them on sophisticated financial matters. Even the audit committee financial experts cannot be expected to fully understand the nuances of the financial statements or to uncover potentially risky behavior or inappropriate activity that is not discovered by those with more exposure to the operations (e.g., internal and external auditors).

While companies with independent audit committees and financial experts did not always discover fraud or self-dealing (e.g., in Enron and Worldcom) the relative absence of fraud in the latest financial crisis, as compared to 2000, (10) reveals that the independent audit committee functions appear to be fulfilling their purpose. Companies, however, could benefit from a more robust risk assessment process, including challenging assumptions regarding liquidity and other critical areas. If the audit committees are to perform those functions, then they should consider methods in which they can help assure their companies undertake that analysis. (Alternatively, companies may seek to have that function supervised by a separate risk committee.)

C. CEO and CFO Certifications

Again, the reduction of fraud in the latest crisis as compared to 2000 could largely be attributable to the requirement that the CEOs and CFOs certify the company financial statements, as mandated by Sarbanes-Oxley. Most executives probably continue to exercise the same degree of oversight over the financial statements as they did prior to the adoption of this requirement. They will continue to rely on advice from professional advisors as to whether company financial statements are proper. Sarbanes-Oxley, however, helps to focus their attention on items within their knowledge, including the identification of risk factors.

D. Risk Analysis and Chief Risk Officers

This area of the law perhaps deserves the most criticism, although it also has probably been the most maligned. Since the adoption of Sarbanes-Oxley, companies have undertaken to better assess their risks, although the quality of that analysis necessarily varies among companies. Even the best risk analysis, however, would not have predicted the severity of the 2008 economic decline for most companies, at least for those outside of the financial services and real estate arenas. Nevertheless, Boards can help fulfill an important function by challenging their executives to perform a robust risk analysis and to develop strategies for minimizing the impact if foreseeable risks occur. Those risks can include crises relating to liquidity, key customers, key employees, litigation, governmental investigations, product or service failures and other potential risks that could severely impact the company.

Risks like these can occur at any time. For example, long before the Deepwater Horizon oil spill of 2010, BP suffered a refinery explosion in Texas. (11) The risks apparently were known at lower levels in the company. (12) Siemens and Boeing have had to deal with issues of bribery of foreign officials and breaching public tender rules, respectively. (13) And Citibank lost its private bank license in Japan due to money laundering charges. (14) Boards would benefit from adequate crisis management training in a broad range of potential issues.

Some companies may have performed risk analyses without undertaking a true "stress test" based on severe assumptions. Although the severity of the 2008 financial crisis was unprecedented in recent times, the occurrence of economic cycles in various industries, particularly financial and real estate, are not unprecedented. (15) As a result, directors of all companies can help to preserve shareholder values by assuring that their executives undertake a risk assessment and help to develop methods of addressing the potential problems.

Enron is a prime example of a company that implemented procedures to address a known risk, but the procedures were not implemented in an independent and thoughtful manner. I understand that Enron required Board committee approval of conflict of interest transactions involving senior executives and the company, but those transactions were routinely approved without modification. Moreover, there were no apparent mechanisms in place to monitor the performance of those transactions or assess the aggregate impact of those cumulative approvals.

Similarly, Lehman Brothers had a risk committee, but that committee only met twice in 2006 and 2007, and Bear Stearns only established its committee shortly before it failed. (16) Obviously, those committees were not successful in preventing their subsequent downfalls. To be most effective, a risk committee should be implemented long before the crisis has developed. Otherwise, the committee will necessarily serve in a reactive rather than a proactive manner, and its available courses of action will be more limited once the troubles have surfaced.

Of course, the operation of any business involves risk, and an appropriate level of risk should be accepted. Some Boards, however, may have inappropriately accepted undue risk, presumably to enhance profitability rather than to protect liquidity. For example, Northern Rock's Board apparently consciously decided not to hedge its liquidity with back-up lines of credit. (17)

Companies could enhance their risk assessments by including those assessments in their planning process. Some companies are enhancing this process through the creation of a Chief Risk Officer (CRO). An independent CRO who reports to the Board, rather than the CEO, and whose compensation is established by the Board and not the CEO, might be an appropriate method of assuring independence of and attention to this critical function. Without these features, the CRO' s independence will depend on the officer's ability to exercise those functions while being subordinate to an executive focused on things other than risk analysis and mitigation. Of course, there are other methods to address this issue, including incorporating risk analysis and avoidance into compensation programs for all executives. Each Board should decide on the best method for addressing these issues based on its own risk profile and management structure.

Engagement of an executive focused primarily on analysis and mitigation of risks could help to identify problems that the Board and auditors might not otherwise catch. For example, many financial institutions jeopardized their liquidity position by supporting the capital of their financing conduits with lines of credit maturing in 364 days, because credit lines with a maturity of a year or longer had to be supported by the bank's capital. (18) The aggregate impact of those lines severely impacted many of those institutions.

In France and the UK, risk management has been introduced into corporate governance principles. (19) The Basel II capital accord requires Boards to review and guide corporate strategy, major plans of action and risk policy. (20)

The risk assessments should evaluate the impact that compensation programs have on the company' s risk profile. The latest financial crisis has emphasized the imbalance of those programs in financial services firms and how those programs helped lead to risky behavior that was not adequately protected. Granted, firms often thought that the presence of credit ratings, insurance and other provisions would help to insulate them from significant loss, but those protections were apparently insufficient to prevent or mitigate the losses at many companies.

Companies like UBS and JP Morgan have begun to tie compensation to long-term results, requiring deferral of bonuses, mandating share ownership, and factoring in risk-weighting into their compensation formulas. Seventy percent of the companies listed on the FTSE defer some part of their annual bonuses. (21) Boards should be careful to understand the consequences of the incentives created by the performance objectives.

E. Auditor Independence and Requirements

Since the enactment of Sarbanes-Oxley, auditors have been more vigilant about assessing risk exposure. The collapse of Arthur Anderson has served as an example of what can happen if they fail to do so. Again, the absence of significant fraud demonstrates that, in most companies, this governance mechanism is functioning reasonably well. It is important, however, to remember that auditors are not guarantors of company activity, regardless of their independent function. Ultimately, the company needs to manage and control itself, rather than to rely on inappropriate activity being discovered by the auditors.

F. Splitting the Chairman and CEO Roles

Having a separate Chairman from the CEO can provide an independent person to help guide the Board's oversight of the company and reduce the ability of the CEO to control the Board's agenda. It would also provide a person to whom the CFO, CRO, general counsel and others who are to exercise independent judgment from the CEO could discuss concerns. In the absence of an independent chairman, the audit or risk committee Chairs also could fulfill that function. In the UK, companies listed on the London Stock Exchange must have an independent Chairman separate from management or explain why they do not do so. (22) However, given that the British banking sector failed to perform any better than its U.S. counterparts, it is questionable whether the presence of an independent chairman would have made a difference in most cases. (23) Again, each Board should decide these issues for itself.

G. Enhancing Director Qualifications

As Carl Ichan has said: "[M]any board members were demonstrably unqualified, abjectly remiss or simply too cozy with management." (24) Many Board members are appointed due to their friendship with the executives or other Board members. Some are appointed to help fulfill perceived needs to add diversity to the Board along gender or racial lines. While those goals are laudable, they should not be at the expense of assuring that the Board is capable of exercising its oversight duties and is sufficiently skilled to understand and exercise independence over the company's direction. A sophisticated company probably needs more experienced and dedicated directors, who can understand the complexity of the matters before them.

Examples of Boards that lacked Board expertise in the company' s business or independence include Bear Stearns and Dillards. (25) At eight major U.S. financial institutions, two thirds of their Board members lacked any banking experience. (26)

Director qualifications can be enhanced through appropriate "onboarding" and periodic training to help assure that the directors understand the company, their duties and the technical aspect of their committee duties, whether it be related to compensation, financial risk or otherwise. Boards help to monitor the qualifications and contributions of their members through evaluations and feedback from shareholders.

H. Director Independence and Management Changes

As Mr. Ichan noted, (27) many directors at troubled companies failed to exercise independence. UCLA professor Avanidhar Subrahmanym found that as the degree of social interaction increased between directors and the executives, their effectiveness as independent directors decreased. While it is important for directors to interact with management, including those who need access to the Board (CFO, CRO, general counsel), the relationship should not interfere with their respective duties to the company and its equity owners, creditors and others, as appropriate.

It takes courage to emphasize risk analysis and prevention measures when shareholders demand increased performance. Warren Buffett had the courage to do so throughout the 1990s when he resisted investing in the "dot com" and telecom bubbles, publicly stating that the valuations in those industries could not be justified, let alone sustained. Ultimately, his judgment proved correct following the market tumbles of the early 2000s. Few directors had the courage to follow suit in subsequent years, but those companies that have withstood the recent turmoil have perhaps been cognizant of their risk profiles and have taken appropriate protective measures.

Directors exercised independent judgment during the latest financial crisis. For example, at the thirty-seven companies removed from the S&P 500 in 2008, Boards replaced CEOs and other executives much more frequently than general trends would predict. They replaced thirteen CEOs and twelve other executives at those companies. (28) This forty percent rate of dismissal for CEOs exceeded the 2.1 percent ten-year average ending in 2007 for the largest 2,500 companies. (29)

While directors appear to have exercised independence in dismissing executives when problems surfaced, it is questionable whether they exercised appropriate independence in approving management proposals for operations and compensation that led to those troubles in later years. Perhaps directors would better serve their constituents by exercising that independence from the start, through a robust risk analysis and planning process, rather than reacting to a crisis when it arises.

In addition, while executives were dismissed, in many instances the departing executives were entitled to severance arrangements that did not provide the Board with an adequate means of withholding those payments, at least without the likelihood of an expensive and distracting litigation. Similarly, when Boards are seeking to hire replacements for the departed executives, they may be pressured to again adopt similar assured severance arrangements. In approving executive agreements, Boards might consider the impact that this insulation from financial results might have on the company's risk profile.

I. Independent Board

Advisors Boards would be well advised to have access to independent advisors when they deem it appropriate. Sarbanes-Oxley requires that the Board have the freedom to engage counsel and other advisors when it desires it, but Boards appear to exercise that prerogative infrequently. Boards might consider engagement of independent professionals to independently guide the Board on issues, particularly those involving Board independence, duties, risk management and liability. Those professionals could be the same as those supporting the company's risk analysis. If the company appointed a Chief Risk Officer, that officer could independently report to the Board and use the same professionals. Ultimately, this is merely one aspect of the overall risk assessment process.

J. Legal Liability

While an expensive and destructive method of helping to assure corporate governance, the legal system serves an important role in helping to assure that companies and their managers fulfill their duties. Because the defense of legal action is enormously expensive, however, companies would be well served to rely on other corporate governance mechanisms to properly manage the company.

Because suits are often commenced when share prices fall, regardless of causation, essentially in an attempt at legal extortion, it is not possible to assess the impact of this method of enforcing corporate governance. Similarly, government investigations often follow financial turmoil, in part due to pressure from the agencies to demonstrate that they have addressed the issue, as well as to address actual violations.

K. Institutional

Shareholder Activism Major shareholders frequently flex their muscles to contact management and attempt to influence the company's direction. While institutional investors may not have been unusually active in this regard after the latest crisis, (30) they helped obtain important changes at a number of troubled companies. In addition, those institutions most likely had a larger impact through informal discussions that were never reported. Of course, shareholders owning a sufficient number of shares to implement change can collectively cause the company to do so, whether through cooperative measures or proxy contests.

While discussions between shareholders, the Board, and management can be a healthy method of obtaining input on the market's reaction to current operations and results, Boards should independently evaluate those inputs to be sure that the interests of some equity holders do not unduly influence the company's overall direction to the detriment of others, especially if those equity owners are seeking short-term results at the expense of capital preservation.

L. Shareholder Rights

Shareholders often seek to elect directors annually and to reserve the right to call a special meeting with a small number of shares. In practice, it would appear that most shareholders routinely approve management proposals and Board slates, so this mechanism is not an effective method of governing the company, with notable exceptions. Troubled companies often bow to pressure to install new directors, or adopt shareholder proposals to avoid a proxy fight. Most shareholders, however, do not engage in this kind of activism. Instead, they tend to sell their shares or simply voice their displeasure to management. In the UK, shareholders owning five percent of a company can call a meeting to dismiss a director, although this power is rarely used. (31) It is too early to determine whether the SEC' s new "proxy access" rules, (32) which allow shareholders to nominate directors, will impact corporate governance.

M. Regulatory Supervision

While shareholders and the public expect that regulatory authorities will help protect them from harm, those agencies are habitually unable to adequately monitor the activities of the myriad companies under their jurisdiction. They tend to investigate following complaints or after the troubles have already occurred. Following cyclical economic downturns, there has been a tendency to add additional regulations designed to address the perceived shortcomings with the existing rules. Some of that is a direct result of the political process, where the legislatures and administrators want to show how they have taken action to prevent a recurrence in the future. The Basel II capital accord enables bank regulators to impose capital charges for incentive structures that encourage risky behavior. (33)

Yet, the same problems continue to surface. The answer may well be in better enforcement of existing regulations, rather than the hurried creation of widespread reforms. Legislatures would be better served by enacting narrowly-tailored reforms to address only the actual deficiencies in corporate governance, rather than rushing to enact broad changes in response to public pressure to "do something."

III. Conclusion: Thoughts for Board Consideration

After reviewing the consequences of the most recent financial downturn, Boards should review their corporate governance procedures to assess their efficacy in light of their particular circumstances. Areas they may wish to evaluate could include:

undertaking a more robust risk analysis, with challenging assumptions and an evaluation of anticipated crises relating to:
- liquidity;
- loss of customers;
- loss of key employees;
- litigation/governmental investigations;
- product/service failures; and
- other anticipated risks;
- appointment of a Risk Committee of the Board, if those functions are not exercised by the Audit Committee;
- appointment of a Chief Risk Officer, and determining the reporting and compensation arrangements for that person;
- strengthening the Board selection, training and evaluation programs to assure that directors are competent and willing to exercise their duties in light of the company's business and regulatory environment.
- periodically evaluating Board independence;
- determining whether the Chairman and the CEO should be separate persons; and
- evaluating compensation programs in light of the risk analysis, including a review of severance arrangements.

While overall, corporate governance performed fairly well at most companies, Boards (along with almost everyone else) underestimated the scope of the recent economic downturn. Accordingly, while widespread reform is not clearly necessary, all Boards could benefit from an honest assessment of their risks, strengths and weaknesses in determining the course of their company' s future endeavors.

1 . Grant Kirkpatrick, The Corporate Governance Lessons from the Financial Crisis, 96 Fin. Market Trends 51 (July 2009).
2. See Brian R. Cheffins, Did Corporate Governance "Fail" During the 2008 Stock Market Meltdown? The Case of the S&P 500, 65 Bus. Law. 1 (2009). Cheffin is the S.J. Berwin Professor of Law, University of Cambridge.
3. Pub. Law 107-204, 116 Stat. 745 (July 30, 2002) (codified at 15 U.S.C. § 7201 [Sarbanes-Oxley].
4. Sarbanes-Oxley, supra note 3, at § 301.
5. Id. at § 407.
6. Id. at § 906.
7. Id. a t § 404.
8. Id. at §§ 201-206.
9. See supra notes 1 and 2.
10. See Cheffins, supra note 2, at 28-29.
11. See, e.g., Kirkpatrick, supra note 1, at 18.
12. Id.
13. Id.
14. Id.
15. See, e.g., S. Henke, The Great 18-Year Real Estate Cycle, Globe Asia (Feb. 2010), available at www.cato.org.
16. Kirkpatrick, supra note 1, at 19.
17. Id., at 28.
18. See, e.g., Kirkpatrick, supra note 1, at 11.
19. Id. at 24.
20. Id. at 17. See also Jacqui Hatfield & Gil Cohen, Banking Industry Regulatory Update, 64 Consumer Fin. L.Q. Rep. 134 (2010).
21. Kirkpatrick, supra note 1, at 28.
22. See Cheffins, supra note 2, at 55.
23. Id.
24. Id. at 54, quoting Carl Ichan, Corporate Boards that Do Their Job, Wash. Post, Feb. 16, 2009 at A15.
25. Cheffins, supra note 2, at 35
26. Kirkpatrick, supra note 1, at 22.
27. See supra note 24.
28. See Cheffins, supra note 2, at 37.
29. Id. at 40.
30. See id. at 45-50.
31. Id. at 59-60.
32. See SEC Rule 149-11
33. See, e.g., Kirkpatrick, supra note.1, at 16; Hatfield & Cohen,Banking Industry Regulatory Update, supra note 20.

Client Alert: Social Security "No-Match" Letters Are Back

2011-05-25T10:30:00.000-07:00

The Social Security Administration (SSA) has resumed sending no-match letters to employers if an employee's name and/or social security number does not match the SSA records. For years, the SSA sent no-match letters (referred to by the SSA as "Decentralized Correspondence" or "DECOR" notices) to employers. The SSA stopped sending the no-match letters a few years ago after litigation was filed challenging a controversial proposed rule issued by the U.S. Department of Homeland Security relating to no-match letters. The proposed rule was eventually rescinded and the resumption of SSA no-match letters became effective as of March 22, 2011.

Unfortunately, the resumption of no-match letters creates questions for employers regarding how to respond to the letters. No-match letters normally provide that the employer does not have to respond to the letter. However, employers should not ignore the letters. Doing so may have serious repercussions.

The SSA has stated that a no-match letter is not a basis, in and of itself, for an employer to take any adverse action against an employee, such as laying off, suspending, firing or discriminating against an individual. In fact, there are a number of reasons why information reported to the SSA may not correspond with SSA records including, but not limited to, typographical errors, incomplete employer records, unreported name changes or even an error in the SSA records. Therefore, employers should not jump to conclusions about the reasons behind a letter.

Employers should develop a company-wide policy for uniformly handling all no-match letters and carefully follow the instructions set forth in the letters. The policy should ensure that all no-match letters are received, and/or forwarded to, one department for processing. According to the SSA, employers should take reasonable steps to resolve the mismatch and apply those reasonable steps uniformly to all employees.

Each case a business or individual may face is unique and may require legal advice. If you have questions about developing or updating your procedures for addressing "no-match" issues, or would like additional information regarding the content of this article, please contact a member of our Labor and Employment Department.

Fourteen Jennings Strouss Attorneys Recognized in the 2011 edition of Southwest Super Lawyers®

2011-05-12T11:09:00.000-07:00

PHOENIX, Ariz. (May 12, 2011) – Jennings, Strouss & Salmon, PLC announced that fourteen attorneys have been named by Southwest Super Lawyers^® magazine as top attorneys in Arizona for 2011. Only five percent of the lawyers in the state are named by Super Lawyers.

Jennings Strouss attorneys who were selected for inclusion in the 2011 edition of Southwest Super Lawyers^® are:

Gerald W. Alston - Alternative Dispute Resolution, Commercial Litigation, and International Arbitration, and International Trade and Finance Law
John R. Christian - Tax Law and Trusts and Estates
Frederick M. Cummings - Medical Malpractice Law, Personal Injury Litigation and Professional Malpractice
John J. Egbert - Labor and Employment Law
Lee E. Esch - Real Estate Law
Jay A. Fradkin - Medical Malpractice/Personal Injury Litigation
Carolyn J. Johnsen - Bankruptcy and Creditor-Debtor Rights Law
Stephen E. Lee - Tax Law
Bruce B. May - Real Estate Law
Michael J. O’Connor - Commercial Litigation and Personal Injury Litigation
Michael R. Palumbo - Alternative Dispute Resolution, Litigation and Real Estate Law
J. Scott Rhodes - Administrative Law, Ethics and Professional Responsibility Law, and Legal Malpractice Law
Jack N. Rudel - Corporate Law
Brian N. Spector - Bankruptcy and Creditor-Debtor Rights Law

The selections for this list are made by the research team at Super Lawyers, which is a service of the Thomson Reuters Legal Division based in Eagan, MN. Each year, the research team at Super Lawyers undertakes a rigorous multi-phase selection process that includes a statewide survey of lawyers, independent evaluation of candidates by the attorney-led research staff, a peer review of candidates by practice area, and a good-standing and disciplinary check.

About Southwest Super Lawyers

Thomson Reuters Legal publishes Super Lawyers magazines across the country. In addition to the magazines, Thomson Reuters Legal publishes newspaper inserts and magazine special sections devoted to Super Lawyers. In 2011, Super Lawyers will reach more than 15 million readers. Super Lawyers was first published in 1991 by Law & Politics and was acquired by Thomson Reuters Legal in February 2010. Super Lawyers can be found online at superlawyers.com where lawyers can be searched by practice area and location.

Client Alert: Avoiding Discrimination Claims under the Genetic Information Nondiscrimination Act (GINA)

2011-05-05T13:03:00.000-07:00

Client Alert: Arizona Legislature Provides Guidance to Employers in Dealing with the Arizona Medical Marijuana Act

2011-05-05T12:59:00.000-07:00

Governor Brewer has just signed legislation that will provide assistance to employers in their implementation of the Arizona Medical Marijuana Act ("AMMA") in the workplace. The new law amends existing drug testing statutes (A.R.S. § 23-493 et seq.) to make it easier for employers to discipline employees who use marijuana, even when they are cardholders under the AMMA. The new law also allows employers to use the electronic registry to verify an employee's cardholder status.

The AMMA allows limited use of marijuana for medicinal purposes without threat of criminal or civil penalty under Arizona law. It does not, however, alter marijuana's status as an illegal drug under federal law. The AMMA contains a very broad anti-discrimination provision that might prove challenging for many employers. Specifically, it prohibits employers from discriminating against a prospective or current employee who is a registered cardholder because of (1) the person's status as a cardholder, or (2) as a result of a registered qualifying patient's testing positive for marijuana through a drug screening. Although the AMMA created an exception to this anti-discrimination provision for employees who used, possessed or were impaired at the workplace or during the hours of employment, the AMMA did not define "impairment" or "under the influence."

Arizona's existing drug testing statutes already provided employers with some protection against lawsuits, but the new law expands that protection to account for the AMMA. The new law adds two new provisions that may help protect employers from litigation. First, it protects employers who take disciplinary action based on a good faith belief that an employee had an impairment while working on the employer's premises or during hours of employment. The law very favorably defines "impairment" to include symptoms that a prospective employee or employee may be under the influence of drugs or alcohol that may decrease or lessen the employee's performance, including the person's speech, appearance, odor and unusual behavior. The new law also defines "current use of any drug," and expands the definition of "good faith." These definitions will provide guidance and assistance to employers dealing with issues under the AMMA and drug testing.

The second new provision protects employers who take action to exclude an employee from performing a safety-sensitive position based on the employer's good faith belief that an employee is engaged in the current use of any drug if the drug could cause an impairment or otherwise decrease or lessen the employee's job performance or ability to perform the employee's job duties. The new law defines "safety- sensitive position" to include a job that includes duties that could affect the safety or health of the employee or others (such as operating a motor vehicle, equipment or machinery or power tools; performing duties at a customer's location;preparing or handling food or medicine; and working in certain occupations regulated by the professions section of Arizona law), as well as a job the employer designates as a safety-sensitive position.

Employers who have, or adopt, a drug testing policy and program that meet the requirements of Arizona's drug-testing statute will qualify for these new protections. Therefore, Arizona employers should review their drug-testing policies. If you have questions about this new law or the AMMA and their impact on your workplace, or if you would like assistance with reviewing and revising your policies, our labor and employment attorneys are available to assist you.

Client Alert: Department of Labor Seeks to Broaden Definition of Fiduciary Under ERISA

2011-04-21T16:15:00.000-07:00

On March 1 and 2,2011 the Department of Labor held public comment hearings on its new proposed regulations defining a fiduciary for purposes of employee benefit plans. It is likely the new regulations will cause many who provide financial services to employee benefit plans to be a fiduciary with respect to the plan. The new regulations will result in fiduciary status for those who do any of the following:

1. Provide advice, appraisals or fairness opinions as to the value of investments, make recommendations as to buying, selling or holding assets, or recommendations as to the management of securities or other property.

2. Acknowledge fiduciary status for purposes of providing advice regardless of whether the person meets other requirements of the regulation.

3. Is an investment advisor under Section 202(a)(11) of the Investment Advisors Act of 1940.

4. Provide advice or make recommendations pursuant to an agreement, arrangement or understanding, written or otherwise, with the plan, a plan fiduciary or a plan participant or beneficiary, where the advice may be considered in making investment or management decisions with respect to plan assets, and the advice will be individualized to the needs of the plan, a plan fiduciary or a participant or beneficiary.

The proposed regulations may be found at the Federal Register.

Each case a business or individual may face is unique and may require legal advice. If you would like additional information regarding the content of this article, please contact a member of our Labor and Employment Department.

Client Alert: ADAAA Regulations Released

2011-04-12T10:46:00.000-07:00

The Equal Employment Opportunity Commission (EEOC) issued its final revised Americans with Disabilities Act (ADA) regulations and accompanying interpretive guidance in order to implement the ADA Amendments Act of 2008 (ADAAA), which prohibits employment discrimination on the basis of disability.

In keeping with the ADAAA, the new regulations are to be construed broadly, and will dramatically change an employer's focus from whether someone is disabled, to what accommodations should be made.

These new regulations will be effective May 24, 2011, and are available in the Federal Register. Employers with 15 or more employees are encouraged to revise policies and train supervisors to comply with these new rules. [For assistance with either of these, please contact Jennings, Strouss & Salmon]

Each case a business or individual may face is unique and may require legal advice. If you would like additional information regarding the content of this article, please contact a member of our Labor and Employment Department.

Hefty Fines Issued for HIPAA Violations

2011-04-11T09:51:00.000-07:00

Within a couple of days apart, the U.S. Department of Health and Human Services (HHS) Office for Civil Rights (OCR) issued civil money penalties (CMPs) to two covered entities for failure to comply with the Health Insurance Portability and Accountability Act's (HIPAA) privacy rule.

On February 22, 2011, OCR fined Cignet Health of George's County, Md. (Cignet) $4.3 million for failure to provide patients access to medical records within the allotted time frame required by HIPAA. This first-ever imposed penalty was a result of what the OCR claims was Cignet's "willful neglect" to provide 41 patients access to their medical records within 30 to 60 days of the submitted requests. These violations occurred between September 2008 and October 2009.

OCR Director Georgina Verdugo stated in a news release, "Covered entities and business associates must uphold their responsibility to provide patients with access to their medical records, and adhere closely to all of HIPAA's requirements." Verdugo also indicated that the HHS will continue to investigate and take action against organizations that knowingly disregard their obligations under the HIPAA privacy rules.

In addition to the direct violations of HIPAA privacy rules, the OCR claimed that Cignet failed to cooperate with its investigations into the violation claims and provide records in response to the OCR's subpoena. HIPAA covered entities are required to cooperate with HHS investigations; however, Cignet only produced the medical records after the OCR filed a petition to enforce its subpoena in U.S. District Court and obtained a default judgment.

Two days after the Cignet fines were issued, the OCR executed a $1 million resolution agreement with The General Hospital Corporation and Massachusetts General Physicians Organization Inc. (Mass General). After an investigation, the OCR determined that Mass General was liable for the privacy rule violation made by an employee who left documents containing protected health information (PHI) related to 192 patients on a subway train.

The HIPAA privacy rule requires that covered entities protect the privacy of patient information through administrative, physical and technical safeguards at all time. Director Verdugo indicated that the OCR investigation revealed that Mass General failed to establish reasonable and appropriate safeguards to protect the privacy of sensitive information when it was removed from the hospital's premises.

As part of the resolution agreement, Mass General entered into a Corrective Action Plan, which includes the development and implementation of a comprehensive set of policies and procedures that ensure patient information is protected when removed from the hospital; training of staff members on these policies and procedures; and designating the director of internal audit services of Partners Healthcare System Inc., the hospital's parent company, to serve as an internal monitor to assess the hospital's compliance with the corrective action plan and submit semi-annual reports to HHS for three years.

"To avoid enforcement penalties, covered entities must ensure they are always in compliance with the HIPAA Privacy and Security Rules," said Verdugo. "A robust compliance program includes employee training, vigilant implementation of policies and procedures, regular internal audits, and a prompt action plan to respond to incidents."

Each case a business or individual may face is unique and may require legal advice. If you would like additional information regarding the content of this article or the variety of services Jennings Strouss provides to our health care clients please contact Fred Cummings.

Richard C. Smith is a member of the Tax, Estate Planning & Probate Departments and represents clients in all aspects of tax, corporate and business planning. His practice has a particular emphasis in the employee benefits area including the design, implementation and other aspects of pension, profit sharing and other qualified plans. He also advises clients in estate planning matters, including estate plans, wills, trust and family partnership agreements. He represents many physicians' practices and handles health care matters for them. Contact Mr. Smith at rsmith@jsslaw.com or 602.262.5972.

Bradley V. Martorana is an Associate attorney focusing his practice on corporate, healthcare,tax and securities law. His practice includes counseling corporations, limited liability companies and partnerships as to the tax and non-tax consequences of formation, operation, compensation and other commercial transactions. He also advises buyers and sellers in mergers, acquisitions, reorganizations and other restructurings and represents issuers and investors in private placements of equity and debt securities. Mr. Martorana also advises on a variety of other business and real estate matters. Contact Mr. Martorana at bmartorana@jsslaw.com or 602-262-5958.

Jennings Strouss - Attorneys at Law

LLC Compensation Classifications: Member Distributions vs. Salary: Beware the Unintended Consequences

Renowned Sports Law Attorney Travis Leach Joins the Phoenix Office of Jennings, Strouss & Salmon

Jennings, Strouss & Salmon Elects Bradley V. Martorana as a New Member

Jennings, Strouss & Salmon Expands Phoenix Office with the Addition of Adam M. Romney

Arizona Court of Appeals Expands Arizona Anti-Deficiency Protection to Unfinished Homes with Intent to Occupy Upon Completion

Arizona's Minimum Wage Increases January 1, 2012

Jennings, Strouss & Salmon Expands Phoenix Office with the Addition of Kami M. Hoskins

EEOC Releases Opinion Letter Regarding Pre-Employment Inquiries into Arrests & Convictions

Jennings, Strouss & Salmon Expands Phoenix Office with the Addition of Callie N. Parkinson

FASB Has Reissued its Accounting Standards Update

NRLB Requires Employers to Post Notice Regarding Employee's Rights to Join a Union

Employers' Use of Independent Contractor Agreements Are Being Targeted

Department of Labor Announced it Will Re-Propose its Rule on the Definition of Fiduciary

26 Jennings Strouss Attorneys Recognized in the 2012 Edition of Best Lawyers in America®

Jennings, Strouss & Salmon Expands Washington, D.C. Office

Jennings Strouss Foundation Receives ICARECORPS Partnership Award

Salt River Project Icon Richard H. Silverman Joins Jennings, Strouss & Salmon

National Labor Relations Board Limits Undocumented Workers' Remedies

8.18.11

Legal Watch Series: Topic 9 - Employees' Privacy Rights When Using Company Computers

Michael R. Palumbo

8.17.11

JS Foundation Holds Successful Back-to-School SupplyDrive

Department of Labor Proposes Changes to Persuader Reporting Requirements

Department of Homeland Security Embarks on a Major Compliance Effort

Jennings Strouss Client Recognized in Top 10 Civil Verdicts for 2010

Jennings Strouss Client Recognized in Top 10 Civil Verdicts for 2010

Tracking the Implementation of the Dodd-Frank Act

The Jennings Strouss Foundation's Lastest Project

Legal Watch Series: Topic 8 - Social Media and the Workplace

Protecting Assets at Risk: Bankruptcy Options for Individual Investors and Other Business People

Brian N. Spector

6.16.11

Robert J. Novak Named the Incoming President of the Board of Directors of The Crossroads, Inc.

U.S. Supreme Court Upholds Legal Arizona Workers Act

Arizona's Anti-Deficiency Laws

Corporate Governance Lessons from the 2008 Financial Crisis: Assessing the Effectiveness of Corporate Governance Through a Look at Troubled Companies

by Richard LiebermanPublished in Consumer Finance Law Quarterly Report

Client Alert: Social Security "No-Match" Letters Are Back

Fourteen Jennings Strouss Attorneys Recognized in the 2011 edition of Southwest Super Lawyers®

Client Alert: Avoiding Discrimination Claims under the Genetic Information Nondiscrimination Act (GINA)

5.3.11

Client Alert: Arizona Legislature Provides Guidance to Employers in Dealing with the Arizona Medical Marijuana Act

Janet B. Hutchison5.2.11

Client Alert: Department of Labor Seeks to Broaden Definition of Fiduciary Under ERISA

Client Alert: ADAAA Regulations Released

Hefty Fines Issued for HIPAA Violations

Bradley V. Martorana, Richard C. Smith4.11.11

by Richard Lieberman
Published in Consumer Finance Law Quarterly Report

Janet B. Hutchison
5.2.11

Bradley V. Martorana, Richard C. Smith
4.11.11