Harsh Sanctions Against Class Action Plaintiff Serves as Reminder to Timely Produce and Supplement Expert Disclosures 26 Sep 2024, 3:35 pm

A recent case out of the Eastern District of New York highlights the (1) criticality of exactness and timeliness of expert disclosure under the Federal Rules; and (2) that practitioners should not rely on the supplementation process available at Rule 26 to set forth opinions that “could have been asserted” at an earlier date.

Mirkin v. XOOM Energy, LLC, 2024 WL 4143376 (EDNY Sept. 2024) involves two expert reports of a class action plaintiff Mirkin. Plaintiff’s first expert report was “adopted” by the District Court to support class certification, and to deny defendant’s motion for summary judgment.

Thereafter, and at the close of expert discovery, plaintiff sought, and the District Court granted, leave to issue an amended report.

The amended report seemingly corrected a methodological flaw in the expert’s analysis.

Defendant, on a motion in limine, raised issue with the methodology set forth in plaintiff’s original expert report and argued that the damages as stated in the original report do not comport with plaintiff’s theory of liability. The District Court noted that defendant did not previously raise this issue during class certification. [1]

Presumably endeavoring to establish good cause for the amended report, Plaintiff argued that the amended report was necessitated by the Court’s later-in-time decisions interpreting the relevant contract between the parties and supplemental discovery from Defendant.

The District Court (1) granted Defendant’s motion to exclude the original report as evidence of damages based on the flaw; and (2) in the same decision, in relation to the amended report (that corrects the flaw), granted Defendant’s motion to preclude the amended report as untimely because, in correcting the methodology, it was “not supplementing” the original report but was offering a “new theory out of time” that was prejudicial to Defendant.

This decision serves as a practice reminder about Federal Rules 26 and 37. Below are the salient points:

• While Rule 26 permits supplementation of an expert disclosure, it does not permit a party to offer a new theory or methodology. [2] EDNY and SDNY have held that permissible supplementation includes changing a mathematical error but not the theory of the opinion. [3]
• If an opinion is out of time (meaning it is not a proper supplement under Rule 26) it is subject to preclusion under Rule 37(c)(1) absent an exception. An exception may be found if “the failure was substantially justified or is harmless.” [4] Generally speaking, if a party can show good cause for the late disclosure, such as new discovery, and either no prejudice or a method to ameliorate the prejudice, late disclosure is typically allowed.[5]
• Generally, whether a sanction is warranted, and whether that sanction is upheld, is a fact specific inquiry. The district courts have wide discretion to impose sanctions and to preclude under Rule 37, and will only be reversed if the party can establish an abuse of discretion. [6]

Here, plaintiff argued that the amended report was justified by (i) post-discovery court orders that clarified interpretation of the underlying service contract in dispute; and (ii) supplemental discovery from defendant. The District Court did not buy those arguments and held that the post-discovery decisions and later in time discovery did not occasion the amendment because the amendment mimicked plaintiff’s earlier arguments, meaning the methodology of the amended report was not “novel” and “could have been asserted at an earlier date.”

When looking at the facts in favor of plaintiff, the result here seems particularly harsh – the flaws in the report were not pointed out previously by defendant (meaning it is not as though plaintiff was notice and then ignored the flaws), plaintiff was granted leave to amend, the amended report corrects the flaws of the original report, and the amended report was still precluded.

However, when looking at the facts in favor of defendant, it seems the methodology set forth in the amended report could been asserted in plaintiff’s original disclosure from the beginning of the case because, according to the District Court, the precise methodology was plaintiff’s theory of liability “all along.”

That said, however, if that was the theory of liability “all along,” and set forth in earlier statements and arguments from plaintiff, how can defendant claim prejudice because the original expert report did not mimic plaintiff’s underlying methodology of liability?

This case serves as a reminder to the Bar that (i) the Rules require exactness and precision with respect to expert disclosures (even if the other side is on notice of the underlying theories); (ii) parties should routinely review whether supplementation or amendments of their disclosures are appropriate and not wait until the end of discovery; and (iii) whether a sanction will be granted is a fact specific inquiry and is given wide discretion on appeal.

[1] See Mirkin v. XOOM Energy, LLC, 2024 WL 4143376. *13 (EDNY Sept. 2024).

[2] See Exist, Inc. v. Tokio Marine Am. Ins. Co., 2023 WL 7117369, at *3 (S.D.N.Y. Oct. 5, 2023) (holding that plaintiff was required to show why the methods used in the amended report could not have been included in the original report).

[3] See Rules 26(a)(2)B and 26(e)(1)(A); see also Lidle v. Cirrus Design Corp., 2009 WL 4907201, at *5 (S.D.N.Y. Dec. 18, 2009).

[4] Rule 37(c)(1).

[5] See Patterson v. Balsamico, 440 F.3d 104, 117 (2d Cir. 2006) (considered the following factors in review of lower court’s decision to grant sanction: “(1) the party’s explanation for the failure to comply with the [disclosure requirement]; (2) the importance of the testimony of the precluded witness[es]; (3) the prejudice suffered by the opposing party as a result of having to prepare to meet the new testimony; and (4) the possibility of a continuance”).

[6] See Design Strategy, Inc. v. Davis, 469 F.3d 284, 297 (2d Cir. 2006) (affirming district court’s preclusion of report on damages even though preclusion would prevent party from establishing damages when other factors favored underlying movant; holding that standard as to whether exception applies includes the following four factors and affirming district court’s sanction precluding damages expert report) citing Patterson, 440 F.3d 104.

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Unpacking the Corporate Transparency Act: What Cooperatives and Condominiums Need to Know 19 Sep 2024, 7:15 pm

SGR’s Cooperative and Condominium Practice Group has received many questions concerning compliance with the federal Corporate Transparency Act (“CTA”) by cooperatives and condominiums. This bulletin is intended to provide guidance and clarification.

The CTA was enacted by Congress in 2021 to assist in prosecuting money laundering and other illicit activities by establishing a national registry, maintained by the United States Treasury Department’s Financial Crimes Enforcement Network (FinCEN), that includes information regarding individuals who control certain entities identified as “reporting companies”. Below are key components you should be familiar with:

1. The CTA in its current form applies to all New York cooperatives, with the exception of those that have (a) annual gross receipts exceeding $5,000,000 and (b) more than 20 full-time employees.

2. There is no consensus whether the CTA applies to New York condominiums, and, as of this date, FinCEN has issued no guidance on the issue. Condominiums may elect to comply if they want to avoid a risk of penalties for non-compliance.

3. The first reports to FinCEN by covered entities must be submitted prior to January 1, 2025.

4. The reports must identify (a) all persons, if any, owning more than 25% of the cooperative’s stock (or, in the case of a condominium that elects to file, 25% or more of the condominium’s common interests), (b) all persons serving on the cooperative’s (or condominium’s) board, and (c) in the unlikely event that principal officers (president, vice president or treasurer) are not board members, those persons as well. (If a 25% owner is itself an entity, such as a trust or a limited liability company, the persons controlling that entity must be identified.)

5. For each person identified to FinCEN, the following information must be provided: (a) name, (b) address, (c) date of birth, and (d) a copy of an identifying government- issued document (which has not expired) containing a unique number, such as a driver’s license, a state-issued ID, a U.S. Passport, or (in the case of a non-U.S. citizen without other identification) a foreign passport. FinCEN does not ask for and does not require the submission of social security numbers. Scanned copies of the identification used by individuals must be submitted with the report.

6. The information submitted to the FinCEN registry is not to be made available to the general public.

7. Once an initial report has been submitted to FinCEN, it must be updated within 30 days of any change in the information initially submitted, such as a change in board membership or the sale of the interest of a 25% owner.

8. Reports may be filed in paperless form on a website/portal maintained by FinCEN at https://fincen.gov/boi.

9. The same website makes available a pdf version of a form for the report that may be downloaded, completed offline, and then submitted online.

10. Although various corporate service companies offer CTA filing services, the reporting information is probably most efficiently collected and submitted by managing agents. Boards and managing agents should confer regarding any division of responsibilities.

11. The CTA authorizes civil and criminal penalties for willful failure to report, complete or update information.

To assist in compliance with reporting requirements, FinCen makes materials available at https://fincen.gov/boi. We suggest that those who take on the responsibility for compliance with the CTA review those materials, and check the site with enough frequency to keep abreast of updates. For more information, contact our attorneys in the Cooperative and Condominium Practice.

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So You Want to Sell Your Cell Site Lease? 8 Apr 2024, 7:38 pm

If you are a property owner that has a cell site located on it, you most likely been besieged by consistent letters and phone calls from large companies offering to purchase your cell site lease.

What does it mean to sell your cell site lease? How might you decide if you want to actually sell the lease? And, if you decide you want to sell your lease, how do you make sure you sell it in a manner that does not have residual negative impact on the operation of the rest of your property? This article will answer some of those fundamental questions and give some guidance about how to go through the cell site sale process.

First and foremost, it is important to know that most cell site lease sales do not make financial sense. Yes, that’s what I said: Most cell site lease sales don’t make sense, but let me delve into those fewer cases where it might make sense…

To determine whether a sale like this makes sense, a property owner should ask two fundamental questions:

1. Can the owner invest the sales proceeds and get at least the same income they would otherwise get from rent over the remaining term of the lease; and
2. What negative impacts on the rest of the property might occur from the sale of the cell site lease?

As to the first question, I often find that owners tend to consider selling their cell site leases because they are in a dire financial situation and need cash – fast! Clients in this situation view selling their cell site lease as an alternative to getting a hard money loan. However, in my experience, a hard money loan is often a better option because you have the potential opportunity to pay it off. If you are in a dire financial situation and take less money than your cell site is worth and agree to terms that are not balanced and fair, you live with that bad financial decision for usually a minimum of 50-99 years, or even forever. Not surprisingly, forever is a long time to be in a bad deal!

Given the complexity involved in the lease sales process, selling your cell site is not usually a fast process, especially if you work through the process correctly, and in a manner that will ensure that you get top dollar.

Selling a cell site usually involves an experienced attorney doing due diligence on the cell site lease(s) and the property. This process can often involve putting together a competitive bid package, putting together a list of potential buyers, and then sending a comprehensive lease sales package to the client to run an auction process where the client solicits multiple bidders. This can sometimes involve two rounds of bidding. This auction process, while extensive, ensures that the seller can compare the business terms and pricing on which the cell site is sold on an “apples to apples” comparison basis.

Once the owner has selected what appears to be the best offer from a cash perspective, the parties may enter into a letter of intent wherein the property owner agrees to negotiate legal documents for a specific period of time. If the parties cannot finalize the deal within that specified period, the client is free to go to the next “best offer” and the process begins all over again. It’s common for the negotiation and legal terms part of the transaction (along with any necessary third-party approvals, such as from a lender or the existing wireless tenant) to take at least 4-6 months (or even longer) to close the transaction.

It is important to note that the “best offer” may not necessarily be the offer with the highest sale price. Of course, price is the primary consideration, but the terms of a cell site sale are also critically important in evaluating which bid is best to select.

A cell site sale is often a much more involved process than a simple sales transaction. The legal documentation often includes a purchase and sale agreement, assignment of lease and easement agreement, title work and obtaining any third-party consents. The process should start with a baseline survey showing location and dimensions of the property, the proposed easement, and an updated preliminary title report. The term “lease sale” is therefore misleading to many property owners because they believe once the “sale” is complete they will have no further obligation with respect to the cell site. This is not the case with respect to cell site lease sales. The owner of the property subject to the easement retains all obligations with respect to that property (including all “landlord” obligations to the tenant(s) under any cell site leases in the property “sold”).

As to the second question, the most important factor to consider when deciding to sell a cell site lease is to ensure that the terms of the sale will not impact the use of the rest of the property. Sellers must consider whether the sale will interfere with the primary use of the property remaining outside the easement area and what impact the sale will have on future use, development, and financing for the property. Failure to focus on this key factor may result in a short-term gain but leave the property owner with a property that has a reduced function, or a reduced income other than to support the cell site lease that has been sold.

I think you’ll agree that it is critical to work with legal counsel who has expertise in these types of transactions because there are endless terms which, if not identified and negotiated, can unwittingly leave a property owner with long term financial responsibilities or, even worse, leave a property owner with a “white elephant” building that effectively exists exclusively for the purpose of maintaining the cell site easement. I’ve seen it happen.

An attorney experienced in cell site transactions will ultimately be in the best position to assist a property owner in evaluating whether to sell their cell site lease, to analyze all the potential alternatives, and to guide you through the process…if it makes sense.

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Diversity Jurisdiction, the Amount in Controversy, and Removal: A Defendant’s Burden 20 Mar 2024, 7:48 pm

In a lawsuit between parties located in different states, a plaintiff sometimes try to keep the case in the state court by being cagey about defining their damages to prevent the defendant from removing the case to federal court. Unless the defendant can show that the “amount in controversy” is at least $75,000, that defendant cannot invoke federal court jurisdiction where the parties have diverse citizenship. In Wal-Mart Stores East, LP v. Howell, Case No. A23A1198 (decided March 12, 2024), the Georgia Court of Appeals wrestled with a case where the plaintiff successfully stayed out of federal court despite recovering a six-figure verdict. The case informs defendants about how to deal with a plaintiff who seeks to obscure the amount in controversy.

The plaintiff in Howell alleged a slip and fall case. Wal-Mart initially removed the case to federal court. It relied on the plaintiff’s $400,000 settlement demand to establish the amount in controversy. Opinion at 5. The federal court remanded the case to state court, concluding that Wal-Mart had not sufficiently proven the amount in controversy. However, the federal court limited the plaintiff’s damages to $75,000 unless the trial judge found that circumstances had changed after the plaintiff moved to remand. Opinion at 5.

Years later, the case proceeded to trial. A jury awarded the plaintiff $300,000. Opinion at 8. Wal-Mart argued on appeal that circumstances had not changed and that the doctrine of judicial estoppel limited the plaintiff’s damages to $75,000.

The Court of Appeals upheld the verdict. The Court of Appeals concluded that the trial court had not abused its discretion in concluding that circumstances had changed. The Court of Appeals noted that the plaintiff had rejected Wal-Mart’s post-remand settlement offer in excess of $75,000. Also, the plaintiff had disclosed additional information about her injuries and additional information bearing on Wal-Mart’s liability had been discovered.

Howell teaches defendants that if the amount in controversy is unclear or obscure, the defendant has the burden to press the issue and create clarity. The Court noted that Wal-Mart had not followed up with additional discovery to clarify plaintiff’s damage claims or removed the case again after plaintiff rejected a settlement in excess of $75,000. Opinion at 13-14.

A defendant has only one year after a case is filed in state court to uncover the amount in controversy and remove the case to federal court. If a plaintiff can remain ambiguous about the amount at issue, a defendant can lose the ability to remove the case.

Howell instructs defendants wishing to remove a case to federal court based on diversity jurisdiction to exercise diligence to press a plaintiff to specify his damages and remove uncertainty about the amount in controversy.

The opinion is available at https://efast.gaappeals.us/download?filingId=0b244536-f3a9-46f6-9560-283b5135f713

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Traps to Avoid When Negotiating a Commercial Sublease 11 Oct 2023, 7:51 pm

Sometimes leasing space from another tenant (subleasing) may appear to be a more advantageous business decision in terms of price, location and size compared with leasing the space directly from the property owner. However, a commercial sublease actually triggers a variety of legal issues simply not present in a direct lease. This therefore leads to the misperception that negotiating and drafting a sublease is easier and quicker than negotiating and drafting a new lease. In reality, it is actually the opposite – subleases will most often be more difficult and time consuming (and possibly involve much higher legal fees) to draft. Therefore, a party considering a subtenant transaction must not only consider all the potential legal risks involved, but also engage in specific due diligence before moving forward.

Risks Involved in a Commercial Sublease Transaction
Becoming a subtenant means taking on risk in certain areas of vulnerability. For instance, a subtenant is not in privity of contract with the master lessor. That means that the master landlord gets to decide whether or not to communicate directly with the subtenant. If the master landlord will not communicate with the subtenant, then all communication must go through the sublandlord. The sublandlord may have little interest in this responsibility.

As a subtenant, it is imperative to explicitly require the sublandlord to timely pay rent under the master lease, and to agree to be a conduit to the master landlord on behalf of the subtenant. If the sublandlord defaults under the master lease, the sublease is subject to being wiped out unless the subtenant can negotiate a recognition and attornment agreement directly with the master landlord. It is rare for a master landlord to offer such protection to a subtenant absent specific economic incentives built into the deal.

A Commercial Sublease Incorporates Terms of the Master Lease
When evaluating a sublease transaction, the potential subtenant must (i) carefully read the master lease, (ii) review or draft the sublease, (iii) dovetail the provisions between the two documents, and (iv) if required by the master lease, negotiate the master landlord’s consent to the sublease.

Fundamental to a sublease transaction is the concept that any right a subtenant has with respect to the subleased space derives from the rights of the sublandlord and are subject to the existing lease (which in a sublease setting is commonly referred to as the “master lease” or “prime lease”). The master lease is, therefore, effectively the lease agreement between the sublandlord and the master landlord. Given this fact, a potential subtenant’s careful review of all of the terms of the master lease is critical. Sometimes (if not commonly) the sublease agreement will be explicit that the sublease agreement is subject to all of the terms and conditions set forth in the master lease. Yet, even in the absence of such language, the parties should understand this concept as the fundamental underpinning of the rights of the parties in the transaction. In other words, each provision of the master lease is included in the sublease unless it is specifically excluded, and the master landlord agrees to such exclusion in a consent to sublease (discussed below).

The parties should therefore undertake a very detailed level of review of each and every provision in the master lease to determine if it applies to the sublease. Oftentimes, the parties will spell out which provisions of the master lease apply to the sublease and which provisions of the master lease are excluded from the sublease. Provisions of the master lease which should apply to the sublease should be incorporated by reference into the sublease. It is legally insufficient to say “whatever shouldn’t apply from master lease doesn’t in the sublease” or words to that effect.

A Consent to Sublease
When the sublandlord and subtenant want to change some of the sublease terms as compared to the master lease, those changes must be approved by the master landlord in a Consent to Sublease. A Consent to Sublease is a tri-party agreement among the master landlord, its tenant (the sublandlord) and the subtenant. When reflecting that change in the sublease, the sublease should say “as long as the Master Landlord agrees.”

A common provision that is approved in the Consent to Sublease is the sublease termination date. A sublandlord may want to terminate the sublease prior to the expiration of the master lease. This is particularly important to avoid liability. An example: upon the termination of the sublease, a subtenant is often required to “walk the space” with the sublandlord to make sure the subleased premises are returned to the condition required by the master lease. If the sublease expires on the same day as the master lease, and the subleased property is not returned in the condition required by the master lease, the sublandlord stands to be liable to the master landlord for the subtenant’s failures. That may effectively put the sublandlord in a holdover situation – often with a substantial financial penalty owed to the master landlord. In this case, a Consent to Sublease would therefore be a tool to avoid this type of liability by setting the sublease termination date reasonably in advance of the master lease termination date.

Due Diligence in a Commercial Sublease Transaction
A subtenant contemplating a sublease transaction is well advised to conduct its due diligence before signing any sublease or letter of intent. As explained above, the fundamental concept of a sublease transaction is that the subtenant “steps into the shoes” of the tenant under the master lease as it relates to the subleased premises. A careful attorney will make sure that its client is not stepping into any existing liability or opening the door to any reasonably foreseeable future liability.

The following is a list of just some of the issues a subtenant must consider before entering into a sublease agreement:

1. A subtenant should independently assess and verify the rights the tenant/sublandlord has to the space.

2. A subtenant should verify that the term of the sublease agreement is shorter than or the same as the term under the master lease. The sublease cannot be for a term that extends beyond the term of the master lease.

3. Since the sublease is subject to the master lease, the subtenant needs to understand the legal ramifications of the possibility that the master lease may terminate before the term provided for in the sublease due to tenant default, landlord default, or any other reason.

4. A subtenant should ensure that the sublease agreement properly provides for the exact terms and conditions of the master lease. This is often done by attaching that master lease and incorporating it as an exhibit into the sublease.

5. A subtenant should determine if there are provisions in the master lease that differ from the business deal between the subtenant and the sublandlord. If there are, it will be important to specifically: (a) exclude these provisions from the sublease, (b) modify these provisions in the sublease, or (c) address the differences in a Consent to Sublease.

As an example, for the fifth point just described, a subtenant often requires alterations or improvements to make the sublease premises ready for the subtenant’s use. Under these circumstances, which party is required to pay for the work (i.e. is the sublandlord offering a tenant improvement allowance)? If the alterations require consent from the master landlord (and those alternations likely will trigger a need for the master landlord’s consent), then this consent needs to be included in the Consent to Sublease. The master landlord’s consent will commonly include attaching plans and specifications for the subtenant buildout, evidence of insurance from the contractor/subcontractor, permits and approvals, and potentially many other specifications. The parties should also consider whether these alterations must be removed from the sublease premises at the end of the term, and if so by when, by whom, and at whose expense.

It is important to note that due diligence also extends to the entity that will be the sublandlord. Be sure that the sublandlord can perform its duties as “Tenant” under the master lease so that the subtenant does not end in default with the master lease terminating – thus terminating the sublease. Theoretically, all rent paid by the subtenant to the tenant should then be turned over and paid by the tenant to the master landlord to the extent necessary to satisfy any rent obligation under the master lease and any “profit” sharing as may be specifically set forth in the master lease. Such due diligence can therefore include conducting a litigation and bankruptcy search on the tenant in the jurisdictions where the sublandlord conducts business.

Conclusion
While a sublease agreement may involve leasing the same or less space to a subtenant than the tenant is leasing from the master landlord, or for a term that is equal to or less than the entire term of the master lease, the legal issues and due diligence involved in commercial sublease transactions often involve more detailed drafting, careful analysis, and more due diligence than entering into a direct lease with the owner of the property. Given that a sublease transaction is often more complex than a direct lease transaction, the wise potential subtenant will engage a qualified and seasoned real estate attorney early in every commercial sublease transaction to avoid the minefield of issues that come up in these seemingly “short and simple” deals.

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Third Circuit Reverses EPA “Reactivation” Policy for PSD 28 Sep 2023, 4:53 pm

A three-judge panel for the U.S. Court of Appeals for the Third Circuit has held that the Clean Air Act (“CAA”) bars the EPA from requiring facilities that are restarting after being shuttered to undergo to strict, Prevention of Significant Deterioration (“PSD”) permitting. In the Opinion, Port Hamilton Refining & Transportation LLP v. EPA, the three-judge panel vacated the EPA’s 2022 decision requiring a refinery to obtain a PSD permit when the shuttered facility reopened. According to the panel, the CAA “unambiguously limits the PSD Program’s application to newly constructed or modified facilities. The refinery is not new and has not undergone a ‘modification’ as the Act defines the term.” Under the Policy, an existing facility is considered “new” if the EPA determines that it has been “permanently shut down” when it ceases operations. If a facility has been idled, then it is not “new” under the policy and does not need to apply the stringent PSD requirements to restart. The court used a six-part test to determine if a plant had been permanently shut down which included the amount of time it was out of operation; the reason for the shut down; statements by the owner regarding intent; the cost and time required to reactivate; the status of permits; and ongoing maintenance and inspections conducted during the shutdown. For more information, please contact one of the attorneys in SGR’s Environmental Practice.

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EPA Eliminates “Emergency” Defenses to CAA Violations 20 Sep 2023, 5:02 pm

On July 21, the EPA finalized a rule barring “affirmative defense” emission waivers for “emergency” scenarios under Clean Air Act (“CAA”) Title V Permits.  The proposed rule would remove an enforcement defense that allowed facilities to avoid liability for permit violations occurring during qualified emergency circumstances such as unavoidable emission control device malfunctions, or emergency start-up or shutdowns. Under the previous waiver provisions, industry permit holders were shielded from civil liability during a malfunction or other emergency that resulted in excess releases of air pollution. The proposed rule will require states to amend their State Implementation Plans (“SIPs”) to eliminate the waiver provisions. States with inconsistent SIPs will have until August 21, 2024 to submit proposed program revisions or apply for extensions. For more information, please contact one of the attorneys in SGR’s Environmental Practice.

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Georgia Courts Continue to Look To Georgia Law When Enforcing Covenants Not Compete 19 Sep 2023, 6:31 pm

Georgia courts have traditionally refused to uphold contractual covenants not to compete that did not meet exacting standards. In addition, Georgia courts have applied their own standards even when the contract specified that it was governed by the law of another state. In Motorsports of Conyers, LLC v. Burbach, Case No. S22G0854 (decided Sept. 6, 2023), the Georgia Supreme Court examined whether statutes adopted in 2011 designed to allow the more liberal enforcement of non-competition covenants altered the traditional approach to resolving choice of law issues. The Court concluded that it had not.

Georgia courts will respect the choice of parties to apply the law of another state to a contract unless application of the other state’s law would be contrary to Georgia public policy. Opinion at p. 10. Because contracts in restraint of trade are contrary to Georgia public policy, Georgia courts have declined to apply the law of another state to uphold a restrictive covenant that Georgia law would not enforce. Opinion at pp. 12-13. In Burbach, the Georgia Supreme Court concluded that although the 2011 statutory changes allowed the enforcement of more non-competition covenants, those covenants that were unenforceable still violated Georgia public policy. Because Georgia courts will not apply the law of another state if doing so would violate Georgia public policy, the law of another state could not make enforceable a covenant a Georgia court would not enforce.

The Burbach decision impacts anyone drafting a non-competition covenant that might be enforced in Georgia. Unless the covenant is enforceable under Georgia law, it will not be enforced even if it would be enforceable under the law of another state.

The opinion is available at https://www.gasupreme.us/wp-content/uploads/2023/09/s22g0854.pdf

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Family Fiduciary Feud–How to Mitigate Conflicts and Manage Litigation in Family-Owned Businesses and Trusts 7 Sep 2023, 6:44 pm

Families fight. That is inevitable. Naturally, when a family-owned business or a family trust is at issue, some level of conflict is to be expected. When these conflict-prone structures combine, the conflicts have the potential to be bigger, riskier, and costlier, and can have multi-generational effects.

This article will touch on why the risk of conflict is so high in the family business and family trust context, provide planning tips to reduce the risk of conflict, and outline important considerations for families and their advisors to keep in mind when family friction boils over into conflict and litigation.

The F-Word: Fiduciary

In both the business and trust context, fiduciary obligations are paramount. Company officers owe similar fiduciary duties to shareholders that a trustee owes to the trust beneficiaries, including the duty of loyalty and the duty of impartiality. Just as a company officer cannot usurp a company opportunity, a trustee cannot transact business with the trust for the trustee’s financial benefit. To do so would breach the fiduciary duties of loyalty and to avoid self-dealing.

In the family business and family trust context, family dynamics collide with these fiduciary obligations and with business necessities. A conflict that has its roots in a simple sibling rivalry or blended-family distrust can snowball into legal allegations of a breach of fiduciary duty when one family member assumes a fiduciary role over another.

There are many topics that breed discord when family members and fiduciary powers intersect. Some examples that are frequent sources of conflict include the appropriate level of compensation received by those working in the family business, which family member is best prepared to run the family business or to control the family trust, and whether trust distributions fairly balance business control with monetary bequests.

Because issues of money, power, and favoritism are often simmering beneath the surface in family-owned businesses, the layering on of additional legal obligations risks bringing the simmer to a full-fledged boil. 

Measures to Avoid or Reduce Conflicts

When considering succession planning, decision makers (typically the senior generation) must face reality about family dynamics and the personal relationships that shape them. The desire to have descendants run the family business is natural, but is often incompatible with objectivity or with the desire to avoid conflict.

1. Establish clear communication.

Whatever the senior generation ultimately decides about its estate or business succession plan, it should communicate the decision to those affected by it with transparency. Educating the beneficiaries of the estate should occur at least in summary form and, as a best practice, copies of the executed governing documents should be provided. With respect to business succession, regular reporting on the progress of the business and any changes to the succession plan should be communicated with regularity. Providing a structured forum for communication (such as regular family meetings on the topic of succession) also reduces the chances for later litigation.

2. Review and revise governing documents.

While open communication is helpful, it is rarely sufficient. Well-advised families will also review and revise corporate and trust documents to ensure to include specific provisions tailored to preventing or minimizing litigation. These may include safe harbor clauses (clauses to establish that certain actions or procedures are authorized under a governing document) and provisions for fiduciary exculpation (exempting fiduciary actions that do not rise to a serious level such as willful malfeasance or bad faith from liability), utilizing the Prudent Investor Rule (protecting actions that a reasonably prudent investor would have taken), the Business Judgement Rule (protecting the decision makers in a business document, not a trust agreement) and Voting Stock versus Non-Voting Stock (facilitating transfers of  the non-voting interests for estate planning purposes without distorting the voting control).

3. Utilize neutrals.

Families should also consider utilizing neutral parties such as a corporate trustee or an independent professional trustee. These individuals are neutral to the family dynamics, but are professionals in dealing with trusts. They understand the nuances and can help provide potentially more objective advice than could a family member trustee.

Even when the senior generation prefers that a family member assume a trustee or other fiduciary position, there is still a place to include a neutral. For example, trust documents may provide for a Special Business Trustee who would direct the primary trustee on decisions related to business interests, or a Trust Protector who is able to remove and replace trustees and exercise additional powers, such as changes in trust situs, without having to go to court to do so.

4. Consider alternative dispute resolution options.

Families and their businesses can also utilize guidance from a dispute resolution consultant or include provisions for pre-litigation resolution proceedings in the governing documents. These may include mediation, arbitration, or “baseball arbitration,” a style of mediation named after the method used in Major League Baseball contract disputes. In this style of mediation, each side submits a comprehensive proposal and the neutral chooses one proposal or the other in the entirety, without splitting the difference between the proposals. Requiring some method of alternative dispute resolution can ensure that all options for resolving the dispute are exhausted before proceeding to litigation.

5. Disincentivize conflicts.

Finally, a large incentive to reduce disputes is to simply make them too costly. This can be done through fee-shifting provisions, indemnification, surcharges, and (in states where they are valid), in terrorem clauses, which provide that anyone challenging the legality of the will or trust forfeits rights to benefit from it. The inclusion of such clauses in governing documents may sufficiently divert conflict away from the courthouse steps.

However, even the best planning cannot guarantee a dispute will not enter litigation.

Litigation Looks Likely—What Now?

1. Gather the right team.

First and foremost, it is vital to have the right team in place. When litigation looks like a possibility, get a litigator involved early. While that may sound like an obvious point, in practice, fiduciaries and beneficiaries often look first to their corporate counsel or the attorney who drafted the governing trust or corporate documents when disputes arise. It is an understandable impulse, but there are many reasons why it is advisable to retain a qualified litigator at the outset rather than relying on the corporate drafting attorney.

For example, there will very likely be conflicts of interests involved when either a fiduciary or a beneficiary seeks to engage the attorney who drafted corporate or trust documents to advise on disputes that have arisen relating to those same documents. Additionally, in the trust context, if a question arises relating to the settlor’s intent in establishing the trust, the lawyer who drafted it may be a necessary witness. Ethical rules prohibit an attorney from representing a party in a case in which the attorney would also be a witness.

Finally, it is important to remember that litigation itself is a specialty. Court rules, norms, and even the judge’s temperament can play a significant role in the outcome of a dispute once it goes to court. Litigators know all of these factors best.

2. Set realistic expectations.

When litigation looks imminent, set realistic expectations. Litigation is unpredictable, expensive, and public. Families who are used to their disputes playing out behind closed doors may be surprised to realize how much about their family business, history, and finances become placed in the public realm once litigation is initiated. It is important to understand this prior to launching a lawsuit because once information is made public, it is near impossible to “un-ring that bell.”

3. Determine scope of representation.

Another critical determination that must be made early on in a dispute is precisely which parties are or can be represented by the same attorney. This determination can be difficult in the family dispute context when, for example, one family member may rely on another to find and hire a lawyer. Often family members’ interests start out aligned, making a dual representation appear cost-effective and reasonable. However, more times than not, interests that begin aligned later diverge, making dual representation risky.

To add, there are several different rules that govern whether a lawyer is even permitted to represent multiple parties, including state ethics rules, probate code rules, trust code rules, and general common law rules. Fiduciary disputes will almost always involve multiple parties with both individual and overlapping interests which will complicate ordinary legal conflicts of interest analyses.

Relatedly, nuanced and unique attorney-client privilege issues arise in the context of fiduciary disputes. For example, depending on where the parties are located, a dispute between a fiduciary and a beneficiary could implicate the fiduciary exception. This exception to the attorney-client privilege provides that certain legal advice sought by a fiduciary is not privileged as to beneficiaries.

The exception has its origin in shareholder derivative actions, where it was determined that when officers of corporations sought legal advice, the shareholders were the actual beneficiaries of that advice and should therefore, be permitted to discover those communications. Certain states have since expanded this exception to cover trustees and trust beneficiaries. Whether in the trust or shareholder context, fiduciaries must understand the possibility that advice they seek from their attorney may not be privileged as against parties with whom they may later find themselves in a legal dispute.

4. Identify deadlines and causes of action.

Finally, when family fiduciary disputes arise, promptly identify deadlines and available causes of action. The deadline to bring some fiduciary related claims can be as short as six months, and many state statutes are vague as to when that six-months-time clocks begins. Determining immediate deadlines, along with ensuring the right legal counsel is retained and possible conflicts of interest and the proper scope of representation identified, are just a few of the critical steps that should be taken as early as possible when fiduciary related disputes emerge.

The Bottom Line

Fiduciary obligations take on additional considerations and risks when family-owned businesses and interests are involved. As a result, plan ahead as if disputes are inevitable (or at least predictable). This will aid in minimizing the risk that ordinary family business conflict turns into family courtroom conflict. And if, despite best efforts, the family conflict veers toward litigation, contact your litigator.

For more information on succession planning and conflicts issues relating to family-owned businesses and fiduciary litigation, contact Michael Whitty.

The post Family Fiduciary Feud–How to Mitigate Conflicts and Manage Litigation in Family-Owned Businesses and Trusts appeared first on SGR Law.

OSHA Issues Heat Hazard Alert and Steps Up Enforcement 23 Aug 2023, 4:09 pm

OSHA has issued a heat hazard alert to remind employers of their obligation to protect workers against heat illness or injury in outdoor and indoor workplaces. The Department also announced that it will intensify its enforcement where workers are exposed to heat hazards with increased inspections in high risk industries like construction and agriculture. OSHA has not yet finalized a heat specific workplace standard, but is issuing the alert to remind employers that they have a duty to protect workers by reducing and eliminating hazards that expose workers to heat illness or injury under the General Duty Clause. Even without a specific standard, the General Duty Clause is fully enforceable and can lead to enforcement actions and fines against employers who put workers at risk. For more information, please contact one of the attorneys in SGR’s Environmental Practice.

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