Author: National Law Forum

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Developments in Securities Law – February 2011

Recent posting including Security Law Updates for February at the National Law Review by Geoffrey R. Morgan, Michael H. Altman, and Jeffrey M. Barrett of Michael Best & Friedrich LLP:

Final Rules

Say-on-Pay Voting Rules

On January 25, 2011, the SEC adopted final rules requiring public companies to conduct separate shareholder advisory votes on executive compensation and “golden parachute” compensation arrangements. These rules were adopted substantially as proposed on October 18, 2010. One notable difference from the proposed rules is a temporary exemption for smaller reporting companies so that these issuers will not be required to conduct either a say-on-pay or say-on-frequency vote until the first annual or other meeting of shareholders occurring on or after January 21, 2013. This temporary exemption does not apply to shareholder advisory votes regarding golden parachute compensation of smaller reporting companies. Because companies that have received TARP funds are required by U.S. Treasury regulations to have an annual say-on-pay vote, which is effectively the same as the say-on-pay vote under these rules, TARP recipients are exempt from the requirement to include an additional say-on-pay vote and a say-on-frequency proposal until their first meeting at which directors are elected after the company is no longer subject to the TARP restrictions.

The Dodd-Frank Act requires public companies to conduct say-on-pay and say-on-frequency votes for their first annual or other such meeting of shareholders occurring on or after January 21, 2011, regardless of whether final rules had been adopted by the SEC. The final rules do not become effective until 60 days following publication in the Federal Register. Companies must comply with the new rules concerning the golden parachute vote and disclosure with respect to any merger proxy statement (and certain other similar filings) filed on or after April 25, 2011.

Michael Best Comments

Say on Pay Could Make for a Rocky 2011 Proxy Season

While the say-on-pay rules just went into effect and the 2011 proxy season has just begun, we are seeing some interesting results that may signal a rocky season. Two of the first 55 say-on-pay votes failed to gain majority approval. While these votes are only advisory, companies whose annual meetings are later this year should take note that proxy advisory firms are playing a significant role in the process, especially for those companies whose say-on-pay proposals failed. Also, given the prohibition on counting broker discretionary votes in say-on-pay and say-on-pay frequency proposals, a major source of votes upon which companies have historically relied, management recommendations on voting have less significance than in the past.

Companies are also required to put to a shareholder vote the frequency with which the say-on-pay vote should occur. Shareholders must be given the choice of annual, biennial or triennial. Shareholders are showing a distinct preference for more frequent review of executive compensation, with the early yet distinct trend towards annual referendums, rather than a biennial or triennial schedule that is favored by most companies. Annual say on pay votes will likely require additional time and cost for companies to design and disclose executive pay programs. There is a discrepancy between management’s recommendation and shareholder’s response to this item. Nearly 60% of companies recommended a triennial vote, while a majority of shareholders at nearly 70% of companies have supported an annual vote. This divergence was more significant for the largest U.S. companies. Most of those companies that were successful in a biennial or triennial vote were controlled by insiders.

Proposed Rules & Final Rules

Net Worth Standard for Accredited Investors

On January 25, 2011, the SEC proposed amendments to its rules to conform the definition of “accredited investor” to the requirements of the Dodd-Frank Act. Section 413(a) of the Dodd-Frank Act requires the definitions of “accredited investor” in the SEC’s rules to exclude the value of a person’s primary residence for purposes of determining whether the person qualifies as an “accredited investor” on the basis of having a net worth in excess of $1.0 million. This change to the net worth standard was effective upon enactment by operation of the Dodd-Frank Act on July 21, 2010, but Section 413(a) also requires the SEC to revise its rules under the Securities Act of 1933 to reflect the new standard.

The change to the accredited investor definition is of significant importance for securities issuers as various exemptions for private or other limited offerings of securities under the Securities Act of 1933 and state “blue sky” laws depend on whether participants are “accredited investors.” One of the bases on which individuals may qualify as accredited is having a net worth of at least $1.0 million, either alone or together with their spouse. Non-accredited investors who participate in private offerings under Rule 505 or Rule 506 of Regulation D must receive financial and other information that is not required to be given to accredited investors, and in offerings relying on Rule 506 there is a limit of 35 non-accredited investors.

Removal of Credit Rating References

On February 9, 2011, the SEC, pursuant to Section 939A of the Dodd-Frank Act, proposed rule amendments that would remove references to credit ratings in rules and forms promulgated under the Securities Act of 1933 and the Securities Exchange Act of 1934. The focus of the proposal is to eliminate the use of credit ratings as a condition of “short-form” eligibility, which enables issuers to register securities “on the shelf” on a Form S-3 or F-3. Currently, an issuer can use a Form S-3 or F-3 if it meets certain registrant requirements, including a requirement that, for at least one year, it has been a reporting company and has been filing its periodic reports in a timely manner, in addition to at least one of the applicable form’s transaction requirements. One such transaction requirement allows an issuer to use a short-form registration statement for an offering of non-convertible securities, such as debt securities, provided that such securities be rated “investment grade” by at least one credit rating agency that is a nationally recognized statistical rating organization. Under the proposed rules, the transaction eligibility requirement relating to the offering of non-convertible securities would be replaced with a new requirement, which would permit use of a short-form registration statement for primary offerings of non-convertible securities if the issuer has issued (as of a date within 60 days prior to the filing of the registration statement), for cash, more than $1 billion in non-convertible securities, other than common equity, through registered primary offerings over the last three years and otherwise meets the registrant requirements. The proposed standard is modeled on the standard for determining whether an issuer is a “well-known seasoned issuer” based on its debt issuances, where it does not meet the public equity float requirement.

New Compliance & Disclosure Interpretations

Smaller Reporting Companies – On February 11, 2011, the SEC released new Q&A interpretations addressing how to determine whether an issuer is a smaller reporting company as of January 21, 2011. If an issuer is a smaller reporting company as of that date, the issuer will be entitled to rely on the delayed phase-in period for holding say-on-pay and say-on-frequency votes. An issuer’s status as a smaller reporting company is based on such issuer’s public float or annual revenues at the end of the second fiscal quarter of 2010. A change in status, if any, based on the issuer’s second fiscal quarter of 2010 results is effective on the first day of such issuer’s first quarter of 2011, regardless of whether such issuer has filed a report with the SEC indicating its new status.

Sec Releases & Policy Statements

No relevant Releases or Policy Statements.

Seeking CAFA Clarity: A Summary of Recent Case Law Addressing Challenges to Jurisdiction Under the Class Action Fairness Act

Very comprehensive article explaining intracacies of CAFA – the Class Action Fairness Act recently posted at the National Law Review by James A. Comodeca and M. Gabrielle Hils of Dinsmore & Shohl LLP.

I. The Class Action Fairness Act (“CAFA”)

In 2005, CAFA was enacted to assure fair and prompt recoveries for class members with legitimate claims, restore the intent of the framers of the United States Constitution by providing for Federal court consideration of interstate cases of national importance under diversity jurisdiction, and benefit society by encouraging innovation and lowering consumer prices. Pub. L. No. 109-2, 119 Stat. 4 (2005), LEXSEE 109 PL 2.

To achieve these stated purposes, 28 U.S.C. §1332 was amended to expand diversity jurisdiction in class action litigation. Subsection (d)(2) of §1332 provides that in class action cases involving 100 or more class members:

(2)        The district courts shall have original jurisdiction of any civil action in which the matter in controversy exceeds the sum or value of $ 5,000,000, exclusive of interest and costs, and is a class action in which–

(A)        any member of a class of plaintiffs is a citizen of a State different from any defendant;

(B)        any member of a class of plaintiffs is a foreign state or a citizen or subject of a foreign state and any defendant is a citizen of a State; or

(C)       any member of a class of plaintiffs is a citizen of a State and any defendant is a foreign state or a citizen or subject of a foreign state.

CAFA eliminates some of the traditional procedural impediments to removal by no longer placing a 1 year limit on removal, allowing removal even if the defendant is a citizen of the state where the suit was initiated, and no longer requiring the removing defendant to obtain consent to removal from the co-defendants. 28 U.S.C. §1453(b).

Pursuant to 28 U.S.C. §1332(d)(11), mass actions also may be removed to federal court. A mass action is a civil action in which monetary relief claims of 100 or more persons are proposed to be tried jointly on the ground that the plaintiffs’ claims involve common questions of law or fact. Jurisdiction shall exist only over those plaintiffs whose claims in a mass action satisfy the $75,000 jurisdictional amount found in of §1332(a), and if the other requirements of CAFA removal are met, including minimal diversity and an aggregate amount in controversy in excess of $5 million.

Even thought CAFA expands diversity jurisdiction, the removing party still has the burden to establish the court’s jurisdiction by demonstrating that the requisite number of plaintiffs exist, that there is minimal diversity, and that the amount in controversy is sufficient to meet the statutory requirements.

II. Exceptions to CAFA Jurisdiction

Certain class actions are specifically excluded from CAFA’s reach. The exceptions to CAFA jurisdiction are fertile territory for plaintiffs trying to keep their class actions cases in state court. CAFA’s exceptions are found in 28 U.S.C. §1332(d)(3) through (5) and include the following:

·       the discretionary/interests of justice exception,

·       the local controversy exception,

·       the home state exception, and

·       the state action exception.

A. Discretionary/Interests of Justice Exception – 28 U.S.C. §1332(d)(3)

The discretionary/interests of justice exception allows a district court to decline jurisdiction in the interests of justice and looking a the totality of the circumstances if greater than one third but less than two-thirds of the members of all proposed plaintiff classes in the aggregate and the primary defendants are citizens of the State in which the action was originally filed. In exercising this discretion the court must consider: whether the claims asserted involve matters of national or interstate interest; whether the claims asserted will be governed by laws of the State in which the action was originally filed or by the laws of other States; whether the class action has been pleaded in a manner that seeks to avoid Federal jurisdiction; whether the action was brought in a forum with a distinct nexus with the class members, the alleged harm, or the defendants; whether the number of citizens of the State in which the action was originally filed in all proposed plaintiff classes in the aggregate is substantially larger than the number of citizens from any other State, and the citizenship of the other members of the proposed class is dispersed among a substantial number of States; and whether, during the 3-year period preceding the filing of that class action, 1 or more other class actions asserting the same or similar claims on behalf of the same or other persons have been filed.

B. Local Controversy Exception – 28 U.S.C. §1332(d)(4)(A)

Under the local controversy exception, a district court shall decline to exercise jurisdiction over a class action which meets the following three criteria. First, greater than two-thirds of the members of all proposed plaintiff classes in the aggregate are citizens of the State in which the action was originally filed. Second at least one defendant is a defendant from whom significant relief is sought by members of the plaintiff class; whose alleged conduct forms a significant basis for the claims asserted by the proposed plaintiff class; and who is a citizen of the State in which the action was originally filed; and principal injuries resulting from the alleged conduct or any related conduct of each defendant were incurred in the State in which the action was originally filed. Third, during the 3-year period preceding the filing of that class action, no other class action has been filed asserting the same or similar factual allegations against any of the defendants on behalf of the same or other persons.

C. Home State Exception – 28 U.S.C. §1332(d)(4)(B)

The home state exception applies when two-thirds or more of the members of all proposed plaintiff classes in the aggregate, and the primary defendants, are citizens of the State in which the action was originally filed.

D. State Action Exception – 28 U.S.C. §1332(d)(5)(A)

If the primary defendants are States, State officials, or other governmental entities against whom the district court may be foreclosed from ordering relief then the case falls within the state action exception to CAFA jurisdiction.

III. Arguments raised to defeat CAFA jurisdiction

A. Is this case a class action?

CAFA applies to class actions and a class action is defined in 28 U.S.C. §1332 (d)(1) (B) as an civil action filed under Rule 23 of the Federal Rules of Civil Procedure or similar State statute or rule of judicial procedure authorizing action to be brought by 1 or more representative persons as a class action. But does CAFA apply if the complaint does not specifically define a proposed class?

In College of Dental Surgeons of Puerto Rico v. Connecticut Gen. Life Ins. Co.,585 F. 3d 33 (1st Cir. 2009) the First Circuit grappled with this issue. The plaintiff, the College of Dental Surgeons of Puerto Rico, brought suit on behalf of its members, consisting of licensed dentists in Puerto Rico, against multiple defendants claiming that the defendants’ claims handling practices were questionable, fraudulent and economically detrimental to the members. Two defendants removed the case to federal court pursuant to CAFA. The district court remanded the case on the basis that the complaint did not sufficiently define the plaintiff class. On appeal, the remand order was vacated. The First Circuit noted that the complaint plausibly alleged claims for class-wide relief and consistently alleged harm to the members as a professional group. The appellate court rejected the argument that remand was appropriate because the case could never be certified since an association cannot be a member of a certifiable class. The Court found that the association met the standing requirements to sue on behalf of its members because the members had standing to sue in their own right, the interests the association sought to protect were germane to its purposes; and neither the claim asserted nor the declaratory relief requested required the participation of individual members in the suit. More importantly, the Court stated that class composition was not the issue at the inception of a class action. Review of the complaint alone typically is insufficient for determining if the class can be certified, so the district court’s ruling on the inadequacy of the class definition was premature.

B. Is this case a mass action under 28 U.S.C. §1332(d)(11)?

In a series of cases brought in California, the plaintiffs were able to avoid CAFA jurisdiction by pleading around both the jurisdictional amount and the number of persons necessary to satisfy a mass action under §1332(d)(11).

In Tanoh v. Dow Chemical, Co, 561 F.3d 945 (9^th Cir. 2009), cert. denied, 130 S. Ct. 187, 175 L. Ed. 2d 236 (2009) the defendant removed seven state court actions involving over 600 foreign nationals who claimed that they had been injured by exposure to the chemical DBCP while working on banana and pineapple plantations in the Ivory Coast. In each case of the seven cases there were fewer than 100 plaintiffs. The cases were removed to federal court on the basis of diversity jurisdiction and the mass action provisions of CAFA. Dow Chemical argued that the seven actions, taken together, constituted a mass action and that the cases had been filed separately just to frustrate the purposes of CAFA jurisdiction.

The district court disagreed and remanded the actions. Specifically, the court looked at the language in 28 U.S.C. §1332(d)(11) which specifically states that a mass action shall not include claims that are joined upon the motion of a defendant. It found that Dow Chemical’s attempt to aggregate the actions for purposes of CAFA, was tantamount to doing an end-run around this limitation in the statute. On appeal, the Ninth Circuit upheld remand of the actions to state court. It rejected Dow Chemical’s argument that the plaintiffs should not be allowed to structure the complaints in order to defeat CAFA jurisdiction. The appellate court did not consider cases decided under provisions other than CAFA’s mass action provision to be persuasive. See also, Venegas v. Dole Food Co., Inc., 2009 U.S. Dist. LEXIS 22885 (C.D. Cal. Mar. 9, 2009), where approximately 2500 plaintiffs, banana plantation workers, filed multiple lawsuits against the same defendants alleging damages from exposure to a chemical used in banana farming operations in Costa Rica, Panama, Honduras and Guatemala. The plaintiffs were divided into groups alphabetically and by country so that each case had less than 100 plaintiffs. Defendants removed the cases to federal court on CAFA jurisdictional grounds asserting that all the actions should be considered one action because the plaintiffs divided their claims solely for purposes of avoiding federal court jurisdiction. The motion for remand was granted. Remand was granted, in part, because nothing in CAFA suggests that the plaintiffs, as the masters of their own complaint, may not file multiple actions each with fewer than 100 plaintiffs. The court also held that the defendant had not met its burden of demonstrating that amount in controversy exceeded $75,000 individually or $5 million in the aggregate.

C. Is there minimal diversity?

1. For purposes of federal diversity jurisdiction, a corporation is considered a citizen of the state where it is incorporated and of the state where it has its principal place of business. 28 U.S.C. §1332(c)(1). But what constitutes a corporation’s principal place of business?

In Hertz Corp. v. Friend, 130 S. Ct. 1181, 175 L. Ed. 2d 1029 (2010), the U.S. Supreme Court addressed the meaning of principal place of business (“PPB”) for diversity jurisdiction purposes. Plaintiffs, California citizens sued their employer, Hertz, in state court alleging California wage and hour law violations. They brought the suit on behalf of themselves and a class of California citizens suffering similar harms. Hertz removed the case to federal court on the basis of diversity jurisdiction, asserting that its PPB was in New Jersey. The plaintiffs moved for remand alleging that Hertz’s PPB was in California. Hertz submitted a declaration to establish that its PPB was in New Jersey. In the declaration, Hertz stated that it had facilities in 44 states, that its corporate headquarters was in New Jersey, and that its core executive and administrative functions were carried out in New Jersey. With respect to the state of California, Hertz stated that it had 273 of its 1606 car rental locations there, that about 2300 of its 11,230 full time employees were in California and that its business in California amounted to about $811 million of its $4.371 billion in annual revenue. Based on these facts, the district court found that Hertz’s PPB was in California under the Ninth’s Circuit’s test which required the court to examine Hertz’s business on a state-by-state basis. If the amount of activity in one state is significantly larger or substantially predominates, then that is the company’s PPB, but if there is no such state, then the PPB is the corporation’s nerve center, i.e., the place where the majority of its executive and administrative functions are performed. After examining the plurality of Hertz’s business activity in various states, the district court found that its activity in California was significant and so Hertz’s PPB was in California. The Ninth Circuit affirmed the remand order and Hertz appealed.

The United States Supreme Court reversed. Noting that there were many different ways in which the various circuit courts over the years had determined what constitutes a company’s PPB, the Supreme Court thought it necessary to find a single, more uniform interpretation of this statutory phrase. The Court adopted the nerve center test, holding that PPB is best read as referring to the place where a corporation’s officers direct control, and coordinate the corporation’s activities. In practice this should normally be the place where the corporation maintains its headquarters — provided that the headquarters is the actual center of direction, control, and coordination, i.e., the nerve center, and not simply an office where the corporation holds its board meetings.

2. What if the plaintiffs sue a limited liability company instead of a corporation. What is the citizenship of an LLC under CAFA?

In Ferrell v. Express Check Advance of SC LLC, 591 F. 3d 698, (4^th Cir. 2010), the plaintiffs filed a class action on behalf of South Carolina citizens against a payday lender for alleged violations of South Carolina law. The lender removed the case under CAFA. Following a long line of case law holding that the citizenship of an unincorporated association is determined based upon the citizenship of each of the association’s members, the lender argued that there was diversity based on the citizenship of its sole member, a Missouri corporation with its PPB in Kansas.

Alternatively, the lender argued that if it was deemed an unincorporated association within the meaning of 28 U.S.C. §1332(d)(10), it was a citizen of Tennessee, under whose laws it was organized, and of Kansas where it had its PPB.

The plaintiff moved to remand, arguing that the defendant’s PPB really was South Carolina, the place where it made all its loans and where all of its employees, but for its top four officers were located. The district court held that the defendant, a limited liability company, was an unincorporated association under 28 U.S.C. §1332(d)(10). Consequently, it was a citizen of the state under whose laws it is organized and of the state where it has its PPB. The district court found that the lender’s PPB was in South Carolina, not Kansas, and therefore the case should be remanded.

On appeal, the Fourth Circuit affirmed. It examined the citizenship language in 28 U.S.C. §1332. Section 1332 (c)(1) provides that a corporation is a citizen of the state of its incorporation and the state of it PPB. Section 1332(d)(10) provides that the citizenship of an unincorporated association is determined by the state under whose laws it is organized and the state where it has it PPB. However, the court observed that the because the provisions relating to the citizenship of corporations and of unincorporated associations are found in different sections of the statute, the provision relating to unincorporated associations in §1332(d)(10) applies only to class actions covered by CAFA. The court concluded that the term “unincorporated association” found in §1332(d)(10) refers to all non-corporate business entities. The appellate court agreed with the district court’s analysis that the defendant’s PPB was in South Carolina so the case was remanded.

D. Is the amount in controversy greater than $5 million?

1. Has the plaintiff alleged any amount in controversy?

When a plaintiff does not allege an amount in controversy in the complaint, the defendant must prove by a preponderance of the evidence that CAFA’s in excess of $5 million amount in controversy has been met. As the following cases demonstrate, this is not always an easy task.

Berniard v. Dow Chemical Co., 2010 U.S. App. LEXIS 16515 (5^th Cir. 2010), involved the remand of seven class actions stemming from a single incident, the sudden accidental release of ethyl acrylate, a potentially noxious chemical. The release resulted in the evacuation of residents and businesses with a 2 mile area east of the facility where the release had occurred. On the day of the release, two class actions were filed in state court. Eventually, three more state court class actions were filed and two class actions were filed in federal court.

The district court examined the allegations in the pleadings to determine if it had jurisdiction under CAFA. It examined the geographical reach of the chemicals, the number of persons affected, the seriousness and extent of the injuries suffered, and the potential monetary value of the damages, including punitive damages. Upon removal, defendants had a choice to either sustain removal by: (1) adducing summary judgment evidence of the amount in controversy; or (2) demonstrating that it is facially apparent from the pleadings alone that the amount in controversy has been met. The defendants chose the latter approach.

To meet the amount in controversy requirement, the defendants offered census data of the geographical areas at issue, and compared the quantum recovery in previously reported cases involving similar incidents and injuries. This was held to be insufficient. The court noted that the defendants had improperly equated the geographic areas in which potential plaintiffs might reside with the population of the class itself. The comparison to damage recoveries in similar cases was found to be speculative. It did not matter that the plaintiffs were claiming compensatory damages, pain and suffering, psychological and long term future damages, and even punitive or exemplary damages.

In Pretka v. Kolter City Plaza II, Inc., 608 F. 3d 744, (11^th Cir. 2010), the court addressed what types of evidence the defendant could present to establish the jurisdictional amount in controversy. The seven plaintiffs brought a putative class action on behalf of themselves and all other similarly situated depositors who had placed deposits on the purchase of luxury condominiums in the defendant’s development in West Palm Beach, Florida. The complaint alleged breach of contract and violation of Florida’s Condominium Act, and sought rescission of the purchase contracts and return of the deposits, but did not state an amount in controversy. Attached to the complaint were the plaintiffs purchase contracts showing an average deposit amount of roughly $105,000. The complaint stated that the class was believed to consist of over 300 members.

The defendant removed the case under CAFA. In support of the removal, defendant attached a declaration of the CFO of its parent company indicating that the company had collected over $5 million in deposits from more than 100 prospective purchasers. The plaintiffs moved for remand arguing that the court could not consider the CFO’s declaration because it was not a paper received from the plaintiffs. In its opposition brief, the defendant attached another declaration from its parent company’s closing manager who had reviewed the closing contracts. She stated that those contracts showed that the defendant possessed purchase deposits totaling over $41 million.

The district court, relying on the 11^th Circuit’s decision in a prior case, Lowery, held that it could not consider either the declaration evidence in support of the amount in controversy, or the contracts of other putative class members because such documents had not been supplied by the plaintiffs. The district court also found that the first declaration impermissibly speculated as to the potential damage claim of all putative class members and the second declaration could not be considered because it had not been submitted with the notice of removal. The district court remanded the case.

The defendant appealed, and the 11^th Circuit held that district court had erred in rejecting the defendant’s evidence of the amount in controversy. In reaching this conclusion, it distinguished its holding in Lowery, and disavowed any statements in the dicta of Lowery that could be considered contradictory to its holding inPretka. The Circuit Court held that when a case is removed under the first paragraph of 28 U.S.C. §1446(b), i.e., within 30 days of receipt of an initial pleading setting forth a claim for relief, that statutory language does not restrict the type of evidence that a defendant may use to satisfy the jurisdictional requirements for removal. This is in contrast, however, to removal under the second paragraph of 28 U.S.C. §1446(b) i.e., within 30 days of receipt of an amended pleading, motion or other paper, upon which it may first be ascertained that the case is removable. In the latter instance, the evidence to be considered is limited to reliance on receipt of an “other paper” due to a voluntary act of the plaintiff.

Contrary to the district court’s ruling, the appellate court recognized that documents generated by a defendant do not necessarily involve impermissible speculation. In the instant case, the CFO’s declaration contained non-speculative knowledge of the amount of every putative class member’s claim which could be considered, since the claims of the individual class members could be aggregated to determine the amount in controversy. The court stated that evidence added post-removal also could be considered by the court. Consequently, upon consideration of all of the defendant’s amount in controversy evidence, the remand order was rescinded.

In McGee v. Sentinel Offender Services LLC, 2010 U.S. Dist. LEXIS 126842 (S.D. Ga. Nov. 30, 2010), the plaintiff challenged the defendant’s CAFA removal on several grounds, including whether the amount in controversy requirement had been met. The Plaintiff filed a putative class action on behalf of all individuals previously convicted of a misdemeanor or ordinance violation in Georgia who were under probation supervised by Sentinel, a private probation company. The plaintiff sued for alleged violation of Georgia’s RICO statute and sought reimbursement in an amount equal to times the amount paid to Sentinel for supervision of the class members in private probation.

Sentinel supported its CAFA removal with a declaration from its COO and Vice President, who stated that there were 35,753 individuals convicted of misdemeanors or ordinance violations in the State of Georgia under probation supervised by Sentinel, and that Sentinel had collected $5,675,639.20 from these individuals in supervision fees. Plaintiff challenged the declaration because it did not specify when the fees were collected, whether they were collected within the statute of limitations period, or if they had been paid by persons who were class members. The court rejected this challenge and retained jurisdiction. The court noted that the declaration set forth an amount reflective of the damages sought by the plaintiff in the complaint. The RICO claim sought the divestiture of any interest in the enterprise or personal property, including all fees collected by Sentinel. As for plaintiff’s statute of limitations argument, the court noted that when determining the amount in controversy for jurisdictional purposes, it could not look past the complaint to the merits of a defense that had not yet been established.

2. Has the plaintiff alleged an amount in controversy less than $5 million?

While some plaintiffs may allege no amount in controversy in the complaint, other plaintiffs may disavow an amount that meets the jurisdictional requisite. For instance, in Freeman v. Blue Ridge Paper Products, Inc., 551 F. 3d 405 (6^th Cir. 2008), the plaintiffs made every effort to avoid CAFA jurisdiction.

The claims involved 300 landowners who sued a paper mill for nuisance created by water pollution. In their first class action suit filed in 2005 in Tennessee state court, the plaintiffs asserted claims covering a 6-year period from 6/1/99 to 8/17/05. At trial in that case, they recovered an aggregate award of $2 million.

Thereafter, plaintiffs filed an additional class action lawsuit in state court, in which they sought damages accruing after 8/17/05 until the date of trial. The name plaintiff disavowed individual damages above $74,000 or aggregate damages above $4.9 million. The defendant removed the suit to federal court, but it was remanded for failure to satisfy the jurisdictional amount.

After remand, the plaintiffs amended the complaint to seek damages from 8/17/05 to 2/17/06. The state court orally granted the motion to amend in December of 2007, but the written order was not entered until February of 2008. In the interim, the plaintiffs filed four more lawsuits in state court , each suit covering a different six month time period. Each complaint was essentially identical and pled the same damage limitations as the initial complaint. On February 4, 2008, the defendant removed all five cases to federal court where they were consolidated and subsequently remanded. Defendant appealed.

On appeal, the Sixth Circuit found that the CAFA threshold had been met because the $4.9 million sought in each complaint had to be aggregated. In so holding, the court noted that the complaints were identical, except for the artificially broken up time periods, and the plaintiffs offered no colorable reason for breaking up the lawsuits other than to avoid CAFA jurisdiction. The court limited its holding to the situation where no colorable basis exists for dividing up the sought-for retrospective relief into separate time periods, other than to frustrate the purposes of CAFA. The Sixth Circuit recognized that generally a plaintiff could avoid CAFA jurisdiction by seeking amounts less than the threshold, “but where recovery is expanded, rather than limited, by virtue of splintering of lawsuits for no colorable reason, the total of such identical splintered lawsuits may be aggregated.” Id. at 409.

E. Arguments for exceptions to CAFA jurisdiction

While the party removing a case has the burden to establish that the federal court has jurisdiction under CAFA, once that burden has been met, the burden then shifts to the party seeking to remand the case to establish that a CAFA exception applies.

1. The Home State Exception.

In Jackson v. Sprint Nextel Corp., 2011 U.S. Dist. LEXIS 7005, (N.D. Ill. Jan. 21, 2011) the plaintiffs sued Sprint, a Kansas Corporation alleging that Sprint conspired with other cell phone providers to impose artificially high prices for text messaging. The action was brought on behalf of a putative class of all individuals who purchased texting from Sprint or an alleged co-conspirator from 1/1/05 to the present, had a Kansas cell phone number, received their cell phone bill at a Kansas mailing address, and paid a Kansas USF fee. Sprint removed based on CAFA jurisdiction and the plaintiffs sought remand on the basis of the home state exception.

The lower court granted remand, finding that the plaintiffs had met their burden of establishing the existence of the home state exception because Sprint was a resident of Kansas and at least two thirds of the members of the proposed class were citizens of Kansas since the class only included members with Kansas billing addresses and cell phone numbers. Sprint appealed.

On appeal the Seventh Circuit reversed, finding that the lower court could not draw conclusions about the citizenship of the class members based on information like the class members cell phone numbers and mailing addresses. Instead, the district court could have relied on evidence of citizenship obtained through affidavits or survey responses in which putative class members revealed whether they intended to remain in Kansas or were a Kansas business. Using statistical principles, the plaintiffs could then establish the two thirds number required under the home state exception. Alternatively, the court noted that the plaintiffs could have defined their class as “all Kansas citizens who purchased text messaging from Sprint Nextel or an alleged co-conspirator. The case was remanded for further proceedings.

On remand, the parties conducted jurisdictional discovery. Following the evidentiary roadmap set forth in the Seventh Circuit’s opinion, the plaintiffs obtained updated customer information from Sprint and its alleged co-conspirators. The plaintiffs conducted a telephone survey of a random sample of putative class members. They searched voter registration, driver license and secretary of state records and collected Internet information to determine the citizenship of those individuals and businesses who had not answered the survey. Using this new data, the Plaintiffs renewed their motion for remand. While Sprint challenged the survey results on various grounds, in the end the court found that the plaintiffs had met their burden of establishing the elements of the home state exception. Hence the case was remanded.

2. The Local Controversy Exception.

Under the local controversy exception, plaintiffs may name a local defendant from whom significant relief is sought and whose alleged conduct forms a significant basis for the claims asserted by the class, and who has not been sued in a class action in the previous three years.

Case in point, LaFalier v. State Farm Fire & Cas. Co., 2010 U.S. App. LEXIS 17588 (10^th Cir. 2010), where the plaintiffs owned properties located in an environmentally contaminated town in Oklahoma. The state established a Trust to purchase the properties and assist the homeowners in relocating. During the purchase/relocation process, many homes were damaged by a tornado. The Trust then offset any amounts the plaintiffs might receive from insurance against the amounts the plaintiffs would receive under the Trust. The plaintiffs eventually brought suit against two individuals responsible for administering the Trust, and two appraisal companies, alleging that the defendants deliberately used appraisals that undervalued the properties, and conducted secret proceedings concerning the appraisals. The plaintiffs also sued ten insurance companies, three from Oklahoma and ten from out of state, alleging that the insurers paid only cash value for the tornado damage because they knew the properties would not be repaired or replaced, failed to reveal all coverage available, and improperly leveraged Trust offsets to urge the insureds to accept lower payments.

State Farm removed the case pursuant to CAFA. The plaintiffs moved for remand under the local controversy exception and the case was remanded. The insurers appealed, but remand was upheld. The insurers argued that the claims against the Trust defendants had been misjoined with the claims against the insurers, consequently, the Trust defendant claims should have been ignored for purposes of analyzing the local controversy exception. The district court disagreed. Every plaintiff had a claim against the Trust defendants, but not every plaintiff had a claim against each named defendant insurer. The Trust defendants were local defendants from whom significant relief was sought and whose conduct formed a significant basis for the claims asserted. The doctrine of procedural misjoinder had not been adopted in the Tenth Circuit, and even if it had, it was not clear that the severed claims against the insurers would meet CAFA’s jurisdictional requirements of over 100 class members and in excess of $5,000,0000.

The lower court also rejected the insurers’ contention that an earlier lawsuit filed by these plaintiffs against the Trust itself, and not against the current named Trust defendants, meant that the plaintiffs could not satisfy the last prong of the local controversy exception. On appeal the Tenth Circuit agreed with the district court, noting that the plain language of 28 U.S.C. §1332(d)(4)(A(ii) says there must be a prior action “against any of the defendants” and not “against any of the defendantsor parties in privity with them” as the insurers would have had the court interpret the statute. The Tenth Circuit also noted that State Farm had admitted that not every plaintiff had a claim against an insurer, and there was nothing before the court to demonstrate that at least 100 plaintiffs had claims against the insurers.

3. The Discretionary/Interests of Justice exception

If greater than one third but less than two-thirds of the members of all proposed plaintiff classes in the aggregate and the primary defendants are citizens of the State in which the action was originally filed the discretionary exception may apply. One of the difficulties in addressing this exception is that the term “primary defendant” is not defined in CAFA. The definition is important because the statute requires that “all” of the primary defendants be residents of the state where the suit was filed.

In Powell v. Tosh, 40 Envtl. L. Rep. 20251, 2009 U.S. Dist. LEXIS 98564 (W.D. Ky. Oct. 21, 2009), the plaintiffs sought to remand their case to state court based, in part, on CAFA’s discretionary exception. The plaintiffs, 28 Kentucky landowners, brought a class action nuisance lawsuit against nine defendants alleging that noxious fumes from the defendants’ hog farm operations were negatively impacting the value of the plaintiffs’ property and causing personal injuries. Among the defendants were the local operators of the hog farms as well as some diverse defendants who were the owners of the hogs on those farms.

While it was undisputed that the CAFA’s jurisdictional requirements had been met, the plaintiffs argued that the case should be remanded pursuant to two of CAFA’s mandatory exceptions, the local controversy exception and the discretionary exception. With respect to the discretionary exception, the plaintiffs argued that greater than one third but less than two-thirds of the members of the proposed class were citizens of Kentucky and the court agreed. Next, the plaintiffs argued that the primary defendants were citizens of Kentucky. The court disagreed.

The court looked at the language of the exception and determined that the requirement that the primary defendants be citizens of the state where the suit was filed, meant “all” of the primary defendants. Next, the court examined the complaint and noted that all members of the plaintiff class had claims against the diverse defendants. Accordingly, those defendants appeared to be the real targets of the class action. Also indicative of their status as primary defendants was the fact that the diverse defendants had been sued directly and were the subject of a significant portion of the claims asserted by the plaintiffs.

4. The State Action Exception

One of the least argued exceptions to CAFA jurisdiction is the state action exception which applies if the primary defendants are States, State officials, or other governmental entities against whom the district court may be foreclosed from ordering relief. Like the discretionary exception, the state action exception also contains the language “primary defendants” which has been interpreted to mean “all” the primary defendants must be state actors.

The question then turns on whether the defendants can be considered States, State officials or other governmental entities against whom the district court may be foreclosed from ordering relief. The purpose behind the enactment of 28 U.S.C. §1332(d)(5)(A) was to prevent states, state officials or governmental entities from removing a case to federal court, and then arguing that due to immunity the federal court would be prohibited from ordering the relief requested by the plaintiff.

The issue was addressed in Frazier v. Pioneer Americas LLC, 455 F.3d 542 (5^thCir. 2006) where the plaintiffs brought a class action against the operator of hydrogen processing equipment and the Louisiana Department of Environmental Quality (“DEQ”) for damages allegedly caused by seeping mercury. Pioneer removed the case pursuant to CAFA. The plaintiffs moved for remand on multiple grounds including that CAFA’s state action exception applied. The district court denied remand and the plaintiffs appealed. On appeal, the plaintiffs argued that the DEQ was both a primary defendant and a state entity so remand was appropriate. The Fifth Circuit disagreed because the statute requires “all” primary defendants to be States, State Officials or other governmental entities and Pioneer also was a primary defendant. The court rejected the plaintiffs’ argument that such a result violated the 11^th Amendment and the principles of state sovereign immunity. The appellate court noted that unless the state joins in the removal, which it is not required to do so under CAFA, it does not waive its right to assert sovereign immunity. Furthermore, the court may ignore sovereign immunity until the state asserts it. The fact that absent waiver of the immunity, the court may not be able to order relief against the state, does not mean the court cannot assume jurisdiction over a case involving a state.

CONCLUSION
In the six years since CAFA’s enactment, the courts have seen many arguments against CAFA jurisdiction. Several of these arguments could not have been foreseen by the drafters of the legislation. In the coming year, we should expect to see more arguments relating to calculation of the amount in controversy, interpretation of the “mass action” provisions, and interpretation of CAFA exceptions containing undefined phrases such as “primary defendant” and “significant relief.”

Social Media Posts by a Third Party: Florida Bar Rules

From Business of Law Guest Blogger at the National Law Review Margaret Grisdela of Legal Expert Connections – a great quick overview of those tricky Florida State Bar rules concerning social media:

Ethics in Blogging was the topic of a presentation I made this morning at the Broward County Bar Association, with co-presenter Alan Anthony Pascal, Esq. of The Florida Bar.

Posts to a lawyer’s social media page by a third party was one of the topics we covered. Below please find some highlights from the Florida Bar Guidelines for Networking Sites, which applies to Florida attorneys as well as lawyers from other states who are soliciting business in Florida.

Third Party Posts

“Although lawyers are responsible for all content that the lawyers post on their own pages, a lawyer is not responsible for information posted on the lawyer’s page by a third party, unless the lawyer prompts the third party to post the information or the lawyer uses the third party to circumvent the lawyer advertising rules.”

Removal of Non-Compliant Information from a Lawyer’s Page

“If a third party posts information on the lawyer’s page about the lawyer’s services that does not comply with the lawyer advertising rules, the lawyer must remove the information from the lawyer’s page.”

Request for Removal of Info on a Page Not Controlled by the Attorney

“If the lawyer becomes aware that a third party has posted information about the lawyer’s services on a page not controlled by the lawyer that does not comply with the lawyer advertising rules, the lawyer should ask the third party to remove the non-complying information. In such a situation, however, the lawyer is not responsible if the third party does not comply with the lawyer’s request.”

Lawyer Social Media Pages are Exempt from Filing

“Finally, the Standing Committee on Advertising is of the opinion that a page on a networking site is sufficiently similar to a website of a lawyer or law firm that pages on networking sites are not required to be filed with The Florida Bar for review.”

Page references in these guidelines can include a LinkedIn profile, a blog comment, Twitter profile, Facebook page, etc.

Read the Florida Bar Guidelines for Networking Sites here.

IRS Announces Second Special Voluntary Disclosure Initiative for Taxpayers With Undisclosed Offshore Accounts

Posted this week at the National Law Review by Keith R. Gercken of Sheppard Mullin – updated information on 2011’s tax amnesty program for off shore accounts:

The Internal Revenue Service announced on February 8, 2011 the creation of a second special voluntary disclosure initiative for U.S. taxpayers with undisclosed foreign bank and other financial accounts. This new program is a follow-on to the IRS’ original voluntary disclosure initiative that closed on October 15, 2009. The 2009 program reportedly attracted some 15,000 voluntary disclosures by taxpayers with previously undisclosed offshore accounts, and has been viewed within the government as a success in getting taxpayers “back into the U.S. tax system” by offering them the ability to avoid or significantly mitigate various the criminal and civil penalties that would otherwise have potentially applied had their failure to disclose been discovered by the IRS on audit.

As background, U.S. persons are generally required to file an annual information statement with the IRS disclosing any beneficial interest in, or signatory authority over, bank or other financial accounts located outside the U.S. This information statement is filed on Form TD F 90-22.1, and is generally referred to as an “FBAR” (Foreign Bank Account Report). From an accountholder perspective the failure to file FBARs as required can potentially lead to a large array of both civil and criminal penalties – including monetary penalties of up to 50% of the unreported account balance (per year) and criminal penalties if the failure to file was willful.

The new 2011 program represents a second chance for taxpayers who did not take advantage of the original 2009 voluntary disclosure program. While the penalty structure offered by the IRS this time around is slightly less favorable than under the original 2009 program, it still offers taxpayers an opportunity to significantly reduce their penalty exposure. Highlights of the new 2011 program include the following:

The program covers the years 2003 through 2010.
There is an August 31, 2011 deadline to submit all required information to the IRS, including delinquent or corrected FBARs and amended income tax returns reporting any previously unreported income.
In lieu of the normal 50% per year penalty, a participating taxpayer must pay a 25% penalty on the highest aggregate account balance in the undisclosed offshore account during the period covered by the voluntary disclosure. In limited cases, this 25% penalty may be reduced to 12.5% or 5%.
Participating taxpayers must pay all delinquent taxes relating to any unreported offshore income, together with applicable interest and a 20% accuracy-related penalty.
Participating taxpayers must pay any other applicable civil penalties associated with a failure to file returns or failure to pay taxes during the period covered by the voluntary disclosure.
The program includes a generally favorable alternative resolution procedure to enable participating taxpayers to calculate their tax liability associated with investments that may have been made in “passive foreign investment companies” (e.g., foreign mutual funds) through their undisclosed offshore accounts.
Participating taxpayers must fully cooperate with the IRS in providing information on offshore financial accounts, institutions and facilitators.
The IRS will not initiate criminal prosecution of taxpayers who fully comply with the terms of the program.

The IRS remains focused on the potential evasion of U.S. income tax that is facilitated by hiding funds in offshore accounts, and has been increasingly aggressive in pursuing U.S. taxpayers who have failed to properly file FBARs and pay taxes on offshore income. As offshore financial secrecy continues to erode, the IRS has become increasingly able to obtain information relating to U.S. taxpayers directly from foreign banks. As a result, taxpayers with undisclosed offshore accounts that did not previously take advantage of the 2009 voluntary disclosure program may wish to consider the potential advantages of participating in this new 2011 program.

Feb. 25th Deadline Approaching for March Publication for the National Law Review Student Legal Writing Contest

Everybody’s talking about how abysmal the job market is for law students – why not build your resume while still in school? Young lawyers are under increasing pressure to start thinking about business development activities earlier than ever in their careers. One tried and true way of building one’s professional reputation is by publishing. One sure way to get noticed and to help others is to write in a style which is helpful and educational to prospective clients. The National Law Review is one of the nation’s premier resources for secondary legal analysis for businesses and in the Spring & Fall we offer students the opportunity to submit consumer-friendly articles for publication.

The winning articles will be published online starting March. The top article(s) chosen will be featured on the NLR home page and will remain in our searchable database for up to two years.

Please note that although students are encouraged to submit articles addressing Intellectual Property Law for the March publication, you may also submit entries covering current issues related to other areas of the law. Please spread the word !!! Thanks!

Extreme Makeover: Arts Edition Paducah, Kentucky

A postive story about urban redvelopment sparked by the arts from Sheppard, Mullin, Richter & Hampton LLP recently posted at the National Law Review:

The notion that the arts make our culture “richer” is commonplace in our vernacular, but an undeniable trend has emerged giving an entirely new meaning to the phrase: across the board, the country’s nonprofit arts and culture industry has grown by twenty-four percent over the past five years, generating over $166 billion in economic activity a year. Art can be big business, and not just in cosmopolitan meccas like New York and Los Angeles. Across the United States, small and midsized cities are harnessing their creative energy to jumpstart their local economies, often with striking results. Cities that have taken heed of this trend have been rewarded in multiple ways—from the rehabilitation and development of uninhabitable areas of the city to the welcoming of tourists, businesses, and well-heeled residents to those very areas. One seminal example is New York’s Soho and Tribecca neighborhoods, which now exceed the famed Upper East Side and Central Park West neighborhoods in rental and real estate prices. It is a reversal of the commonly held notion that artists drain resources, rather than attract them. Perhaps no city has been more successful in exploiting the economic potential of the arts than Paducah, Kentucky, a town of 27,000 which got the Extreme Makeover formula just right when it implemented what has come to be known as an Artist Relocation Program.

Ten years ago, artists were lured to the blighted downtown neighborhood of LowerTown by the prospect of free home ownership and creative autonomy in developing their properties. As a result, Paducah today has been transformed into a thriving community of galleries, shops, and cafes. It is just the kind of place that attracts visitors and tourism. Paducah’s tourist revenue has drastically increased from $66 million in 1991 to nearly $287 million in 2009. Since the Artist Relocation Program began, the city has attracted 234 new businesses, created over 1,000 jobs, raised over $52 million from private investors and invested nearly $50 million from public funds. Tom Barnett, Paducah’s former city planning director, boasted that for every dollar the city has put into the program, it has received $14 back—an extremely impressive return on its investment. Paducah has indeed become a national model for how a city can reinvent itself as a cultural destination.

Paducah is hardly different in its skeleton than countless cities across the country. It suffered from both a loss of the economy that had helped it prosper (in this case, a uranium enrichment plant), and perhaps more substantially, from suburban flight. LowerTown, which is the oldest neighborhood in the town, was once a thriving, self-contained neighborhood. But as its older residents passed on, the next generation showed little interest in returning from their larger homes outside town. LowerTown’s homes were gradually chopped up into apartments and largely neglected. It is a story repeated across the country. Now, many of these cities are mimicking the Paducah strategy. Chattanooga, Tenn., Pawtucket, R.I., and Oil City, Pa., provide just three of many examples of smaller cities that are wholeheartedly embracing the idea of an Artist Relocation Program.

When pursuing a rehabilitation process, city governments and planning committees begin by first consulting the current zoning laws and maps. Fortunately for Paducah, LowerTown was already designated as a mixed use zone, thus it did not have to drastically adjust the districts’ zoning laws. Mixed use zones accommodate multiple land uses in one zone, allowing a retail store to sit next to a single-family home or a restaurant to be housed on the first floor of a 100-unit condominium complex. On the other hand, conventional zoning, often referred to as Euclidean zoning, divides a city into specific and separate districts and assigns each district a permitted land use, such as residential, commercial, or industrial. To further complicate matters, Euclidean zoning also utilizes overlay zones to control land use, so for instance, a lot will be designated “commercial” and then in addition, the overlay rules will mandate that each lot be a minimum of 10,000 square feet. Zoning laws were originally written to be “as of right.” This means that by consulting the zoning ordinance governing their land, owners can determine what types of projects they are able to develop, subject only to the city’s verification that the owner’s plan complies with the applicable zoning laws. There has been a distinct trend over time to move towards discretionary zoning, which grants a city the right to review virtually all land use projects within a zone and determine whether the project will be approved, rejected or approved with additional conditions. Developers typically prefer ‘as of right’ zoning over discretionary zoning because discretionary zoning requires a public hearing, which often leads to increased costs and time. While most cities have employed discretionary zoning on mixed use zones, Paducah continued to utilize ‘as of right’ zoning in order to encourage growth and minimize expenditures for new developers.

Specifically tailored zoning ordinances allowed Paducah to effectively control both the aesthetic character of renovation projects and the intent of artists and businesses relocating to the city, in order to ensure the city’s rehabilitation project evolved into the community the city hoped to build. Further, Paducah took advantage of its mixed use zoning to enable artists to use their residences as both a home, studio, and sometimes even a gallery, leading to more affordable property values and rental costs. In addition, mixed use zones naturally lend themselves to more compact, close-knit communities that are organized to make walking and biking easier and more pleasant. This is helpful for an art community because it connects artists with the community while simultaneously providing the public easy access to artists’ works and galleries. It also leads to more “mom and pop” owned cafes and boutiques that serve as social hot spots for the local community.

In addition to offering mixed use real estate, Paducah provided qualifying artists with financial incentives to relocate to the city, as well as affordable properties to purchase in connection with a reimbursement program for artists who choose to restore their newly purchased property. For instance, Paducah offered relocating artists up to $2,500 in moving expenses, properties for $1 with an approved qualifying proposal, a $2,500 reimbursement for architectural and professional improvements and up to $5,000 for rehabilitation costs associated with the new property. In addition, the locally owned Paducah Bank offered artists long-term loans with generously fixed interest rates to finance the purchase and renovation costs of their homes. After approving these legislative measures, Paducah began actively seeking out artists via commercials and advertisements that portrayed Paducah as a quirky southern town which embraced the arts. The Artist Relocation Program and successful PR campaign have incentivized over 75 artists to relocate to LowerTown from across the country, helping to reduce the town’s crime rate and revive Paducah’s economy.

Further, the significant twenty-four percent growth in the country’s nonprofit arts and culture industry can largely be attributed to the substantial amount of event-related spending by arts audiences. Art and cultural events generate economic activity for local businesses, including restaurants, hotels, retail stores and parking garages. Astutely realizing this potential, Paducah organizes large-scale events to entice tourists, such as the annual quilting convention that brings in nearly 40,000 tourists and the LowerTown music festival. During these events, the city’s “no vacancies” signs are lit, restaurants are hopping, and local boutiques are brimming with customers. In addition, Paducah plans local events to encourage residents to socialize and support one another. An example of this is Paducah’s “Live On Broadway” series that occurs every Saturday night in the summer. At these events, the city provides free live music, public art demonstrations, and horse-drawn carriage rides throughout the downtown district. Paducah residents are encouraged to support their community by shopping at local galleries and boutiques that remain open late into the evening exclusively for the event. Thus, Paducah effectively capitalizes on the arts’ economic potential by utilizing both large and small scale events to attract tourists and local residents.

Paducah’s future appears to be in good hands under the guidance of Mayor Bill Paxton, who explains, “As a Paducah native, I have watched the City grow and change. It’s always been known as a hub for river traffic and a regional destination for shopping, entertainment, employment, education, and medical facilities. But with the artist relocation program that revitalized LowerTown, the National Quilt Museum of the United States, and the Paducah School of Art, Paducah has become a nationally known cultural center. The City Commission and I are committed to making Paducah even better. We are working hard to bring new jobs to the area, revitalize more neighborhoods, and make the downtown and riverfront areas a destination for all. Everything we do is to improve the quality of life.”

As far as Extreme Makeovers go, one Paducah resident may have said it best when she stated that her city “makes you feel good to live here.” More importantly, Paducah and this overall national trend demonstrate how the arts can serve as an effective catalyst in reviving a community by paving the way for a richer city, both economically and culturally.

Mexico’s Unified Secured Transactions Registry Offers New Opportunities for Secured Lending

A big thank you to recent featured bloggers at the National Law Review from Strasburger & Price LLP. John E. Rogers wrote a helpful post about commercial lending changes in Mexico.

Mexican companies have historically encountered difficulties in attracting secured lending from U.S. and other foreign banks, mainly because of concerns as to the reliability of Mexican laws governing secured transactions and of its systems for filing and perfecting security interests (garantías reales) in personal (movable) property or goods (bienes muebles). Mexican banks have shared these concerns and have tended to rely on real property collateral in most of their secured lending. As a result, many Mexican companies whose primary assets are inventory, receivables and equipment have lacked access to adequate financing on competitive terms.

In order to encourage lenders to finance the operations of Mexican borrowers, Mexico has enacted significant reforms of its secured transactions laws. Most recently, dramatic steps have been taken to improve its public registry system to make it easier to search for existing liens on a debtor’s property and to perfect new security interests.

Mexican Bankruptcy Considerations

The importance to creditors of taking collateral security from Mexican debtors has arguably been increased by certain difficulties in the application of the Mexican Bankruptcy Law (the Ley de Concursos Mercantiles or LCM) enacted in 2000 and subsequently amended.¹ As a practical matter, the LCM does not ensure the “cram down” of secured creditors to the extent possible under the U.S. Bankruptcy Code, which allows a debtor, under a reorganization plan, to pay a secured creditor less than its full claim if it is under-collateralized. The secured claim can be “crammed down” to the value of the collateral by paying under the plan, over time, the value of the collateral, with the remainder of the claim being treated as unsecured.²

The LCM provides that a secured creditor may proceed with the enforcement of its collateral security if the reorganization plan does not provide for full payment of the secured debt, or the payment of the value of the collateral.³ On the surface, the latter option suggests the possibility of a cram down, but the absence of clear valuation procedures and criteria in the LCM, combined with the fact that bankruptcy judges often have limited experience with the LCM and few precedents to rely upon, means that it is more difficult than it would be under the U.S. Bankruptcy Code to prevent the secured creditor from proceeding (or threatening to proceed) with an action to enforce its collateral. Depending on the importance of the collateral to the future operation of the debtor, any such enforcement action could in effect jeopardize the success of the reorganization plan.

This gives the secured creditor significant negotiating leverage in a restructuring under the LCM, and has implications not only for secured bank lending but also for Mexican corporate bond financings, as to which bond investors may have a strong argument based on the LCM to insist on collateral security when the bonds are issued. If an issuer must provide such collateral, for example to support a high-yield bond offering, it may be less costly for the issuer to provide collateral consisting of personal property than to mortgage its real property, partly because of high mortgage recording costs and the related notarial fees. In order to obtain the advantages of treatment as a secured creditor under the LCM, having personal property collateral is as effective as having real property collateral of comparable value.

Like the U.S. Before the UCC

Mexico has a bewildering variety of personal property security interests, including among others the pledge (prenda), the industrial mortgage (hipoteca industrial) and the specialized security interests tied to the crédito refaccionario and the crédito de habilitación y avío, that brings to mind the personal property collateral devices (chattel mortgages, trust receipts etc.) that were commonly used in the U.S. prior to the adoption of the Uniform Commercial Code. Although Mexico has had the advantage of a single Commercial Code (and other federal secured transactions laws) that apply to the entire country, rather than a system of separate State laws as in the U.S., each of the 32 States and the Federal District has its own Civil Code establishing a Public Registry system for real property deeds and mortgages (each such registry is a Registro Público de la Propiedad) and, although personal property security filings are governed by the federal Commercial Code, they have previously been required to be made in the commercial registry (Registro Público de Comercio or “RPC”), which is normally managed by a unit of the related State or municipal government, in the place of the debtor’s domicile. Some of these locally managed commercial registries are less reliable than others, and significant delays are common in searching for existing liens and filing new security interests on collateral of companies domiciled in remote locations.

The Nonpossessory Pledge and the Guaranty Trust

On the substantive side, Mexico has made significant progress since 2000 by amending the Mexican Commercial Code and the General Law of Credit Instruments and Transactions (the Ley General de Títulos y Operaciones de Crédito or LGTOC) to permit personal property security interests to be created more easily on a “floating lien” basis. A new type of nonpossessory pledge called theprenda sin transmisión de posesión allows a debtor to pledge all of its inventory and receivables, for example, generically described (rather than described by reference to specific items), to a secured party without requiring that possession of the collateral be transferred to the secured party. This pledge can permit the debtor to sell the pledged collateral in the ordinary course of business without obtaining a case-by-case release from the secured party, and can automatically subject newly acquired property to the pledge without any further filing, which effectively results in a floating lien. A similar effect can be achieved through a guaranty trust (fideicomiso de garantía) with respect to the same or similar types of property, whereby title to the collateral is transferred to a Mexican trustee (typically a Mexican bank).⁴ Although these new devices resemble a security interest created in the U.S. under Article 9 of the UCC, lenders have remained reluctant to significantly expand their secured lending activities in Mexico because of ongoing concerns about their ability to perfect these security interests against third parties through the public registry system.

UNCITRAL and the OAS Encourage Registry Reforms

Recently, in an attempt to provide guidance for emerging market countries like Mexico that wish to improve access by borrowers to secured lending, the United Nations Commission on International Trade Law (UNCITRAL) has promoted reforms of the bankruptcy laws and secured transactions laws in such countries. Its 2008 Legislative Guide on Secured Transactions indicated the importance of a country having a “registry in which information about the potential existence of security rights in movable assets may be made public.”⁵ In 2010, UNCITRAL decided to expand its work in this field by preparing a “model registry regulation,” which is still in the process of preparation.

The previous efforts of the Organization of American States (OAS) to adopt a Model Inter-American Law on Secured Transactions (the “Model Law”)⁶ appear to have influenced Mexico in its adoption of the nonpossessory pledge concept. The OAS has also been tackling the registry issue; in October 2009, it held its Seventh Inter-American Conference on Private International Law, which approved Model Registry Regulations to “provide the legal foundation for implementing and operating the registry regime contemplated by the Model Law.”⁷ Among other things, the Model Registry Regulations contemplate the adoption of electronic filing systems and acknowledge that most of their features were recommended in UNCITRAL’s 2008 Guide and included in the registry systems recently developed in some Latin American countries, including Mexico, as well as in the U.S. (the UCC), Canada (the Personal Property Security Act) and some European countries.

Mexico’s 2009 Commercial Code Amendments and Creation of the RUG

Mexico has been receptive to the objectives reflected by the UNCITRAL and OAS efforts. Not only did Mexico enact secured transactions law reforms in 2000 and subsequent years to reflect many of the changes contemplated by the OAS’ Model Law, but Mexico’s initiatives with respect to public registry reforms have actually preceded the formal adoption of model rules by UNCITRAL and the OAS. In August 2009, a few months prior to the adoption of the OAS Model Registry Regulations, the Mexican Congress approved amendments to the federal Commercial Code that provide for the establishment of a Unified (or Sole) Registry of Movable Property Collateral (the Registro Único de Garantías Mobiliarias or “RUG”).⁸ The new Article 32 bis of the Code provides for the RUG (pronounced “roog”) to be a centralized registry for all types of security interests granted in favor of any creditor that carries out commercial activities (a comerciante) in personal property. The RUG will be a section of the PRC under the supervision of the Ministry of Economy (Secretaría de Economía), in which all filings are to be carried out electronically, through the RUG website, www.rug.gob.mx.

The stated Congressional purpose of the RUG is to strengthen the system for personal property secured transactions “as an effective tool for access to credit.” Its main functions are to create a mechanism that allows public disclosure of security interests created on personal property and to establish priority rules for secured creditors. Filings through the RUG have immediate effect, without requiring any approval by any authority. Such filings can be made by financial institutions, public officials, public notaries (notarios públicos) or brokers (corredores públicos) and others authorized by the Ministry of Economy. Under Article 32 bis 4 of the amended Commercial Code, a debtor is generally deemed to have authorized any secured party creditor that is acomerciante to file evidence of the applicable security interest in the RUG. Article 32 bis 7 allows “any interested party” to request the issuance of a certification as to the filings that have been made in the RUG with respect to any debtor.

New Registry Regulations

On September 23, 2010, an executive decree was issued by Mexican President Felipe Calderón implementing the 2009 Commercial Code amendments by amending the Regulations governing the PRC to provide specifically for the inclusion of the RUG as a section of the overall PRC.⁹ The amendments clarify how the RUG will operate through the electronic system called the Integrated System of Registry Procedures (Sistema Integral de Gestión Registral or SIGER) and the procedures to be followed for the use of the RUG by those who wish to (i) search it for the existence of existing security interests and (ii) perfect their own security interests as against third parties by filing notices. Anyone who registers with the RUG can initiate a search, but filings of security interests directly by an institutional creditor can only be done if the creditor entity has arranged to utilize an electronic signature for this purpose which satisfies the technical requirements contemplated by the Commercial Code¹⁰. Otherwise the security interest must by filed on the creditor’s behalf by someone else authorized under the RUG to do so.

The provisions of the amended Regulations (the “Amended Registry Regulations”) impose certain formalities which do not seem to be contemplated by the new Article 32 bis of the Commercial Code and may contravene the policy guidelines recommended by the OAS and UNCITRAL. For example, Article 10 of the Amended Registry Regulations provides for the RUG registrar or officer to verify that a filing has been properly made “in accordance with applicable legal and regulatory provisions,” which would seem to prevent the filing from becoming immediate and automatic, as provided in Article 32 bis 4 of the amended Commercial Code. Also, Article 10 bis of the Amended Registry Regulations specify that filings can only occur through a public authenticating officer (fedatario), i.e. a public notary (notario público) or broker (corredor público), although Article 30 bis seems to permit others, including financial entities, to make filings without using a fedatario. As a practical matter, until changes are made in Article 10 bis to allow filings to be made otherwise, it seems advisable to use a fedatario to carry out the filing. A number of law firms in Mexico employ fedatarios, so this should not be a significant impediment to the filing process or impose a significant additional cost. The use of a fedatario has the advantage of avoiding the requirement under Article 10 that the RUG registrar or officer verify the propriety of the filing; under Article 10 bis a filing by a fedatario has immediate effect.

Preventive Filings

Prior to the closing of a secured lending transaction, the proposed lender may wish to have the comfort that there will be no last-minute filings by other lenders of security interests that would have priority (based on time of filing) over any security interest to be filed to secure the transaction in favor of the proposed lender. To obtain such comfort, Articles 32 bis 5 of the Commercial Code amendments and 33 bis of the Amended Registry Regulations permit the proposed lender to make a filing prior to the scheduled closing, which will have the effect of preventing any other lender from making a filing that would have priority over the later definitive filing by the proposed lender of its own security interest. If the closing does not take place, the debtor need not seek removal of the preventive filing from the records of the RUG, because such filing would automatically cease to be effective after the passage of a specified period, normally two weeks.

Information to be Provided in Filings through the RUG

Article 33 Bis 2 of the Amended Registry Regulations provides that the information that must be provided in the filing of the security interest will be (i) the name of the debtor or debtors granting the security interest, (ii) the name of the creditor or secured party, (iii) the type of security device utilized to create the security interest, (iv) the personal property securing the relevant obligations, (v) the secured obligations, (vi) the term or time frame during which the filing will be effective, and (vii) anything else contemplated by Article 33 of such regulations, i.e. anything else that may be required by the forms to be used in order to effect such filings, which are to be specified in a publication in the official Gazette (Diario Oficial) of the Republic.

Using the RUG

As contemplated by the Amended Registry Regulations, to provide further guidance on using the RUG, the Ministry of Economy published a User’s Guide (Guía de Usuario) in Spanish providing additional guidance as to how the search and filing processes will operate.¹¹ The User’s Guide shows how (i) a user can become registered with the RUG, (ii) searches can be performed, (iii) search certificates can be obtained, (iv) secured party creditors (whether organized or resident within or outside of Mexico) can be registered and (v) the creditor’s representatives can be registered in order to be entitled to submit filings on behalf of the creditor.

Mexican creditors can be registered online by including their Mexican tax ID numbers in the creditor information they provide. In the case of foreign creditors not having such numbers, the registration may be carried out at one of the designated offices of the Ministry or through a fedatario. Foreign creditors that wish to avoid delays at the closing of a secured loan may wish to become pre-registered before the closing. For cases involving multiple creditors, such as a syndicated loan, there is a separate procedure for entering the names of the additional creditors. As for the debtor, the filing form contemplated by the User’s Guide mandates that it be filed electronically in such a way that the debtor’s name is accompanied by an indication of whether the debtor is an individual or an entity and his or its nationality, registration file (folio) number and taxpayer ID or CURP number. A debtor that is an individual may be registered by a fedatario at the time of the filing of the security interest, but a debtor that is a company or other entity will have to have been registered in the PRC prior to the time of filing.

According to the User’s Guide, the filing of a security interest is to be effected by making entries in the electronic equivalent of a document akin to a UCC financing statement, which should specify

(i) the name and address of the person requesting the registration of the security interest,
(ii) a description of the type of property subject to the security interest, such as “machinery and equipment” (the applicable type is to be selected from alternatives that appear on the screen),
(iii) the type of security document under which the security interest was created, i.e. whether it was a nonpossessory pledge, guaranty trust etc. (again, the selection is from the types indicated on the screen),
(iv) the date of the relevant security agreement,
(v) the maximum amount secured, specifying the applicable currency,
(vi) a more detailed description of the property subject to the security interest,
(vii) a description of the public deed issued before the fedatario which formalized the security agreement,
(viii) a description of the agreement under which the secured obligation arose,
(ix) optionally, any terms and conditions established by the documents, and
(x) the period of time for which the filing is to remain effective.

The User’s Guide provides examples of entries that are to be made in the online “financing statement,” and indicates how the electronic signature is to be applied to the document in order to affect its filing.

The User’s Guide includes similar instructions for related procedures, such as amendments, assignments, renewals or reductions of the effective term of the filing, corrections of errors, cancellations and “annotations” (anotaciones). The annotations might include information on any enforcement action with respect to the security interest, and would be made pursuant to instructions from a court or other authority. An annotation might result from a debtor challenging the propriety of the filing.

Effect of the Reforms: Better than the UCC?

The RUG is now the exclusive method in Mexico for perfecting security interests in inventory, receivables, equipment and many other types of personal property, whether created through a possessory or nonpossessory pledge, guaranty trust or other device, superseding all of the local public registries. However, security interests previously filed in the local registries will continue to be effective, so lenders must undertake searches as to any debtor in the locally-managed public registry responsible for such debtor’s domicile until such time as the previously filed security interests are no longer effective (for example, because they have been released or the related debt has been repaid), or otherwise satisfy themselves that no such filings have occurred (for example, by obtaining representations and warranties from the debtor to this effect). Similar transition issues were encountered in the U.S. during the implementation of the UCC and its associated filing systems.

Two features are present in the Mexican situation which did not exist in the case of the adoption of the UCC. First, the RUG will be the sole registry in Mexico for filing security interests in personal property, unlike the separate filing systems in the 50 States of the U.S. and in the District of Columbia, and many local filing places such as the offices of County Clerks. Thus, the sometimes thorny question in the U.S. of where to file will not apply in Mexico. Secondly, the RUG is exclusively electronic, as opposed to the recordation systems in the U.S., which initially relied entirely on paper filings and have only recently began to transition to electronic systems, gradually, on a State by State basis.

It will still be necessary to comply with the relevant requirements for creating security interests, which in Mexico often requires that the security agreement or pledge agreement be formalized by the preparation by afedatario of a formal deed (escritura). Instead of being recorded in the locally managed public registry, such deed should now be recorded in the RUG. Filings as to some types of collateral, such as vessels and aircraft, will continue to be made in specialized registries. Also, some of the enforcement remedies available under the UCC are not available under Mexican law, and the enforcement process in Mexico is likely to be more time-consuming than it is in the U.S.

But with those exceptions, and despite some uncertainty created by the amended Regulations, the establishment of the RUG represents a huge step forward by Mexico in making secured lending an attractive option for borrowers and lenders alike. Even a lender that remains skeptical about the enforcement of security interests in Mexico may be persuaded that it is worth perfecting security interests pursuant to a filing in the RUG in order to obtain the important practical advantages under the Mexican bankruptcy law of being a secured lender.

^*The authors gratefully acknowledge the collaboration of Fernando Barrita of Strasburger & Forastieri and the helpful comments of Steve Roberts and John Dorsey in Austin and of Professor Alejandro Garro of Columbia Law School in New York. The authors are, however, solely responsible for the contents of this article.

¹ Published in the Diario Oficial de la Federación (the “D.O.F.”) on May 12, 2000. Amendments to the LCM were published in the D.O.F. on December 27, 2007.

² 11 U.S.C. § 1129(b)(2)(A).

³ See LCM Articles 158, 160.

⁴ Published in the D.O.F. on May 23, 2000, with amendments published in the D.O.F. on June 13, 2003.

⁵ Legislative Guide on Secured Transactions of the United Nations Commission on International Trade Law, GA Res. 63/121, UN GAOR, 63rd Sess., 17 December 2008.

⁶ Adopted on February 8, 2002, by the Sixth Inter-American Specialized Conference on Private International Law (known as “CIDIP-VI”, for its Spanish acronym) [CIDIP-VI, Final Act 3(f), OEA/Ser.K/XXI.6/ CIDIP-VI/doc.24/02 rev.3 (March 5, 2002)].

⁷ Approved by the Seventh Inter-American Specialized Conference on Private International Law (CIDIP-VII)
at its second plenary session of October 9, 2009); quoted language appears in the Introduction.

⁸ Published in the D.O.F. on August 27, 2009.

⁹ Published in the D.O.F. on September 23, 2010.

¹⁰ Art. 11 of the Amended Registry Regulations.

¹¹ See http://www.rug.gob.mx/Rug/resources/pdf/
guia%20de%20usuario/Manual%20de%20Usuario%20RUG.pdf.

A Brave New World for Commercial Buildings: ASTM's "BEPA" Standard

Recently posted at the National Law Review by Douglas J. Feichtner of Dinsmore & Shohl LLP – ASTM BEPA standard is expected to become the standard for building energy use data collection.

On February 10, 2011, ASTM formally published its Building Energy Performance Assessment (BEPA) Standard – E 2797-11. This standard will enable users to measure the energy performance of a commercial building in connection with a real estate transaction. Regulatory drivers spurred the development of the BEPA standard, even in the midst of a construction recession. In the past few years, several states and local governments passed mandatory building energy labeling and transactional disclosure regulations. These disclosure regulations, combined with some building codes that are now requiring specific energy-efficiency improvements, triggered the development of a standardized methodology to assess and report on a commercial building’s energy use. The BEPA’s passage arrives at a crucial time when building certification standards face increased scrutiny, both in the market and the courtroom.

The ASTM BEPA standard includes the following five components: (1) site visit; (2) records collection; (3) review and analysis; (4) interviews; and (5) preparation of a report. ASTM is not creating or implying the existence of a legal obligation for the reporting of energy performance or other building-related information. Rather, the BEPA offers certain guidelines to the industry to promote consistency when collecting (and perhaps reporting) buildings’ energy usage data, such as:

collecting building characteristic data (i.e., gross floor area, monthly occupancy, occupancy hours)
collecting a building’s energy use over the previous three years (with a minimum of one year) – including weather data representative of the area where the building is located;
analyzing variables to determine what constitutes the average, upper limit, and lower limit of a building’s energy use and cost conditions;
determining pro forma building energy use and cost; and
communicating a building’s energy use and cost information in a report

One of the options available to users of the BEPA standard is to identify government-sponsored energy efficiency grant and incentive programs that may be available for any energy efficiency improvements that could be installed at the building (thereby increasing its value, and making it more attractive to potential buyers).

Building benchmarking (i.e., comparing a building’s energy output to its peers) is not part of the ASTM BEPA standard’s primary scope of work, but rather a “non-scope consideration.” The BEPA certainly could be used in conjunction with building certification tools already in the marketplace, such as ASHRAE, Green Globes, and U.S. Green Building Council (LEED), to name a few.

However, as the economic noose has tightened in recent years, green building standards have received increased scrutiny. Indeed, builders and landlords who sell their properties with the promise that they have some green certification (which can be expensive to obtain), and that promise for whatever reason fails to translate to the economic savings contracted for, could face liability.

The Gifford v. USGBC lawsuit currently pending in the United States District Court for the Southern District of New York crystallizes the debate over green building certification (in this case – LEED). The core allegations in the lawsuit prompt this author to see significant value for stakeholders to use ASTM’s BEPA as a supplement to applying rating and benchmarking systems like LEED.

Gifford’s primary complaint is that LEED-certified buildings are not as energy-efficient as advertised. Support for this contention rests on Gifford’s analysis of a 2008 New Buildings Institute (NBI) study comparing predicted energy use in LEED-certified buildings with actual energy use. In the study, NBI concluded that LEED buildings are 25-30% more energy-efficient compared to the national average. To the contrary, Gifford concluded that LEED-certified buildings use 29% more energy than the national average. He further emphasized that the NBI results were skewed in part because the NBI study compared the median energy use of LEED buildings to the mean energy use of non-LEED buildings.

The purpose of this article is not to comment on the merits of the Gifford lawsuit or criticize LEED. But this apples-to-oranges argument articulated by Gifford magnifies the proverbial elephant in the “green” room – the need for sufficient objective data to accurately compare the energy use and energy cost of buildings against their relevant peer groups. With such data in hand, the benchmarking and rating systems already in place can be buttressed with a greater measure of consistency and transparency (a big issue for detractors of green building certification, like Gifford). Furthermore, the more stakeholders in the real estate industry (buyers, sellers, lenders) understand how a building’s energy performance was determined, the better equipped they will be to put a price on the economic and environmental benefits of green buildings.

In sum, the ASTM BEPA standard is expected to become the standard for building energy use data collection. It can be used to quantify a building’s energy use as well as its projected energy use and cost ranges, factoring in a number of independent variables (i.e., weather, occupancy rates), by way of a transparent process. Finally, the BEPA building energy use determination can complement compliance reporting under applicable building energy labeling or disclosure obligations. In the end, ASTM’s BEPA can provide the foundation by which an apples-to-apples comparison can take place in evaluating commercial building energy performance determinations and certifications.

Out of Work? Out of Luck

Great posted added today at the National Law Review about the EEOC’s hearing about the impact of employers considering only those currently employed for job vacancies.

EEOC Examines Employers’ Treatment of Unemployed Job Applicants at Hearing

WASHINGTON—In a public meeting held today, the U.S. Equal Employment Opportunity Commission (EEOC) examined the impact of employers considering only those currently employed for job vacancies.

“Throughout its 45 year history, the EEOC has identified and remedied discrimination in hiring and remains committed to ensuring job applicants are treated fairly,” said EEOC Chair Jacqueline A. Berrien. “Today’s meeting gave the Commission an important opportunity to learn about the emerging practice of excluding unemployed persons from applicant pools.”

According to Helen Norton, Associate Professor at the University of Colorado School of Law, employers and staffing agencies have publicly advertised jobs in fields ranging from electronic engineers to restaurant and grocery managers to mortgage underwriters with the explicit restriction that only currently employed candidates will be considered. “Some employers may use current employment as a signal of quality job performance,” Norton testified. “But such a correlation is decidedly weak. A blanket reliance on current employment serves as a poor proxy for successful job performance.”

“The use of an individual’s current or recent unemployment status as a hiring selection device is a troubling development in the labor market,” said Fatima Goss Graves, Vice President for Education and Employment of the National Women’s Law Center. She noted that this practice “may well act as a negative counterweight” to government efforts to get people back to work. Women, particularly older women and those in non-traditional occupations, are disproportionately affected by this restriction, testified Goss Graves.

Denying jobs to the already-unemployed can also have a disproportionate effect on certain racial and ethnic minority community members, Algernon Austin, Director of the Program on Race, Ethnicity, and the Economy of the Economic Policy Institute, explained. Unemployment rates for African-Americans, Hispanics and Native Americans are higher than those of whites. When comparing college-educated workers, the unemployment rate for Asians is also higher. Thus, restricting applications to the currently employed could place a heavier burden on people of color, he concluded.

The use of employment status to screen job applicants could also seriously impact people with disabilities, according to Joyce Bender, an expert in the employment of people with disabilities. “Given my experience, I can say without a doubt that the practice of excluding persons who are currently unemployed from applicant pools is real and can have a negative impact on persons with disabilities,” Bender told the Commission.

Dr. William Spriggs, Assistant Secretary of Labor for Policy, offered data supporting this testimony. Spriggs presented current national employment statistics showing that African-Americans and Hispanics are overrepresented among the unemployed. He also stated that excluding the unemployed would be more likely to limit opportunities for older applicants as well as persons with disabilities.

“At a moment when we all should be doing whatever we can to open up job opportunities to the unemployed, it is profoundly disturbing that the trend of deliberately excluding the jobless from work opportunities is on the rise,” said Christine Owens, Executive Director of the National Employment Law Project. In addition to presenting statistical evidence, she recounted stories unemployed workers have shared with her organization where they were told directly that they would not be considered for employment due to being unemployed.

James Urban, a partner at the Jones Day law firm, who counsels employers, expressed doubt as to the extent of the problem. Fernan Cepero, representing the Society of Human Resource Professionals, told the Commission that his organization is not aware of this practice being in regular use. But both Mr. Urban and Mr. Cepero noted that the automatic exclusion of unemployed persons from consideration does not constitute “due diligence” in the screening of job applicants.

Ice Inspection Hits Close to Home – Guilty of I-9 Form Violations

Recently posted by Jennifer G. Parser of Poyner Spruill LLP at the National Law Review – details about a recent employer immigration fine – where the employer had a legal workforce…..

Fast Food Franchisee In Fayetteville, NC Fined Over $27,000 — Despite Legal Workforce

In a decision dated December 22, 2010, the US Department of Justice Executive Office for Immigration Review’s Office of the Chief Administrative Hearing Officer (OCAHO) found a fast food franchisee in Fayetteville, North Carolina, guilty of I-9 violations and fined the company $27,150. Count I alleged that the franchisee hired 11 individuals from 2006 through early 2009, yet failed to ensure that they properly completed Section 1 of the I-9 Form and/or failed itself to properly complete Section 2 or Section 3. Count II alleged that the franchisee hired 97 individuals during the same time period for whom it failed to prepare any I-9s. Penalties were sought in the amount of $1,028.50 for each violation, for a total of $111,078. OCAHO found that, based upon a visual inspection, the I-9 Forms for the 11 individuals named in Count I contained substantive violations, and no I-9 Forms could be produced for any of the 97 employees named in Count II. For reasons discussed below, OCAHO ultimately fined the franchisee $27,150, approximately 25% of the penalties sought by ICE.

Never Backdate I-9 Forms

Employers should be aware that the substantive violations found in Count I were caused in part by the ICE auditor subtly marking a Form I-9 to determine if it was later tampered with, something that the franchisee tried to do, demonstrating bad faith. In this case, the ICE auditor made “three subtle marks” to determine later whether the forms produced were backdated or completed after service of the Notice of Inspection on the franchisee in the context of the auditor simultaneously providing a sample I-9 Form and a copy of the Handbook for Employers (M-274). At that time, the ICE auditor expressly warned the franchisee’s employee not to backdate the I-9 Form if new ones were prepared. When the I-9s were subsequently reviewed by ICE, however, it was determined that they had all been completed after the Notice, and that 7 of the 11 forms were backdated with the employer attestation at Section 2 still left blank.

Factors Used by OCAHO in Setting Penalties

Turning to assessing the amount of fines to be levied, OCAHO considered the following five factors which were not given equal weight:

Size of the business,
Good faith of the employer,
Seriousness of the violation(s),
Whether or not the individuals involved were unauthorized aliens, and
Any history of previous violations of the employer.

Each factor will be reviewed in light of the fines levied against the franchisee.

Size of Employer

OCAHO found the franchisee’s relatively small size to be a mitigating factor in assessing the fines. Analyzing its number of employees, OCAHO determined that despite being part of a national fast food franchise, the franchisee was in fact a small employer with a large turnover common in the fast food industry, hence the 97 former employees.

Good Faith

Any analysis of an employer’s good faith focuses first on whether or not the employer reasonably attempted to comply with its obligations prior to issuance of the Notice of Inspection. Here, OCAHO determined that:

“…there is not a scintilla of evidence that suggests [the franchisee] made any effort whatsoever to ascertain the requirements of the law…[The franchisee] made no effort at all to ascertain what the law required and lacked the reasonable diligence required: there was simply no attempt at compliance prior to the Notice of Inspection. [The franchisee’s] subsequent attempts at compliance have minimal bearing on an analysis of its good faith because conduct occurring after the investigation is over is ordinarily outside the permissible scope of consideration.”

It is important for employers to note that mistakes found in Section 1 completed by the employee can be attributable to the employer as the employer is obligated to ensure that the employee properly completes Section 1: “[The franchisee] not only made no effort at all to ascertain what the law requires or to conform its conduct to it, it also attempted deception by permitting employees to backdate I-9 forms, and this is sufficient to support an assessment of bad faith.”

Further, the franchisee’s belated and disingenuous attempt to complete the I-9s by failing to attest to its own compliance in Section 2 implies an avoidance of liability for perjury.

Seriousness of the Violation(s)

OCAHO noted that a failure to prepare an I-9 at all is among the most serious of paperwork violations. As described above as a demonstration of a lack of good faith, OCAHO found the franchisee’s failure to complete Section 2 to imply an avoidance of liability for perjury.

Employees were not Unauthorized and Employer had no History of Previous Violations
None of the employees whose I-9s were involved was an unauthorized to work, nor had the franchisee a history of violations, probably mitigating the fines levied.

Mitigating or Exacerbating Factors in Assessing Penalties

Here, OCAHO took into account the depressed state of the economy and the difficulty any displaced employee would have in finding other work and reduced the penalties accordingly. As a result, the franchisee was directed to pay $27,150 in civil money penalties and not the $111,078 sought by ICE.

Conclusion

Employers should be aware that they will be blamed by ICE and penalized accordingly for failing to ensure their employees are properly completing Section 1, for permitting backdating or tampering with incomplete or missing I-9s for failing to complete its Section 2. Merely employing a legal workforce will not absolve an employer from imposition of penalties if Section 1 of its I-9 Forms are not meticulously completed by the employee on day one of hire for pay and Section 2 by the employer by day three.

Say on Pay Could Make for a Rocky 2011 Proxy Season

Net Worth Standard for Accredited Investors

Removal of Credit Rating References

New Compliance & Disclosure Interpretations

Sec Releases & Policy Statements

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A. Discretionary/Interests of Justice Exception – 28 U.S.C. §1332(d)(3)

B. Local Controversy Exception – 28 U.S.C. §1332(d)(4)(A)

C. Home State Exception – 28 U.S.C. §1332(d)(4)(B)

D. State Action Exception – 28 U.S.C. §1332(d)(5)(A)

III. Arguments raised to defeat CAFA jurisdiction

A. Is this case a class action?

B. Is this case a mass action under 28 U.S.C. §1332(d)(11)?

C. Is there minimal diversity?

D. Is the amount in controversy greater than $5 million?

2. Has the plaintiff alleged an amount in controversy less than $5 million?

E. Arguments for exceptions to CAFA jurisdiction

1. The Home State Exception.

2. The Local Controversy Exception.

3. The Discretionary/Interests of Justice exception

4. The State Action Exception

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Third Party Posts

Removal of Non-Compliant Information from a Lawyer’s Page

Request for Removal of Info on a Page Not Controlled by the Attorney

Lawyer Social Media Pages are Exempt from Filing

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Mexican Bankruptcy Considerations

Like the U.S. Before the UCC

The Nonpossessory Pledge and the Guaranty Trust

UNCITRAL and the OAS Encourage Registry Reforms

Mexico’s 2009 Commercial Code Amendments and Creation of the RUG

New Registry Regulations

Preventive Filings

Information to be Provided in Filings through the RUG

Using the RUG

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Never Backdate I-9 Forms

Factors Used by OCAHO in Setting Penalties

Size of Employer

Good Faith

Seriousness of the Violation(s)

Mitigating or Exacerbating Factors in Assessing Penalties

Conclusion

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