Category: Business Organizations

The Unredeemable Debtor

The law is the witness and external deposit of our moral life. Its history is the history of the moral development of the race.

– Oliver Wendell Holmes

Bankruptcy law decisions are replete with references to the “worthy debtor.”  In re Carp, 340 F.3d 15, 25 (1st Cir. 2003); In re BankVest Capital Corp., 360 F.3d 291 (1st Cir.2004); In re Institute of Business and Professional Educ., Inc., 79 B.R. 948 (Bankr. S.D. Fla. 1987); In re Nickerson, 40 B.R. 693 (Bankr. N.D. Tex. 1984); In re Marble, (Bankr. W.D. Tex. 1984); In re Doherty, 219 B.R. 665 (Bankr. W.D. N.Y. 1998).

These decisions typically employ the “worthy debtor” nomenclature in the context of the entitlements that are afforded by the provisions of the Bankruptcy Code.  It is always the “worthy debtor” that is entitled to a discharge of debts, a “fresh start”,  or to reject cumbersome contracts. This usage bespeaks a universe that also contains the “unworthy debtor,” a party whose behavior does not merit the statutory benedictions of the Bankruptcy Code. The identity of these parties is most often examined in the context of the discharge of debts and the behavior or actions that merit a denial of discharge or the finding that a particular debt is non-dischargeable.

There is a larger and more amorphous question though that also merits consideration, namely are their industries, companies, enterprises whose function and purpose is so odious and inconsistent with the precepts of good citizenship and the “moral development of the race”, to quote Justice Holmes, that they should be denied the benefits of reorganization afforded by the Bankruptcy Code.

If there is an argument to be made to prevent such enterprises from receiving the benefits of the Bankruptcy Code, to deny them the colloquial label of “worthy debtor”, that recourse likely lies within the provisions of the Bankruptcy Code that require that a plan of reorganization be “proposed in good faith and not by any means forbidden by law.”  11 U.S.C. § 1129(a)(3).  The “not forbidden by law” requirement is of limited utility in situations where the behavior is recognizable as immoral or intrinsically evil to most but has not yet been sanctioned by any legislative authority. Notably, and perhaps inversely, enterprises engaged in the sale and growing of cannabis are without access to the Bankruptcy Code because they act in contravention of the federal Controlled Substances Act, 21 U.S.C. §§ 801 et seq., which has been found to take precedence over state laws allowing the sale of cannabis. See, Gonzales v. Raich, 545 U.S. 1, 12 (2005).  As a result, bankruptcy being a creature of federal law, cannabis cases are generally being dismissed at the outset for cause in accordance with 11 U.S.C. § 1112(b) and not making it as far as the confirmation standard. See, In re Way To Grow, Inc., 597 B.R. 111 (Bankr. D. Colo. 2018).

If “forbidden by law” is unavailable as a source of relief, the last best hope to prevent the sanctioned reorganization of the unworthy debtor lies within the requirement that a plan be proposed in “good faith.”

“Good faith” is not defined by the Bankruptcy Code, a fact that makes it more likely that our  understanding of good faith may be transitory and that as the ‘moral development of the race’ proceeds, so might our understanding of ‘good faith.’  In other words, what was good faith yesterday might not, in light of our communal experience and growth as citizens, be good faith today.

In the first instance, we can understand from the ordering of the words within section 1129(a)(3) that the good faith standard exists independently of the ‘forbidden by law’ standard.  A plan of reorganization may describe a course of action not forbidden by law, but may still not meet the ‘good faith’ standard.

The good faith standard as used within section 1129(a)(3) is most commonly described as proposing a plan that fulfills the purposes and objectives of the Bankruptcy Code.  Those purposes and objectives within the context of Chapter 11 are most commonly understood as being “to prevent a debtor from going into liquidation, with an attendant loss of jobs and possible misuse of economic resources.”  NLRB v. Bildisco & Bildisco, 465 U.S. 513, 528 (1983);  see also, Bank of Am. Nat. Trust & Sav. Ass’n v. 203 N. LaSalle St. P’ship, 526 U.S. 434, 452 (1999) (“[T]he two recognized policies underlying Chapter 11 [are] preserving going concerns and maximizing property available to satisfy creditors”)

This case law, which is by far the most consistent usage of the term, emphasizes paying back creditors and preserving an ongoing enterprise. It does not suggest the existence of anything more amorphous beyond those standards and it supports the idea that the ‘good faith’ standard is not meant to be an existential inquiry into the moral worth of a particular industry.

Bankruptcy courts have, however, recognized that the absence of a definition of good faith leaves courts without “any precise formulae or measurements to be deployed in a mechanical good faith equation.”  Metro Emps. Credit Union v. Okoreeh–Baah (In re Okoreeh–Baah), 836 F.2d 1030, 1033–34 (6th Cir.1988) (interpreting good faith in context of Chapter 13).

Any successful collateral attack under section 1129(a)(3) on the ‘good faith’ of the immoral enterprise must likely follow the path of connecting the good faith standard to the “public good.”  Bankruptcy Courts have invoked the ‘public good’ in refusing to enforce certain contracts and have followed the dictates of some courts that “while violations of public policy must be determined through “definite indications in the law of the sovereignty,” courts must not be timid in voiding agreements which tend to injure the public good or contravene some established interest of society. Stamford Bd. of Educ. v. Stamford Educ. Ass’n., 697 F.2d 70, 73 (2d Cir.1982).

The concept of the ‘public good’ is not a foreign one in bankruptcy courts.  Seeking relief for debtors that are the only providers of a service within their geographic area is an immensely easier task, no court, and no bankruptcy judge, likes to see a business fail and when the business is important to the community, support for reorganization from the bench often works to make reorganization easier.  Bankruptcy courts, although restrained by a statutory scheme, are as a matter of practice courts of equity.  Employing those equitable arguments to support a reorganization is both achievable and a reality of present practice.

Whether equitable arguments can be inversely employed to graft a sense of the ‘public good’ onto the good faith requirement within section 1129(a)(3) is decidedly uncertain and is not directly supported by the case law as it exists.

Somewhere out there though in one of those small border towns between the places of unelected legislators and the judicious and novel application of historical precedent lies the “moral development of the race” and the bankruptcy court that finds that incumbent within the concept of good faith is fair consideration of the public good.

Article By Peter J. Haley of Nelson Mullins

For more bankruptcy and restructuring news, click here to visit the National Law Review.

Copyright ©2022 Nelson Mullins Riley & Scarborough LLP

Employers Beware: Take-Home COVID Cases are on the Rise (US)

You’ve just been informed that an employee who apparently contracted COVID-19 from exposure in your workplace brought the virus home, and now his spouse, who is in a high-risk category, has contracted the virus and is in the hospital.  Do you as the employer face potential liability for the spouse’s illness?

More than two dozen so-called “take-home” COVID-19 lawsuits have been filed across the country, including against some of the largest employers in the US. This alarming pattern has prompted trade groups to warn employers of the potential for lawsuits stemming from COVID infections filed not only by workers’ family and friends but by anyone infected by that circle of people, creating a seemingly endless chain of liability for employers. Some states have enacted laws shielding employers from such suits, but where that is not the case, the legal theories and procedural paths under which these suits have proceeded vary – including some being brought in state courts, some in federal courts, and others brought under claims within the worker’s compensation system.

The issue is currently being tested in California, where the US Court of Appeals for the Ninth Circuit recently certified questions to the California Supreme Court seeking guidance on the state’s laws. The case, Kuciemba v. Victory Woodworks, Inc., arose after Mr. Kuciemba allegedly was exposed to COVID-19 through his work at one of his employer’s job sites.  According to the Kuciembas, Victory knowingly transferred workers from an infected construction site to the job site where Mr. Kuciemba was assigned without following the safety procedures required by the San Francisco Health Order. He was forced to work in close contact with these employees, and soon developed COVID-19, which he brought back home. His wife is over 65 years old and was at high risk from COVID-19, and the family had been careful to limit their exposure to the virus, with the exception of Mr. Kuciemba going to work. Mrs. Kuciemba subsequently tested positive for the disease and was hospitalized for over a month after developing severe symptoms. The Kuciembas filed suit, alleging that Victory caused Mrs. Kuciemba’s injuries by violating the Health Orders, and negligently allowed COVID-19 to spread from its worksite into their household.

The lower court dismissed the case, which was then appealed to the federal appeals court. After hearing the argument, the court asked the California Supreme Court to answer two questions of state law. First, whether Mrs. Kuciemba’s illness was an “injury” that was “derivative” of Mr. Kuciemba’s work-related injury, and therefore, Mrs. Kuciemba’s claims would be subject to the exclusive jurisdiction of the Worker’s Compensation Act (“WCA”); and second, assuming that the WCA is not the exclusive remedy, whether the employer owed a duty to the households of its employees to exercise ordinary care to prevent the spread of COVID-19. Neither question has been squarely answered by the California Supreme Court, although, as noted by the federal appeals court, in a somewhat analogous situation, California courts have allowed suits against employers who negligently allowed their employees to carry asbestos fibers home to their families.

While the Kuciemba case was pending, a California Court of Appeal in another case, See’s Candies v. Superior Court, ruled that the derivative injury doctrine does not bar third-party COVID-related claims. Under a similar fact pattern, the court allowed the negligence case to go forward while noting that the plaintiff would still need to prove that the employer owed a duty of care to non-employees infected with COVID-19 due to an employee contracting the virus at work. Acknowledging that an analysis of this duty “appear[s] worthy of exploration,” the state appellate court said the analysis would include an assessment of “public policy concerns that might support excluding certain kinds of plaintiffs or injuries from relief.” The California Supreme Court declined to review the See’s case, meaning that it’s holding still stands.

The California Supreme Court has not yet announced whether it will use its discretion to respond to the Ninth Circuit’s certified questions in the Kuciembas’ case. In the meantime, California employers cannot automatically rely on the exclusive remedial scheme provided under the worker’s compensation system to cover these claims and are not necessarily shielded from COVID-19 lawsuits brought by employees’ family members (and perhaps others). That said, even if employers owe their employees’ families a duty of care, affected employees will still have to prove that it was the employer’s negligence that caused the illness and that the virus was not contracted from another source – a tall order for a highly transmissible virus like COVID-19. In the meantime, however, it behooves all California employers to continue maintaining health and safety measures to prevent the spread of COVID-19, and react quickly and appropriately in the event of an outbreak of COVID-19 in the workplace.

Article By Karen E. Wentzel and Cristen R. Hintze of Squire Patton Boggs (US) LLP

For more Coronavirus news, click here to visit the National Law Review.

© Copyright 2022 Squire Patton Boggs (US) LLP

How Changing Beneficial Ownership Reporting May Impact Activism

The SEC in February proposed amendments to Regulation 13D-G to modernize beneficial ownership reporting requirements. Adoption of the amendments as proposed will accelerate the timing – and expand the scope – of knowledge of certain activist activities. The deadline for comments on the proposed rules was April 11 and final rules are expected to be released later this year.

The current reporting timeline creates an asymmetry of information between beneficial owners on the one hand and other stockholders and issuers on the other. The SEC proposal is seeking to eliminate this asymmetry and address other concerns surrounding current beneficial ownership reporting. The accelerated beneficial ownership reporting deadlines will result in greater transparency in stock ownership, allowing market participants to receive material information in a timely manner and potentially alleviating the market manipulation and abusive tactics used by some investors.

The shortened filing deadlines should benefit a company’s overall shareholder engagement activities. The investor relations team at a company will have a more accurate and up-to-date picture of its institutional investor base throughout the year, which should result in more timely outreach to such shareholders.

INVESTOR ACCUMULATION OF SHARES BEFORE DISCLOSURE

Although issuers will likely view the proposed rules as beneficial, many commentators have predicted a negative impact on shareholder activism. Under the current reporting requirements, certain activist investors may benefit by having both additional time to accumulate shares before disclosing such activities and potentially more flexibility in strategizing with other investors.

Many commentators have argued that the proposed shorter timeline for beneficial ownership reporting will negatively impact an activist shareholder’s ability to accumulate shares of an issuer at a potentially lower price than if market participants had more timely knowledge of such activity and intent. In many cases a company’s stock price is impacted once an investor files a Schedule 13D with clear activist intent. This can even occur in some cases once a Schedule 13G is filed by a known activist investor without current activist intent.

If the shorter reporting deadlines reduce such investors’ profit, it is expected that an investor’s incentive to accumulate stock in order to initiate change at a company will also be reduced. Activists instead may be encouraged to engage more with management. In other words, the shorter reporting period may deter short-term activists and encourage more long-term focused activism.

TIMING OF ISSUER RESPONSE

The shorter reporting deadlines are also expected to result in management having earlier notice of any takeover attempt and to give a company the opportunity to react more quickly to any such attempt. There is potential for this to lead to increased use of low-threshold poison pills. But the SEC stated in the proposed rules release that it believes the risk of abundant reactionary low-threshold poison pills is overstated due to scrutiny of such poison pills from courts and academia, limitations imposed by state law and the unlikelihood that the beneficial ownership would trigger the low-threshold poison pills.

Companies that have low-threshold poison pills – such as one designed to protect a company’s net operating losses – may want to review them to confirm that the proposed rules would not be expected to have any impact. For example, such poison pills may link the definition of beneficial ownership to the SEC rules, including Schedule 13D and 13G filings.

‘GROUP’ REPORTING

Another proposed change expected to affect shareholder activism is the expanded definition of ‘group’ for the purposes of reporting under Schedule 13D. The current rules require an explicit agreement between two or more persons to establish a group for purposes of the beneficial ownership reporting thresholds.

Commentators believe that under the current rules, certain investors seeking change at a company may share the fact that they are accumulating shares of a company with other shareholders or activists, which can then act on this information before the general public is aware; in other words, before public disclosure in and market reaction to the Schedule 13D filing. This activity may result in near-term gains for the select few involved before uninformed shareholders can react.

Under the SEC’s proposed amended Rule 13d-5, persons who share information with another regarding an upcoming Schedule 13D filing are deemed to have formed a group within the meaning of Section 13(d)(3) regardless of whether an explicit agreement is in place, and such concerted action will trigger reporting requirements. This proposed change is expected to benefit companies and shareholders overall by preventing certain investors from acting in concert on information not known to a company and its other shareholders.

The full impact of the proposed rule changes on shareholder activism cannot be accurately predicted, but we believe that at a minimum, issuers will find it beneficial to have more regularly updated information on their institutional investor base for, among other things, their shareholder engagement efforts.

Article By Alexandra Clark Layfield and Rachel Solino of  Jones Walker LLP

For more Securities and SEC news, click here to visit the National Law Review.

© 2022 Jones Walker LLP

Small Businesses Don’t Recognize Risk of Cyberattack Despite Repeated Warnings

CNBC surveys over 2,000 small businesses each quarter to get their thoughts on the overall business environment and their small business’ health. According to the latest CNBC/SurveyMonkey Small Business Survey, despite repeated warnings by the Cybersecurity and Infrastructure Security Agency and the FBI that U.S.- based businesses are at an increased risk of a cyber-attack following Russia’s invasion of Ukraine, small business owners do not believe that it is an actual risk that will affect them, and they are not prepared for an attack. The latest survey shows that only five percent of small business owners reported cybersecurity to be the biggest risk to their company.

What is unfortunate, but not surprising, is the fact that this is the same percentage of small business owners who recognized a cyber attack as the biggest risk a year ago. There has been no change in the perception among business owners, even though there are repeated, dire warnings from the government. Also unfortunate is the statistic that only 33 percent of business owners with one to four employees are concerned about a cyber attack this year. In contrast, 61 percent of business owners with more than 50 employees have the same concern.

According to CNBC, “this general lack of concern among small business owners diverges from the sentiment among the general public….In SurveyMonkey’s polling, 55% of people in the U.S. say they would be less likely to continue to do business with brands who are victims of a cyber attack.” CNBC’s conclusion is that there is a disconnect between business owners’ appreciation of how much customers care about data security and that “[s]mall businesses that fail to take the cyber threat seriously risk losing customers, or much more, if a real threat emerges.” Statistics show that threat actors are targeting small to medium-sized businesses to stay under the law enforcement radar. With such a large target on their backs, business owners may wish to make cybersecurity a priority. It’s important to keep customers.

Article By Linn F. Freedman of Robinson & Cole LLP

For more cybersecurity legal news, click here to visit the National Law Review.

Copyright © 2022 Robinson & Cole LLP. All rights reserved.

Implications of the Use of the Defense Production Act in the U.S. Supply Chain

What owners, operators and investors need to know before accepting funds under the DPA

There has been an expansion of regulations related to Foreign Direct Investment (FDI) in both the United States and abroad. Current economic and geopolitical tensions are driving further expansion of FDI in the U.S. and elsewhere.

Whether by intent or coincidence, the Foreign Investment Risk Review Modernization Act (FIRRMA) regulations that took effect February 13, 2020, included provisions that expanded the Committee on Foreign Investment in the U.S. (CFIUS) and FIRRMA based upon the invocation of the Defense Production Act (DPA) – such as with President Biden’s recent Executive Order evoking the DPA to help alleviate the U.S. shortage of baby formula.

As background, the U.S. regulation of foreign investment in the U.S. began in 1975 with the creation of CFIUS. The 2007 Foreign Investment and National Security Act refined CFIUS and broadened the definition of national security. Historically, CFIUS was limited to technology, industries and infrastructure directly involving national security. It was also a voluntary filing. Foreign investors began structuring investments to avoid national security reviews. As a result, FIRRMA, a CFIUS reform act, was signed into law in August 2018. FIRRMA’s regulations took effect in February 2020.

It is not surprising that there are national security implications to U.S. food production and supply, particularly based upon various shortages in the near past and projections of further shortages in the future. What is surprising is that the 2020 FIRRMA regulations provided for the application of CFIUS to food production (and medical supplies) based upon Executive Orders that bring such under the DPA.

The Impact of Presidential DPA Executive Orders

The 2020 FIRMMA regulations included an exhaustive list of “critical infrastructure” that fall within CFIUS’s jurisdiction. Appendix A to the regulations details “Covered Investment Critical Infrastructure and Functions Related to Covered Investment Critical Infrastructure” and includes the following language:

“manufacture any industrial resource other than commercially available off-the-shelf items …. or operate any industrial resource that is a facility, in each case, that has been funded, in whole or in part, by […] (a) Defense Production Act of 1950 Title III program …..”

Title III of the DPA “allows the President to provide economic incentives to secure domestic industrial capabilities essential to meet national defense and homeland security requirements.” This was arguably invoked by President Trump’s COVID-19 related DPA Executive Orders regarding medical supplies (such as PPEs, tests and ventilators, etc.) and now President Biden’s Executive Order related to baby formula (and other food production).

Based on the intent of FIRRMA to close gaps in prior CFIUS coverage, the FIRRMA definition of “covered transactions” includes the following language:

“(d) Any other transaction, transfer, agreement, or arrangement, the structure of which is designed or intended to evade or circumvent the application of section 721.”

Taken together, the foregoing provision potentially gives CFIUS jurisdiction to review non-U.S. investments in U.S. companies covered by DPA Executive Orders that are outside of traditional M&A structures. This means that even non-controlling foreign investments in U.S. companies (such as food or medical producers) who receive DPA funding are subject to CFIUS review. More significantly, such U.S. companies can be subject to CFIUS review for a period of 60 months following the receipt of any DPA funding.

As a result of DPA-related FDI implications, owners, operators, and investors should carefully assess the implications of accepting funding under the DPA and the resulting restrictions on non-U.S. investors in businesses and industries not historically within the jurisdiction of CFIUS.

Article By David Vance Lucas of Bradley Arant Boult Cummings LLP

For more administrative and regulatory legal news, click here to visit the National Law Review.

© 2022 Bradley Arant Boult Cummings LLP

SEC Awards Whistleblower Whose Tip Led to Opening of Investigation

On May 19, the U.S. Securities and Exchange Commission (SEC) issued a whistleblower award to an individual who voluntarily provided the agency with original information that led to a successful enforcement action.

Through the SEC Whistleblower Program, qualified whistleblowers are entitled to an award of 10-30% of the sanctions collected by the government in the enforcement action connected to their disclosure.

The SEC awarded the whistleblower approximately $16,000.

According to the award order, the whistleblower “helped alert Commission staff to the ongoing fraud and his/her tip was a principal motivating factor in the decision to open the investigation.”

In determining the exact percentage of an award, the SEC weighs a number of factors including the significance of the whistleblower’s information, the law enforcement interest in the case, the degree of further assistance provided by the whistleblower, the whistleblower’s culpability in the underlying violation, and the timelines of the disclosure.

According to the award order, the SEC considered that the awarded whistleblower “provided continuing assistance by supplying critical documents and participating in at least one subsequent communication with Commission staff that advanced the investigation.”

The SEC notes that the whistleblower did not initially make their disclosure via a Form TCR. However, the whistleblower qualified for an award because they filed a Form TCR within 30 days of learning of the filing requirement.

Since issuing its first award in 2012, the SEC has awarded approximately $1.3 billion to over 270 individuals. In the 2021 fiscal year, the program set a number of records. The SEC issued a record $564 million in whistleblower awards to a record 108 individuals.

In addition to monetary awards, the SEC Whistleblower Program offers confidentiality protections to whistleblowers. Thus, the SEC does not disclose any identifying information about award recipients.

Individuals considering blowing the whistle to the SEC should first consult an experienced SEC whistleblower attorney to ensure they are fully protected and qualify for the largest possible award.

Article By Mary Jane Wilmoth of Kohn, Kohn & Colapinto. Geoff Schweller also contributed to this article.

For more white collar business crime legal news, click here to visit the National Law Review.

Copyright Kohn, Kohn & Colapinto, LLP 2022. All Rights Reserved.

The Metaverse: A Legal Primer for the Hospitality Industry

The metaverse, regarded by many as the next frontier in digital commerce, does not, on its surface, appear to offer many benefits to an industry with a core mission of providing a physical space for guests to use and occupy. However, there are many opportunities that the metaverse may offer to owners, operators, licensors, managers, and other participants in the hospitality industry that should not be ignored.

What is the Metaverse?

The metaverse is a term used to describe a digital space that allows social interactions, frequently through use of a digital avatar by the user. Built largely using decentralized, blockchain technology instead of centralized servers, the metaverse consists of immersive, three-dimensional experiences, persistent and traceable digital assets, and a strong social component. The metaverse is still in its infancy, so many of the uses for the metaverse remain aspirational; however, metaverse platforms have already seen a great deal of activity and commerce. Meanwhile, technology companies are working to produce the next-generation consumer electronics that they hope will make the metaverse a more common location for commerce.

The Business Case for the Hospitality Industry

The hospitality industry may find the metaverse useful in enhancing marketing and guest experiences.

Immersive virtual tours of hotel properties and the surrounding area may allow potential customers to explore all aspects of the property and its surroundings before booking. Operators may also add additional booking options or promotions within the virtual tour to increase exposure to customers.

Creating hybrid, in-person and remote events, such as conferences, weddings, or other celebrations, is also possible through the metaverse. This would allow guests on-site to interact with those who are not physically present at the property for an integrated experience and possible additional revenue streams.

Significantly, numerous outlets have identified the metaverse as one of the top emerging trends in technology. As its popularity grows, the metaverse will become an important location for the hospitality industry to interact with and market to its customer base.

Legal Issues to Consider

  1. Select the right platform for you. There are multiple metaverse platforms, and they all have tradeoffs. Some, including Roblox and Fortnite, offer access to more consumers but generally give businesses less control over content within the programs. Others, such as Decentraland and the Sandbox, provide businesses with greater control but smaller audiences and higher barriers to entry. Each business should consider who its target audience is, what platform will be best to reach that audience, and its long term metaverse strategy before committing to a particular platform.
  2. Register your IP. Businesses should consider filing trademark applications covering core metaverse goods or services and securing any available blockchain domains, which can be used to facilitate metaverse payments and to direct users to blockchain content, such as websites and decentralized applications. Given the accelerating adoption of blockchain domains along with limited dispute resolution recourse available, we strongly encourage businesses to consider securing intellectual property rights now.
  3. Establish a dedicated legal entity. Businesses may want to consider setting up a new subsidiary or affiliate to hold digital assets, shield other parts of their business from metaverse-related liability, and isolate the potential tax consequences.
  4. Take custody of digital assets. Because of their digital character, digital assets such as cryptocurrency, which may be the primary method of payment in the metaverse, are uniquely vulnerable to loss and theft. Before acquiring cryptocurrency, businesses will need to set up a secure blockchain wallet and adopt appropriate access and security controls.
  5. Protect and enforce your IP. The decentralized nature of the metaverse poses a significant challenge to businesses and intellectual property owners. Avenues for enforcing intellectual property rights in the metaverse are constantly evolving and may require multiple tools to stop third-party infringements.
  6. Reserve metaverse rights. Each Business that licenses its IP, particularly those that do so on a geographic or territorial basis, should review existing license agreements to determine what rights, if any, its licensees have for metaverse-related uses. Moving forward, each brand owner is encouraged to expressly reserve rights for metaverse-related uses and exercise caution before authorizing any third party to deploy IP to the metaverse on a business’ behalf.
  7. Tax matters. Attention needs to be paid to how the tax law applies to metaverse transactions, despite the current tax law not fully addressing the metaverse. This is particularly the case for state and local sales and use, communications, and hotel taxes.

Ready to Enter?

As we move into the future, the metaverse appears poised to provide a tremendous opportunity for the hospitality industry to connect directly with consumers in an interactive way that was until recently considered science fiction. But like every new frontier, technological or otherwise, there are legal and regulatory hurdles to consider and overcome.

Article By Charles B. Ferguson, Jr. and Kimberly A. Wachen of ArentFox Schiff LLP

For more technology legal news, click here to visit the National Law Review.

© 2022 ArentFox Schiff LLP

When Your Business Partner Uses Company Money to Purchase Assets for Himself, You Have a Remedy – If You Don’t Wait Too Long

Minority owners of closely-held businesses are often shocked to learn what their business partner – usually the majority owner – has been doing with the company’s money.  In some cases, an investigation reveals that your worst suspicions are true, and your partner has actually started a competing company on the side.  But diverting assets and resources can often have results other than an active, competing business.  Sometimes embezzlement is as simple as company funds being used to purchase assets – such as real estate – in which you, of course, have no ownership interest.  This can be done by having the jointly-owned company purchase the land outright, or make the mortgage payments on property your business partner has cut you out of.  Either way, joint money is being used to subsidize your partner’s solo venture.

I have had clients come to me believing that because they do not have an ownership interest in an asset, they cannot possibly have any rights to it, or in it.  But that is not necessarily true.  For example, in New Jersey, if you are a 1/3 owner of a company, and the 2/3 majority owner uses company money to buy real property, you may have an excellent argument that you should be legally recognized as a 1/3 owner of the property, or at least be entitled to 1/3 of any profits or proceeds from it. Similarly, if company monies are used to start a competing company, you may be entitled to be awarded 1/3 ownership of that competing company, or at least damages equaling 1/3 of that company’s profits.

The logic is obvious – 1/3 of the money improperly used effectively belongs to you.  However, many business owners suspect something like this for years but fail to act, usually because they think it’s too late once the money is gone.  If you believe money is unaccounted for in your own company, you are entitled to answers.  If you can’t understand why your business partner is suddenly devoting time to other business ventures, but will not explain to you what he is doing, you are entitled to answers.  If you do a search and learn that your business partner owns real estate, and you can’t understand how he paid for it and want to know if any of your money was used, you are entitled to answers.  You can get those answers in court – but the fact that you are entitled to do so should help you get them without resorting to a disruptive and expensive judicial filing.

When, exactly, you learned of the embezzlement will impact how long you have to take action before it is legally too late.  So if you have suspicions, don’t wait to seek legal advice.  You just may have more rights than you realize.

©2022 Norris McLaughlin P.A., All Rights Reserved
For more content on business law, please visit the NLR White Collar Crime & Consumer Rights section.

Debt Ceiling Shrinks for Small Business Bankruptcies

Subchapter V of Chapter 11 of the Bankruptcy Code, which took effect in February 2020, creates a more streamlined and less expensive Chapter 11 reorganization path for small business debtors.  Under the law as originally passed, to be eligible for Subchapter V, a debtor (whether an entity or an individual) had to be engaged in commercial activity and its total debts — secured and unsecured – had to be less than $2,725,625.  At least half of those debts must have come from business activity.

In March 2020, in response to the COVID-19 pandemic, Congress passed the CARES Act, which raised the Subchapter V debt ceiling to $7.5 million for one year.  Congress extended it to March 27, 2022.  A bipartisan Senate bill would make the Subchapter V debt limit permanent at $7.5 million and index it to inflation.  But Congress has not yet passed the legislation or sent it to President Biden for signature.  So, for now, the debt ceiling has shrunk to the original $2,725,625.

Subchapter V has proven popular, with over 3,100 cases filed in the last two years (78 in North Carolina).  Many of those cases could not have proceeded under Subchapter V but for the higher debt limits.  The American Bankruptcy Institute has reported that Subchapter V cases are experiencing higher plan-confirmation rates, speedier plan confirmation, more consensual plans, and improved cost-effectiveness than if those cases had been filed as a traditional Chapter 11.  Anecdotally, most debtors in North Carolina are filing under Subchapter V if they are eligible.

We will continue to monitor legislative activity and report if Congress passes a law to reinstate the $7.5 million debt ceiling.

Article By Lance P. Martin of Ward and Smith, P.A.

For more financial and business legal news, click here to visit the National Law Review.

© 2022 Ward and Smith, P.A.. All Rights Reserved.