Corporate law Archives - Page 28 of 28

Anti-Money Laundering Compliance Costs

Recently posted in the National Law Review an article by Emily Holbrook of Risk and Insurance Management Society, Inc. (RIMS) regarding anti-money laundering initiatives take more precedence in the corporate world:

Each year, anti-money laundering (AML) initiatives take more precedence in the corporate world, particularly within the financial industry. According to Celent, global spending on AML compliance, including operations and technology, will reach a staggering $5.8 billion within the financial sector by 2013.

Overall, the AML compliance burden is expected to expand at a rate of 7.8% annually while global spending on AML software is projected to expand at a rate of 10.4% per year. But what is the motivation behind such a drive? The research firm found that 42% of respondents cited regulatory requirements, and 25% pointed to reputational risk and brand protection as the main driver for AML compliance spending. And in further findings, financial institutions cited the integration of their AML and anti-fraud operations and technologies as a long-term goal.

“Although intuitively attractive, many institutions may find it difficult to build a business case for integrating AML with anti-fraud,” said Neil Katkov, senior vice president for Celent. “Fortunately, the compliance-driven development of modern AML software, analytics and case management has created a new generation technology that can often deliver better results than legacy anti-fraud systems.”

It seems it’s out with the old and in with the new — and expensive — AML

The 16th Annual National Institute on Negotiating Business Acquisitions

The National Law Review wants to remind you to mark your calendars for the 16th Annual National Institute on Negotiating Business Acquisitions presented by the ABA’s Business Law Section Mergers and Acquisitions Committee, General Practice, Solo & Small Firm Division, and the Center for Continuing Legal Education:

Negotiating Business Acquisitions

Event Information

When: November 10 – 11, 2011

Where: The Ritz-Carlton Miami Beach | South Beach Miami

1 Lincoln Rd, Miami Beach, FL, 33139-2000

Primary Sponsors

ABA Center for CLE

General Practice, Solo and Small Firm Division and Business Law Section

Highlights

This National Institute includes an extensive mock negotiation that will give you valuable insights on negotiating key representations, warranties, closing conditions and indemnification provisions in an acquisition agreement. Advance preparation is not needed for this program.

Program Description

This two-day National Institute will provide you with an expert perspective on negotiating business acquisitions.

Panelists include nationally known mergers & acquisitions attorneys who will discuss all facets of the acquisition process, including techniques used in structuring and negotiating M&A deals; the tax and securities law aspects of business acquisitions; and the impact of recent legal and regulatory developments on M&A transactions.

The program will examine both fundamental and cutting-edge issues, with sessions addressing
the following:

The key business, financial, and legal terms of the acquisition agreement
Special issues in asset acquisitions
Tax considerations in M&A transactions
Acquisitions of public companies and related Delaware and securities law considerations
An investment banker’s perspective on M&A trends
Recent developments, including the role of private equity buyers
Ethical issues in M&A transactions

Program Brochure

Click here to view program brochure.

OFAC Settles Alleged Sanctions Violations for $88.3 million

Posted in the National Law Review an article by Thaddeus Rogers McBride and Mark L. Jensen of Sheppard Mullin Richter & Hampton LLP regarding OFAC’s settlements with financial institutions:

On August 25, 2011, a major U.S. financial institution agreed to pay the U.S. Department of Treasury, Office of Foreign Assets Control (“OFAC”) $88.3 million to settle claims of violations of several U.S. economic sanctions programs. While OFAC settlements with financial institutions in recent years have involved larger penalty amounts, this August 2011 settlement is notable because of OFAC’s harsh—and subjective—view of the bank’s compliance program.

Background. OFAC has primary responsibility for implementing U.S. economic sanctions against specifically designated countries, governments, entities, and individuals. OFAC currently maintains approximately 20 different sanctions programs. Each of those programs bars varying types of conduct with the targeted parties including, in certain cases, transfers of funds through U.S. bank accounts.

As reported by OFAC, the alleged violations in this case involved, among other conduct, loans, transfers of gold bullion, and wire transfers that violated the Cuban Assets Control Regulations, 31 C.F.R. Part 515, the Iranian Transactions Regulations, 31 C.F.R. Part 560, the Sudanese Sanctions Regulations, 31 C.F.R. Part 538, the Former Liberian Regime of Charles Taylor Sanctions Regulations, 31 C.F.R. Part 593, the Weapons of Mass Destruction Proliferators Sanctions Regulations, 31 C.F.R. Part 544, the Global Terrorism Sanctions Regulations, 31 C.F.R. Part 594, and the Reporting, Procedures, and Penalties Regulations, 31 C.F.R. Part 501.

Key Points of Settlement. As summarized below, the settlement provides insight into OFAC’s compliance expectations in several ways:

1. “Egregious” conduct. In OFAC’s view, three categories of violations – involving Cuba, in support of a blocked Iranian vessel, and incomplete compliance with an administrative subpoena – were egregious under the agency’s Enforcement Guidelines. To quote the agency’s press release, these violations “were egregious because of reckless acts or omissions” by the bank. This, coupled with the large amount and value of purportedly impermissibly wire transfers involving Cuba, is likely a primary basis for the large $88.3 million penalty.

OFAC’s Enforcement Guidelines indicate that, when determining whether conduct is “egregious,” OFAC gives “substantial” weight to (i) whether the conduct is “willful or reckless,” and (ii) the party’s “awareness of the conduct at issue.” 31 C.F.R. Part 501, App. A. at V(B)(1). We suspect that OFAC viewed the conduct here as “egregious” and “reckless” because, according to OFAC, the bank apparently failed to address compliance issues fully: as an example, OFAC claims that the bank determined that transfers in which Cuba or a Cuban national had interest were made through a correspondent account, but did not take “adequate steps” to prevent further transfers. OFAC’s emphasis on reckless or willful conduct, and the agency’s assertion that the bank was aware of the underlying conduct, underscore the importance of a compliance program that both has the resources to act, and is able to act reasonably promptly when potential compliance issues are identified.

2. Ramifications of disclosure. In this matter, the bank voluntarily disclosed many potential violations. Yet the tone in OFAC’s press release is generally critical of the bank for violations that were not voluntarily disclosed. Moreover, OFAC specifically criticizes the bank for a tardy (though still voluntary) disclosure. According to OFAC, that disclosure was decided upon in December 2009 but not submitted until March 2010, just prior to the bank receiving repayment of the loan that was the subject of the disclosure. Although OFAC ultimately credited the bank for this voluntary disclosure, the timing of that disclosure may have contributed negatively to OFAC’s overall view of the bank’s conduct.

This serves as a reminder that there often is a benefit of making an initial notification to the agency in advance of the full disclosure. This also serves as reminder of OFAC’s very substantial discretion as to what is a timely filing of a disclosure: as noted in OFAC’s Enforcement Guidelines, a voluntary self-disclosure “must include, or be followed within a reasonable period of time by, a report of sufficient detail to afford a complete understanding of an apparent violation’s circumstances.” (emphasis added). In this regard, OFAC maintains specific discretion under the regulations to minimize credit for a voluntary disclosure made (at least in the agency’s view) in an inappropriate or untimely fashion.

3. Size of the penalty. The penalty amount—$88.3 million—is substantial. Yet the penalty is only a small percentage of the much larger penalties paid by Lloyds TSB ($350 million), Credit Suisse ($536 million), and Barclays ($298 million) over the past few years. In those cases, although the jurisdictional nexus between those banks and the United States was less clear than in the present case, the conduct was apparently more egregious because it involved what OFAC characterized as intentional misconduct in the form of stripping wire instructions. The difference in the size of the penalties is at least partly attributable to the amount of money involved in each matter. It also appears, however, that OFAC is distinguishing between “reckless” conduct and intentional misconduct.

4. Sources of information. As noted, many of the violations in this matter were voluntarily disclosed to OFAC. The press release also indicates that certain disclosures were based on information about the Cuba sanctions issues that was received from another U.S. financial institution (it is not clear whether OFAC received information from that other financial institution). The press release also states that, with respect to an administrative subpoena OFAC issued in this matter, the agency’s inquiries were at least in part “based on communications with a third-party financial institution.”

It may not be the case here that another financial institution (or institutions) blew the proverbial whistle, but it appears that at least one other financial institution did provide information that OFAC used to pursue this matter. Such information sharing is a reminder that, particularly given the interconnectivity of the financial system, even routine reporting by financial institutions may help OFAC identify other enforcement targets.

5. Compliance oversight. As part of the settlement agreement, the bank agreed to provide ongoing information about its internal compliance policies and procedures. In particular, the bank agreed to provide the following: “any and all updates” to internal compliance procedures and policies; results of internal and external audits of compliance with OFAC sanctions programs; and explanation of remedial measures taken in response to such audits.

Prior OFAC settlements, such as those with Barclays and Lloyds, have stipulated compliance program reporting obligations for the settling parties. While prior agreements, such as Barclay’s, required a periodic or annual review, the ongoing monitoring obligation in this settlement appears to be unusual, and could be a requirement that OFAC imposes more often in the future. (Although involving a different legal regime, requirements with similarly augmented government oversight have been imposed in recent Foreign Corrupt Practices Act settlements, most notably the April 2011 settlement between the Justice Department and Johnson & Johnson. See Getting Specific About FCPA Compliance, Law360, at:http://www.sheppardmullin.com/assets/attachments/973.pdf).

Conclusions. We think this settlement is particularly notable for the aggression with which OFAC pursued this matter. Based on the breadth of the settlement, OFAC seems to have engaged in a relatively comprehensive review of sanctions implications of the bank’s operations, going beyond those allegations that were voluntarily self-disclosed to use information from a third party. Moreover, as detailed above, OFAC adopted specific, negative views about the bank’s compliance program and approach and seems to have relied on those views to impose a very substantial penalty. The settlement is a valuable reminder that OFAC can and will enforce the U.S. sanctions laws aggressively, and all parties—especially financial institutions—need to be prepared.

Troubled Loan Workouts: Qualified Professionals Can Help Maximize Recovery for All Parties

Posted in the National Law Review an article by Norman B. Newman of Much Shelist Denenberg Ament & Rubenstein P.C. regarding workout of a financially troubled loans:

The workout of a financially troubled loan requires the participants—typically the lender, the borrower and the guarantors—to be well versed in legal and business principals, coupled with an ability to understand the emotional aspects of the situation. The primary goal of a troubled loan workout is to maximize the recovery to all parties involved. That end result is best achieved when each party is represented by qualified professionals, including a loan officer who is familiar with the situation, as well as experienced attorneys and workout consultants. Collectively, these resources offer a vast network of appraisers, real estate and business brokers, buyers, prospective lenders and other contacts—all of whom are familiar with financially troubled business matters.

From the lender’s side, a loan workout officer will bring to the table a thorough understanding of the loan documents and know what collateral has been pledged, as well as the extent of the perfection of the security interests granted to the lender. The loan officer will be able to communicate with the borrower and the guarantors with respect to the existing defaults under the loan documents. This individual will also know the lender’s rights in light of the default and whether the lender is choosing to presently exercise its rights under the loan documents or reserve exercising them until a future date.

From a legal prospective, it is essential that all parties involved in a troubled loan workout be represented by attorneys experienced in handling financial distress matters. The lender’s attorney will review the loan documents, examine collateral perfection issues and assist in providing updated UCC, tax lien and judgment lien searches. This attorney will also be able to advise the lender as to the various remedies available in the exercise of its rights against the borrower and the guarantors, including in-court and out-of-court options.

The other parties should also turn to legal counsel for advice regarding their rights, remedies and obligations under the operative documents. Attorneys for the borrower and guarantors will advise their clients how best to cooperate with the lender in a consensual workout scenario or what defenses might be available in an adversarial situation. This advice will also cover in-court and out-of-court options, including the availability of bankruptcy relief as part of a consensual loan workout.

Assuming the lender does not need to take immediate action to get control over or liquidate its collateral, most troubled loan workouts involve some period of forbearance that affords the borrower additional time to resolve its financial problems. Under a limited forbearance arrangement, the lender gives up little, while both the borrower and the lender have an opportunity to pursue various benefits. At this stage, the parties should involve experienced workout consultants who, for example, will help analyze the borrower’s business and provide advice regarding the profitability and viability of the enterprise. They often help prepare short-term and long-term cash flow projections and budgets or test such projections and budgets when they are prepared by the borrower. Additionally, they typically play a role in determining the best way to maximize the recovery to all parties, whether it be a reorganization of the borrower, a sale or an orderly liquidation of the borrower’s assets. If a restructure or reorganization is the chosen solution, workout consultants will help determine what additional funds might be necessary to accomplish the desired result.

The workout of a financially troubled loan involves complex legal and business issues, as well as the emotions of the business owners or the guarantors of the borrower’s indebtedness. Partnering with experienced attorneys and other workout professionals is an essential step towards navigating these difficult waters and ensuring a successful outcome for all of the parties involved.

Hitting Non-Practicin Entities Where It Hurts

Recently posted in the National Law Review an article by Robert A. Gutkin and Jeff C. Dodd of Andrews Kurth LLP about the Federal Circuit affirmed a district court award of substantial sanctions against a Non-Practicing Entity (NPE) that had a business model of suing numerous companies for nuisance value settlements.

The Federal Circuit Affirms an Award of Substantial Sanctions Against a NPE with a Business Model of Bringing Litigation To Extract Quick Settlements

Eon-Net LP v. Flagstar Bancorp, No. 2009 – 1308 (Fed. Cir., July 29, 2011) (Judges Lourie, Mayer and O’Malley)

In a July 29 decision, the Federal Circuit affirmed a district court award of substantial sanctions against a Non-Practicing Entity (NPE) that had a business model of suing numerous companies for nuisance value settlements. As the Court succinctly stated:

The record supports the district court’s finding that Eon-Net acted in bad faith by exploiting the high cost to defend complex litigation to extract a nuisance value settlement from Flagstar. At the time that the district court made its exceptional case finding, Eon-Net and its related entities, Millennium and Glory, had filed over 100 lawsuits against a number of diverse defendants alleging infringement of one or more patents from the Patent Portfolio. Each complaint was followed by a “demand for a quick settlement at a price far lower than the cost of litigation, a demand to which most defendants apparently have agreed.” Slip Op at 22.

We think that this is a potentially important holding because the Federal Circuit approved an exceptional case for enhanced sanctions based on the business model adopted by some NPE’s—suit followed by quick settlement at lower-than-litigation cost. As we discuss below, the Eon-Net LP case represents the latest in a string of judicial opinions providing defendants with additional ammunition against NPE’s pursuing “objectively baseless” litigation. However, the threat of sanctions may also lead NPE’s to be more difficult in their settlement demands and willingness to offer quick and early settlements.

Background

The case at issue involved three document processing systems patents, U.S. Patent Nos. 6,683,697 (“the ‘697 Patent”), 7,075,673 (“the ‘673 Patent”), and 7,184,162 (“the ‘162 Patent”) (collectively “the Patents”) owned by Eon-Net LP, a patent holding company formed to enforce various patents. The Patents are part of a larger patent family (“the Patent Portfolio”) originating with a parent patent application filed in 1991. Between 1996 and 2001, Millennium L.P., an Eon-Net related company, filed four lawsuits asserting various claims of the Patent Portfolio. After 2001, Eon-Net hired new outside litigation counsel, and the number of patent cases filed on behalf of Eon-Net and its related entities skyrocketed. By the time the district court in the present matter had issued sanctions against Eon-Net, more than 100 lawsuits had been filed, almost all of which resulted in early settlements or dismissals.

Eon-Net sued Flagstar Bancorp in 2005, alleging infringement of the ‘697 patent. The district court entered summary judgment of noninfringement in favor of Flagstar, finding that Eon-Net failed to adequately investigate its claims prior to filing suit, and finding that the claims were baseless. The district court also assessed Rule 11 sanctions in the amount of $141,984.70 against Eon-Net and its attorney.

After the Federal Circuit vacated and remanded both the summary judgment and Rule 11 decisions in 2007, Eon-Net LP v. Flagstar Bancorp, 249 F. App’x 189 (Fed. Cir. 2007), Eon-Net pursued the case (even adding new claims for infringement). But after receiving an unfavorable Markman decision on claim construction, Eon-Net stipulated to noninfringement. The district court subsequently granted Flagstar’s motion for attorney fees under 35 U.S.C. §285, finding that Eon-Net pursued baseless claims; the lawsuit was brought for the improper purpose of seeking a nuisance value settlement; Eon-Net destroyed evidence; and, Eon-Net’s litigation tactics were improper. Upon invitation from the district court, Flagstar renewed its prior Rule 11 motion. The district court reinstated in full the $141,984.70 in attorneys fees and costs against Eon-Net and its attorney for violation of Rule 11. The district court also found the case to be exceptional under 35 U.S.C. §285, and awarded Flagstar $489,150.48 in attorneys fees and costs after Eon-Net continued to litigate the case after remand.

The Federal Circuit Decision

The Federal Circuit upheld the district court’s claim construction, and affirmed the judgment of noninfringement to which Eon-Net had stipulated.

In reviewing the district court’s finding of an exceptional case under 35 U.S.C. §285, the Federal Circuit stated:

Indeed, “[l]itigation misconduct and unprofessional behavior may suffice, by themselves, to make a case exceptional under § 285.” Absent litigation misconduct or misconduct in securing the patent, sanctions under § 285 may be imposed against the patentee only if both (1) the patentee brought the litigation in bad faith; and (2) the litigation is objectively baseless (citations omitted). Slip Op at 17.

Eon-Net failed to show that the district court’s findings regarding the accused litigation misconduct were clearly erroneous. Eon-Net also failed to overcome the finding that its infringement allegations could only be supported by baseless claim construction positions.

Certainly Eon-Net’s behavior during the course of the litigation was egregious, as the court described in detail.¹ But that alone would not have warranted our Client Alert, for the behavior giving rise to sanctions in any given case is based on the particular facts of the case. What caught our eye was the Federal Circuit’s condemnation of the business model of filing litigation to obtain a quick return through settlement:

Eon-Net’s case against Flagstar had “indicia of extortion” because it was part of Eon-Net’s history of filing nearly identical patent infringement complaints against a plethora of diverse defendants, where Eon-Net followed each filing with a demand for a quick settlement at a price far lower than the cost to defend the litigation. Slip Op at 22.

Meritless cases like this one unnecessarily require the district court to engage in excessive claim construction analysis before it is able to see the lack of merit of the patentee’s infringement allegations…. Thus, those low settlement offers—less than ten percent of the cost that Flagstar expended to defend suit—effectively ensured that Eon-Net’s baseless infringement allegations remained unexposed, allowing Eon-Net to continue to collect additional nuisance value settlements. Slip Op at 23.

The Federal Circuit affirmed the finding that the case was exceptional under 35 U.S.C. §285, and was disturbed by the ability of an NPE, such as Eon-Net, to impose high costs on a company to defend against meritless claims, while at the same time the NPE faces little downside risk other than the loss of future licensing revenue.²

Potential Implications of Eon-Net LP

We stress that the Federal Circuit did not uphold sanctions merely because a NPE sought to enforce its patent rights. Rather, the Federal Circuit was clearly bothered by the ability of an NPE to exploit the “system” to extort nuisance value settlements while facing little downside risk.

Indeed, some NPE’s count on defendants to settle based on the inescapable fact that defense of even a suit on a bad patent is expensive. That cost is built into the architecture of patent litigation. As our colleague David Griffith chronicled in“Patents by the Numbers” in Andrews Kurth’s IP and Technology Developmentsthe median cost of defense in 2009 (as reported by AILPA) was $650,000 if less than one million was at risk, $2.5 million if $1 million to 25 million at risk – $2,500,000. In addition, the median time for an infringement case to get to trial was 2.5 years (2009 data from a report by PwC). While the rate of success was 38% in the 15 most active patent dockets (1995-2009) as reported by PwC (31% for NPE’s) if the patentee survives summary judgment motions and gets to a jury, its odds improve to a 75% win rate (according to the University of Houston Law Center’s patstats). Given these statistics, the temptation for any operating company faced with a lawsuit is to settle and move on with its business if the NPE’s offer of settlement is far less than the cost of defense. NPE’s count on that temptation.

The Federal Circuit stopped short of stating that business models like that of Eon-Net provide the sole basis for finding an exceptional case under 35 U.S.C. §285. However, the language of the decision does suggest that the business model may per se satisfy the “bad faith” element of the two part requirement for finding an exceptional case. This decision seems to be an attempt by the Court to try to level the playing field for patent litigation by increasing the downside risk for a NPE. Moreover, this case follows a string of other cases, including eBay (which held that irreparable harm would not be presumed in a preliminary injunction action even if infringement had been found) and MedImmune (which allows declaratory judgment actions to be brought under less stringent standards than the Federal Circuit had historically applied).

Just as importantly, we are seeing many other trends and techniques that defendants are starting to use to combat vexatious NPE litigation. Some defendants are finding success in obtaining venue transfers from courts thought to be more favorable to NPE litigation; others are using declaratory judgment actions; yet others are pursuing early summary judgments (by some accounts approximately 60% of patent cases are decided on summary judgment and patentee success at the summary judgment stage is only 12%).

Our firm also has had success strategically employing the re-examination to narrow or even eliminate patent claims from weak (or worse patents). Our success is consistent with some compelling statistics. Again our colleague David Griffith reported that the chances that PTO will grant an ex parte/inter partes reexamination application are greater than 90% (based on USPTO statistics as of March 2011). According to an AILPA 2009 report, the median cost of an ex parte reexamination was $10,000; for an inter-partes proceeding the median was $188,000. Moreover, according to USPTO statistics as of March 2011, in most cases claims were cancelled or modified:

ex parte reexamination (third party requested re-exam)	inter partes reexamination
All claims confirmed: 24%	All claims confirmed: 12%
All claims cancelled: 13%	All claims cancelled: 45%
Claims modified: 63%	Claims modified: 43%

The bottom line: defendants in NPE litigation should consider in the calculus of settlement not only litigation cost but also the trends and techniques favoring defendants over NPE’s, especially now that Eon-Net LP may encourage courts to shift the expenses of defense that NPE’s count on encouraging quick settlement—at least in the most abusive cases.

1. The court provided an extensive litany of Eon-Net’s sanctionable behavior throughout the course of the litigation, including: destroying relevant documents prior to the initiation of the lawsuit; flaunting the fact that as a patent enforcement company they did not believe they needed to have a document retention policy; refusing to participate in the claim construction process; lodging incomplete and misleading evidence with the court; submitting declarations contradicting deposition testimony; and, evidencing a general disdain and disrespect for the court process including statements made at a deposition by a party witnesses complaining that his deposition was “an inconvenience and a bother” and that he was “so sick of this stuff by now. I am so sick of this stuff, especially this haggling over stupidities and trivialities which is the name of the game in litigation.” Slip Op at 20.

2. The Federal Circuit also affirmed the Rule 11 sanctions, even though it was undisputed that Eon-Net’s counsel did examine portions of Flagstar’s website and reach a conclusion that it worked in a manner that infringed the ‘697 patent. “A reasonable pre-suit investigation, however, also requires counsel to perform an objective evaluation of the claim terms when reading those terms on the accused device.” Slip Op at 26. It was not clearly erroneous for the district court to conclude that Eon-Net’s claim construction position “borders on the illogical” and that “[t]he specification exposes the frivolity of Eon-Net’s claim construction position.” Id.

Avoid Unnecessary Real Property Taxes

Recently posted in the National Law Review an article by Richard B. Tranter and Sarah Sparks Herron of Dinsmore & Shohl LLP regarding valuation pitfalls involved with the purchase of an on-going business that owns real estate.

When Buying an On-Going Business that Includes Real Estate in Ohio

Beware the valuation pitfalls involved with the purchase of an on-going business that owns real estate. A buyer can accidentally cause its real property taxes on the newly purchased property to increase dramatically if it fails to allocate values properly between personal property and real property. Fortunately, a few preventative measures can be taken at the closing to prevent an unnecessary real property tax increase and litigation.

Imagine the following scenario: Company ABC decides to buy a hotel. The purchase includes the real estate on which the hotel is located, the personal property, including the furniture, fixtures and equipment (“FF&E”) within the hotel, and the goodwill associated with the hotel franchise. The purchase price for everything is $3,600,000. Neither the purchase agreement nor the settlement statement allocates this purchase price between the real estate, FF&E and goodwill. After the closing, a title agent goes to record the deed for the real estate at the local recorder’s office. The agent is asked to fill out a “Real Property Conveyance Fee Statement of Value and Receipt” (a/k/a “Conveyance Fee Statement”). The agent fills-in the purchase price as the consideration for the real property. Shortly thereafter, Company ABC receives a notice that the County Auditor will be increasing the value of the real property to reflect the $3.6 million purchase price, and the real property taxes will be going up to reflect this new, higher value. Company ABC objects because the $3.6 million price reflects the combined value of the real property, FF&E and goodwill. Now, to challenge the property valuation, Company ABC must file a complaint with the county board of revision and prove that the purchase price, as stated on the Conveyance Fee Statement, does not reflect the fair market value of the real property.

This is exactly what happened in a recent Ohio Supreme Court case, Hilliard City Schools Bd. of Educ. v. Franklin Cty. Bd. of Rev., 128 Ohio St.3d 565, 2011-Ohio-2258, 949 N.E.2d 1. The buyer in that case, K.D.M. and Associates, L.L.C. (“KDM”), purchased an 80-room, fully operating hotel for $3,600,000. Shortly thereafter, the Franklin County Auditor increased the value of the real property from $2,240,000 to $3,550,000. KDM filed a complaint, and the Franklin County Board of Revision reduced the real property value by $800,000 for FF&E, $60,000 for inventory, and $500,000 for goodwill for a final real property valuation of $2,240,000. The local school board appealed to the Board of Tax Appeals (“BTA”), which disallowed the $500,000 allocation to goodwill and the $60,000 allocated to inventory. Thus, the BTA concluded that the value of the real estate was $2,750,000. On appeals by both KDM and the school board, the Supreme Court valued the real estate even higher. The Court decreased the deduction for FF&E from $800,000 to $280,000. In addition, the Court refused to permit the deduction of $500,000 for goodwill. Thus, approximately six years after the plaintiff purchased an operating hotel for $3,600,000, the Ohio Supreme Court determined that the value of the real estate involved was $3,320,000.

What could KDM have done to avoid years of litigation and an additional $1.1 million in real property tax value? First, KDM could have completely filled out the Conveyance Fee Statement. Section 8(E) of this form asks what portion, if any, of the total consideration paid was for items other than real property. After every sale, the auditor will evaluate whether to increase or decrease the property’s valuation. This determination is made, in part, based on the Conveyance Fee Statement. If the new property owner allocates the purchase price on the Conveyance Fee Statement and the auditor accepts the allocation at this stage, then the new property owner does not have to challenge the auditor’s valuation. Further, if the local school board challenges the property valuation, the school board has the burden of proving a higher valuation. Thus, a fully completed Conveyance Fee Statement can head-off potential valuation disputes.

Second, KDM could have documented the allocation between real property, FF&E and goodwill in the closing documents. Notably, the settlement statement for the hotel purchase did not provide an allocation to personal property. In addition, the bill of sale for personal property was incomplete. The bill included “inventory, equipment, fixtures, assets used by seller in the business in the attached ‘Exhibit A’”, but there was no Exhibit A, nor any value assigned to that property. Thus, KDM had little evidence from the closing to support its conclusion that $800,000 of the purchase price was for FF&E, $60,000 was for inventory, and $500,000 was for goodwill.

The Supreme Court ultimately concluded that the FF&E was worth $280,000 based on a financing appraisal conducted in anticipation of the purchase. The Court pragmatically concluded that an operating hotel clearly included personal property, and this personal property clearly had value to be allocated as part of the purchase price. Thus, the Court rejected the school board’s argument that the sale price, as set forth in the Conveyance Fee Statement, reflected the fair market value of the real property. The Court, however, rejected KDM’s representatives’ testimony about the value of the FF&E and rejected an unauthenticated, 2005 year-end financial statement showing FF&E of $800,000. With no allocation on the Conveyance Fee Statement or in the closing documents, the best evidence available to the Court was the financing appraisal which presented an estimation of value relied upon by KDM’s lender at the time of the sale. The Court utilized such appraisal evidence.

In conclusion, the purchase of an on-going business can have multiple moving parts. If you are contemplating a purchase that includes real estate, remember to document the purchase price allocation between real and personal property in both the Conveyance Fee Statement and closing documents. These simple steps can avoid unnecessary real property taxes and litigation.

Wisconsin Supreme Court Addresses Issues Concerning the Default Judgment Statute, the Direct Action Statute, and Personal Liability for Corporate Officers

Recently posted posted in the National Law Review an article by Heidi L. Vogt and Jessica M. Swietlik of von Briesen & Roper, S.C. regarding the Wisconsin Supreme Court issued a decision in Casper, et al. v. American International South Ins. Co.

Casper, et al. v. American International South Ins. Co., et al., 2011 WL 81

On July 19, 2011, the Wisconsin Supreme Court issued a decision in Casper, et al. v. American International South Ins. Co., et al., 2011 WI 81 (“Casper”) in which it addressed three issues: 1) the excusable neglect standard relative to default judgments; 2) whether an insurance policy must be delivered or issued in the State of Wisconsin in order to subject the insurer to a direct action under Wis. Stat. §§ 632.24 and 803.04(2); and 3) whether a corporate officer may be held personally liable for non-intentional torts that occur within the scope of employment.

The Casper case arises from a motor vehicle accident. Mark Wearing, a co-employee of Bestway Systems, Inc. (“Bestway”) and Transport Leasing/Contract Inc. (“TLC”), struck the Caspers’ minivan from behind, seriously injuring all five passengers in the Caspers’ vehicle.

Investigators learned that Wearing was under the influence of oxycodone, diazepam, and nordiazepam when the collision occurred. At the time of the accident, Wearing was en route to make a delivery for a Bestway customer. Jeffrey Wenham, the CEO of Bestway, had allegedly approved a driving route for Wearing on this particular delivery that required him to drive 536 miles through several states overnight. Wearing claimed he was told he would be fired if he did not complete the route as planned. However, Wenham had never met Wearing and the route that Wenham apparently approved was designed a year and a half prior to the accident. An expert hired by the Caspers opined that the route violated the hours of service requirements of the Federal Motor Carrier Safety Regulations (“FMCSR”) and was unsafe.

The Caspers brought suit against fourteen named defendants, including: Mark Wearing, his co-employers Bestway and TLC, Bestway’s CEO Jeffrey Wenham, and TLC’s excess insurer, National Union Fire Insurance Company of Pittsburgh PA (“National Union”). The appeals in this case stem from three orders issued by the trial court, all of which were affirmed by the court of appeals: 1) its order granting National Union’s request for a 7-day extension to file its answer and denying the Caspers’ motion for default judgment against National Union on the grounds that National Union had demonstrated excusable neglect; 2) its order granting summary judgment to National Union on the grounds that under Kenison v. Wellington Ins. Co., 218 Wis. 2d 700, 582 N.W.2d 69 (Ct. App. 1998) the Caspers could not maintain a direct action against National Union because its insurance policy was not issued or delivered in Wisconsin; and 3) its order denying Wenham’s motion for summary judgment on the Caspers’ claims for negligent training and supervision. The Wisconsin Supreme Court considered each of these issues separately, and affirmed in part, reversed in part, and remanded with instructions consistent with its decision.

The court affirmed on the first issue, holding that the trial court did not erroneously abuse its discretion by finding that National Union’s “lost in the mail” excuse amounted to excusable neglect such that granting an extension and denying the motion for default judgment was appropriate. The court noted that “although courts should be skeptical of glib claims that attribute fault to the United States Postal Service,” it was satisfied that a reasonably prudent person could neglect a deadline when correspondence gets lost, as was the case with National Union here.

Second, the court reversed on the direct action issue and thereby explicitly overruled Kenison. In doing so, the court acknowledged that the court of appeals properly applied Kenison as it lacked authority to ignore it. In Kenison, the court of appeals concluded that Wis. Stat. § 631.01 limited the application of the direct action statute, § 632.24, to insurance policies issued or delivered in Wisconsin. The Casper court disagreed. After carefully examining the plain language and the legislative history of Wis. Stat. §§ 631.01, 632.24, and 803.04(2), the court concluded that “Section 803.04(2) explicitly and § 632.24 by necessary implication are intended to apply to liability insurance policies delivered or issued for delivery outside Wisconsin, so long as the ‘accident, injury or negligence occurred in this state.’” Accordingly, the Caspers should have been allowed to maintain a direct action against National Union even though its policy was neither issued nor delivered in Wisconsin because the accident occurred in Wisconsin.

With regard to the third issue, the Wisconsin Supreme Court agreed with the lower courts that there are some instances where corporate officers like Wenham can be held personally liable for non-intentional torts committed in the course of employment. Both the trial court and the court of appeals had ended their inquiries there, finding that issues of fact existed regarding Wenham’s alleged negligent supervision and training of Wearing such that summary judgment was not appropriate on those claims. However, the Wisconsin Supreme Court considered and ultimately reversed on public policy grounds, holding that even if Wenham’s approval of the route that allegedly violated the FMCSR was a cause of the accident, “the results are so unusual, remote, or unexpected that, in justice, liability ought not be imposed.”

Justice Bradley issued an opinion concurring in part and dissenting in part, and Chief Justice Abrahamson joined in Justice Bradley’s concurrence/dissent.

It's Not Easy Being Green: Understanding and Avoiding the Pitfalls of Green Marketing

Recently posted in the National Law Review an article by Anne E. Viner of Much Shelist Denenberg Ament & Rubenstein P.C. regarding the idenfication of “green” products and services:

A current trend among businesses is to identify their products and services as “green,” “environmentally safe,” “ozone friendly” or otherwise good for the environment. Companies do this to show that they are good stewards of the Earth and to attract customers who are interested in purchasing products that are “environmentally friendly.” But what does that phrase—or similar terminology—really mean? What sort of information must a business have in order to support these kinds of claims? Not surprisingly, there are a number of federal and state regulations, rules and guidelines that govern green marketing.

The Federal Trade Commission (FTC) Act prohibits deceptive representations in advertising, labeling, product inserts, catalogs and sales presentations. If statements concerning the environmental benefits of a product or service cannot be substantiated, they may be found to be deceptive by the FTC. Customers, competitors and environmental citizen groups often monitor green marketing and can file administrative complaints with the FTC if a company’s claims are misleading. Such complaints not only hurt businesses monetarily (legal expenses, administrative penalties, etc.), but can also damage the goodwill that the environmental claim was attempting to establish.

Federal Guidance

To help businesses determine when green marketing claims are acceptable and when they have gone too far, the FTC and the United States Environmental Protection Agency (EPA) have developed guidelines to ensure that environmental marketing claims do not mislead consumers. Advertising, labeling, promotional materials, presentations and other forms of marketing that run afoul of the guidelines created by the FTC and EPA can result in such conduct being declared unlawful under the FTC Act.

The following guidelines apply broadly to all environmental marketing efforts—whether they are consumer-focused claims or business-to-business claims directed at suppliers, affiliated companies, distributors or other customers:

Clearly identify whether the advertised environmental benefit is with the product itself, the packaging, a service, or some other portion or component of the product, service or packaging. For example, if a box of aluminum foil is labeled “recyclable” without further elaboration, this claim would be considered deceptive if any part of either the box or the foil cannot be recycled.
Avoid overstatements of environmental benefits. For example, a package might be labeled “50% more recycled content than before” after the manufacturer upped the amount of recycled material from 2% to 3%. Although the claim is technically true, it gives a false impression that the amount of recycled material was significantly increased.
Be ready to substantiate any comparisons between products. For example, if an ad claims that a package creates “less waste than the leading national brand,” the advertiser must be able to substantiate the comparison with calculations comparing the relative solid waste contributions of the two packages. If it cannot, the ad runs afoul of the FTC Act and may create liability.

The guidelines created by the FTC and EPA also address the following specific environmental claims:

Avoid general, unqualified terms (such as “environmentally friendly” and “green”) that cannot be quantified and may convey a wide range of meanings to customers. The broader the term (a brand name like Eco-Safe, for example), the more likely it will be found deceptive by the FTC.
Reliable, scientific evidence must support claims that a product or package is degradable, biodegradable or photodegradable, as well as compostable or made with recycled, pre-consumer or post-consumer products. For example, if a shampoo is advertised as “biodegradable” with no qualifications, the manufacturer must have reliable scientific evidence that the product, which is customarily disposed of in sewer systems, will break down and decompose into elements found in nature in a short period of time. These specific terms have precise environmental meanings, and the guidelines give numerous examples of acceptable and deceptive uses of them.

The Guidelines in Action

Assume that a manufacturer wants to identify its entire product line of plastic buckets as being “made of recyclable material.” However, only one type of bucket in the line is made of post-consumer plastic and the post-consumer content averages just 20% annually. How can the manufacturer properly advertise the recycled content of its bucket line? According to the FTC and EPA guidelines, it is deceptive to identify the entire line as “green” or as being “made of recycled materials.” These broad, unquantifiable terms should also be avoided when advertising the one type of bucket that actually is made from post-consumer plastic. However, it is acceptable to use the 20% annual average of recycled material in marketing that particular bucket type. Such averaging is permissible, provided the company’s claims can be substantiated with scientific evidence.

The FTC Act and related guidance is just one example of regulations that are potentially applicable to green marketing claims. The EPA has established additional regulations and guidance under its Consumer Labeling Initiative and EPA Environmentally Preferable Procurement Program. The International Organization for Standardization also has developed environmental labeling criteria for products sold worldwide. Many states have their own environmental disclosure and marketing requirements as well.

Given the numerous requirements associated with environmental marketing, along with the potential risks of being found deceptive, it really isn’t easy being green. So, before your business makes any environmental claims about its products or services, carefully consider how you will state the environmental benefits, whether they can be supported with scientific evidence and what regulations may govern your claims.

ALJ Upholds OIG’s Eight-Year Exclusion of Company Owner

Posted recently in the National Law Review an article by Meghan C. O’Connor of von Briesen & Roper, S.C. regarding OIG’s use of its exclusionary authority against individuals:

In yet another example of the OIG’s use of its exclusionary authority against individuals, an Administrative Law Judge (ALJ) upheld the OIG’s exclusion ofMichael D. Dinkel, the owner and President of a diagnostic imaging company. Dinkel has been excluded from participation in all Federal health care programs for a period of eight years.

The OIG has the authority to exclude individuals and entities from Federal health care programs for presenting or causing to be presented claims for items or services that the individual or entity knows or should know where not provided as claimed, or are otherwise false or fraudulent.

According to the OIG’s press release, Dinkel and his company, Drew Medical, Inc., submitted approximately 9,500 false claims worth $1.6 million to theMedicare and Medicaid programs for services related to venography, a radiology procedure. The OIG found that no venography services had actually been performed. Instead, claims were submitted to Medicare and Medicaid for a corresponding procedural code for MRI and CT procedures with contrast. Prior to Dinkel’s exclusion, a $1,147,564 civil False Claims Act settlement had been entered into with Dinkel and his company.

The ALJ found that Dinkel had a duty “to understand Medicare and Medicaid billing requirements and apply them scrupulously to the claims that he caused to be presented.” Furthermore, Dinkel’s failure to ensure his company properly claimed reimbursement “constituted reckless indifference to the propriety of the claims he cause to be presented.”

The ALJ’s full decision is available by request from the OIG.

Entrepreneur’s Guide to Litigation – Blog Series: Complaints and Answers

Recently posted at the National Law Review by John C. Scheller of Michael Best & Friedrich LLP an entrepreneur’s guide to the litigation process .

A. The Complaint

Litigation begins with a Complaint. “Complaint” is capitalized because it is a specific legal document, rather than a garden-variety complaint about something. The Complaint lays out the plaintiff’s specific legal claims against the defendant. It needs to contain enough facts that, if everything stated is true and there are no extenuating circumstances, a judge and jury could find in favor of the plaintiff.

As an example, Paul Plaintiff is suing Diana Defendant for violating a contract. Paul files a Complaint with a court claiming several facts: 1) Diana signed a contract to buy widgets; 2) Paul delivered the widgets; and 3) Diana did not pay the agreed-upon amount. If the court finds that these facts are true, then, unless there were extenuating circumstances, Diana probably breached a contract with Paul and should pay damages.

Paul’s Complaint also needs to allege facts showing that he has a right to be in that court. For example, if Paul wants to sue Diana inTexas, he has to show that the case and the parties have some connection toTexas. If he wants to sue her in a federal court, he has to meet a number of other criteria. (Federal court is generally only available if the parties are based in different states and the damages are relatively substantial or if the legal question is one of federal law.)

B. Response to a Complaint

Once the defendant officially learns of the Complaint, she has a certain limited time to file some sort of response with the court. The time to respond, however, does not run from when the plaintiff filed the lawsuit, but generally when he officially delivered notice of the Complaint to the defendant. (There is a timeline that starts ticking when the defendant becomes aware of a state court lawsuit she wants to “remove” to federal court.) The amount of time for the defendant to respond varies by what court the case is in, but is generally a short period of time.

After receiving the complaint, the defendant has three options: 1) Ignore the Complaint and have the court grant judgment in favor of the plaintiff; 2) Tell the court that the Complaint is defective and ask for dismissal; or 3) Answer the Complaint. Option one is usually not a good plan; courts do not look favorably on defendants who ignore the legal process, and this option prevents a defendant from fighting the plaintiff’s claims.

Option two does not deal with the merits of the plaintiff’s issue. It is simply telling the court that the Complaint is defective for a variety of reasons including, for instance, how it was served, who the parties are (or are not), which court the case is in, or simply that, even if everything is true, the plaintiff cannot win. For example, if Paul sues Diana, but never tells Diana about the suit, Diana can then ask the court to dismiss the case. Also, if Diana works for DefendCo and Paul’s contract was actually with DefendCo and not with Diana, personally, she may be able to have the case dismissed because Paul sued the wrong party. If Paul sued Diana in a federal court inTexaswhen both parties are residents ofCaliforniaand neither has ever been to or done business in Texas, then Diana may be able to get the case dismissed, at least from theTexascourt.

Finally, there is the “So, what?” defense. If the Complaint doesn’t actually allege a cause of action, the defendant can ask the court to dismiss it. This usually happens because the plaintiff simply assumes a fact, but does not include it in the Complaint. If, for example, Paul alleges only that Diana failed to pay him a certain amount of money, but does not allege that a contract existed between them, then Diana can essentially say “So, what?” and ask the court to dismiss the case. She would ask the court to dismiss the case because, even if true (she really did not pay him any money), he did not plead any facts showing that she was supposed to pay him money. The defendant is not admitting the truth of the allegation; she is just saying that even if true, the plaintiff cannot win.

Finally, a defendant can file an Answer. Again, “Answer” is capitalized because it is a specific legal document. In an Answer, the defendant responds, paragraph by paragraph, to each of the plaintiff’s allegations. The defendant must admit, deny, or say that she does not know the answer to each specific allegation. Saying “I don’t know” functions as a denial.

For example, Paul’s Complaint probably alleges that Diana lives at a certain address. Assuming Diana actually lives there, she has to admit that fact. Paul may allege that he delivered the correct number of working widgets to Diana. If the widgets were not what she actually ordered or did not work, Diana would deny that allegation. Finally, Paul may claim that those widgets cost him a certain amount of money. Diana likely has no way to know how much Paul paid for the widgets, so she would say she does not know – thus leaving Paul to prove that allegation.

Also in the Answer, the defendant can claim affirmative defenses. Those tell the court that there were extenuating circumstances so that, even if everything the plaintiff says is true, the court should not find in favor of the plaintiff.

For example, if Paul told Diana not to worry about paying him for the widgets for six months but then turned around and immediately sued her, she would claim that as an affirmative defense.

Finally, the Answer may contain counterclaims. These claims are the defendant counter-suing the plaintiff for something. The counterclaims may be related to the original suit or not. Usually they are related, but they do not have to be. This section follows the same rules as if the defendant were filing a complaint.

For example, Diana may counterclaim against Paul because he sent her the wrong widgets and, perhaps, add a claim that when Paul delivered the widgets to her warehouse, he backed his truck into her building and caused damage. She would then counterclaim for breach of contract and property damage. The court would then sort out the whole mess to decide who owed whom how much.

Click Here: to view the previous post in the Entrepreneur’s Guide to Litigation – Blog Series: Introduction

Category: Corporate law

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