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The National Law Forum - Page 702 of 753 - Legal Updates. Legislative Analysis. Litigation News.

DOL Proposes New FMLA Regulations on Military Family Leave

Recently in The National Law Review was an article regarding New FMLA Regulations written by the Labor & Employment Practice of Morgan, Lewis & Bockius LLP:

Proposed rules impact exigency leave and military caregiver leave and include clarifications on increments of intermittent leave.

On January 31, the U.S. Department of Labor (DOL) made public proposed Family and Medical Leave Act (FMLA) regulations that attempt to align existing regulations with two statutory amendments passed in 2009. The DOL’s Notice of Proposed Rulemaking (NPRM) addresses the coverage of military caregiver and exigency leaves and revamps eligibility requirements for certain airline industry employees. It also proposes changes to other FMLA regulations, although it does not contain the kind of groundbreaking regulatory changes issued in 2008. Nevertheless, the proposed changes do contain important clarifications to existing law that, if finalized, will impact employers.

Background on FMLA Amendments

As most employers are now well aware, the FMLA was amended in January 2008 to provide two types of military family leave for FMLA-eligible employees:

  • “Exigency leave”: A 12-week entitlement for eligible family members of National Guard and Reserves servicemembers to deal with exigencies related to a call to active duty.
  • “Military caregiver leave”: A 26-week entitlement for eligible family members to care for seriously ill or injured servicemembers of the regular Armed Forces, National Guard, and Reserves.

Less than a year later, Congress once again amended the FMLA. Through the National Defense Authorization Act for Fiscal Year 2010 (FY 2010 NDAA), P.L. No. 111-84, Congress expanded both types of military family leave by doing the following:

  • Expanding the FMLA’s military caregiver leave entitlement to include veterans with serious injuries or illnesses who are receiving medical treatment, recuperation, or therapy if the veterans were members of the Armed Forces at any time during the period of five years preceding the date of the medical treatment, recuperation, or therapy. Veterans had not been covered under existing law.
  • Expanding the exigency leave entitlement to include family members of the regular Armed Forces deployed to a foreign country who were not entitled to exigency leave under existing law.[1]
  • Extending the availability of military caregiver leave for current members of the Armed Forces to include a preexisting serious injury or illness that was aggravated by active duty service.

FY 2010 NDAA did not include an effective date, so these changes were presumed to be effective on October 28, 2009. The DOL, however, has now taken the position that employers are not required to provide employees with military caregiver leave to care for a veteran until the DOL defines, through regulation, a qualifying serious injury or illness of a veteran. Thus, according to the DOL, until the regulations are finalized, any time provided voluntarily by employers under this provision cannot count to reduce an employee’s FMLA entitlement. Because the statute did not have a delayed effective date for this provision, however, it is not clear whether a court would agree with this approach.

Later in 2009, Congress also passed the Airline Flight Crew Technical Corrections Act (AFCTCA), Public Law 111-119, to provide an alternate eligibility requirement for airline flight crew employees.

Now, more than two years after the passage of the 2009 amendments, the DOL has issued its NPRM to promulgate rules related to the FY 2010 NDAA and AFCTCA. The public comment period on these proposed rules will close 60 days after the NPRM is officially published in theFederal Register.

A summary of the key proposals follow.

Proposals Relating to Qualifying Exigency Leave

Definition of Active Duty

§ 825.126(a)

The DOL proposes important amendments that help clarify what kind of service qualifies for exigency leave under the FMLA. Specifically, the proposal would replace the existing definition of “active duty” with two new definitions: “covered active duty” as it applies to the Regular Armed Forces and “covered active duty” as it applies to the Reserves. The DOL believes that this change will “more accurately reflect the fact that there are limitations on the types of active duty that can give rise to qualifying exigency leave.”

The proposed definition of “covered active duty” as it relates to the Regular Armed Forces comes as no surprise, given the mandate of the FY 2010 NDAA. Simply put, a member of the Regular Armed Forces meets the definition of “covered active duty” when deployed with the Armed Forces in a foreign country.

The proposed definition of “covered active duty” as it relates to Reserve members, however, is a bit more nuanced. Proposed Section 825.126(a)(2) defines “covered active duty or call to covered active duty” status for a member of the Reserve components as duty under a call or order to active duty during the deployment of the member to a foreign country under a federal call or order to active duty in support of a contingency operation. While the FY 2010 NDAA struck the term “contingency operations” from the FMLA, the DOL takes the position that it will continue to require members of the Reserve components to be called to duty in support of a contingency operation in order for their family members to be entitled to qualifying exigency.

That means that, if the proposal is adopted, employers would need to offer exigency leave only to those Reserve members who are (1) called to duty in support of a contingency operation when that call is (2) in a foreign country.

Exigency Leave for Childcare and School Activities

§ 825.126(a)(3)

The current regulations allow eligible employees to take qualifying exigency leave to arrange childcare or attend certain school activities for a military member’s son or daughter. The proposed regulations would place new limits on this type of leave. Specifically, if the proposal becomes effective, the military member must be the spouse, son, daughter, or parent of the employee requesting leave in order for the employee to qualify for the leave under the DOL’s proposed amendment to the regulation. The child in question could be “the military member’s biological, adopted, or foster child, stepchild, legal ward, or child for whom the military member stands in loco parentis, who is either under age 18 or age 18 or older and incapable of self-care because of a mental or physical disability at the time that FMLA leave is to commence.”

For example, the employee may be the mother of the military member and may need qualifying exigency childcare and school activities leave for the military member’s child. Under this proposal, the child for whom childcare leave is sought need not be a child of the employee requesting leave.

Exigency Leave for Rest and Recuperation

§ 825.126(a)(6)

Current regulations allow an eligible employee to take up to five days of leave to spend time with a military member on rest and recuperation leave during a period of deployment. The DOL proposes to expand the maximum duration of rest and recuperation qualifying exigency leave from five to 15 days, noting that the leave remains limited to the actual amount of time granted to the military member.

The proposal also clarifies that employers may request a copy of the member’s rest and recuperation leave orders or other military documentation to certify the need for leave.

Proposals Relating to Military Caregiver Leave

Certification Provisions for Caregiver Leave

§ 825.310

The current regulations limit the type of healthcare providers authorized to certify a serious injury or illness for military caregiver leave to providers affiliated with the Department of Defense (DOD) (e.g., a Department of Veterans Affairs (VA) or DOD-TRICARE provider). The proposed regulations would eliminate this distinction and would allow any healthcare provider that is authorized under Section 825.125 to certify a serious health condition under the FMLA to also certify a serious injury or illness under the military caregiver provisions.

Because of this change, the DOL also proposes to remove the prohibition on second and third opinions on certifications of military caregiver leaves—at least as it relates to non-DOD/VA providers. That is, the DOL proposes in Section 825.310(d) to provide that second and third opinions are not permitted when the certification has been completed by one of the types of DOD/VA authorized healthcare providers identified in Section 825.310(a)(1)-(4), but second and third opinions are permittedwhen the certification has been completed by a healthcare provider that is not one of the types identified in Section 825.310(a)(1)-(4).

Definition of Covered Veteran for Caregiver Leave

§ 825.127

Since the current regulations do not define “covered servicemember” with regard to veterans, the DOL plans to define “covered veteran” as an individual who was discharged or released under conditions other than dishonorable at any time during the five-year period prior to the first date the eligible employee takes FMLA leave to care for the covered veteran.

That is, a veteran will be considered a covered veteran under FMLA if he or she was a member of the Armed Forces within the five-year period immediately preceding the date the requested leave is to begin. If the leave commences within the five-year period, the employee may continue leave for the applicable “single 12-month period,” even if it extends beyond the five-year period. This interpretation may exclude veterans of previous conflicts (Gulf War veterans) and may exclude certain veterans of the War in Afghanistan and Operation Iraqi Freedom, depending on the veteran’s discharge date and the date the eligible employee’s leave is to begin.

Definition of Serious Injury or Illness

§ 825.127

In the NPRM, for both current members of the Armed Forces and covered veterans, a serious injury or illness that existed before the beginning of the military member’s active duty and was aggravated by serving in the line of duty on active duty includes both conditions that were noted at the time of entrance into active service and conditions that the military was unaware of at the time of entrance into active service but that are later determined to have existed at that time. A preexisting injury or illness will generally be considered to have been aggravated by service in the line of duty on active duty where there is an increase in the severity of such injury or illness during service, unless there is a specific finding that the increase in severity is due to the natural progression of the injury or illness.

In addition, and because the FY 2010 NDAA requires the DOL to define a qualifying serious injury or illness for a veteran, the DOL proposes a new Section 825.127(c)(2) that would define serious injury or illness for a covered veteran with three alternative definitions set out in paragraphs (c)(2)(i), (c)(2)(ii), and (c)(2)(iii).

  • Definition 1: Proposed Section 825.127(c)(2)(i) defines a serious injury or illness of a covered veteran as a serious injury or illness of a current servicemember, as defined in Section 825.127(c)(1), that continues after the servicemember becomes a veteran. Thus, if a veteran suffered a serious injury or illness when he or she was an active member of the Armed Forces and that same injury or illness continues after the member leaves the Armed Forces and becomes a veteran, the injury or illness will continue to qualify as a serious injury or illness warranting military caregiver leave.
  • Definition 2: Proposed Section 825.127(c)(2)(ii) defines a serious injury or illness for a covered veteran as a physical or mental condition for which the covered veteran has received a VA Service Related Disability Rating (VASRD) of 50% or higher and such VASRD rating is based, in whole or part, on the condition precipitating the need for caregiver leave. The DOL’s review indicates that a VASRD disability rating of 50% or higher encompasses disabilities or conditions such as amputations, severe burns, post traumatic stress syndrome, and severe traumatic brain injuries. However, the DOL notes that there are injuries that do not qualify as creating a total disability under the VASRD system that will qualify as a serious injury or illness for military caregiver leave. For example, burns resulting in distortion or disfigurement (see 38 C.F.R. § 4.118) or psychological disorders resulting from stressful events (see 38 C.F.R. § 4.129) occurring in the line of duty on active duty may not result in a VASRD rating of 60% or higher, but nonetheless may be severe enough to substantially impair a veteran’s ability to work and therefore should be considered qualifying injuries or illnesses. The DOL is particularly concerned that military caregiver leave be available to family members of veterans suffering from, or receiving treatment for, such injuries or illnesses, which may include continuing or follow-up treatment for burns, including skin grafts or other surgeries, and amputations, including prosthetic fittings, occupational therapy, and similar care.
  • Definition 3: Proposed Section 825.127(c)(2)(iii) is the third alternative definition of a serious injury or illness for a covered veteran; it covers injuries and illnesses that are not technically within the definitions proposed in paragraph (c)(2)(i) or (ii), but are of similar severity. The DOL proposes to define a serious injury or illness for a covered veteran in the third alternative as a physical or mental condition that either substantially impairs the veteran’s ability to secure or follow a substantially gainful occupation by reason of a service-connected disability, or would do so absent treatment. This proposed definition is intended to replicate the VASRD 50% disability rating standard under paragraph (c)(2)(ii) for situations in which the veteran does not have a service-related disability rating from the VA. The DOL expects that, when making determinations of serious injury or illness under this proposed definition, private healthcare providers will do so in the same way they make similar determinations for Social Security Disability claims and Workers’ Compensation claims. The DOL stresses that this definition is meant to comprehensively encompass traumatic brain injuries, post traumatic stress disorder, and other such conditions that may not manifest until sometime after the member has become a veteran.

Additionally, the DOL seeks comments on whether it should make a rule that veterans who qualify for enrollment in VA’s Program of Comprehensive Assistance for Family Caregivers automatically meet the requirement of having a serious injury or illness.

Proposals Affecting Airline Flight Crews

Effective December 21, 2009, the AFCTCA provides that an airline flight crew employee will meet the hours of service eligibility requirement if he or she has worked or been paid for not less than 60% of the applicable total monthly guarantee (or its equivalent) and has worked or been paid for not less than 504 hours (not including personal commute time or time spent on vacation, medical, or sick leave) during the previous 12 months. Airline flight crew employees continue to be subject to the FMLA’s other eligibility requirements.

The DOL proposal includes provisions to align existing regulations with the passage of the AFCTCA. The proposal also does the following:

  • Defines monthly guarantees for airline employees and “line holders” (e.g., flight crew employees who are not on reserve status). For airline employees who are on reserve status, the applicable monthly guarantee means the number of hours for which an employer has agreed to pay the employee for any given month. For line holders, the applicable monthly guarantee is the minimum number of hours for which an employer has agreed to schedule such employee for any given month.
  • Defines how to calculate “hours worked” and “hours paid.”  Airline flight crew employees may become eligible under the FMLA (as amended by the AFCTCA) if they have either the required number of “hours worked” or “hours paid.” The DOL proposes to base the number of hours that an airline flight crew employee has worked on the employee’s duty hours during the previous 12-month period. Hours paid, according to the DOL, are routinely tracked by most airlines’ payroll systems.
  • Adds recordkeeping requirements for employers of airline flight crews. The requirements include all the records required of other employers under the FMLA, plus any records or documents that specify the applicable monthly guarantee for each type of employee to whom the guarantee applies, including any relevant collective bargaining agreements or employer policy documents that establish the applicable monthly guarantee, as well as records of hours scheduled, in order to be able to apply the leave calculation principles contained in proposed Section 825.205(d).

Other Proposed Changes Universal to the FMLA

Increments of Intermittent FMLA Leave

§ 825.205

The current Section 825.205(a) defines the minimum increment of FMLA leave to be used when taken intermittently or on a reduced schedule as an increment no greater than the shortest period of time that the employer uses to account for other forms of leave, provided that it is not greater than one hour. The DOL intends to emphasize that an employee’s entitlement should not be reduced beyond the actual leave taken and therefore proposes to add language to paragraph (a)(1) stating that an employer may not require an employee to take more leave than is necessary to address the circumstances that precipitated the need for leave. However, the DOL underscores that this principle remains subject to the rest of the rule, including the increment of leave rule. Thus, this change in the rules does not necessitate action for any employer already complying with the shortest increment rule.

The DOL notes that if an employee elects to substitute paid leave for the unpaid leave time offered under the FMLA, and the employer has a policy of offering paid leave in larger increments of time than unpaid leave, the employer can then require the employee to use more FMLA leave than necessary for the purpose of the leave in order to get the benefit of wage replacement. However, the employee can always elect to take the shorter increment of leave without pay to avoid drawing down the FMLA entitlement.

The DOL further proposes to clarify that the additions to Section 825.205(a) underscore the rule that if an employer chooses to waive its increment of leave policy in order to return an employee to work at the beginning of a shift, the employer is likewise choosing to waive further deductions from the FMLA entitlement period. In other words, if the employee is working, the time cannot count against FMLA time, no matter what the smallest increment of leave may be.

The DOL also proposes to remove the language in Section 825.205(a) allowing for varying increments at different times of the day or shift in favor of the more general principle of using the employer’s shortest increment of any type of leave at any time

Currently, Section 825.205(a)(2) includes a provision on physical impossibility, which provides that where it is physically impossible for an employee to commence or end work midway through a shift, the entire period that the employee is forced to be absent is counted against the employee’s FMLA leave entitlement. The DOL proposes to do either of the following:

  • Delete this provision.
  • Add language emphasizing that it is an employer’s responsibility to restore an employee to his or her same or equivalent position at the end of any FMLA leave as soon as possible.

If the DOL retains the provision as modified, it offers the following example: If after three hours of FMLA leave use it was physically possible to restore a flight crew employee to another flight, the employer would be required to do so. If, however, no other flight is available to which the employee could be assigned, or no other equivalent work is available, restoration could be delayed and the employee’s FMLA entitlement reduced for the entire period the employee is forced to be absent.

The DOL also proposes to clarify that the rule stated in Section 825.205(c), which addresses when overtime hours that are not worked may be counted as FMLA leave, applies to all FMLA qualifying reasons, not just serious health conditions.

The DOL further proposes to add Section 825.205(d), which will provide a methodology for calculating leave for airline flight crew employees.

Recordkeeping Requirements

§ 825.300

The DOL proposes adding a sentence to Section 825.300 reminding employers of their obligation to comply with the confidentiality requirements of the Genetic Information Nondiscrimination Act of 2008 (GINA). To the extent that records and documents created for FMLA purposes contain “family medical history” or “genetic information” as defined in the GINA, employers must maintain such records in accordance with the confidentiality requirements of Title II of GINA. The DOL notes that GINA permits genetic information, including family medical history, obtained by the employer in FMLA records and documents to be disclosed consistent with the requirements of the FMLA

Conclusion

With most employers having taken the position that the veteran’s provisions went into effect when the FMLA was amended in 2009, little action is called for at this time. However, employers should take this opportunity to review their FMLA policy, and should be aware that the DOL may take issue if a qualifying exigency for a veteran is counted against an employee’s FMLA entitlement such that the employee is later restricted in taking another leave. Further, employers should consider whether they wish to provide comments to the DOL during the comment period. Beyond that, most employers need only “watch and wait” until the DOL finalizes this rulemaking process to make tweaks to existing policies. Nevertheless, the DOL’s NPRM serves as a good reminder to employers to ensure that their FMLA policies incorporate the 2009 statutory changes.

Copyright © 2012 by Morgan, Lewis & Bockius LLP.

2012 Young Professionals in Energy International Summit

The National Law Review is pleased to bring you information on the 2012 Young Professionals in Energy International Summit:

2012 YOUNG PROFESSIONALS IN ENERGY INTERNATIONAL SUMMIT

April 23-25, 2012
Planet Hollywood Resort & Casino
Las Vegas, Nevada

About the YPE:

Young Professionals in Energy (“YPE”) is the first and only interdisciplinary networking and volunteer organization for people in the global energy industry – a place where bankers can connect with engineers, accountants with geologists and so on. Our mission is to provide a forum for knowledge sharing and camaraderie among future leaders of the energy industry.

The event will feature panel discussions and presentations by YPE members from around the world on such vital energy issues as the world oil supply, shale, renewable energy, career issues and funding new energy projects.

Confirmed speakers include YPE members from the American Petroleum Institute, ExxonMobil, Fulbright & Jaworski L.L.P. the India Ministry of Petroleum and Natural Gas, the Nevada Institute for Renewable Energy Commercialization, Pemex, the University of Southern California and the U.S. Dept. of Commerce.

Highlighting the three-day conference is a keynote speech by Daniel Yergin, author of the best-selling “The Quest: Energy, Security and the Remaking of the Modern World (www.danielyergin.com).

Secured Lender Successfully Invokes Seldom Used Tool to Protect Collateral in Bankruptcy

Recently The National Law Review published an article about Protecting Collateral in Bankruptcy by Mark A. Berkoff, Robert Radasevich, Nicholas M. Miller, William Choslovsky and Kevin G. Schneider of Neal, Gerber & Eisenberg LLP:

The commercial real estate market continues to struggle.  Beyond poor market conditions, financing difficulties and other well known issues of late, many mortgage holders, realizing that their properties are worth significantly less than their mortgage balance, are walking away from the properties or otherwise looking for a way to reduce their mortgage obligation to the property’s current depressed market value, including through a chapter 11 bankruptcy process.  Ultimately, the question in that situation becomes:  who will take the loss on their balance sheet—the lender or the borrower?  Often, the loss falls on the lender.

On January 19, 2012, however, the United States Court of Appeals for the Seventh Circuit issued an opinion, authored by Judge Richard A. Posner, representing a significant victory for undersecured lenders holding distressed real estate collateral.  In that case, In re River East Plaza, LLC, No. 11-3263, — F.3d —-, 2012 U.S. App. LEXIS 1048 (7th Cir. Jan. 19, 2012), the subject property was the River East Art Center located near Navy Pier in downtown Chicago.  Neal, Gerber & Eisenberg LLP (“NGE”) was lead counsel to the property owner’s senior secured lender, LNV Corp., an affiliate of Beal Bank.

The facts are straightforward:  When the building’s owner and mortgagor, River East Plaza, LLC (“River East” or the “Debtor”), defaulted on its mortgage, LNV successfully pursued difficult foreclosure proceedings in state court and obtained a foreclosure sale order in February 2011, nearly two years after River East defaulted on its mortgage.  Then, just 11 hours before the scheduled foreclosure sale, River East filed for chapter 11 bankruptcy protection, automatically halting the foreclosure sale.

Because this was a single asset real estate (“SARE”)[1] case, River East was subject to special Bankruptcy Code rules designed to put pressure on SARE debtors to move their cases quickly.

Once a Debtor files for bankruptcy, an estate is created and the Debtor is protected by an automatic stay that prohibits creditors of the Debtor from taking certain actions to collect debts, enforce remedies or complete litigation without obtaining relief from the automatic stay from the Bankruptcy Judge.  Among other things, in a SARE case, a Debtor has only 90 days to start making monthly mortgage payments to its lender or to file a plan of reorganization “that has a reasonable possibility of being confirmed within a reasonable time”.  If one of these conditions isn’t satisfied, then the Bankruptcy Judge must modify the automatic stay and may allow the lender to pursue its state court remedies (i.e. complete its foreclosure).  11 U.S.C. § 362(d)(3).

In this case, however, the Debtor did not make any mortgage payments to the lender within 90 days after the bankruptcy filing.  Therefore, the sole issue was whether this Debtor had timely filed a plan of reorganization that had a “reasonable possibility of being confirmed within a reasonable time.”  Id.  The Debtor filed a plan that, in effect, proposed to cash out the lender at a very distressed price, well below LNV’s $38.3 million claim.  While it was undisputed that the value of the real estate had fallen precipitously in the current real estate recession and that the property was “underwater,” the Debtor valued the property at what LNV viewed as an artificially low $15 million (and also valued LNV’s claim, after accounting for taxes and mechanics liens, at $13.5 million).  Because LNV was unwilling to accept a lowball cash out, it objected to the Debtor’s plan andalso made the strategic decision to make what is called a “section 1111(b) election” – a provision that has been in the Bankruptcy Code for over 30 years, but is seldom invoked.

The statute is awkwardly worded, confusing and hard to interpret, which may explain why it is seldom invoked, but the key takeaway is that section 1111(b):

  1. Allows a secured creditor to “elect” to have its entire claim treated as secured (even if the lender is undersecured (i.e. claim is worth $38.3 million and debtor (borrower) believes the lender’s secured interest in the collateral is worth only $13.5 million));
  2. Allows the secured lender to retain its lien on the property until that secured claim is paid in full;
  3. Is appropriate when the secured creditor believes the property is undervalued and will appreciate, and when the lender believes the reorganized debtor may later default under its confirmed plan; BUT
  4. The secured creditor, in making the election, must agree to waive its undersecured deficiency claim (in this case approximately $25 million).

As the Seventh Circuit stated:

. . . an under-secured creditor who decides, as LNV has decided, to participate in his debtor’s bankruptcy proceeding has a secured claim for the value of the collateral at the time of bankruptcy and an unsecured claim for the balance.  11 U.S.C. § 1111(b)(1)(A).  But generally he can exchange his two claims for a single secured claim equal to the face amount of the unpaid balance of the mortgage.  §§ 1111(b)(1)(B), (2).  LNV made this choice, so instead of having a secured claim for $13.5 million and an unsecured claim for $24.8 million it has a secured claim for $38.3 million and no unsecured claim . . .

The swap is attractive to a mortgagee who believes both that the property that secures his mortgage is undervalued and that the reorganized firm is likely to default again . . .

River East Plaza, 2012 U.S. App. LEXIS 1048, at *7-8.

The Debtor responded to LNV’s § 1111(b) election by filing an amended plan that offered LNV the option of receiving (1) a cash out of the secured portion of its claim at the distressed price of approximately $13.5 million, plus a dividend of 4% on LNV’s $25 million deficiency claim (meaning an additional $1 million); or(2) approximately $13.5 million in 30-year U.S. Treasury bonds paying approximately 3% interest (which, “through the magic of compound interest”, would pay LNV a total of $38.3 million in 30 years).

In so doing, the Debtor proposed to retain the property, to strip LNV’s lien from the property and, instead, give LNV a lien on the long-term Treasury Bonds so that the Debtor could obtain construction financing, develop the property, realize the benefit of any appreciation or improvement in the real estate market and, presumably, sell the property for a very tidy profit in a few years.  LNV, meanwhile, would be effectively cashed out for $13.5 million on its $38.3 million claim.

Needless to say, LNV vehemently opposed this tactic and immediately filed a motion to terminate the automatic stay on the grounds that the Debtor’s amended plan “was not likely to be confirmed in a reasonable time” because the Debtor was proposing to retain the property while stripping LNV’s lien in violation of section 1111(b) and other plan-related provisions of the Bankruptcy Code.  LNV argued that its § 1111(b) election ensured it the right to retainitslien on the real estate and benefit from any appreciation in the real estate market until its claim was paid in full.

The Debtor argued that it was able to do this because, among other things, giving LNV the lien on Treasury Bonds was giving LNV the “indubitable equivalent”[2] of its lien on the real estate, which the Bankruptcy Code allows under certain circumstances when a plan proponent (normally the debtor) attempts to cram a plan down the throat of an objecting secured creditor.[3]  LNV countered that even ifthe Debtor could use the “indubitable equivalent” standard of cram down, a lien on stagnant 30-year Treasury Bonds was not the indubitable equivalent of a lien on real estate that can and does fluctuate wildly in value.

Bankruptcy Judge Wedoff agreed with LNV and lifted the automatic stay to allow the foreclosure to proceed, and he also dismissed the bankruptcy case.  River East successfully requested a direct appeal to the Seventh Circuit, which ultimately affirmed Bankruptcy Judge Wedoff’s decisions.

In a key ruling for secured creditors, the Seventh Circuit determined that the Debtor had delayed the secured creditor long enough and that Judge Wedoff appropriately lifted the stay and dismissed the bankruptcy case.  The Seventh Circuit also determined that the proposed replacement lien on 30-year Treasury Bonds was not the indubitable equivalent of LNV’s lien on the property because the risk profiles of the two forms of collateral were not equivalent.

Judge Posner observed that:

River East argues that the reason LNV chose to convert the entire $38.3 million debt that it was owed to a secured claim is that it wanted to thwart the bankruptcy proceeding.  No doubt.  LNV wanted to foreclose its mortgage and doubtless expected to be the high bidder at the foreclosure sale and thus become the building’s owner and so the sole beneficiary of any appreciation if and when the real estate market recovered.  But there is nothing wrong with a secured creditor’s wanting the automatic stay lifted so that it can maximize the recovery of the money owed it.

* * *

Banning substitution of collateral indeed makes good sense when as in the present case the creditor is undersecured . . .

River East, 2012 U.S. App. LEXIS 1048, at *12.

The Court also explained that:

And so it comes as no surprise that the lien on the Treasury bonds proposed by River East would not be equivalent to LNV’s retaining its lien on the building.  Suppose the building turns out to be worth $40 million five years from now, yet River East, having borrowed heavily in the interim to finance improvements that bring the building’s value up to that level, defaults.  With its lien intact and the bankruptcy court unlikely in this second round of bankruptcy to stay foreclosure, LNV would be able to foreclose, and so would be paid in full.  In contrast, if its lien were transferred to the substituted collateral, it would have to wait another 25 years to recover the $38.3 million owed it.

Id. at *14.

Judge Posner summed up the case as follows:

River East’s aim may have been to cash out LNV’s lien in a period of economic depression and reap the future appreciation in the building’s value when the economy rebounds.  Such a cashout is not the indubitable equivalent of a lien on the real estate, and to require it would be inconsistent with section 1111(b) of the Code, which allows the secured creditor to defeat such a tactic by writing up his secured claim to the full amount of the debt, at the price of giving up his unsecured claim to the difference between the current value of the debt and of the security.

Id. at *17 (emphasis added).

So, at least in this jurisdiction, secured lenders holding distressed real estate as collateral when a borrower files a SARE chapter 11 case now have another arrow in their quiver that can be used and must be considered.  Depending on the facts of your particular case, the §1111(b) election may just be “checkmate” to a debtor that is (i) frustrating a secured lender’s remedies on a defaulted mortgage, (ii) stringing out the lender in foreclosure court and then filing a bankruptcy petition on the eve of foreclosure to attempt to retain their property, and (iii) attempting to cash out the secured lender at a historically low price or give it inferior collateral in an effort to cram down a bankruptcy plan that hurts the lender.  Such “tactics” will no longer be tolerated in the Seventh Circuit.

[1]           The Bankruptcy Code defines SARE as a nonresidential property, or a residential property containing five or more apartments or other residential units, “on which no substantial business is being conducted by a Debtor other than the business of operating the real property and activities incidental thereto.”  11 U.S.C. §101(51B).

[2]           The Bankruptcy Code does not define indubitable equivalence.

[3]           A complete discussion of the parameters of “cram down,” which is technically complicated under the Bankruptcy Code, is beyond the scope of this article.

© 2012 Neal, Gerber & Eisenberg LLP.

Cutting Edge Issues in Asbestos Litigation Conference

The National Law Review would like to advise you of the upcoming Perrin Conference regarding Cutting-Edge Issues in Asbestos Litigation:

Thursday, March 1st – Friday, March 2nd, 2012
Beverly Wilshire, A Four Seasons Hotel
Beverly Hills, CA

The Anatomy of Data Risk Management

An article by Risk and Insurance Management Society, Inc. (RIMS) recently found in The National Law Review focused on Data Risk Management:

Think of data as a living organism.

Just like a human body, data has various components and life support systems that must be maintained to ensure the whole thrives and survives. You can think of a data risk specialist as a doctor trying to keep the organism healthy through its various life stages.

Data, our hypothetical patient, (you’re welcome Star Trek fans) needs a safe and healthy environment, a supportive lifestyle and good hygiene. Just as a doctor has to consider external threats (“do you smoke?”) so does the data risk manager.

Let’s look at what this all means, and how this philosophy can be applied to your businesses policies and practices.

Data, our hypothetical patient, has three basic forms: paper, electronic and human memory.  A good data risk management plan must consider all three.

Controlling paper and electronic data is what we think of most when considering data security. This is your standard (or what should be standard) security policy, access controls procedures, system audits, and the like. It’s where security planning meets IT.

Human memory is a little more elusive. Education, security training and a reward-demotion plan can help control human errors, as can confidentiality agreements, and project-specific security contracts. These are the tools of teachers and lawyers. Generally speaking, there are four key rules to protecting data in all its forms:

  1. Be stingy with sensitive data, internally and externally;
  2. Provide access to data on a need-to-know basis;
  3. Provide access only to that specific data, rather than entire data sets;
  4. Be deliberate in how data is handled, used and shared.

Data has a life cycle. If your data doesn’t, it should. Whether it’s government secrets or an online shopper’s credit card number, data is received or created within your company’s computer systems. It is used, maintained and stored. It is archived or destroyed. That data, in all cases, has three basic states: in action, in motion or at rest. Take the credit card number example: that information can be used, the card charged, or moved to another computer system, or archived. Use, motion, rest.

There are four fundamental rules regarding the life cycle of data:

  1. If the organization doesn’t need it, don’t collect it.
  2. If data must be collected, collect only what is needed.
  3. If data is needed, control it and encrypt it.
  4. When data is no longer needed, get rid of it – SECURELY.

Now that we know what data looks like (paper, electronic, mnemonic) and how it lives (in action, in motion, at rest) we should consider those external threats, namely data breaches. A data breach is an incident (or series thereof) in which sensitive, protected or confidential information has potentially been viewed, stolen or used with unauthorized access. This can be a hacker attack, an internal company mistake that results in exposed information or, in some cases, corporate or government espionage. A data breach can be anything that jeopardizes data.

These threats range from simple user negligence, operating or systemic issues, all the way to highly complex criminal attacks launched against your organization. As anyone who follows the tech news knows, sensitive consumer and business information has become a criminal commodity.

With this hostile environment in mind, it is imperative for the business to plan and prepare not only for the protection of their information, but also for the response and recovery of their data and business in the event of a data breach. For a data manager or security professional to fail to issue such a warning would be akin to that doctor not asking about smoking.

At the end of the day, data as an organism is more than an extended metaphor. It’s a means to look at your company’s data products in an abstract way and understand how it operates. This, in turn, will allow you to develop the proper health plan. Just like with our health, there is no single wonder pill. But there are data doctors out there who can analyze your businesses’ risk posture and recommend ways to get it in shape.

Brian McGinley, senior vice president of data risk management at Identity Theft 911 offers this well-written piece on the timely topic.

Risk Management Magazine and Risk Management Monitor. Copyright 2012 Risk and Insurance Management Society, Inc.

2012 Launching & Sustaining Accountable Care Organizations Conference

The National Law Review is pleased to bring you information on the Launching & Sustaining Accountable Care Organizations Conference will be a two-day, industry focused event specific to CEOs, COOs, CFOs, CMOs, Vice presidents and Directors with responsibilities in Accountable Care Organizations, Managed Care and Network Management from Hospitals, Physician Groups, Health Systems and Academic Medical Centers.

By attending this event, industry leaders will share best practices, strategies and tools on incorporating cost-sharing measures in a changing healthcare landscape to strengthen the business model and ensure long-term success.

Attending This Event Will Enable You to:
1. Understand the initial outcomes and lessons learned from launching ACOs, with a focus on how to sustain these partnerships in the future
2. Hear from the early adopters of ACOs or similar cost-reducing partnerships and understand their initial operational and implementation challenges.
3. Learn about the final regulations regarding ACOs and their impact on those who want to initiate the formation process
4. Gain a clear understanding of regulatory issues and accreditation processes
5. Conquering initial hurdles for establishing an ACO
6. Gain knowledge from newly-formed ACOs
7. Ensure longevity by establishing a robust long-term plan

Transfer of Ownership Requires a Written Assignment

Recently in The National Law Review was an article by Jeremy T. Elman of McDermott Will & Emery regarding the Transfer of Patent Ownership:

Addressing the issue of patent ownership based on contractual assignments, the United States Court of Appeals for the Federal Circuit affirmed the district court’s decision dismissing patent ownership claims where a consulting agreement contained no express assignment language requiring defendant to assign the patents-in-suit to plaintiffs.Abbott Point of Care, Inc. v. Epocal, Inc., Case No. 11-1024 (Fed. Cir., Jan. 12, 2012) (Rader, C.J.)

Defendant-appellee Epocal was founded by Dr. Imants Lauks (Lauks), who was previously an employee of a predecessor company of plaintiff-appellant Abbott, with whom he signed three contracts (two employment agreements and one consulting agreement).  Both Epocal and Abbott claim to own the patents-in-suit, which cover systems for testing blood samples.Epocal is the assignee of both patents.  Lauks’ 1984 employment agreement contained language assigning all inventions to Abbott’s predecessor company (Integrated Ionics), but his 1999 consulting agreement, although it stated that the 1984 agreement remained in effect for work done while Lauks was an employee, was “silent” as to assignments of any inventions.  Lauks filed applications for these two patents in 2001, after which Abbott sued Epocal and claimed ownership of the patents pursuant to the 1984 agreement.  Epocal claimed ownership pursuant to the 1999 consulting agreement.After the district court granted Epocal’s motion to dismiss, Abbott appealed.

After noting that the Court reviews decisions on standing and contracts without deference, the Federal Circuit noted that Abbott had the burden of showing ownership and concluded that under New Jersey law, where the contract was apparently signed, the 1984 employment agreement ceased upon the execution of 1999 consulting agreement.  The 1999 consulting agreement expressly stated that Lauks resigned from his position and the 1999 consulting agreement then refers to Lauks as a “Senior Consultant,” i.e., no longer an employee.  The Court found that the 1999 consultant agreement did not specify that the entire 1984 employment agreement remained in effect, but only the confidentiality provisions.  The 1999 consulting agreement was silent as to any assignment of inventions, but “recognized and allowed Lauks to pursue other, non-conflicting interests.”  The Court thus found that there was an express recognition that Lauks’ agreement in the 1984 employment agreement to assign his inventions had ceased.   The Court rejected the contention that Lauks had a duty to continue to assign his inventions to Abbott, finding that proposed interpretation to be in conflict with the express language of the 1999 consulting agreement.  The Court thus held that Epocal was the owner of the patents-in-suit and affirmed the district court’s dismissal of Abbott’s infringement claim.

Practice Note: Companies should carefully examine patent assignment obligations of their employees or consultants and, in connection with corporate changes, examine whether prior assignment agreements will impose continuing assignment obligations after the employee or consultant has ceased employment with the company.

© 2012 McDermott Will & Emery

7th Drug & Medical Device Litigation Forum, 7-8 Mar 2012, Philadelphia

The National Law Review is pleased to inform you of the 7th Drug & Medical Device Litigation Forum: Implementing Appropriate Litigation Readiness and Costs Management Policies That Ensure An Effective Defense at Trial 
Event Date: 7-8 Mar 2012
Location: Philadelphia, PA, United States
Key conference topics
  • Mitigate and maintain costs associated with litigation
  • Gain judical insight on drug and medical litigation and its recent developments
  • Build better relationships with outside counsel in order to reduce the miscommunciation factor
  • Understand the limitations of marketing and advertising as it relates to emerging social media issues
  • Learn the latest on medical device product liability

Conference focus

 Pharmaceutical and medical device manufacturers have faced a growing array of legal challenges this year. With the increase of mass tort litigation, as it relates to product liability, pharmaceutical and medical device manufacturers must be prepared to defend the increasingly sophisticated, well-funded and multi-jurisdictional product liability campaigns against their companies.

The 7th Drug and Medical Device Litigation Conference will be a two-day, industry focused event specific to those within Drug & Medical Device Litigation, Product Liability and Regulatory Affairs in the Medical Device, Biotech and Pharmaceutical industries.

By attending this event, industry leaders will share best practices, strategies and tools on incorporating litigation readiness, utilizing cost efficient litigation strategies and accurately managing policies to ensure an effective defense at trial.

Attending This Event Will Enable You to:
1. Review the current landscape of drug and medical device litigation
2. Learn strategies in settlements and mass tort issues
3. Manage litigation expenses in order to effectively manage costs
4. Review recent case rulings, including the Mensing and Levine cases
5. Take a view from the bench: explore drug and medical device litigation
from a judicial point of view
6. Tackle product liability issues and challenges
7. Uncover the risks for drug and medical device companies when leveraging social media for marketing and advertising campaigns

With a one-track focus, the 7th Drug and Medical Device Litigation Conference is a highly intensive, content-driven event that includes case studies, presentations and panel discussions over two full days.

This is not a trade show; our Drug and Medical Device Litigation conference series is targeted at a focused group of senior level leaders to maintain an intimate atmosphere for the delegates and speakers. Since we are not a vendor driven conference, the higher level focus allows delegates to network with their industry peers.

Testimonials:

“Great selection & breadth of speakers. Uniformly high quality of presentations. Intimate nature of meeting provided excellent opportunities for networking” – Abbott

“Great venue to learn and exchange best practices. More importantly how to leverage lesions learned from others.” – Baxter

“One of the best meetings I’ve attended. Excellent organization, topics and speakers. Overall extremely well done.” – Sanofi Aventis

marcusevans


Indiana Becomes the First "Right-to-Work" State in the Rust Belt

The National Law Review recently published an article regarding Right-to-Work by Lisa Carey-Davis of Schiff Hardin LLP:

Indiana Governor Mitch Daniels signed the Right-to-Work Act, making Indiana the first Rust Belt state — and the first state in more than ten years — to adopt right-to-work legislation. With this law, Indiana joins 22 other states, mostly in the southern and western United States, that prohibit employers from requiring employees to become or remain union members and to pay dues or fees to the union as a condition for getting — and keeping — their jobs.

The Impact of the New Law in Indiana and Beyond

Supporters of the new law contend that because it offers employers “more flexibility and lower hiring costs,” more businesses will now choose to call Indiana home. Republican House Speaker Brian Bosma declared that the Right-to-Work Act “announces, especially in the Rust Belt, that we are open for business.”

Some suggest that other Rust Belt states may soon follow Indiana’s example. State Representative Jerry Torr, who sponsored Indiana’s bill, has predicted that two of Indiana’s more heavily unionized neighbors — Michigan (19%) and Ohio (14%) — will “fall like dominoes” in the wake of Indiana’s decision because “they will have to in order to compete.” Mike Shirkey, a Republican state representative from Michigan, admitted that he was disappointed that Indiana beat Michigan to the punch, adding “now a border state is going to establish a leverage position in being attractive to businesses.”

Currently, roughly 11% of Indiana’s workforce is unionized, primarily in the auto and steel industries. If history is any indication, that number may soon decline. On average, right-to-work states have significantly lower rates of unionization than states without such laws. In 2010, for example, the average rate of unionization was seven percent in right-to-work states, while the average in the rest of the states was more than double at 15%.

The Right-To-Work Act was passed by Indiana’s Republican-controlled legislature over bitter opposition from Democratic lawmakers, including a walkout by House Democrats that denied Republicans for several weeks the quorum required to take action on the bill. Democrats also proposed an amendment that would have put a Right-to-Work referendum on the November ballot, but that amendment was voted down. Unlike Ohio — where a short-lived statute that stripped public sector employees of collective bargaining rights was struck down last year by voters — ballot initiatives in Indiana must be approved by the legislature and cannot be introduced by voters. Therefore, a referendum vote on Indiana’s new law is unlikely.

What the New Law Means for Indiana Employers

The new law contains a grandfather clause that exempts any collective bargaining agreement already in effect on March 14, 2012. Until those grandfathered contracts expire, employers may continue to abide by and enforce union security provisions contained therein by requiring employees to join unions and to pay dues as a condition of employment.

But contracts “entered into, modified, renewed, or extended” after the new law takes effect on March 14 cannot contain such requirements. Specifically, the law prohibits employers from requiring employees to join or remain members of any labor organization, and from requiring them to pay dues, fees or “other charges of any kind” to such organizations. If a contract violates any of these prohibitions, the entire contract — not just the offending clause — is “unlawful and void” according to the statute. In addition, any Indiana employer that violates the law may be subject to both criminal and civil penalties and may be sued by an individual who claims to have been injured by the employer’s actual or threatened violation of the law.

Employers are not required to inform employees about the change in the law, but some may wish to do so.

© 2012 Schiff Hardin LLP

The 15th Annual ABA National Institute on the Gaming Law Minefield Feb 24-25 LasVegas

The 2011 Gaming Law Minefield program is specifically designed to provide in-depth coverage and discussion of the cutting-edge legal, regulatory, and ethical issues confronting both commercial and Native American gaming. Attorneys, compliance officers, Native American leaders, regulators, and legislators will all provide invaluable insights into current trends, opportunities and obstacles in the gaming industry. The program’s subject matter includes new gaming technology, increased IRS CTR and SAR compliance audit activity, Internet gaming, Native American gaming, breaking hot topics in the gaming industry, latest developments in dealing with problem gamblers, and a two-hour CLE-certified ethics program.

The Gaming Law Minefield program constitutes one of the most comprehensive, state-of-the-law gaming programs available. Program attendees have consistently rated the program as a valuable educational experience that provides participants with the opportunity to meet and talk with a wide variety of gaming law experts and leading state and Native American regulators.

Early Bird Registration ends January 24th. For More Information:  Click Here: