Tag: Regulatory

Lessons Learned about Real Estate Lending in this Last Recession

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We all know real estate, and especially real estate lending, was heavily affected by the recession. Now that banks are starting to lend again, what can we learn from those bad years to set us on a better course for the future?

1. Real estate lending in the last cycle. We learned problem loans arose principally on loans with high loan to value ratios, or based on projections that were too optimistic, or in geographic markets where the lender did not have good market knowledge, and especially where the bank became more of a joint venturer with the developer. Smaller community banks especially felt more pressure to help home grown companies expand.

2. Problems exposed in the recession and recovery.

  • Appraisal methodology. Through the hard lessons of foreclosure and bankruptcy we learned more acutely about appraisal methodology, and the weaknesses of this methodology in troubled times became transparent. We learned that, although appraisers are not supposed to take “forced sales” into account in calculating fair market value, when the market is thin, “forced sales” may be the only comparables.
  • Exercise of developer’s rights. We also learned a developer’s decisions can have a drastic impact on a lenders’ ability to recover collateral, and on holding costs during workout or foreclosure. This was especially clear in cases where a condominium developer suddenly expanded the condominium into future phases, even when units were not selling, thus creating many separate tax key numbers with separate real estate tax bills, separate condominium association assessments, and no means of reversing that decision except with unanimous or near-unanimous consent of all condo unit owners and their lenders.
  • Interstate Land Sale Act. Condo unit buyers attempting to cancel contracts to purchase condos whose value had fallen, started using the long-dormant Interstate Land Sale Act as a weapon, with increased liability to developers.
  • Priority of municipality’s rights under development agreements. The Baylake Bank case in Wisconsin highlighted the ability to challenge the priority of charges and obligations contained in municipal development agreements.
  • Drastic impacts to condominium and homeowners’ associations’ budgets. Failure of even a small percentage of condo unit owners or homeowners to pay their assessments resulted in grave difficulties in that association’s ability to function.
  • Foreclosing on less than all needed assets of a project. Lenders foreclosing on projects discovered they lacked the ability to make needed changes in the project to facilitate its resale and needed to negotiate with their delinquent borrowers to secure Declarant rights reserved in condo declarations, permits issued only in the borrower’s name, and necessary easements.

3. Reaction to market risks. In response to these risks exposed in the recession, parties in the real estate market took action.

  • Title insurance changes. In reaction to the sudden increase in title claims, title companies not only increased their fees substantially, but also reversed their practice of deleting the “creditor’s rights” exception in their policies.
  • Secondary mortgage market changes. In response to liability claims, Fannie Mae, Freddie Mac, the Department of Veterans Affairs and others modified their requirements for purchase of loans from primary lenders, which changed requirements for condominium declarations and strongly encouraged phasing of projects.
  • Lending changes. Lenders are now under more scrutiny and stiffer governmental oversight on all real estate loans.

Those of us who are involved in the commercial real estate world hope we are starting on a new cycle of expansion. However the “hangover” of this recession will require us to change our documents and practices for success in this new period.

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The Financial Crises in Detroit and Spain and a New Round of Deaccessioning Debates

Sheppard Mullin 2012

When public institutions are suffering from financial deficits, one question is usually raised: can they sell art to survive? In the museum world it is generally understood that you are to deaccession art only if the work is duplicative of another work in the collection, or for similar collections-related reasons, and the sale proceeds are used exclusively for collections activities. Therefore, for example, you cannot seek to sell art to obtain sufficient liquidity to meet any financial obligation, or make debt service payments. There is little government regulation on deaccessioning (for example, the NY Board of Regents has the power to provide limitations on deaccessioning on New York museums chartered after 1890). However, private institutions such as the American Alliance of Museums (“AAM”) and the Association of Art Museum Directors (“AAMD”) have adopted for their members certain policy guidelines on deaccessioning. Their members are subject to sanctions such as censure, suspension and/or expulsion in the event they do not follow these guidelines.

This is the debate currently happening in the city of Detroit, which has recently filed for bankruptcy, and countries in Europe such as Spain, where steep cuts in its budget have affected state-sponsored museums such as the Prado museum.

As for Detroit’s bankruptcy, some have argued whether the Detroit Institute of Arts (“DIA”) should sell its artwork, yielding an estimate of $2 billion (the city of Detroit has a $20 billion debt). The DIA has 600,000 annual visitors and a collection of approximately 65,000 artworks. Michigan’s attorney general, Bill Schuette, has stated that DIA’s artworks were ‘held in trust for the public’ and could only be sold for the purpose of acquiring new art. Others have claimed that the collection should be sold to refrain Detroit’s retired employees from losing part of their pensions.

From a bankruptcy law perspective, municipalities, unlike businesses, cannot be forced to liquidate their municipal assets (the concept which provides that if a debtor wishes to reorganize it must provide creditors with at least as much as they would get in liquidation does not apply to municipalities). A municipal restructuring plan cannot be approved unless it complies with state law, and as mentioned above, Michigan’s attorney general issued a non-binding opinion stating that the artworks were held in trust for the citizens of Michigan, and thus cannot be sold.

As for Spain, the Spanish Official Gazette has published the annual statements of the Prado museum and one thing is clear: art is not immune to Spain’s recession. Patronage from the Spanish government had a 28% drop (from approximately €6.6 million to €4.8 million) in the last 2 years. However, rather than deaccessioning, this drop has been set off by increasing its international loans. Therefore, the museum authorities allocated these foreign loans receipts as deemed patronage, and this has allowed the museum to stabilize its balance sheet. The annual statements report that the main private sponsors for temporary exhibitions were Axa, Telefónica, BBVA and La Caixa, who contributed a total aggregate amount of €625,000. However, the statements do not specify how much the museums actually invested in setting up such temporary exhibitions. The Contemporary Art Institute (Instituto de Arte Contemporáneo) has been criticizing the lack of transparency in museums and art galleries that receive sponsorship or other type of financial assistance from the state. This Institute has created standards of best practices for contemporary art museums (the “Standards”), which attempt to follow the path of the AAM’s National Standards and Best Practices for U.S. Museums (see http://www.aam-us.org/resources/ethics-standards-and-best-practices/standards and http://www.iac.org.es/seguimiento-del-documento-de-buenas-practicas/documento-de-buenas-practicas-en-museos-y-centros-de-arte).

Spain’s Ministry of Culture was actively involved in drafting these Standards, which were revised and signed in 2007 by the Ministry of Culture, the Contemporary Art Institute, and other prestigious institutions, such as ADACE (Association of Directors of Contemporary Art in Spain), CG (the Consortium of Contemporary Art Galleries), UAAV (the Association of Visual Artists), CCAV (the Board of Critics of Visual Arts), and UAGAE (the Association of Art Galleries of Spain). As in the United States, the Standards are voluntary. The pressure by funders, regulators, the press and the public may be considerable, but museums still choose to follow, or not, the Standards. As of this date, of all 50 museums ranked by the Contemporary Art Institute, only two museums comply with the Standards’ minimum requirements: the Museo Nacional Centro de Arte Reina Sofía and the Artium.

Spain is also trying to overcome the steep cuts in state subsidies and public grants for art institutions by enacting a bill that will heavily increase tax benefits for museum’s private donors (mirroring the French system) through the Patronage Act (Ley de Mecenazgo). If this bill is passed, tax deductions will increase from 25% to 70% for natural persons, and from 35% to 65% for legal persons. Moreover, small donations of less than €150 will be fully deductible. The aim is to achieve France’s success, where revenues increased from €150 million to € 683 million in a seven-year period (2004 to 2011).

In conclusion, the vast majority of museums are nonprofit and ask for public support in return for providing some kind of public good. Thus, it is essential that museums are broadly accountable for their conduct, in particular in times of recession.

Should they sell part of their collection, or should they choose Spain’s path? i.e. advocate for a subset of artworks in the collection to be sent on a 10-year tour (or less) to museums around the world, receiving a revenue stream while having part of its collection available for the public as a representative and emissary of the city of Detroit? Or is there another path?

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Lawsuits Against Creditors of NewPage

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The trustee for the litigation trust resulting from the NewPage Corporation bankruptcy has launched nearly 800 lawsuits against pre-bankruptcy creditors of NewPage Corporation seeking payment to the trust.

The lawsuits (also called adversary proceedings) have been filed in Delaware bankruptcy court by litigation trustee Pirinate Consulting Group LLC to recover allegedly preferential payments made in the months prior to the company’s Chapter 11 bankruptcy filing in September, 2011.

Much to the surprise of many who did business with the debtor prior to the bankruptcy filing, not only are they waiting for payment on amounts owed, but they will now face claims that they must give back monies previously received.

Defendants should know there are often defenses to these claims, including that the allegedly preferential payments were made in the ordinary course of business or that additional goods were shipped after those allegedly preferential payments were received. Upon receipt of a complaint, defendants should contact counsel knowledgeable about bankruptcy avoidance actions for assistance. Failure to respond to the adversary proceeding complaint in a timely manner, can result in a judgment and collection efforts by the litigation trustee.

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Who’s GINA and What Should I Know About Her? Re: Genetic Information Nondiscrimination Act

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GINA is not a who, but rather a what. The Genetic Information Nondiscrimination Act (“GINA”) was passed by Congress in 2008. GINA makes it illegal for employers with 15 or more employees to discriminate against employees or applicants on the basis of genetic information. Employers cannot lawfully inquire about (1) an individual’s genetic tests; (2) the genetic tests of an individual’s family members; or, (3) the manifestation of a disease or disorder in the family members of such an individual.

At the end of 2012, the Equal Employment Opportunity Commission (“EEOC”) announced in its Strategic Enforcement Plan that genetic discrimination would be a top priority over the next four years. The EEOC stuck to their word – in May, 2013, the EEOC settled its first lawsuit alleging GINA violations. The suit involved a fabrics distributor, Fabricut, Inc., who allegedly violated the Act by asking a woman for her family medical history in a post-offer medical examination. The company refused to hire the applicant after assessing that she had carpal tunnel syndrome, which led to Americans with Disabilities Act violations as well. The suit was settled for $50,000.

Shortly thereafter, the EEOC filed its second suit against The Founders Pavilion, Inc., a nursing and rehabilitation center. According to the EEOC suit, Founders conducted post-offer medical exams of applicants, which were repeated annually if the person was hired. As part of this exam, Founders requested family medical history, which is a form of information prohibited by GINA.

Employers should ensure that their policies related to employee medical information and any conducted medical exams comply with GINA. In addition, it would be wise for employers to update employee handbooks to state that discrimination on the basis of genetic information is prohibited.

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Second Circuit Rules Against Make-Whole Premium for Refinancing of Accelerated Debt

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The U.S. Court of Appeals for the Second Circuit has upheld a bankruptcy court’s decision enforcing indenture language providing for the automatic acceleration, without make-whole premium, of secured American Airline, Inc. notes upon American Airline Inc.’s bankruptcy filing.  The Second Circuit’s September 12 opinion generally follows that of the lower court, discussed in our February 20, 2013 blogpost, and likewise holds that the subsequent refinancing of the accelerated notes did not convert the acceleration into a voluntary redemption on which a make-whole premium would have been due.

The Second Circuit’s opinion does not hold that make-whole premiums are unenforceable in bankruptcy, it merely applies express language in a particular indenture stating that the make-whole premium is inapplicable to an acceleration upon bankruptcy.  Accordingly, creditors that wish to preserve the possibility of obtaining a makewhole premium (or other type of prepayment premium) if their debt is repaid in bankruptcy should insist upon express indenture language to the effect that a make whole premium (or other premium) is due upon acceleration.  Whether or not a court would enforce such a premium is left unaddressed by the Second Circuit ‘s decision; however, the opinion aligns the Second Circuit with courts that have held that automatic acceleration upon bankruptcy clauses in debt instruments are enforceable, because the bankruptcy code’s proscription on the enforcement of so-called ipso facto clauses triggered by bankruptcy applies only to executory contracts, and debt instruments are not executory.

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A Tech Industry-Friendly Stance On Cloud Computing Tax

GT Law

In a pleasant surprise, the New Jersey Division of Taxation recently issued guidance announcing that sales tax is not due on most cloud computing services. New Jersey’s position is contrary to a growing national trend in which many states have taken the position that cloud computing is subject to sales tax as the sale of software.

New Jersey demonstrates a pro-information technology industry position. It also comes at the same time that Massachusetts, traditionally an extremely technology-friendly state, appears to have changed its policy direction on taxation of information technology services.

New Jersey Technical Bulletin 72 addresses three types of cloud computing services:

software as a service (SaaS), which offers the use of software on a per transaction basis, through a service contract or by a subscription;

platform as a service (PaaS), which provides access to computing platforms; and

infrastructure as a service (IaaS), which provides hardware, software and other equipment and services necessary to support and manage the content and dataflow of its customers.

The technical bulletin says that software as a service is not subject to New Jersey sales tax as the sale of software because it is not delivered in tangible form, it is not downloaded onto the customer’s computer and title to the software is not transferred to the customer.

However, the bulletin does say that certain types of SaaS may be subject to sales tax as a taxable information service. A taxable information service is defined as:

The furnishing of information of any kind, which has been collected, compiled or analyzed by the seller and provided through any means or method, other than personal or individual information which is not incorporated into reports furnished to other people.

The bulletin then cites examples of taxable information services such as Westlaw, LexisNexis, Commerce Clearing House (CCH) and Rich Internet Application (RIA). But it would appear that most other classes of

SaaS that do not involve compiling or analyzing information should not fall into the taxable information service category. This is a fact-based determination, which would require analysis on a case-by-case basis.

The bulletin states that platform as a service and infrastructure as a service would not be subject to sales tax because they do not represent the sale of tangible personal property, but merely access to the software. The bulletin states that IaaS arrangements that show billing for the rental of hardware (e.g., servers) are not taxable because the customer does not have title or possession of the equipment.

Finally, the bulletin says that web hosting and data hosting services are not subject to New Jersey sales tax.

The position taken by the New Jersey Division of Taxation is quite favorable to providers and customers of cloud computing services, as other states have been taking the opposite approach, saying that many of these services are taxable, including states such as New York, Pennsylvania and Vermont.

Companies that provide cloud-based computing services should determine the states in which they might have a sales tax collection obligation, and whether the services they provide are subject to that state’s sales tax.

To see the full text of this new technical bulletin, please follow this link and click on TB-72.

This pro-IT industry move is in contrast to a new Massachusetts law that went into effect on July 31, just a few weeks after the bill being passed by its Legislature. This new Massachusetts law signals a sea change in the Bay State’s pro-technology industry policy.

Massachusetts now imposes sales tax on most software and hardware design, installation and integration services, including the modification, integration, enhancement, installation and configuration of prewritten software.

So, this new tax will include amounts paid in order to customize any prewritten software for the needs of the customer, including macros and plug-ins that operate in conjunction with the software (although there are exemptions for modifications to free open source software, and software that operates industrial machinery).

This expansion of the Massachusetts sales tax will cast a wide net that will tax hardware and software consulting services that have not been taxable in the past, from the biggest, most sophisticated software consulting firms that manage the integration of software for large corporations, down to the high school student who helps non-tech savvy baby boomers set up their home computer for $20 an hour.

This apparent new direction taken by Massachusetts is a huge contrast to the position staked out by the state’s then-Gov. Paul Cellucci in the early years of the Internet boom, when the debate on the taxation of e-commerce sales was just beginning.

A bill had been introduced in Congress to exempt all e-commerce sales from state taxation. Cellucci was quoted in the Feb. 4, 2000, edition of State Tax Notes as being in favor of the measure because it would be bad tax policy to tax the emerging Internet industry:

Arguing that ‘the rapid growth of high-tech in the past five years’ has created 450,000 new jobs in his state, Cellucci said the taxation of remote and electronic commerce is ‘not just a real threat to the economy of Massachusetts, but for the nation as a whole. Unlike traditional brick-and-mortar businesses, e-commerce ventures are extremely portable, and could easily move their headquarters to an offshore island where they would be immune from any sales tax from this country. (Tax Analysts Document Number: Doc 2000-3441.)

The new Massachusetts law indicates a reversal of the state’s earlier pro-industry policy, while New Jersey, which in prior years has taken an aggressive tax approach to IT taxation, has apparently also reversed course, but in the opposite positive direction.

It is possible that Massachusetts has grown complacent, assuming that its enormous stockpile of human innovation capital will stay put, while New Jersey appears to be recognizing the value of cultivating the IT industry in the Garden State. Time will tell if these shifts in policy toward the IT industry will result in any measurable migration.

This article was previously published by Law360.

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Former Head of Investor Relations Penalized by SEC for Selectively Disclosing Material Nonpublic Information, While Self-Disclosing Company Escapes Charges

Katten Muchin

The selective and early disclosure of material non-public information resulted in a Securities and Exchange Commission cease and desist order and civil penalties against the former head of investor relations at First Solar, Inc. (First Solar or the Company), an Arizona-based solar energy company. The SEC determined that Lawrence D. Polizzotto violated Section 13(a) of the Securities Exchange Act of 1934 and Regulation FD by informing certain analysts and investors ahead of the market that First Solar would likely not receive an important and much anticipated loan guarantee commitment of nearly $2 billion from the US Department of Energy (DOE). The day after those disclosures, the Company publicly disclosed this information in a press release, causing its stock price to dip six percent.

On September 13, 2011, First Solar’s then-CEO publicly expressed confidence at an investor conference that the Company would receive three loan guarantees of close to $4.5 billion, which the DOE previously committed to granting upon satisfaction of certain conditions. Polizzotto and several other First Solar executives learned a couple of days later that the Company would not receive the largest of the three guarantees. An in-house lawyer expressly advised a group of First Solar employees, including Polizzotto, that they could not answer questions from analysts and investors until the Company both received official notice from the DOE and issued a press release or posted an update on the guarantee to its website. According to the SEC, notwithstanding this instruction, Polizzotto and a subordinate, acting at Polizzotto’s direction, had one-on-one phone conversations with approximately 30 sell-side analysts and institutional investors prior to First Solar’s public disclosure. In the conversations, they conveyed the low probability that First Solar would receive one of the three guarantees. In some instances, Polizzotto went further and said that a conservative investor should assume that the guarantee would not be granted.

Polizzotto agreed to pay $50,000 to settle the charges without admitting or denying any of the SEC’s findings. He, however, was not subject to even a temporary industry bar. The SEC did not bring an enforcement action against First Solar due to the Company’s cooperation with the investigation, as well as its self-disclosure to the SEC promptly after discovering Polizzotto’s selective disclosure. In addition, the SEC emphasized the strong “environment of compliance” at the Company, including the “use of a disclosure committee that focused on compliance with Regulation FD” and the fact that the Company took remedial measures to address improper conduct, including conducting additional compliance training.

In the Matter of Lawrence D. Polizzotto, File No. 3-15458 (Sept. 6, 2013).

The Facts on FATCA – Foreign Account Tax Compliance Act

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On August 19, 2013, the Internal Revenue Service introduced its new registration portal to assist Foreign Financial Institutions (“FFI”) as they make efforts to comply with the Foreign Account Tax Compliance Act (“FATCA“). Financial firms (banks, investment funds, and insurance companies) around the world must comply with the law, aimed at keeping US persons from hiding income and assets overseas, or risk serious consequences that could shut them out of financial markets. In recent years, the U.S. government has suspected that U.S. persons are underreporting massive sums of money hidden in offshore accounts.

FATCA was enacted as part of the Hiring Incentives to Restore Employment Act of 2010 (“HIRE”). Under FATCA, FFIs are required to collect, verify, and provide information about their U.S. clients to the IRS. If they fail to do so, they are subject to a 30% withholding tax on U.S. source payments. To assist foreign countries with the Act’s reporting requirements, the U.S. Treasury Department developed model Intergovernmental Agreements (“IGAs”). FATCA implementation has been tumultuous, largely because there are foreign governments which have not entered into these IGAs with the U.S. government. To date, the Treasury has signed ten IGAs, and is engaged in ongoing conversations with more than 80 other countries. The Act was scheduled to take effect in January 2014, but the enforcement date has been postponed to July 2014. As of now, the IRS will start collecting firms’ customer account information in 2015.

FATCA implementation is set to occur in three phases. The first is implementation of the Act itself, with the collection of information regarding U.S. accountholders in FFIs. Second, FATCA partner countries will enter into bilateral agreements for the purpose of exchanging this information. Last, this information will be transferred to a centralized FATCA database that acts as the central repository for offshore account information for all countries that are members of the Organization for Economic Co-Operation and Development (“OECD”). A list of these countries can be found here.

There has been significant resistance from FFIs, who are opposed to the IRS snooping into their financial affairs and frustrated with FATCA’s reporting and compliance requirements. Many FFIs believe that the law turns them into tax collectors and burdens them with a job that the IRS should be handling itself. Some FFIs, faced with the complicated burdens and tax exposure risks, have simply chosen to drop their U.S. clients. Major banks like HSBC, Deutsche Bank, Credit Suisse and Commerzbank are among those that have done so. This, of course, presents a major problem to Americans who conduct business or invest internationally; it is harder to obtain bank accounts, find insurance coverage, and qualify for loans. Expatriates are especially hard hit by institutions that are dropping American clients. Businesses are not exempt, either. Pursuant to FATCA, FFIs are required to report any private foreign corporation, business, or partnership in which a U.S. citizen is a ten percent or greater shareholder. A foreseeable consequence of the law is that foreigners become hesitant to do business with U.S. citizens because FATCA could expose sensitive account information and compel tax investigations.

Curbing tax evasion is a worthy goal, but FATCA comes at an expense to the law-abiding Americans citizens, expatriates, and businesses that engage in financial transactions overseas. Whether it will be a successful endeavor remains to be seen, but you can be sure that the side effects of it are already being felt by many.

Internet Peeping Toms and The Internet of Things Face New Hurdles: Federal Trade Commission (FTC) Settles with TRENDnet, Inc.

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The Federal Trade Commission (“FTC”) recently entered into a settlement agreement with TRENDnet, Inc., a company that sells Internet Protocol (“IP”) cameras that allow customers to monitor their homes remotely over the Internet.  Notably, this is the FTC’s first action against a seller of everyday products that connect to the Internet and other mobile devices, commonly referred to as the “Internet of Things.”

The Complaint

In its complaint, the FTC alleged that, despite representing to its customers that TRENDnet’s IP cameras are “secure,” TRENDnet failed to reasonably secure its IP cameras against unauthorized access by third parties.  According to the FTC, TRENDnet transmitted user login credentials in clear, readable text over the Internet and stored user credentials on a user’s mobile device in clear, readable text, despite the availability of free software to secure the transmissions and the stored credentials.  The FTC Further alleged that TRENDnet failed to employ reasonable and appropriate security in the design and testing of the software that it provided consumers for its IP cameras.

Due to TRENDnet’s inadequate security measures, in January 2012, a hacker exploited the vulnerabilities of the TRENDnet system and posted live feeds for nearly 700 of TRENDnet’s IP cameras, including customers that had not made their video feeds public.  These video feeds displayed people in their homes, including sleeping babies and young children playing.  Once TRENDnet learned of this flaw, it uploaded a software patch and attempted to alert its customers of the need to update their IP cameras through TRENDnet’s website.

The Settlement

Last week, TRENDnet entered into a settlement agreement with the FTC to resolve the FTC’s claims.  Pursuant to the settlement agreement, TRENDnet has agreed that it will not misrepresent:

  • the extent to which its products or services maintain and protect the security of its IP cameras;
  • the security, privacy, confidentiality or integrity of the information that its IP cameras or other devices transmit; or
  • the extent to which a consumer can control the security of the information transmitted by the IP cameras.

What’s more, TRENDnet is required to establish, implement and maintain a comprehensive security program that is reasonably designed to address security risks that could result in unauthorized access to the IP cameras or other devices, and to protect the security, confidentiality and integrity of the information that its IP cameras or other devices transmit.  TRENDnet is further required to conduct initial and biennial assessment and reports of such security program by an independent third-party professional every two years for the next twenty years.   Again, some real bottom line costs as a result of these settlements.

Finally, in addition to the measures that TRENDnet must take to protect its customers in the future, TRENDnet must also notify all of its current customers about the flaw in the IP cameras that allowed third parties to access the live feed of TRENDnet customers, and TRENDnet must provide these customers with instructions on how to remove this flaw.

The TRENDnet settlement is the FTC’s first step at regulating data security in the land of the Internet of Things.  Keep a look out to see whether this becomes the FTC’s next hot topic.

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A Federal District Court in Florida Finds Hospital System Properly Terminated a Professional Services Contract for a Health Insurance Portability and Accountability Act (HIPAA) Breach

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The U.S. District Court for the Southern District of Florida found on June 20, 2013 that defendant Community Health Systems, Inc., and its affiliated hospital, Salem Hospital (collectively, “CHS”) properly terminated a Professional Services Agreement it had with Managed Care Solutions, Inc. (“MCS”) for breach of contract after determining that Nichole Scott, one of MCS’s employees, misappropriated Protected Health Information (“PHI”) from the hospital. Ms. Scott misappropriated PHI from the hospital’s patients including patients’ checks, credit card numbers and social security numbers.

The Business Associate Agreement (“BAA”) between CHS and MCS provided, among other things, that in the event MCS breached its obligations under the BAA, CHS could terminate both the BAA and the Professional Services Agreement. After CHS terminated the Professional Services Agreement with MCS as a result of Ms. Scott’s misappropriation of its patients’ PHI, MCS sued CHS for breach of contract. The Florida District Court granted CHS’s motion for summary judgment and dismissed the lawsuit.

The lesson from this case is that healthcare entities should have clear cross-default provisions in their Professional Services Agreements with their business associates and in their Business Associate Agreements that allow them to terminate the Professional Services Agreement or take other appropriate remedial action in the event of a breach by the business associate of its obligations under the Professional Services Agreement and/or under the Business Associate Agreement.

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