DC Metropolitan Business Law Alert

Your Mandatory Forum Selection Clause Might Not Be So "Mandatory" - At Least in Some Federal Courts; U.S. Supreme Court to Address Circuit Split on This Issue

Joe Wilson — Thu, 09 May 2013 14:06:55 -0500

Businesses and business persons beware: the mandatory forum selection clause (MFSC) in your contract might not be as “mandatory” as you think. To elaborate:

A typical response by a defendant when a plaintiff files a complaint in a court that has proper venue under the federal law, but which forum is not the one designated in the MFSC, is to file a motion to have the lawsuit transferred to the forum named in the MFSC or, alternatively, dismissed for improper venue. There is, however, a split among the federal courts of appeals as to whether, under this circumstance, the MFSC is to be treated as binding. On April 1, 2013, the U.S. Supreme Court granted a petition for certiorari in Atlantic Marine Construction Company, Inc. v. J-Crew Management, Inc. to address this circuit split.

The Circuit Split. In Atlantic Marine Construction Company, Inc. v. J-Crew Management, Inc., 701 F.3d 736 (5th Cir. 2012), the Fifth Circuit joined the Third and Sixth Circuits in holding that federal courts do not have to treat a MFSC as mandatory in deciding motions to transfer/dismiss, where the lawsuit was filed in an otherwise proper venue. Under the law of these three circuits, such motions are to be decided following the discretionary balancing test of 28 U.S.C. § 1404(a), which gives weight to the MFSC – along with several other factors. The other factors can outweigh the MFSC, with the end result potentially being that the MFSC is not enforced. By contrast, the Second, Seventh, Eighth, Ninth, and Eleventh Circuits eschew this balancing test, and instead have held that 28 U.S.C. § 1406, Fed. R. Civ. P. 12(b)(3), and/or the test enunciated in M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1 (1972) govern these motions. Under that authority, a valid MFSC, generally speaking, renders venue improper in courts other than those designated in the MFSC, save for some narrow exceptions.

The Likely Impact of The Supreme Court’s Decision on Businesses and Business Persons. MFSCs are a common and important part of business today. Notably, they shape the expectations of businesses and business persons in entering contracts by providing a level of certainty regarding (1) the location and court in which future disputes concerning the contract containing the MFSC will be litigated and (2) that expenses for litigating over venue will not be incurred in the event of such a contract dispute. How the Supreme Court rules on the Atlantic Marine appeal will likely affect the extent to which federal courts will enforce MFSCs and, in turn, will likely affect the reasonableness of these business expectations.

New Maryland Legislation Would Expand Real Property Transfer and Recordation Tax Exemption to Affiliated LLC Transactions.

Aaron Rosenfeld — Tue, 23 Apr 2013 15:15:06 -0500

On April 8, 2013, the Maryland legislature passed a bill that, following the Governor’s signature (which is expected), will now extend a real property transfer and recordation tax exemption to certain transfers among affiliated limited liability companies. Currently, Sections 12-108(p) and 13-207(a)(9) of the Maryland Code provide an exemption from real property transfer and recordation taxes for certain transfers among only affiliated corporations. Limited liability companies do not qualify for the exemption. The new legislation changes the term “corporation” in those provisions to “business entity,” which is defined for these purposes as a limited liability company or a corporation (but not a partnership). The exemption (when enacted) is applicable to the following three types of transfers:

(1) a transfer of real property between a parent business entity and its wholly owned subsidiary business entity or between 2 or more subsidiary business entities wholly owned by the same parent business entity. To qualify, (a) the parent business entity must be an original owner of the subsidiary business entity, or (b) it must have become an owner through gift or bequest from an original owner of the subsidiary business entity, in either event, for no consideration, nominal consideration or consideration that comprises only the issuance, cancellation, or surrender of the ownership interests of a subsidiary business entity;

(2) a transfer of real property resulting from a corporate reorganization described in § 368(a) of the U.S. Internal Revenue Code (which provision is not applicable to limited liability companies); or

(3) a transfer of real property from a subsidiary business entity to its parent business entity for no consideration, nominal consideration or consideration that comprises only the issuance, cancellation, or surrender of the subsidiary’s ownership interest. To qualify for this type of transfer, (a) the parent business entity must have previously owned the real property, (b) the parent business entity must have owned the ownership interest of the subsidiary for at least 18 months or (c) the parent business entity must have acquired the ownership interest when the subsidiary business entity was already in existence and had owned the real property for a period of at least 2 years prior to the acquisition.

Once signed by the Governor, the amended law will have an effective date of July 1, 2013 for all transfers occurring thereafter.

Got IDEAS for Maryland's Aging Assets? Recent P3 Legislation Could Provide Solutions

Rebecca Tzou — Tue, 23 Apr 2013 13:42:00 -0500

Lawmakers and Governor O’Malley are hoping that new legislation taking effect July 1, 2013 will inject renewed life into an existing business construct previously used primarily for Maryland’s transportation assets. By creating partnerships between the private and public sectors ( public – private partnership = P3) - addressing shortfalls in Maryland’s public asset and infrastructure management – the State is anticipating that a more robust submission and oversight process along with streamlined and clearer requirements will cause new types of government-owned assets and their private sector proponents to join the queue for the P3 structure. The new law provides for more unified terms, conditions and standards for P3 agreements, enhances inspection rights and performance security, and requires concurrent, instead of sequential, 30-day reviews, thus expediting the process. In addition to more traditional requirements for this State-supported program such as meeting specified minority business enterprise targets and prevailing wage and living wage standards, there is also a means for a reporting agency to incentivize the process by reimbursing a participating private entity for the costs incurred to develop even an unsuccessful response to a public notice of solicitation for a P3. The new law also creates an innovative method for the reporting agencies to consider unsolicited P3 proposals – protecting the submitter’s proprietary information, while engaging in a process to evaluate and then solicit similar proposals if the agency decides that the unsolicited P3 proposal meets its needs. Eagerly embracing the new legislation, Maryland’s Department of Transportation issued a Request for Information last week, seeking private sector input on how best to deliver and finance the Maryland National Capital Purple Line and the Baltimore Red Line transit lines. The new P3 legislation will soon be available to contractors relying on such law to aid in financing those transit projects and, hopefully, other future infrastructure projects.

Ownership Transfer Restrictions Will No Longer Hinder Verification As A Service-Disabled, Veteran-Owned Small Business

Elizabeth Johnson — Tue, 02 Apr 2013 10:25:14 -0500

The Department of Veterans Affairs (“VA”) recently signaled a policy change that will make it easier for service-disabled, veteran-owned small businesses (“SDVOSBs”) to qualify as such under the VA’s verification program (a prerequisite for eligibility to bid on certain government set-aside contracts). The VA has announced that the inclusion of “right of first refusal” provisions in the organizational documents of a SDVOSB, along with other “transfer restrictions that are part of normal commercial dealings,” will no longer serve as a bar to verification as a SDVOSB.

VA regulations require that a small business “be unconditionally owned and controlled by one or more eligible veterans, service-disabled veterans or surviving spouses” in order to qualify as an SDVOSB. 38 C.F.R. § 74.2(a). In the past, the VA relied on this “unconditionally owned” requirement to deny contractors SDVOSB verification when a veteran owner’s interest in his or her company was subject to transfer restrictions. Among the more important of such provisions is a standard “right of first refusal” clause, which would give other (non-veteran) shareholders the first right to purchase the veteran owner’s shares under certain limited circumstances. (In a recent case, Miles Construction, LLC v. United States, the U.S. Court of Federal Claims rejected the VA’s attempt to deny verification based on a “right of first refusal” provision.)

In recent written testimony submitted to the House Subcommittees on Contracting and the Workforce and Oversight and Investigations, however, a VA official stated that “right of first refusal” provisions and other such transfer restrictions “do not materially affect the ability of a Veteran to unconditionally own or control a business.” He further confirmed that as of March 6, 2013, the VA would no longer consider these restrictions a reason for denying SDVOSB eligibility.

The VA’s policy reversal is a victory for SDVOSBs, making it easier for those companies with traditional transfer restrictions to qualify for SDVOSB verification and the opportunity to bid on lucrative VA set-aside contracts.

Recent Decision Highlights Virginia's "Voluntary Payment Doctrine" as a Trap for the Unwary

Joe Wilson — Fri, 22 Mar 2013 14:18:16 -0500

The following is a common business occurrence: Party A demands payment from Party B to perform work on a project in which the two are engaged. Party B is not obligated to make the payment under the parties’ agreement, but does so anyway – albeit under protest and with a reservation of rights to sue for recovery of the payment later – in order to keep the project moving along While it would seem that Party B has acted prudently, that is not necessarily the case as illustrated by the recent decision of the Virginia Supreme Court in D.R. Horton, Inc. v. Board of Supervisors For The County of Warren. In Horton the Court applied Virginia’s “voluntary payment doctrine” to bar a real estate developer from recovering payment under the above scenario.

The defendant in Horton, a county board of supervisors, had charged the plaintiff, a real estate developer, some $200,000 in water and sewer hook-up fees as a condition of receiving building permits. The board asserted its entitlement to collect the fees pursuant to a zoning agreement with the developer. On several occasions the developer objected to the charge arguing that no agreement existed that obligated the payment. In the end, however, the developer paid the fees but had its counsel write to the county that it was doing so only “until this matter has been resolved” in order “‘to avoid further damage to [itself].’” Counsel’s letter further noted that the payment was being made “only under protest and with a full reservation of [the developer’s] rights and remedies.”

Eventually, the developer sued for a declaratory judgment that the defendant could not lawfully assess the hook-up fees and to recover, based on a claim of unjust enrichment the payments previously made. The trial court ruled in the developer’s favor on the declaratory judgment action, but then held that the developer “was nevertheless barred from being awarded reimbursement of the unlawful [hook-up] fees because it paid them ‘voluntarily’ within the meaning of the voluntary payment doctrine.”

The Virginia Supreme Court affirmed. Citing prior precedent, it held:

‘Where a party pays an illegal demand with a full knowledge of all the facts which render such demand illegal, [i] without an immediate and urgent necessity therefor, or [ii] unless to release his person or property from detention, or [iii] to prevent an immediate seizure of his person or property, such payment must be deemed voluntary, and cannot be recovered back. And the fact that the party at the time of making the payment, files a written protest, does not make the payment involuntary.’ [Emphasis added.]

The Court explained that “[a]ll payments are presumed to be voluntary until the contrary is made to appear.” Thus, the party seeking to recover the payments bears the burden “‘to show that its payment was not voluntary.’” The Court reasoned that the voluntary payment doctrine is to “advance[e] certainty and finality between parties in the resolution of their legal affairs; . . . without [this doctrine], ‘the payment of money would soon become but the parent of a suit, and the settlement of an account the harbinger of litigation.’”

Applying the voluntary payment doctrine, the Virginia Supreme Court rejected the developer’s arguments why the doctrine did not apply. Most notably, the Court rejected the developer’s argument that it had paid the hook-up fees involuntarily because it had an “immediate and urgent need” to pay those as it “faced an immediate and urgent necessity’ to ‘do what it could to build and sell houses,’ which included paying the [hook-up] fees to obtain the [building] permits authorizing their construction.” The Court explained that “[t]o establish the requisite necessity to pay an unlawful demand, a plaintiff must prove that it ‘did not have time and opportunity to relieve [itself] of [its] predicament by resorting to legal methods.’” The developer’s argument on this point failed because it had not shown that it did not have the time or opportunity to pursue an appropriate legal remedy such as obtaining an injunction prohibiting the county from collecting the fees. The Court also noted that the developer’s protests were of no import because “simply protesting an unlawful demand does not render payment of the demand involuntary under the voluntary payment doctrine[.]”

The takeaway from Horton: if you make a payment in response to a demand that you recognize to be wrongful, you may be foregoing your right to recover the payment in the future – even if you made the payment under protest and reserved your rights to seek recovery. In short: caveat payor.

FTC Issues Revised Guidelines on Effective Disclosures in Digital Advertising

Allan Weiner — Mon, 18 Mar 2013 11:33:52 -0500

On Tuesday, the Federal Trade Commission (“FTC” or “Commission”) announced final revisions to the guidance it gives to advertisers on how to keep endorsement, testimonial, and other digital ads in compliance with the FTC Act. “.com Disclosures, How to Make Effective Disclosures in Digital Advertising” (“the Revised Guide”) updates a 2000 guidance and addresses the increased use of smartphones and space-constrained advertising platforms such as Twitter and Facebook. The Revised Guide makes clear that the “same consumer protection laws that apply to commercial activities in other media apply online, including activities in the mobile marketplace.”

While the Revised Guide is not a rule and does not carry the force of law, it does provide important insight into how the Commission will examine advertisements and related disclosures to assess whether they are false or misleading under federal law.

Click here to read the complete Kelley Drye Client Advisory on kelleydrye.com.

You Can't Be Greedy: Virginia Supreme Court Holds Employer Not Required to Pay Attorneys' Fees Incurred by Former Employee for Claims Other Than Breach of Severance Agreement

Stephen R. Freeland — Mon, 18 Mar 2013 11:21:25 -0500

In Online Resources Group v. Lawlor, the Virginia Supreme Court held that, under Delaware law, an employer was required to pay the attorneys’ fees incurred by its former employee in litigation filed by the employee after he was terminated. The plaintiff in the case founded the employer in 1998, and served as its CEO and Chairman for over twenty years. Shortly after the company went public, the Board of Directors voted to remove him as CEO and also forced his resignation as Chairman of the Board and as an employee. After the company refused to pay him the amount he claimed to be owed under the terms of his severance agreement and two separate stock option plans, he filed suit in Circuit Court in Fairfax County asserting various causes of action, including breach of the severance agreement, breach of the two stock option plans, unjust enrichment, and wrongful termination, as well as declarative and injunctive relief.

The jury found for plaintiff on all of his causes of action except for wrongful termination, and awarded him compensatory damages of over five million dollars. Based on the attorney fee provision in the severance agreement, the jury also awarded him over two million dollars in attorneys’ fees incurred in litigating all of his causes of action.

On appeal, the employer contended that the express language of the severance agreement only permitted plaintiff to recover attorneys’ fees for breach of the severance agreement, not for his other causes of action. The Virginia Supreme Court agreed. The severance agreement provided that, if plaintiff filed suit “to enforce any obligations of the Company under this Agreement and it is ultimately determined that [plaintiff] is entitled to any payments or benefits under this Agreement,” the company would be required to pay “all reasonable expenses (including reasonable attorneys’ fees and legal expenses) incurred by plaintiff “with respect to such action.”

Applying Delaware law, which was the law chosen by the parties to govern the severance agreement, the Virginia Supreme Court held that this language only permitted plaintiff to recover attorneys’ fees incurred in connection with his breach of severance claim, and not his claims for unjust enrichment, wrongful termination, and breach of the two stock option claims, which “were separate from the claim to enforce [the employer’s] obligations under the Severance Agreement.” The court reversed the trial court’s attorney fee award and remanded the matter for a “determination of the amount of attorneys' fees and expenses plaintiff incurred as a result of enforcing [the employer’s] obligations under the Severance Agreement.” The court noted, however, that it was “mindful that such a determination will require careful consideration of overlapping issues.”

Online Resources Group teaches that, in the event companies wish to include attorney fee provisions in employment agreements, they should be careful to expressly limit any potential exposure in the event of litigation. To limit the ability of a former employee to collect attorneys’ fees for claims beyond those for breach of an employment or severance agreement, companies should consider including a cap on the amount of fees that can be collected as well as provisions requiring, as a condition precedent to collecting any fees, a breakout of the amount fees specifically incurred in connection with the breach of contract claim. This could be accomplished by, among other things, including language that requires plaintiff’s attorneys to enter time spent on the severance agreement claim separate from time spent on any other claim. Conversely, to the extent that an employee wants to obtain recovery of all litigation fees incurred as a result of a breach of contract as well as other actions by the employer, she should be mindful to negotiate more expansive terms, unlike the employee in Online Resources Group.

Obama Pushes Carried Interest to the Fore of U.S. Tax Policy Debate

Allan Weiner — Thu, 21 Feb 2013 11:05:05 -0500

President Obama and the US Congress are engaged in an intense debate on how to control the federal budget deficit. One of the points of contention is the role that additional tax revenues should play in reducing the deficit. Republicans have generally taken the position that no additional new taxes beyond those agreed to in the “fiscal cliff” legislation early this year should be considered. That legislation raised the top individual rate for ordinary income to 39.6 percent. increased the capital gains income rate to 20 percent, and made several other tax changes that taken together raise more than $600 billion in new tax revenue over ten years.

President Obama, however, has argued that additional tax revenue is needed to truly address the budget deficit, particularly to replace the $1.2 billion in budget cuts over ten years mandated by the sequester, which are scheduled to take effect on March 1st. The tax “loophole” that he has highlighted most is the tax rate on carried interest income. This Kelley Drye client advisory provides additional information about the taxation of carried interest income.

Policyholder Loses Insurance Coverage Due to Delay in Notifying Carrier

Cameron Argetsinger — Tue, 19 Feb 2013 18:21:45 -0500

Liability insurance provides valuable protection to policyholders against claims by third parties. When a lawsuit is filed or a claim is made against a policyholder, its liability insurance carrier may step in and defend the suit and/or indemnify the policyholder for a judgment or settlement. However, insureds are at risk of losing that protection if they fail to comply with basic notice requirements written into their policies, as a recent Virginia federal court decision demonstrates.

In Nationwide Mutual Insurance Co. v. Sandbridge Properties Inc., the federal district court for the Eastern District of Virginia held that a property management company forfeited its insurance coverage for a personal injury lawsuit because the company did not notify its insurer when it first learned about the accident that was the basis for the lawsuit. Siebert Realty, the defendant in that case, managed vacation rental properties in Virginia Beach on behalf of individual property owners. In July 2008, a guest at one of the vacation properties informed Siebert that her nine-year-old daughter had fallen out of a bunk bed and had been taken to the hospital. Siebert notified the property owners who in turn notified their own insurance carrier. Siebert did not, however, inform its own “excess liability” carrier, Nationwide Mutual Insurance, of the event at that time.

Nearly three years later, in April 2011, the family of the injured girl sued Siebert, alleging she had suffered permanent traumatic brain injuries, and seeking over $10 million in damages. Siebert notified Nationwide of the lawsuit shortly thereafter and tendered the suit to the insurance carrier for defense.

Nationwide denied coverage for the suit and filed its own lawsuit against Siebert, seeking a declaratory judgment that it had no obligation to defend or indemnify Siebert for the underlying personal injury action. Nationwide argued that it was relieved of its obligations under the policy because Siebert had breached the policy condition that it notify Nationwide in a timely manner of any “occurrence . . . which may result in a claim.”.

The court agreed, finding that, even though the injured girl’s family did not made a claim against Siebert until it filed the lawsuit in April 2011, Siebert had a duty to notify Nationwide of the potential for a lawsuit once it learned of the girl’s injuries in July 2008. Nationwide’s policy required Siebert to notify the insurer of such an occurrence “as soon as possible” or “as soon as practicable.” Applying Virginia law, the court concluded that the nearly three-year delay in notice constituted a material breach of the insurance contract that relieved Nationwide of any duty to cover the personal injury suit.

The court further found that Siebert was not excused by its belief that the Nationwide policies would not be implicated by the accident. Even though Siebert may have reasonably concluded that any claim arising out of the accident would have been fully covered by the vacation property owner’s insurance policy, such a “subjective mistaken belief” does not negate the notice requirement, the court held.

Insurance policyholders should take note of this decision. It is important to be aware that insurance policies generally require the insured to notify the insurer in the event of an “occurrence” that might result in a claim or a lawsuit, not just when a suit is filed or a demand is made. Additionally, when a policyholder does learn of such an occurrence, it is important to notify every insurance carrier that could potentially provide coverage for the claim, even if it appears very unlikely to the policyholder that there will be any coverage under a particular policy. Failure to take these precautions could result in a denial of coverage.

Confessed Judgments - Another Tool in Creditors' Arsenal - But Process Matters

Rebecca Tzou — Wed, 06 Feb 2013 16:14:32 -0500

A recent Pennsylvania case, Graystone Bank v. Grove Estates, LP, upheld the enforceability of a confessed judgment provision even in light of alleged inconsistencies. In most cases, a confessed judgment is a debtor’s statement signed prior to a default that a stipulated amount is owed to a creditor and permits bypassing certain legal proceedings. In Greystone, the debtor’s arguments that the confessed judgment should be set aside because the provision was not on the same page as debtor’s signature, the subsequent loan modification failed to restate the confession of judgment and attorney’s fees set at 10% of the principal balance of the loan were unreasonable -- failed to sway the Pennsylvania court, even on appeal. The court remanded the decision for a review of the reasonableness of attorneys’ fees, but otherwise, upheld the confessed judgment provision.

While most states prohibit the use of confessed judgments in consumer loans, Virginia and Maryland (and even the District of Columbia under certain post-default situations) permit such provisions in commercial transactions. Virginia’s statute requires the use of particular language in 8 point or larger font on the first page of a document containing a confessed judgment, but a recent change in Virginia law now permits a substitute of attorney-in-fact where previously only a named party could enter the confessed judgment. In long-term debt transactions, ensuring that the party named as attorney-in-fact in the loan documents would still be associated with the lender at the time of default had been problematic to effect a Virginia confessed judgment. The recent amendment removes another hurdle to the use of confessed judgments in Virginia. Maryland has specific although less arduous requirements, but the courts have recently been more lenient to debtors by permitting the use of oral statements to challenge the use of confessed judgments. The District of Columbia’s courts are even more wary of the use of confessed judgments by creditors, but have permitted such provision to stand if the facts warrant such remedy.

Thus, although confessed judgments are not above attack, they still can be useful creditor’s weapons if a careful practitioner adheres to state law requirements. Other tips to the effective use of a confessed judgment provision include: (1) be conspicuous – use all capital letters and boldface print (and the statutory language, if available); (2) ensure that the document is signed by the debtor (and notarized, if required) in a manner that evidences the debtor knows that certain legal rights are being waived; (3) repeat the confessed judgment provision in any loan modification documents; (4) know that a stated attorneys’ fee term in the provision will be subject to review by the court – make it a reasonable charge; and (5) if the confessed judgment provision is being used by an attorney in a promissory note by a client for services rendered, ensure that the client was advised in writing to obtain independent counsel prior to signing the promissory note (and note that attorneys’ fees may not be awarded if an attorney is representing himself in exercising a confessed judgment against a delinquent client).