Pennsylvania Litigation Blog

A Guide for Brew Pub Entrepreneurs

Jeremy D. Frey — Tue, 26 Feb 2013 10:45:51 -0500

Throughout Pennsylvania, the emergence of brew pubs are making Pennsylvania beer lovers very happy. In many instances, these brew pubs are helping revitalize downtown areas and redevelop older buildings, providing a boost to local economies. Brew pubs are allowed to brew their own individually crafted beers and sell them to their customers along with food and Pennsylvania wines. Some of the brew pubs have been opened by existing breweries to provide their beer directly to consumers, while others have found them to be a great boost to existing restaurants. This has created a nice buzz in local communities where beer lovers can find a variety of beers brewed not in Colorado or Missouri, but right here in Pennsylvania.

Just as with the sale of any alcohol in Pennsylvania, brew pubs are regulated by the Pennsylvania Liquor Control Board (PLCB). In order to manufacture and sell the beer directly to customers, two licenses are required. The first is a license for manufacture, storage or transportation (a brewery license) which allows the applicant to brew the beer. The second is a retail liquor or retail dispenser license which allows the applicant to sell the beer directly to consumers.

In addition to the state licenses, brew pubs also require approval from the Tobacco Tax and Trade Bureau (TTB) within the federal government. TTB regulates the brewing of beer for purposes other than personal or family use. In order to obtain approval from TTB, a Brewer’s Notice must be obtained. The federal government taxes the sale of beer by brewers, so a tax tank must be obtained and used as part of the brewer’s operations.

In addition to federal and state licenses, brew pubs require zoning approval from local municipalities, which can sometimes be difficult as most zoning ordinances do not specifically define brew pubs, or even breweries, as a specific use. Barley Snyder has assisted brewers with securing zoning approval and the applicable licenses to begin their operations. Brewers interested in learning more about the process, or seeking assistance with their applications, should contact Jeremy Frey at 717-852-4983 or jfrey@barley.com to discuss.

Employers May Be Eligible for Refund of Severance Pay FICA Taxes

Dara C. Bachman — Tue, 26 Feb 2013 10:33:56 -0500

Employers who have made severance payments to laid off employees may be entitled to refunds of Federal Insurance Contributions Act (“FICA”) taxes remitted in connection with such payments. According to a ruling from the United States Court of Appeals for the Sixth Circuit, finalized just last month, severance payments qualifying as supplemental unemployment compensation benefit (“SUB”) payments are not taxable as wages, and accordingly, are not subject to FICA taxes. The Internal Revenue Code defines SUB payments as (1) payments made to an employee, (2) pursuant to an employer’s plan, (3) because of an employee’s involuntary separation from employment, whether temporary or permanent, (4) resulting directly from a reduction in force, the discontinuance of a plant or operation, or other similar conditions, and (5) included in the employee’s gross income.

If your company’s severance payments satisfy this definition, consult your tax advisor promptly to explore preserving potential refund claims. A company can file a protective tax refund claim for any taxable year that remains open. Typically, a taxable year remains open until three years after the date the return was due or two years after the payment date, whichever is later. As a result, an employer’s 2009 income tax return (assuming such employer reports on a calendar year) will typically remain open until April 14, 2013.

To obtain refunds of SUB payments, employers must secure each terminated employee’s written consent to file the refund claim for FICA taxes withheld on the employee’s behalf. Additionally, employers must pay employees their share of any refunded FICA taxes.

For employers with operations within the Sixth Circuit’s geographic area (Michigan, Ohio, Kentucky, and Tennessee), their refund claims for SUB payments may be processed now. All others, including employers operating in Pennsylvania, will have to wait and see how the issues resolve. The Government has until April 4, 2013 to appeal the issue to the United States Supreme Court, and Congress could amend the Internal Revenue Code to clarify the definition of SUB payments. But if the Sixth Circuit’s decision is not overturned or amended, it could be extended throughout the country.

Despite the uncertainty, this is an area with potentially significant financial implications for employers who have been forced to lay off employees over the last several years. Such employers should decide soon whether to file refund claims to avoid missing out on the potential financial benefit if the Sixth Circuit’s decision stands or is extended to other areas of the country.

When Retirement Isn't Really Retirement: Pennsylvania Supreme Court Finds Early Retirees Eligible for Unemployment Compensation Benefits

Jennifer Craighead — Tue, 12 Feb 2013 10:31:58 -0500

In Diehl v. Unemployment Compensation Board of Review, the Pennsylvania Supreme Court recently ruled that early retirees are eligible for unemployment compensation benefits, reversing over 30 years of case law on the subject. In this case, Howard Diehl, a 63 year-old shipping clerk, accepted an early retirement package his employer offered as part of a program to avoid layoffs. The package included continuation of health insurance benefits and payment of unused vacation leave. Subsequently, Diehl filed for unemployment compensation benefits, but his claim was denied because Diehl voluntarily resigned without a necessitous and compelling reason. The Unemployment Compensation Board of Review and the Commonwealth Court upheld the denial.

On appeal, the Pennsylvania Supreme Court reversed, holding that the Unemployment Compensation Law’s definition of “layoff” could be interpreted to include the voluntary acceptance of an early retirement package. Consequently, employers considering early retirement programs should now factor in the costs of unemployment compensation claims. Employers can no longer defend claims by early retirees on the basis that they voluntarily left employment.

Barley Snyder’s Employment Law Group frequently counsels employers on early retirement programs and incentives. Please contact a member of our Employment Law Group if you would like assistance in structuring legally compliant retirement programs and incentives.

U.S. Department of Labor Issues Final Regulations Regarding FMLA's Qualifying Exigency and Military Caregiver Provisions

David Freedman — Tue, 05 Feb 2013 00:00:00 -0500

On February 5, 2013, the United States Department of Labor issued final regulations implementing amendments to the Family Medical Leave Act (“FMLA”). These amendments, passed by Congress in 2008 and 2010, created—and then expanded—two classes of military-related FMLA leave: “Qualifying Exigency Leave,” and “Military Caregiver Leave.” Below is a list of the new regulations’ highlights:

“Qualifying Exigency Leave”

The definition of a “qualifying exigency” now includes service in the regular armed forces, as well as service in the National Guard or Reserves. To trigger Qualifying Exigency Leave, however, service must involve deployment to a foreign country.
The regulations add a new leave-triggering “qualifying exigency” for employees who must care for the parent of a military member on overseas deployment.
The regulations also expand, from five to 15 days, the amount of time an employee may take to spend with a covered military member who is on rest-and-recuperation leave. Employers, however, may require that employees provide a copy of the military service member’s leave orders, or other similar documentation, to certify the leave.

“Military Caregiver Leave”

Employees are now permitted to take FMLA leave to care for a veteran discharged from service (other than dishonorably) during the five-year period prior to the leave. The period between October 28, 2009 and March 8, 2013 must not be counted toward the five-year limit, which means that, currently, leave may be taken to care for veterans discharged since approximately October 2003.
Leave may be taken to care for a covered service member/veteran whose serious health condition arose either before or after military service, if (1) military service aggravated the injury or illness, (2) the service member/veteran has received a 50% or greater VA Service Related Disability Rating, (3) the physical or mental condition impairs the service member/veteran’s ability to secure or maintain employment, or (4) the service member/veteran has been enrolled in the Department of Veterans Affairs Program of Comprehensive Assistance for Family Caregivers.
Previously, only certain health care providers associated with the U.S. Department of Defense and the U.S. Department of Veterans Affairs (“VA”) could certify the need for service member caregiver leave. Now, any FMLA-qualified health care provider can fill out the certification form.
In lieu of providing the FMLA certification form, an employee may now provide documentation establishing his/her enrollment in the VA’s Program of Comprehensive Assistance for Family Caregivers. Such documentation is sufficient even if the employee is not the caregiver named in the document, although the employer may require confirmation of the employee’s relationship to the covered service member or documentation of the veteran’s discharge date and status.

The final regulations become effective March 8, 2013. Employers should update their FMLA policies now to reflect these regulatory changes, and start using the new FMLA certification forms found at http://www.dol.gov/whd/fmla/index.htm#Forms. Should you have questions about FMLA compliance, please feel free to contact any of Barley Snyder’s Employment Law Group attorneys.

Preparing for the Stepped Up CLERY ACT Enforcement

David R. Keller — Tue, 20 Nov 2012 16:20:37 -0500

The United States Department of Education (DOE), after years of inactivity, has made it a priority to increase enforcement efforts under the CLERY Act. As a result, the DOE is conducting audits of CLERY Act compliance on a regular basis. This is a good time to revisit CLERY Act compliance and assure that your college has proper procedures in place and documents available to bring an audit to a successful outcome.

There are essentially three requirements of the CLERY Act. First, that a college notify the campus community of its current policies regarding reporting criminal actions or emergencies on campus, security of and access to campus facilities, and campus law enforcement. Second, colleges are required to have certain records and reports. Crimes must be reported to campus security authorities, reports from other law enforcement agencies must be obtained, and for colleges with campus police or security, a daily crime log must be maintained which must include non-CLERY Act crimes. Third, information must be provided to the campus. This includes timely warning of a crime that may threaten students or employees, access to the crime log, an annual security report regarding designated CLERY Act crimes, and information about obtaining data on registered sex offenders.

A college must also designate “Campus Security Authorities” (“CSA”), who are officials of an institution who have significant responsibility for student and campus activities, including, but not limited to, student housing, student discipline, and campus judicial proceedings. Each CSA is a mandated reporter of crimes and should be trained on CLERY Act compliance.

In order to be prepared for an audit, the College should have a list of all CSAs for CLERY Act purposes. Other relevant documents will include handbooks which contain institutional policies, any publications relating to the CLERY Act and information on how they are distributed, public safety operating procedures, all records of recorded crimes, both CLERY and non-CLERY, maps and lists of buildings and land for which reporting is required, and the most recent campus security reports.

It is imperative that a college enter an audit understanding the geographic area for which it must report crimes, and the crime statistics it must collect, including statistics from other law enforcement agencies. Emergency response and evacuation procedures must be in place. The daily crime logs and annual security reports must be accurate and up to date and must address procedures to report crimes or emergencies and policies and procedures for issuing timely warnings to the campus population. Any audit will also include an examination of drug or alcohol abuse education programs and programs offered by the college regarding sexual assaults and prevention of sexual offenses, including procedures to follow when a sex offense occurs.

We strongly suggest that each college create checklists of
required documents and procedures to meet complex CLERY Act requirements, and identify and train campus security authorities to meet their obligations. It has become apparent that the days of DOE indifference to CLERY Act compliance are over.

For more Higher Education articles, check out our recent Higher Education Newsletter release.

Employment Client Alert: Fair Credit Reporting Act Notice Changes to be Implemented Shortly

Joshua L. Schwartz — Mon, 12 Nov 2012 15:08:57 -0500

The Consumer Financial Protection Bureau (CFPB) has promulgated revisions to various forms required by the Fair Credit Reporting Act (FCRA) in the context of background checks. A creation of the Dodd-Frank Act, the CFPB is taking over responsibility for the FCRA from the Federal Trade Commission, and the new forms reflect the agency’s contact and website information. The regulations require the new forms to be used beginning January 1, 2013.

The FCRA is triggered any time a background check is conducted by a third-party agency. Employers conducting background checks in conjunction with the hiring process must ensure that applicants consent to the background check in an acknowledgment form solely dedicated to that purpose. If information in the background check might disqualify the applicant, the applicant must be notified of his or rights to dispute or explain information from the background report. The new form for this is available here at Appendix K. Additional language is required in the unusual event that a credit score would be used in a hiring decision.

Please feel free to contact an attorney in the Employment Law Group for further guidance regarding your obligations when conducting a background check for hiring purposes.

Josh is an associate in the firm's Employment Law Group, where he represents management and employers in all aspects of labor and employment law and in employment litigation matters before federal and state courts and administrative agencies, including the Department of Labor, the Equal Employment Opportunity Commission, and the unemployment and workers' compensation agencies of various states. Josh also counsels employers on issues related to employee discipline and termination, workplace harassment, and compliance with federal and state employment laws.

Click here to read Josh's full bio...

2011-2012 U.S. Supreme Court Update: A Relatively Calm Term

David Freedman — Sat, 03 Nov 2012 10:44:53 -0500

During its 2011-2012 term, the United States Supreme Court issued momentous decisions regarding health care, immigration, and the death penalty. But the 2011-2012 term featured few significant labor and employment law cases, although those cases with likely long-term impact were all favorable to employers.

Perhaps the most important decision occurred in the case of Hosanna-Tabor Evangelical Lutheran Church & School v. EEOC, in which the Supreme Court recognized, for the first time, that a ministerial exception shields religious employers from discrimination lawsuits brought by their ministers. In that case, a teacher at the Hosanna-Tabor Evangelical School alleged that the Church terminated her in violation of the Americans with Disabilities Act. The Church moved to dismiss the lawsuit, arguing the teacher was a member of the Evangelical Lutheran clergy and, therefore, allowing her to sue the Church would violate the First Amendment’s prohibition on government regulation of religious activities. The Supreme Court sided with the Church, dismissed the case, and affirmed that there is a “ministerial exception” to Federal anti-discrimination laws. The Court also rejected the teacher’s argument that she was not really a minister because her duties primarily involved teaching secular subjects. Instead, the Court noted that the Church classified the teacher as “called,” which meant that she had to receive a Lutheran post-secondary education, take a number of courses in theology, and obtain the endorsement of the local Snyod district. Additionally, the teacher taught a religion class, led the students in daily prayer and devotional exercises, and led school-wide chapel service twice a year. Given these obviously religious duties, the Court deferred to the Church’s classification of the teacher as a minister, which marks a major victory for religious institutions. Although the case does not provide a blanket immunity from all Federal anti-discrimination laws, it does provide an immunity for those institutions when they are sued by employees whom the institutions classify as ministers. Moreover, Federal courts will follow a religious institution’s classifications regarding which Church employees are ministers, provided some factual basis supports those classifications.

In the case of Christopher v. SmithKline Beecham Corporation, the Supreme Court addressed the issue of the “outside sales exemption” to the Fair Labor Standards Act (“FLSA”), the Federal law that requires employers to pay an overtime wage premium when employees work more than 40 hours in a week. As most employers know, the FLSA exempts several classes of employees from its requirements, including any employee considered an “outside salesman,” which the FLSA defines as “any employee . . . whose primary duty is . . . making sales. . . .” Christopher worked for SmithKline Beecham as a “pharmaceutical detailer,” providing information to physicians about the company’s products with the goal of getting physicians to sign non-binding agreements to prescribe these products. Christopher regularly worked 60 hours per week, but received no overtime pay because SmithKline Beecham classified him as an “outside salesman.” Christopher sued for unpaid overtime, arguing that the outside sales exemption was inappropriate because his duties did not actually involve making sales, even though his duties were designed to lead to sales. Despite never initiating any enforcement actions regarding pharmaceutical detailers, the United States Department of Labor (“DOL”) sided with Christopher, arguing that his duties were merely promotional and did not involve making sales. The Court, however, rejected the DOL’s argument, holding Christopher was an “outside salesman” based on the FLSA’s broad definition of the term “sales.” Moreover, the Court refused to give deference to the DOL’s narrow interpretation of the exemption since that interpretation was not memorialized in any formal DOL regulation. This suggests that the Court might take a more active role in policing regulatory agencies, which could bode well for employer-sponsored challenges to agency requirements regarding “quickie elections,” obligatory posters describing collective bargaining rights, and revised “persuader” reporting requirements.

Finally, in a case of significant importance to public employers, the Court held in Coleman v. Court of Appeals of Maryland that the Eleventh Amendment to the United States Constitution bars certain claims under the Family Medical Leave Act (“FMLA”). This immunity, though, only applies to suits filed against state-operated or state-affiliated employers and only affects the FMLA’s “self-care” and “family care” provisions. That is, the entire FMLA still applies to non-state affiliated employers who have over 50 employees, and the FMLA’s pregnancy and family care provisions apply to all FMLA employers, even state-operated or affiliated entities.

Although the 2011-2012 term yielded no major labor or employment law decisions, But in 2012-2013, the Supreme Court will have a rather active labor and employment docket in 2012-2013. Vance v. Ball State University will address employer responsibility for harassment by employees who have some supervisory authority but lack the power to hire, discipline, or terminate other employees. Employers who use “leads” or other similar quasi-supervisory employees will want to look out for that decision. In Genesis Healthcare Corp. v. Symczyk, the Court will address whether employers can defeat an FLSA collective action simply by offering full relief to the named plaintiff. And in U.S. Airways v. McCutchen, the Court will decide whether the Employee Retirement Income Security Act permits judges to override specific plan language in the interest of fairness to plan participants. Stay tuned to the Employment Law Newsletter and check your email inbox for Legal Alerts; we will continue to update you as major developments occur.

Services Spotlight

Employment Litigation Management Services

Barley Snyder’s employment attorneys also work with our clients to manage and oversee litigation that may involve the use of local counsel in various states or nationwide. Our firm currently acts as employment counsel for a number of nationwide businesses covering a variety of industries, including, but not limited to, retail and manufacturing. Barley Snyder’s litigation management services are ideal for companies that operate in a multi-state or national arena but do not have the in-house capability to manage such litigation.

In this litigation management role, Barley Snyder’s employment attorneys operate as a gatekeeper for employment litigation, both at the administrative level and in state and federal court. When a company receives notice that a charge or complaint has been filed, the company forwards the matter to one of our gatekeeper lawyers. The lawyer in turn will review the matter, determine assignment of local counsel, if necessary, and monitor and oversee the handling of the matter by local counsel, or, depending on the jurisdiction where the charge or lawsuit is filed, Barley Snyder itself may be able to handle the matter. Our lawyers will also monitor the costs of the litigation and supply a client with a detailed budget regarding the services to be provided.

Barley Snyder offers its litigation management services at reduced rates. As part of this service, Barley Snyder also will provide a monthly status report for each state in which your company operates. Contact Jennifer Craighead for more information about these services - jcraighead@barley.com or 717-399-1523.

David Freedman is an experienced labor and employment litigator who represents public and private employers of all types and sizes in litigation before state and federal courts and administrative agencies. David has represented employers in claims brought under Title VII of the Civil Rights Act, the Americans with Disabilities Act, the Age Discrimination in Employment Act, the Family and Medical Leave Act, the Combined Omnibus Budget Reconciliation Act (“COBRA”), the Pennsylvania Human Relations Act, the Pennsylvania Wage Payment Collection Law and the Pennsylvania Unemployment Compensation Law, among others.

Click here for David's full biography...

Appeals Court Rules that Prior Oral Agreement Requires Employer to Recognize Union Through Authorization Cards

David R. Keller — Thu, 01 Nov 2012 09:47:20 -0500

On October 16, the United States Third Circuit Court of Appeals issued a decision highlighting the danger of entering into oral agreements with labor unions. In the case of Rite Aid of New Jersey v. United Food and Commercial Workers Union, Local 1360, the court upheld an arbitrator’s award requiring Rite Aid to recognize and bargain with a union at any store where the union obtains majority support through authorization cards. Relying upon an oral agreement made many years earlier, the court rejected Rite Aid’s request for an election conducted by the National Labor Relations Board (“NLRB”).

In their first collective bargaining agreement (“CBA”), which ran from 1999 through 2002, Rite Aid and the Union agreed the Union could become a bargaining representative of employees in other stores through an NLRB-conducted election or “other demonstration of union status acceptable to” Rite Aid. Other evidence suggested Rite Aid orally agreed, in connection with the signing of the original CBA, that it would honor card check as the method of showing union majority status, rather than require an NLRB election.

Over several years, Rite Aid recognized the Union via card check on 63 occasions. After executing a later CBA, Rite Aid determined that card check was not an acceptable method of proving union majority status and began insisting on NLRB elections. The Union filed a grievance, and the arbitrator ruled that Rite Aid’s oral agreement from years earlier bound it. On appeal, the court held that, through the oral agreement, Rite Aid waived the right to reject card check status. The court also noted that Rite Aid received a benefit through the oral agreement because the Union’s Health and Welfare Plan agreed to use Rite Aid as a participating pharmacy provider. Additionally, Rite Aid negotiated two contracts with the Union after the oral agreement and could have raised and settled the issue during those negotiations. Having failed to do so, it was bound by its prior actions.

As this case demonstrates, oral agreements (even very old ones) can be binding in labor-management relationships. Management, therefore, should be wary of such oral agreements.

Bankruptcy Decisions You Should Know

Timothy G. Dietrich — Tue, 23 Oct 2012 10:57:43 -0500

Every now and then, a few cases that are clearly critical to commercial lending and loan recoveries float to the surface of the flood of bankruptcy court opinions. This is the first in a series of short synopses of cases that you should factor into your strategies.

Upstream Subsidiary Guaranty As A Fraudulent Conveyance

The case of In re TOUSA has been widely followed on appeal and is among the most significant in the country. Simply stated, the U.S. Bankruptcy Court for the Southern District of Florida found (1) that the granting of a guaranty by subsidiary corporations to secure more than $420,000,000 of new loans extended to the parent corporation, secured by liens on the corporate assets of the subsidiaries, was an avoidable fraudulent conveyance. The new lender provided funding for a compromise and settlement of prior secured debts, which rendered the parent company, in the opinion of the Court, the "most highly - leveraged company in the industry". TOUSA, Inc. was a large residential builder. Six months later, the parent company and all of its subsidiaries filed a Chapter 11 case. The fraudulent conveyance claim was advanced against the original lenders who received the compromise and settlement payment and they were ordered to return the $420,000,000 payment.

The Bankruptcy Code provides, in Section 548, that a trustee may avoid as fraudulent any transfer of an interest of the debtor (such as a lien) if the debtor received less than reasonably equivalent value in exchange for the transfer and the debtor was insolvent at the time or rendered insolvent as a result of the transfer. Obviously, to the extent that a transfer is avoided under Section 548 of the Bankruptcy Code, the trustee may recover the property transferred, either from the initial transferee or from an entity which benefited from the transfer.

The Bankruptcy Court found that the subsidiaries were, in fact, insolvent at the time that the guaranty and new collateral were granted and that the subsidiaries did not receive reasonably equivalent value for the guaranty and liens. The Court found that the subsidiaries received indirect and minimal benefits from the transaction and rejected the contention that avoidance of contingent claims, avoidance of litigation or avoidance of imminent bankruptcy were sufficient consideration.

On appeal, the U.S. District Court reversed the decision of the Bankruptcy Court.(2) On further appeal to the U.S. Court of Appeals for the Eleventh Circuit, the District Court was reversed and the Eleventh Circuit essentially overruled the District Court and supported the original trial court decision. (3)

The Bankruptcy Court also discounted the viability of insolvency "savings clauses" in the subsidiary guaranty, which are not unusual in these transactions and purport to have the effect of reducing the amount of the guaranty by a sum sufficient to assure that the subsidiary remains solvent, thereby preventing a fraudulent conveyance claim. Neither the District Court nor the Eleventh Circuit ruled on the validity or effect of the savings clause.

The TOUSA decision may ultimately be little more than an obvious response to a refinancing occurring six months before a bankruptcy filing and the court’s judgment about the lenders’ due diligence. Nevertheless, the case raises several points that should be considered by both lenders and workout officers. For example:

(a) Due diligence on the financial condition and solvency of the subsidiary providing a guaranty must be thoroughly conducted and the creation of contemporary evidence of solvency at the time of the transaction is essential to the enforcement of the upstream guaranty.

(b) Incidental and intangible benefits to the subsidiary providing the guaranty, particularly in a setting where the companies are already stressed or in trouble, is unlikely to win the day in defending against a fraudulent conveyance claim. More concrete benefits must be identified - and documented. Some lenders resort to a "co-borrower" structure to work around the benefits/consideration problem. We urge caution in a co-borrower structure where there is ample evidence that the parties have no expectation that the subsidiary will borrow under the credit facility.

(c) The degree of foreseeability of subsequent financial difficulty must be assessed and a lack of credible evidence supporting the lender’s or recipient’s contention that they could not anticipate subsequent insolvency will be problematic.

(d) Credit underwriting decisions which rely upon the value of subsidiary assets and upstream guaranties have been common in the past, with the lender often arguing that the subsidiary received "indirect value", even though it did not receive loan proceeds. The TOUSA decision indicates that the possible prevention of an immediate bankruptcy filing is not "reasonably equivalent value", in and of itself. Upstream guarantys should be discounted as a credit support in the credit underwriting process, unless the lender can identify either (1) that the subsidiary will receive a direct and demonstrable benefit from the transaction or (2) the subsidiary was clearly, as shown by evidence, solvent at the time of the transaction.

(e) Receiving payoff proceeds from a transaction involving other funding sources, which include an upstream guaranty, may subject the recipient of the payoff to a fraudulent conveyance claim and to a refund of the payoff. Again, due diligence is necessary in any material payoff or settlement situation.

(f) Continue using "savings clauses" in upstream guaranties. Their protective value has not yet been finally determined.
____________________________
(1) Official Committee of Unsecured Creditors of TOUSA, Inc. v. Citicorp N. Am. Inc. (In re TOUSA Inc.), 422 B.R. 783 (Bankr. S.D. Fla. 2009).
(2) 3V Capital Master Fund Ltd. v. Official Committee of Unsecured Creditors of TOUSA Inc. (In re TOUSA Inc.), 444 B.R. 613 (S.D. Fla. 2011).
(3) Senior Transeastern Lenders v. Official Committee of Unsecured Creditors (In re TOUSA Inc.), 680 F.3d 1298 (11th Cir. 2012).

What Every Business and Lender Should Know About PACA

Daniel T. Desmond — Fri, 12 Oct 2012 10:52:01 -0500

PACA stands for the Perishable Agricultural Commodities Act, a Depression-era federal statute that protects growers and suppliers of unprocessed fruits and vegetables. PACA creates a floating, non-segregated trust on buyer’s accounts receivable and inventory. This provides PACA suppliers with a right to payment before all other creditors, including secured lenders with blanket liens. This super-priority status means that when a buyer purchases produce from a PACA supplier, it must account to the supplier before all other creditors. Until the buyer does, the trust operates by placing a lien on not only the inventory derived from the produce , but also on accounts receivable and proceeds from the sale of the produce. 7 U.S.C. § 499e(c)(2); In re Magic Restaurants, Inc., 205 F.3d 108, 111-12 (3d Cir. 2000). Since PACA can have harsh consequences for businesses and lenders that deal with PACA suppliers, it is important to be aware of its provisions. Front-end lenders also need to be mindful of ways in which they can protect their banks and guard against some of PACA’s unforgiving provisions.

To establish a PACA trust, the goods in question must be fruits and vegetables which have not been altered from their original state (i.e., cucumbers but not pickles, cranberries but not cranberry sauce, onions but not onion rings). The supplier must also provide the buyer with written notice that the goods are sold subject to PACA, which usually is found on the invoice. Unless the parties agree otherwise, PACA requires prompt payment (usually within thirty days). Buyers who breach a PACA trust may be subject to interest and attorneys fees for collection costs and their principals may be personally liable if they knowingly played a role in dissipating the trust assets (i.e., spending it elsewhere). That is one of the many reasons why it is important to be mindful of accounts involving PACA suppliers.

Perhaps most importantly to lenders, courts have held creditors liable for breach of the trust when they “knew or should have known” that they were being paid with receivables that rightly belonged to the PACA supplier. Consumers Produce Co., Inc. v. Volante Wholesale Produce, Inc., 16 F.3d 1374, 1382 (3d Cir. 1994). In Volante, the court stated that lenders must return the receivables from the PACA trust unless they could prove that they were a bona fide purchaser for value who did not know the receivables came from trust assets. Id; see also Albee Tomato, Inc. v. A.B. Shalom Produce Corp., 155 F.3d 612 (2d Cir. 1998).

In bankruptcy, PACA’s impact can be even greater. PACA supplier’s claims in bankruptcy enjoy the same super-priority status as they do outside bankruptcy, but they also are not subject to avoidance in a preference action. Courts have held that, since the debtor is holding the funds in question for the benefit of PACA claimants, the funds are not part of the bankruptcy estate. Hence, when the suppliers are paid in full from available trust funds, they are excluded from any new value defense to a preference claim. See In re Arizona Fast Foods, 299 B.R. 589 (Bankr. D. Ariz. 2003). Both the potential lender liability as well as the effects of PACA on a debtor’s bankruptcy estate should make creditors mindful of a the PACA trust.

The good news, at least in Pennsylvania’s federal courts, is that there is a limit to how far the PACA trust can extend. The trust corpus does not include vehicles and equipment purchased using PACA funds. United Fruit & Produce, 242 B.R. 295, 301. Moreover, real property similarly lies outside the trust since, like equipment, it is not inventory or proceeds from the sale of PACA products. Chiquita Brands Co. N. Am., Inc. v. J & J Foods, Inc., 2004 U.S. Dist. LEXIS 22847, *31-34 (E.D. Pa. 2004). Thus, simply because assets held or purchased by a produce buyer can be traced to PACA trust receivables, it does not follow that those assets are part of the PACA trust. Outside of Pennsylvania, however, courts have found that real property, equipment and even the insurance proceeds of a PACA debtor are subject to the PACA trust. See In re Kornblum, 81 F.3d 280 (2d Cir. 1996); J.A. Besterman Co. v. Carter’s Inc., 439 F. Supp. 2d 774 (W.D. Mich. 2006); In re Atlantic Tropical Market Corp., 118 B.R. 139 (Bankr. S.D. Fla. 1990); Sam Wang Produce, Inc. v. EE Mart FC, LLC, 2010 U.S. Dist. LEXIS 13608 (E.D. Va. 2010). It may not be long until the Third Circuit addresses this discrepancy.

So how can a lender wary of PACA protect itself on the front end? The best way is by including a loan provision requiring the debtor to keep a minimum amount, either in reserve or in the form of inventory, to cover eligible PACA claims. That way, the debtor will have funds on hand to cover PACA claimants and the lender will be able to recover from non-PACA assets.

Homeowners Emergency Mortgage Assistance Program and Act 91 Notice Requirements Officially Reinstated

Scott Landis — Fri, 28 Sep 2012 10:49:29 -0500

On August 9, 2012, Governor Tom Corbett announced the re-start of the Pennsylvania Homeowner’s Emergency Assistance Program ("HEMAP") administered by the Pennsylvania Housing Finance Agency ("PHFA"). HEMAP was discontinued in August of 2011 as a result of PHFA’s determination that it lacked the necessary funding for the program. In June of 2012, Governor Corbett signed the Homeowner Assistance Settlement Act. This act, among other things, allocates to HEMAP the lion’s share of Pennsylvania’s portion of the cash settlement received in the litigation brought by states and the federal government against the nation’s five largest mortgage servicers for alleged misconduct in connection with home foreclosures. According to the announcement, Pennsylvania’s share of the funds has been received and PHFA will begin accepting applications for HEMAP immediately.

Another important part of HEMAP is the Notice of Intention to Foreclose, also known as the Act 91 Notice (the "Act 91 Notice"), which a mortgage lender is required to send to the borrower before initiating a foreclosure against the borrower’s home. The Act 91 Notice provides notice to the borrower of the nature of their default and the time and method to cure such default. It also informs the borrower of HEMAP and how to apply for assistance under the program. The requirement to send the Act 91 Notice was suspended at the time HEMAP was discontinued. As part of the re-start of HEMAP, mortgage lenders will again be required to send the Act 91 Notice before instituting foreclosure in cases where the mortgage is secured by real estate that is the borrower’s primary residence. In the August 18, 2012 issue of the Pennsylvania Bulletin, PHFA published its formal notice of the resumption of HEMAP. According to the published notice, October 2, 2012 is the official date for resumption of the Act 91 Notice Requirement. As a result, lenders will not be able to institute foreclosures against a borrower’s home, unless it has sent the borrower an Act 91 Notice and has otherwise complied with the Act 91 Notice requirements. The form of Act 91 Notice that is required to be sent is the same form notice that was in effect when the notice requirement was suspended in 2011. A copy of PHFA’s published notice, which includes a copy of the form Act 91 notice is attached to this Alert.

One obvious timing question raised by this is how to handle loans that become eligible for foreclosure prior to the October 2, 2012 effective date. If the foreclosure is not filed prior to the effective date, either because it could not be filed (e.g. due to the pendency of another notice period) or for some other reason, the foreclosure will not be able to be filed until the Act 91 Notice is sent and all applicable notice or stay periods have run. This could delay the process for at least thirty (30) days or more. A possible solution to this situation would be to begin sending the Act 91 Notices prior to the date such notices are actually required. Beginning to send the Act 91 Notices no less than 30 days prior to the effective date (i.e., by September 2, 2012) should alleviate the problem of any "notice gap." Also, since PHFA is apparently already accepting applications for HEMAP, lenders may decide to begin sending the Act 91 Notices as soon as possible after publication of the official notification by PHFA.

Sending the Act 91 Notice prior to the actual effective date, as outlined above, will serve two purposes. First, it will make it less likely that a particular foreclosure will fall through the cracks during the transition. Second, it will comply with PHFA’s request that lenders give notice to homeowners who are currently in the foreclosure process of the possible availability of HEMAP assistance. Such voluntary notification on the part of mortgage lenders is being encouraged and recommended by some banking and lending organizations as a possible stop-gap to the fear that some courts may unilaterally impose blanket stays on foreclosure proceedings during the transition.

A final area to be discussed involves the inter-relationship between the Act 91 Notice and the notice required under Act 6. The Notice of Intention to Foreclose under Act 6 (the "Act 6 Notice") has been a part of the law since before Act 91. The resumption of requiring the Act 91 Notice does not eliminate Act 6. However, as was the case before the suspension of Act 91, the Act 6 Notice is not required where the Act 91 Notice is being sent. Act 91 expressly states that the Act 91 Notice is to be in lieu of any other notices. The Act 91 Notice also contains all of the information that is required to be included in the Act 6 Notice. For this reason, it seems clear that where the Act 91 Notice is sent no other notice is required, even where the notice is sent before the effective date of the Act 91 Notice requirement. Lenders who are concerned that discontinuing the Act 6 Notice prior to the effective date of the Act 91 Notice requirement could open their foreclosures to a technical challenge, may opt to send both notices during that time period. One other point to keep in mind - Act 6 is not going away. Where Act 91 does not apply, an Act 6 Notice could still be required where: a) the real estate being foreclosed upon meets the definition of "residential real estate" under the act; and b) the original mortgage amount is less than the "base figure" (currently $230,110).

Pennsylvania Supreme Court Expands Scope of Workers Compensation Liability for "Statutory Employers"

Joshua L. Schwartz — Thu, 13 Sep 2012 15:06:57 -0500

In a landmark decision that effectively overrules approximately thirty years of precedent, the Supreme Court of Pennsylvania recently expanded “statutory employer” status to any company that subcontracts for services or work “of a kind which is a regular or recurrent part of the entity’s business.” Under the new caselaw, contractors may be held secondarily liable for injuries incurred by their subcontractors’ employees, even if they have no control or authority over those employees.

It is well-established that, where a subcontractor’s employee is injured on premises generally controlled by a contractor, the contractor is responsible for workers compensation coverage if the subcontractor lacks insurance. This has been the case since the Supreme Court’s 1930 opinion in McDonald v. Levinson Steel Co. The new case, called Six L’s Packing Co. v. Workers’ Compensation Appeal Board (Williamson), extends this liability beyond the worksite.

Six L’s Packing Company harvests, processes, and distributes tomatoes and other produce. The company contracts with other companies for transport of tomatoes between its facilities and various other services. In April 2002, a employee for one of these contractors, F. Garcia & Sons, was injured in a motor vehicle accident while transporting tomatoes between a warehouse in Pennsylvania and processing facility in Maryland. Garcia did not have workers compensation coverage, and Six L’s was deemed the responsible statutory employer.

In awarding benefits, the Court rejected Six L’s arguments that it did not own trucks or employ drivers and that it was not in control of the public highway where the employee was injured, as required under the McDonald test. The Court noted that the “premises” language from McDonald did not appear in the section of the Act imposing statutory employer status on “contractors,” effectively limiting McDonald to circumstances in which employers control the worksite where an injury occurs. Since the Court further held that transport of tomatoes was a “regular or recurrent part of” Six L’s business, it was liable for the subcontractor’s injuries.

This case highlights the importance of ensuring that contractors carry workers compensation coverage for all their workers. Any company using contractors should obtain proof of such coverage and, further, may want to include indemnity clauses in its contracts to insulate itself from workers’ compensation liability.

NLRB Rules that Employer's Request for Confidentiality During Internal Investigation Violated NLRB Section 7

David Freedman — Thu, 30 Aug 2012 12:33:08 -0500

On July 30, the National Labor Relations Board (“NLRB”) issued a 2-1 decision in the case of In re Banner Health System, holding that the employer violated Section 7 of the National Labor Relations Act (“NLRA”) by requiring that participants in internal investigations maintain confidentiality. Section 7 of the NLRA makes it an unfair labor practice for an employer to inhibit employees’ “concerted activity” regarding their working conditions. The NLRB concluded that Banner Health System’s requirement of confidentiality in all internal investigations infringed on employees’ right to discuss their working conditions. Although the NLRB’s ruling does not impose an across-the-board ban on confidentiality during internal investigations, the decision makes clear that the NLRB now places the burden on employers to justify whether witnesses need protection, evidence is in danger of being destroyed, testimony is in danger of being fabricated, or there is a need to prevent a cover up. If an employer cannot demonstrate these factors, then a request for confidentiality during an internal investigation could be deemed an unfair labor practice.

The problem with this is that employers almost never have advance warning of such conduct. And when these issues do arise, it is frequently too late to undo the damage. As a result, requiring that an employer have a justification before requesting that investigation participants maintain confidentiality could significantly hamper the effectiveness of internal investigations. Placing that burden on employers seems particularly unfair given the significant liability employers face for retaliation under Title VII and other anti-discrimination statutes.

This ruling is the latest in a series of head-scratching NLRB opinions and proposed rules. Given the tension between the NLRB’s ruling and employers’ potential retaliation liability, employers will have to think long and hard about how strictly to follow the NLRB’s ruling. That being said, employers would be wise to review their internal investigation policies and procedures to minimize strict reliance on any broad confidentiality mandates.

Deferred Action Application Process Implemented by DHS

Silas M. Ruiz-Steele — Fri, 24 Aug 2012 12:31:29 -0500

August 15, 2012 marks the beginning of the "deferred action" program implemented by the Department of Homeland Security. This program provides temporary relief from deportation, known as deferred action, to undocumented immigrants who were brought to the United States as children, and who meet certain eligibility criteria.

The program, which operates as a form of prosecutorial discretion, offers young people who are in the United States with no legal immigration status the opportunity to avoid deportation for an initial period of two years and to gain employment authorization.

The program is now available to individuals who:

(1) were under the age of 31 as of June 15, 2012;

(2) came to the United States before reaching their 16th birthday;

(3) have continuously resided in the United States since June 15, 2007;

(4) were physically present in the United States on June 15, 2012;

(5) entered without inspection before June 15, 2012, or had no lawful immigration status as of June 15, 2012;

(6) are currently in school, have graduated or obtained a certificate of completion from high school, have obtained a general education development (GED) certificate, or are an honorably discharged veteran of the Coast Guard or Armed Forces of the United States; and

(7) have not been convicted of a felony, significant misdemeanor, three or more other misdemeanors, or do not otherwise pose a threat to national security or public safety.

Individuals who are 15 or older and not in immigration detention may apply for deferred action through United States Citizenship and Immigration Services (USCIS). USCIS published the Form I-821D, to be used to request deferred action. Applications for employment authorization (Form I-765) may also be submitted concurrently with the request for deferred action.

For additional information or questions regarding how the above information may affect your case, please contact Silas Ruiz-Steele, Chair of the Immigration Section, at 610-898-7153 or sruizsteele@barley.com.

Homeowners Emergency Mortgage Assistance Program and Act 91 Notice Requirements Officially Reinstated

Scott Landis — Fri, 17 Aug 2012 12:28:26 -0500

On August 9, 2012, Governor Tom Corbett announced the re-start of the Pennsylvania Homeowner’s Emergency Assistance Program (“HEMAP”) administered by the Pennsylvania Housing Finance Agency (“PHFA”). HEMAP was discontinued in August of 2011 as a result of PHFA’s determination that it lacked the necessary funding for the program. In June of 2012, Governor Corbett signed the Homeowner Assistance Settlement Act. This act, among other things, allocates to HEMAP the lion’s share of Pennsylvania’s portion of the cash settlement received in the litigation brought by states and the federal government against the nation’s five largest mortgage servicers for alleged misconduct in connection with home foreclosures. According to the announcement, Pennsylvania’s share of the funds has been received and PHFA will begin accepting applications for HEMAP immediately.

Another important part of HEMAP is the Notice of Intention to Foreclose, also known as the Act 91 Notice (the “Act 91 Notice”), which a mortgage lender is required to send to the borrower before initiating a foreclosure against the borrower’s home. The Act 91 Notice provides notice to the borrower of the nature of their default and the time and method to cure such default. It also informs the borrower of HEMAP and how to apply for assistance under the program. The requirement to send the Act 91 Notice was suspended at the time HEMAP was discontinued. As part of the re-start of HEMAP, mortgage lenders will again be required to send the Act 91 Notice before instituting foreclosure in cases where the mortgage is secured by real estate that is the borrower’s primary residence. In the August 18, 2012 issue of the Pennsylvania Bulletin, PHFA published its formal notice of the resumption of HEMAP. According to the published notice, October 2, 2012 is the official date for resumption of the Act 91 Notice Requirement. As a result, lenders will not be able to institute foreclosures against a borrower’s home, unless it has sent the borrower an Act 91 Notice and has otherwise complied with the Act 91 Notice requirements.   The form of Act 91 Notice that is required to be sent is the same form notice that was in effect when the notice requirement was suspended in 2011. A copy of PHFA’s published notice, which includes a copy of the form Act 91 notice is attached to this Alert.

One obvious timing question raised by this is how to handle loans that become eligible for foreclosure prior to the October 2, 2012 effective date. If the foreclosure is not filed prior to the effective date, either because it could not be filed (e.g. due to the pendency of another notice period) or for some other reason, the foreclosure will not be able to be filed until the Act 91 Notice is sent and all applicable notice or stay periods have run. This could delay the process for at least thirty (30) days or more. A possible solution to this situation would be to begin sending the Act 91 Notices prior to the date such notices are actually required. Beginning to send the Act 91 Notices no less than 30 days prior to the effective date (i.e., by September 2, 2012) should alleviate the problem of any “notice gap.” Also, since PHFA is apparently already accepting applications for HEMAP, lenders may decide to begin sending the Act 91 Notices as soon as possible after publication of the official notification by PHFA.

Sending the Act 91 Notice prior to the actual effective date, as outlined above, will serve two purposes. First, it will make it less likely that a particular foreclosure will fall through the cracks during the transition. Second, it will comply with PHFA’s request that lenders give notice to homeowners who are currently in the foreclosure process of the possible availability of HEMAP assistance. Such voluntary notification on the part of mortgage lenders is being encouraged and recommended by some banking and lending organizations as a possible stop-gap to the fear that some courts may unilaterally impose blanket stays on foreclosure proceedings during the transition.

A final area to be discussed involves the inter-relationship between the Act 91 Notice and the notice required under Act 6. The Notice of Intention to Foreclose under Act 6 (the “Act 6 Notice”) has been a part of the law since before Act 91. The resumption of requiring the Act 91 Notice does not eliminate Act 6. However, as was the case before the suspension of Act 91, the Act 6 Notice is not required where the Act 91 Notice is being sent. Act 91 expressly states that the Act 91 Notice is to be in lieu of any other notices. The Act 91 Notice also contains all of the information that is required to be included in the Act 6 Notice. For this reason, it seems clear that where the Act 91 Notice is sent no other notice is required, even where the notice is sent before the effective date of the Act 91 Notice requirement. Lenders who are concerned that discontinuing the Act 6 Notice prior to the effective date of the Act 91 Notice requirement could open their foreclosures to a technical challenge, may opt to send both notices during that time period. One other point to keep in mind - Act 6 is not going away. Where Act 91 does not apply, an Act 6 Notice could still be required where: a) the real estate being foreclosed upon meets the definition of “residential real estate” under the act; and b) the original mortgage amount is less than the “base figure” (currently $230,110).

To read the complete notice click here.

Please feel free to contact a member of the Barley Snyder Finance and Creditors Rights Group if you have any questions about this.

Deadline Approaching for Participant-Level Plan Fee Disclosures

Mark A. Smith — Sun, 12 Aug 2012 10:49:42 -0500

As reported in prior newsletter articles, sponsors of defined contribution qualified retirement plans having participant-directed investments, including most 401(k) and 403(b) plans, must provide participants detailed information concerning certain fees associated with their plan’s operations and investment choices. For purposes of these disclosure requirements, participants include employees eligible to participate, whether or not they are enrolled in the plan. The first annual disclosure under the Department of Labor regulations must be made by August 30, 2012 in the case of calendar year plans. The disclosure requirements are intended to facilitate more informed decision-making by plan participants about their investment decisions.

The disclosure rules are elaborated in recently finalized Department of Labor regulations, which require the plan administrator (usually the plan sponsor) to disclose to participants “plan-related information” and “investment-related information.” Plan-related information includes matters such as the circumstances under which participants can give investment instructions; explanation of any expenses for general plan administrative services that may be charged against a participant’s account; and expenses that may be charged against a participant’s account on an individual basis (e.g., fees for processing plan loans and qualified domestic relations orders and for investment advice). Investment-related information covers identification of each investment option available under the plan; average annual rates of return for the plan’s investment options and benchmark returns for similar classes of investment; sales charges, redemption fees and other expenses that may be charged directly against a participant’s account; restrictions or limitations on purchases, withdrawals or transfers; expense ratios, expressed as both a percentage and a dollar amount for a $1,000 investment; and various disclosures specific to particular investment types (e.g., fixed-return, employer stock and annuity purchase investments).

Department of Labor guidance published in the form of thirty-eight frequently asked questions (FAQs) further elaborates the operation of the disclosure rules in various contexts, such as where recordkeeping fees are reduced by revenue sharing proceeds the recordkeeper receives from the plan’s investment options and in cases of self-directed brokerage windows. These initial disclosures must be followed, beginning no later than November 14, 2012, by quarterly individualized statements reflecting the dollar amount of fees and expenses charged against each participant’s account during the preceding quarter and a description of the services to which the charges relate. While plan administrators will typically rely on their plans’ service providers to furnish the information required for the disclosures, the plan administrator bears ultimate responsibility for compliance. Therefore, it is essential that plan administrators work closely with their vendors to ensure that the required disclosures will be provided on a timely basis to plan participants.

The 8/80 Overtime Rule for Hospitals and Nursing Care Facilities is Alive In Pennsylvania!

Richard Hackman — Sun, 05 Aug 2012 10:46:40 -0500

Earlier this month, Governor Corbett signed into law H.B. 1820, which revives the 8/80 overtime rule and gives health care institutions and nursing homes in Pennsylvania a reason to cheer. The Governor’s approval of this bill is in response to a decision from the Philadelphia Court of Common Pleas and subsequent class action litigation that created turmoil over how nurses could be scheduled and paid for overtime in Pennsylvania.

Under this new law, Pennsylvania health care institutions and nursing homes can now rely on the 8/80 method of overtime calculation available under the federal Fair Labor Standards Act (FLSA), which is now fully incorporated into Pennsylvania’s Minimum Wage Act. The 8/80 method is an alternative to the standard requirement to pay overtime to employees for all hours worked in excess of 40 in a 7-day workweek. Under the 8/80 method, hospitals, nursing homes, homes for the aged, and certain other medical institutions who provide residential care were permitted under federal law to pay their non-exempt employees one and one-half times their regular rate for all hours worked in excess of 8 hours in a workday, and in excess of 80 hours in a 14-day period.

Health care institutions across Pennsylvania have had a long history of using the 8/80 method to accommodate patient needs and the non-traditional schedules of a round-the-clock facility. However, after a March 2010 Philadelphia court decision in Turner v. Mercy Health System, ruling that the 8/80 method is not available in Pennsylvania, health care institutions faced the challenge of rescheduling their nurses and paying all non-exempt workers overtime for all hours worked in excess of 40 in a 7-day workweek, or risk being a target for class action litigation that was proliferating against hospitals in Pennsylvania.

Now, with the passage of this law, health care institutions and nursing homes once again have flexibility in scheduling their employees under the 8/80 method.

No Time Like the Present: Prepare your Estate Plan for Possible Changes in Federal Tax Law

Alex E. Snyder — Mon, 30 Jul 2012 10:43:12 -0500

The year 2012 promises to be a watershed for federal estate, gift and generation skipping transfer (“GST”) tax law. Much to the potential chagrin of taxpayers, the significant and largely taxpayer friendly changes to the federal transfer tax system enacted in 2010 are set to expire at the end of this year if Congress does not take further action.

On December 17, 2010, President Obama signed the Tax Relief, Unemployment Insurance Reauthorization, And Job Creation Act of 2010 into law. This Act was passed as a temporary stop gap to a previous set of laws that expired in 2010. The 2010 Act was largely favorable to taxpayers, as it increased the amount of wealth that could be shielded from federal estate and gift taxes to $5 million per person, escalated annually for inflation, set the maximum marginal gift, estate and generation skipping tax rate at 35% (down from a maximum of 55% in recent years), and made the estate tax exemption portable between spouses, so that any unused estate tax exemption on the death of the first spouse could be transferred to the surviving spouse, to be used on his or her death. As a result, through the credits available to both spouses, a married couple can shield up to $10 million (indexed for inflation) from federal estate tax, and individuals can transfer significant wealth to their descendants through gifting.

Unfortunately, the changes brought about by the 2010 Act are set to expire at the close of 2012 unless Congress takes further action. If that happens, each individual will be able to pass only $1 million in assets (indexed for inflation) without being subject to Federal estate tax, the maximum gift, estate and generation skipping tax rate will increase from 35% to 55% and the portability option will be removed. In practical terms, the federal estate tax will impact many more individuals and families and the top estate tax rate will be 20% higher than under the 2010 Act. Of course, this is likely a worst case scenario, as Congress is predicted to enact further legislation.

What does this mean for you? For one, it is a good time to revisit your estate plan to ensure that it is functioning properly in anticipation of significant potential changes in transfer tax law. Through some planning, you can ensure that your ability to shield your hard earned wealth from estate tax is maximized. Second, for those impacted by the possible reduction in the federal estate tax exemption amount, it may also be a good time to consider removing assets from your estate, with strategies such as gifting, the use of irrevocable life insurance trusts, and charitable bequests.

While history has shown that it is difficult to predict changes Congress will make to the tax code, it has also shown that merely reacting to those changes can have serious consequences in the arena of estate planning. If you have not done so already, it may be a good time for you to contact your advisor to discuss your estate plan and how it will be impacted by the impending changes in tax law.

Employers Must Act on Retirement Plan Service Provider Disclosures

David J. Ledermann — Sun, 15 Jul 2012 10:40:28 -0500

Retirement plan sponsors should by now have received detailed fee disclosures from their plan’s service providers. United States Department of Labor regulations required that by July 1, 2012, service providers furnish information concerning the services being performed; the cost of such services; the payment sources of the service provider’s compensation; and the service provider’s fiduciary status, if applicable. Affected retirement plans include defined benefit and defined contribution plans (such as 401(k) plans), as well as ERISA-covered 403(b) plans. The underlying compliance issue addressed by these new regulations is that, under ERISA, all plan service provider arrangements must be “reasonable,” with any arrangement not meeting this standard being deemed a “prohibited transaction.” Civil liability and excise tax consequences are imposed on all parties involved in approving and participating in a prohibited transaction.

The disclosure regulations apply to providers of ERISA fiduciary services, registered investment advisers, and recordkeepers and brokerage firms making available designated investment alternatives for self-directed individual account plans. In addition, individuals or firms receiving indirect compensation (i.e., payments other than from the plan or from the plan sponsor) who provide accounting, actuarial, auditing, appraisal, legal and third party administration services must satisfy the disclosure requirements. Service providers expecting to receive less than $1,000 under an arrangement are not required to furnish these disclosures.

The plan administrator must review the service provider disclosures to determine the reasonableness of each arrangement, including the reasonableness of the compensation and whether any conflicts of interest exist. This process involves looking beyond the amount of fees directly expended by the plan for services, to encompass the total compensation received by a service provider from all sources, including revenue sharing arrangements and marketing fees paid by third parties, such as mutual funds.

The plan administrator has a duty to ensure that the service provider disclosures are received and that they are complete, failing which the administrator should immediately request that the service provider promptly furnish fully compliant disclosures. Absent a satisfactory response within 90 days, the plan administrator, to avoid itself being deemed a party to an ERISA prohibited transaction, must notify the Department of Labor concerning the service provider’s noncompliance. The plan administrator must also determine whether to discontinue the relationship with the service provider.

The plan administrator’s duty under ERISA to engage only in reasonable service provider arrangements may entail benchmarking of fees within a peer group of similar plans, issuing a request for proposal to prospective service providers and replacing service providers in cases of unsatisfactory performance, excessive fees or conflicts of interest. Some situations may call for a renegotiation of service provider contracts. Plan administrators who are not sufficiently knowledgeable or inclined to undertake this process alone should consult a professional advisor to assist them in meeting their fiduciary obligations in connection with their plans’ service provider arrangements.

Real Esate Brokers - Get it in Writing or Lose Your Commission

Sarah Yocum Rider — Tue, 10 Jul 2012 10:35:47 -0500

Real estate brokers who rely upon oral agreements or oral modifications or extensions to written brokerage agreements run the risk of losing valuable commissions.

In a 2011 Pennsylvania Superior Court case, the Court addressed the enforceability of an oral extension to a written listing agreement. The Court ultimately refused to allow a real estate broker to recover a commission from a landlord based on an oral extension to a brokerage agreement. The broker failed to comply with the Pennsylvania Real Estate Licensing and Registration Act (“RELRA”) (see 63 P.S. §§ 455.101 - 455.902) by failing to put the extension of the term of the agreement in writing.

In order for brokerage agreements to be enforceable, it is important to be aware of the RELRA requirements. The RELRA provides that brokerage agreements must be in writing and signed by all parties. The Pennsylvania Superior Court held that this requirement must be applied to extensions of original brokerage agreements as well.

In addition, a written brokerage agreement must contain the following:

1. Notice that a Real Estate Recovery Fund exists to reimburse a person who has obtained a final civil judgment against a Pennsylvania real estate licensee owing to fraud, misrepresentation or deceit in a real estate transaction and who has been unable to collect the judgment after exhausting legal and equitable remedies;

2. Notice that payments of money received by the broker on account of a sale shall be held by the broker in an escrow account pending consummation of the sale or a prior termination thereof;

3. Notice that the broker’s commission and the duration of the agreement have been determined as a result of negotiations between the broker, or a licensee employed by the broker, and the seller/landlord or buyer/tenant;

4. A description of the services to be provided and the fees to be charged;

5. Notice about the possibility that the broker or any licensee employed by the broker may provide services to more than one party in a single transaction, and an explanation of the duties owed to the other party and the fees which the broker may receive for those services;

6. Notice of the licensee’s continuing duty to disclose in a reasonably practicable period of time any conflict of interest;

7. In an agreement between a broker and a seller/landlord, a statement regarding cooperation with subagents and buyer agents, a disclosure that a buyer agent, even if compensated by the listing broker or seller/landlord, will represent the interests of the buyer/tenant and a disclosure of any potential for the broker to act as a dual agent; and

8. In an agreement between a broker and a buyer/tenant, an explanation that the broker may be compensated based upon a percentage of the purchase price, the broker’s policies regarding cooperation with listing brokers willing to pay buyer’s brokers, a disclosure that the broker, even if compensated by the listing broker or seller/landlord will represent the interests of the buyer/tenant and a disclosure of any potential for the broker to act as a dual agent.

Typically, all of the requirements above are included in standard written brokerage agreements. However, it is equally important to be aware that any extensions (or other modifications) to those agreements must be in writing signed by the parties in order for such agreements (and thus rights to commissions) to be enforceable.