April 6, 2013

On March 26, 2013, in Teed v. Thomas & Betts Power Solutions, LLC, the U.S. Court of Appeals for the 7th Circuit in Chicago affirmed the U.S. District Court’s decision to impose successor liability on an entity who acquired the assets of [...]]]> By Steve Mulligan
Bieging Shapiro & Barber LLP

April 6, 2013

On March 26, 2013, in Teed v. Thomas & Betts Power Solutions, LLC, the U.S. Court of Appeals for the 7^th Circuit in Chicago affirmed the U.S. District Court’s decision to impose successor liability on an entity who acquired the assets of a company being sued under the Fair Labor Standards Act (the “FLSA”).

JT Packard & Associates (“Packard”) provided maintenance and emergency technical services for equipment designed to protect computers and other electrical devices from being damaged by power outages.  Packard was a profitable company but its parent was not having defaulted on a $60 million secured loan.  Prior to the default, employees had sued Packard and the parent for violations of the FLSA.

The parent assigned its assets-including its stock in Packard to an affiliate of the secured lender.  The assets were placed in a receivership under Wisconsin law and auctioned off, with the proceeds going to the secured lender.  Thomas & Betts Power Solutions, LLC (“Thomas & Betts”) was the high bidder at the auction having paid approximately $22 million for Packard’s assets.  A condition of the sale was that Packard’s assets were to be conveyed free and clear of all liabilities that had not been assumed including any of the liabilities that Packard might incur in the FLSA litigation.  After the transfer, Thomas & Betts continued to operate Packard under the same name and had offered employment to most of Packard’s employees.  Subsequent to the acquisition, Thomas & Betts was substituted as the defendant in the FLSA litigation.

In rendering its decision, the 7^th Circuit held that the federal standard, not the state standard, applied for determining whether successor liability applied.  The 7^th Circuit held that successor liability is appropriate in suits to enforce federal labor or employment laws even when the successor disclaimed liability unless there are good reasons to withhold such liability.  One good reason would be lack of notice – the first criterion of the federal standard.  In this case, Thomas & Betts had notice and specifically disclaimed liability for any damages under the FLSA.  The court reasoned that application of the federal standard was appropriate to achieve the statutory goals of federal labor and employment laws.  Otherwise, workers would often not be able to head off a corporate sale by their employer aimed at extinguishing the employer’s liability to them.

The 7^th Circuit noted that under Wisconsin law, the applicable state law in this case, successor liability would not be imposed.

This decision could have far reaching impact on mergers and acquisitions.  Potential liability for FLSA violations and violations of other federal law could reduce the price an acquirer is willing to pay for the assets of a company or make the acquisition of a going concern economically unfeasible leading to piecemeal liquidation.  This decision could also adversely impact sales of companies out of bankruptcy since the 7^th Circuit seems to suggest that this type of successor liability would apply in bankruptcy cases.  The court notes that when a company is in bankruptcy, maximizing the value of its assets for the benefit of all its creditors is a primary goal in a sale context and if an appropriate purchase price cannot be negotiated to account for the potential successor liability, the assets might have to be sold on a piecemeal basis even if economic value would have been destroyed.

It is not certain if other courts will follow this decision or how it will be interpreted.  At this point, though, it does give cause for concern and the potential successor liability, at least for FLSA violations, must not be ignored.  Also, ensure that you know the federal standard for determining the issue of successor liability in the event that it applies rather than a state law standard – it might help in structuring the deal in the best possible way.

For more information, please contact Steve Mulligan at Bieging Shapiro & Barber LLP at 720-488-0220 or smulligan@bsblawyers.com.

February 28, 2013

Bankers and lenders, if your borrower grows marijuana or rents to people who grow marijuana, your real property collateral may be at risk of forfeiture under federal law despite the fact that such activity might be legal under Colorado state law.

Judge Howard A. Tallman, chief judge of [...]]]> By Steve Mulligan

February 28, 2013

Bankers and lenders, if your borrower grows marijuana or rents to people who grow marijuana, your real property collateral may be at risk of forfeiture under federal law despite the fact that such activity might be legal under Colorado state law.

Judge Howard A. Tallman, chief judge of the U.S. Bankruptcy Court in Colorado, had recent occasion to considersuch a situation.  In In re Rent-Rite Super Kegs West Ltd., the Chapter 11 debtor owned a warehouse in Denver and some of its tenants were in the business of growing marijuana.  While this may be a legal activity under Colorado law, it is not under the federal Controlled Substance Act (the “CSA”) unless one receives a certificate of registration from the Drug Enforcement Agency (“DEA”).

Judge Tallman looked to § 856 of the CSA, known as the “crack house statute,” which provides that it is a federal crime to use real property or allow real property to be used for unlawfully manufacturing, storing, distributing, or using a controlled substance.  Marijuana is a Schedule I controlled substance under the CSA.

The Judge then looked to the criminal penalties for violating the CSA which includes a potential prison term of not more than twenty years.  As a result, the federal forfeiture statute comes into play.  That statute provides that real property used in connection with activities that violate the CSA and are punishable by more than one year’s imprisonment is subject to forfeiture.

Consequently, Judge Tallman found that the debtor’s illegal activity put the lender’s collateral at risk because of the federal forfeiture statute.  Moreover, since the automatic stay provisions of the Bankruptcy Code do not prevent the U.S. from seizing property under the forfeiture statute, the risk continued every day that the debtor remained in bankruptcy.  The matter was before the court on the secured creditor’s motion to dismiss the debtor’s bankruptcy case.

In re Rent-Rite highlights the need for lenders to gather important information when underwriting and administering a commercial real estate loan.  Such information should include current rent rolls, copies of any leases, and research on any tenant; it may be that the name is a good indication as to what the tenant’s business is.  If possible, you may want to visit the property to see if any potentially illegal activity is taking place.  An affirmative covenant from the borrower that no activity in violation of state or federal law may also be beneficial.

Additionally, consider requiring the borrower to provide periodic updates and immediate notification if it enters into any new leases or changes its own business to include growing marijuana.  Finally, think about reviewing your default provisions; if the borrower engages in activities that are in violation of the CSA or allows such activities to occur, you may be able to declare a default under the loan documents.

For more information, please contact Steve Mulligan, Duncan Barber or Christian Otteson at Bieging Shapiro & Barber LLP at 720-488-0220.

Kevin Funnell, Of Counsel for Bieiging Shapiro & Barber, LLP, will be presenting a public webinar on technology service agreements on March 6, 2013 for BankersHub. The presentation is entitled, “Technology Service Agreements: Meeting Regulators’ Expectations.”

Regulators, employing basic principles of safety and soundness, expect financial institutions to document their [...]]]> January 25, 2013

Kevin Funnell, Of Counsel for Bieiging Shapiro & Barber, LLP, will be presenting a public webinar on technology service agreements on March 6, 2013 for BankersHub. The presentation is entitled, “Technology Service Agreements: Meeting Regulators’ Expectations.”

Regulators, employing basic principles of safety and soundness, expect financial institutions to document their legal agreements with their technology service providers in a way that appropriately allocates the legal and business risks to the parties that arise out of the relationship. Regulators also expect institutions to minimize the risk that the institution will be held liable for claims caused by the service providers’ performance of (or failure to perform) the services.

The session will discuss what banks and credit unions should consider in negotiating and documenting their agreements with third party technology service providers so that those agreements do the following:

• Meet regulatory guidance
• Protect the financial institution from unacceptable (and often unanticipated) legal risks, and
• At the same time, meet the institution’s business needs

Mr. Funnell works with financial institutions and other companies on complicated business and regulatory matters, including mergers and acquisitions, business alliances, commercial transactions, financial institutions regulations, mortgage banking, privacy, Internet and electronic commerce, outsourcing, and information technology services. He also represents financial institutions in connection with legal and regulatory compliance issues related to treasury management services and new product development and implementation.

The webinar, originally scheduled for January 23, has been rescheduled for March 6. It is open to the public, and details on accessing the live presentation are available on the BankersHub website.

January 11, 2013

Shortly before she left office, Sheila Bair gave an interview to the American Banker’s Joe Adler, in the course of which she admitted something she’s admitted before.

“As bad as I knew subprime and the nontraditional mortgages were, I never thought it would have led to this global, [...]]]> By Kevin Funnell

January 11, 2013

Shortly before she left office, Sheila Bair gave an interview to the American Banker’s Joe Adler, in the course of which she admitted something she’s admitted before.

“As bad as I knew subprime and the nontraditional mortgages were, I never thought it would have led to this global, on-the-brink crisis that we experienced in the fall and early winter of 2008,” she said.

This is essentially the same admission she made to NBC Today host Matt Lauer in 2009. No matter how smart we think we were, few of us, including the bank regulators, saw this coming. To paraphrase respected banking attorney Walt Moeling, the FDIC and the other bank regulators told everyone to prepare for a 100-year flood, and we got a 500-year flood.

Notwithstanding the foregoing, those of us who represent community banks that are in distress have seen a consistent pattern of accusations by federal bank examiners and supervisory personnel that senior management and directors of community banks that have suffered because of concentrations of credit in commercial real estate, were, solely because of those concentrations, negligent in the performance of their fiduciary duties to their banks.

However, as we continue to wallow in an unprecedented (since the 1930s) period of economic malaise, we think the regulators are starting to see some weakness in that line of reasoning. We’ve seen some subtle shadings in the accusations against bank directors and management that we think are influenced by the fact that if push comes to shove, a trier of fact is going to have a tough time finding “gross negligence” or even “ordinary negligence” (in states where that standard applies) in the conduct of some of the boards of directors and senior management of community banks with CRE concentrations.

Instead of continuing to argue that the failure to anticipate the depth and severity of the economic downturn and the ripple effect of the collapse of the subprime mortgage market on the rest of the economy (including commercial real estate) was “grossly negligent,” we’ve seen cases where the regulators allege that when the depth of the downturn became evident, senior management and directors were “grossly negligent” in not reacting swiftly enough and/or effectively enough to address these concentrations or the otherwise deal with the problem CRE loans.

I think the regulators will have a tough time if they sue directors or senior management on that basis, except in the most egregious cases of failure to act or failure to act with alacrity and/or coherence. Once the train started rolling down hill, taking fast action might have saved some assets, but not most. In case the “experts” within the regulatory agencies didn’t grasp the fact, once Lehman Brothers was allowed to fail and all hell broke loose, the Epic Fail train had already pulled out of the station. Banks might have made themselves feel better by putting lipstick on their pigs, but other banks or buyers weren’t fooled into thinking that they might be buying or lending on the value of anything other than something out of which bacon is made.

Then again, much of what we see these days appears to be designed to deflect blame from the regulators themselves for not foreseeing what any reasonable person would admit was not foreseeable (other than those few short-selling protagonists of “The Big Short”).

It couldn’t be that most of us were caught, like grazing bovines, staring dully and uncomprehendingly at a tractor plowing a field in the distance, as a stampede of crazed water buffalo bore down on our backsides. No, in this brave new world that’s judged with the benefit of 20/20 hindsight, somebody has got to take the fall for the unforeseeable, and that somebody sure as hell is going to be “the other guy.”

__________________________

Originally published in the December 2012 issue of the BankersHub.com newsletter.

Bieging Shapiro & Barber LLP is pleased to announce that Julie A. Trent, a partner with the firm, will be giving a presentation to the board of directors of the Colorado Medical Society on November 7, 2012. Ms. Trent will be presenting on the issue of physician-related, non-compete provisions [...]]]> Nov. 1, 2012

Bieging Shapiro & Barber LLP is pleased to announce that Julie A. Trent, a partner with the firm, will be giving a presentation to the board of directors of the Colorado Medical Society on November 7, 2012. Ms. Trent will be presenting on the issue of physician-related, non-compete provisions in Colorado.

Covenants not to compete are statutorily void in Colorado, with certain, limited exceptions. One of the statutory exceptions allows non-compete provisions vis-à-vis physicians if the non-compete includes a liquidated damages provision that allows a physician to “buy” his or her way out of the non-compete. This is an important issue for physicians and health care organizations, as employers, because of the current and proposed changes in how health care is provided. Additionally, it’s an important an issue for patients who want to ensure that their choice of physician is available to them.

Ms. Trent has drafted, negotiated and litigated non-compete provisions in Colorado for many years as part of her general litigation practice. Bieging Shapiro & Barber was founded in 2001 by former partners of national and regional law firms, and provides companies and individuals with superior legal expertise in a broad range of commercial litigation and other business matters.

Best [...]]]> Bieging Shapiro & Barber is pleased to announce that three of its attorneys have been named to the 2013 edition of The Best Lawyers in America, the oldest peer-review publication in the United States. The BSB attorneys are partners I. Thomas Bieging, Stephen B. Shapiro and Julie M. Williamson.

Best Lawyers® has compiled its list of the most respected attorneys in the U.S. for more than 30 years, using a rigorous and unbiased process of confidential surveys.

Thomas Bieging focuses his practice in the areas of banking and commercial litigation. He was named to “Best Lawyers” for his work in Banking and Finance Law, Commercial Litigation, Financial Services Regulation Law, and Litigation – Banking and Finance.

Stephen Shapiro was named to Best Lawyers for his Insurance Law practice. In his role as insurance coverage counsel for policyholders, Mr. Shapiro has secured many millions of dollars in insurance benefits to resolve third party and first party coverage claims.

Julie Williamson has extensive experience in the area of complex commercial litigation, including multi-forum, class and collective actions involving insurance practices, employment disputes, consumer fraud, sports franchise matters, and employee benefits. Ms. Williamson was selected for her work in Commercial Litigation (Civil Litigation, Complex Litigation and Mass Tort).