It was the spring semester of 1983 when I took the introductory Business Associations (“BA”) class at the University of Texas Law School. As a second-year student who knew nothing about business associations—and who was scared stiff of the professor, Robert W. Hamilton—I didn’t foresee spending most of the next 40 years in a career devoted to the subject, first in law practice, then in teaching. But that’s what happened.

In spring 2023, as I transition to emeritus law professor status at Drake University, I remain a BA student in many respects. I regularly consult with attorneys in my home state (Iowa) on business law matters, serve on the Iowa State Bar Association’s Business Law Section Council and its Legislative Committee, present CLEs, and maintain a treatise on business organizations.^[1] As I reflect on changes in the field over the past four decades, the details far exceed the scope permitted in a magazine column. This article instead covers several trends I’ve observed during my years as a BA student, providing, I hope, a forest perspective on some of the trees that comprise modern business entity law.

Increasing Statutory Complexity

In 1983, my study of statutory law in the BA course was largely confined to three acts: the Uniform Partnership Act (1914) (“UPA”), the Uniform Limited Partnership Act (1976) (“ULPA”), and the Model Business Corporation Act (“MBCA”). The latter had just been comprehensively redrafted for the first time since 1950, with my professor serving as Reporter.^[2] These same statutes still guided most states’ business associations laws when I began teaching BA at Drake in 1992.

Critically, each act was relatively short. The UPA ran 6,500 words, while the ULPA, including a minor 1985 revision, totaled just 4,000 words. The MBCA was a bit longer but still manageable. Given the relatively simple statutory architecture, in a four-credit BA course I could survey most provisions in each of the three acts, along with interpretative case law. I was also able to contrast parts of Delaware corporate law with the MBCA, and to introduce “baby business” and accounting concepts, as well as some securities law basics.

By the 2021–22 school year, my last year of full-time teaching, the instructor’s task in BA was considerably more challenging because the length and complexity of statutory business associations law had increased dramatically. At 32,000 words, the UPA (1997/2013) was five times as long as the original act.^[3] The ULPA (2001/2013) ran 35,000 words—eight times its original length.^[4] The Uniform Limited Liability Company Act (“ULLCA”), a newer and critical business entity statute, had grown from roughly 17,000 words in 1996 to 31,000 words in its latest version, ULLCA (2006/2013).^[5] Not to be outdone, the most recent version of the MBCA clocked in at roughly 62,000 words.^[6]

Although it’s tempting to conclude these modern business associations codes are needlessly prolix, several other trends I’ve observed over the past 40 years help explain the acts’ increased length and complexity.

Economic Perspectives Prevail

Brevity was an appealing feature of older business associations codes, but many provisions in those acts were prescriptive, allowing little or no variation from statutory norms. Scholars began to substitute economic analysis for social and regulatory conceptions of business associations as early as the 1930s, and by the 1980s these views were ascendant and increasingly influential with policymakers.^[7] A preference for private ordering over regulation has reshaped the direction of business associations statutes ever since.

Today, whether one organizes a partnership, a limited liability company (“LLC”), or a corporation, business associations codes provide only default rules for many internal matters. Owners of a business entity are thus generally free to tailor the entity’s governance template through partnership or operating agreements, corporate charter or bylaw provisions, and/or secondary contracts.

This emphasis on contractual freedom comes at a price, of course. Modern business entity codes are longer than their former counterparts, in part because they must spell out detailed boundaries for permitted governance variations, as well as “opt-out” or “opt-in” procedures for firms that want to use them.^[8]

Limits on Judicial Regulation

Statutory business associations law was also relatively simple in the early 1980s because judicial decisions filled many gaps. As an example, case law—not statutes—traditionally defined the scope of corporate director and officer fiduciary duties, attendant liability and damage risks, and the permissible boundaries for judicial review, like the business judgment rule. The same was true for litigation involving partners of general and limited partnerships.

Both fiduciary duties and the business judgment rule remain key precepts of modern business associations law. And judges remain involved in their development, though far more in Delaware than in other states. But concerns about perceived judicial overreach triggered changes starting in the mid-1980s, and governing codes began to incorporate nuanced yet complex statutory provisions that constrain the role courts play in business entity disputes.^[9]

For example, following statutory trends first launched in Delaware in 1986 and consistent with private ordering themes described earlier, the MBCA has, since 1990, allowed corporations to exculpate directors against damage claims for duty of care violations with an optional charter provision.^[10] Unincorporated entity acts have embraced similar innovations for partnerships and LLCs.^[11] In 1998, the MBCA added complex and lengthy provisions regulating the permissible scope of claims against directors for monetary damages, including grounds for suit and burdens of proof on both claims and defenses.^[12]

Current statutory innovations designed to reduce litigation risks for corporations and their fiduciaries include procedures for ratification of defective corporate actions, advance approval or waiver procedures for duty of loyalty claims, enhanced indemnification rights for fiduciaries, and limits on permissible litigation forums.^[13] As with other statutory governance options in modern business associations law, the enabling provisions are often both lengthy and complex.

Although most statutory innovations have reduced the potential for judicial involvement in business entity disputes, developments for closely held organizations go both ways. On the one hand, modern statutes authorizing specialized management arrangements and exit planning for privately held corporations have reduced the occasion for judicial challenges to such plans.^[14] On the other hand, new statutory oppression remedies in most jurisdictions now supplement or replace minority owner fiduciary protections derived from case law and are available for both closely held LLCs and corporations.^[15]

Entity Proliferation

The three acts I studied when taking BA in 1983—the UPA, the ULPA, and the MBCA—also described the primary entity options available to business lawyers and their clients at that time: partnerships, limited partnerships, and corporations, with the potential addition of “professional” or “Subchapter S” options for the latter. Available entity choices have since increased dramatically because of two near-simultaneous developments in the late 1980s.

The first was a 1988 revenue ruling authorizing pass-through taxation for owners (“members”) of an LLC—a novel entity then available in only two states—offering limited liability to all participants, along with flexible options for company management.^[16] The second was legislation allowing new limited liability versions of partnerships, a product of malpractice litigation against partners in Texas law firms and national accounting firms in the wake of the savings and loan crisis of 1988.^[17]

As a result of these developments, by the mid-1990s all states had amended their business entity codes to encompass these new options, including limited liability partnerships (“LLPs”), limited liability limited partnerships (“LLLPs”), and LLCs, as well as “professional” variations of new entities, like PLLPs and PLLCs. This expanded entity menu necessarily added to the complexity of statutory business associations law, including new provisions in partnership acts governing LLPs and LLLPs, additional freestanding codes (LLC acts), and, in recent years, supplemental legislation authorizing “series” LLCs.

As acceptance of these novel entity choices has grown over the past three decades—with the LLC the clear favorite for closely held firms—that growth has also fueled added complexity for business associations case law as long-established doctrines, like veil piercing and other exceptions to limited liability, and even traditional creditor remedies, like charging orders, are relitigated in new contexts.^[18] That trend will surely continue as benefit corporations, now available in 34 states, and other new entity options join the mix.^[19]

Technological and Transactional Flexibility

As in other legal fields, many changes in business associations laws over the past few decades were designed to accommodate technological innovations. In corporate law, for example, former requirements for filing paper documents now encompass electronic equivalents.^[20] Sanctioned notice processes have also evolved from paper to electronic systems.^[21] And these changes extend well beyond documents and recordkeeping. When I studied BA in 1983, statutes authorizing directors to meet through a conference telephone call—a then-recent innovation—seemed “as fur as they could go,” to paraphrase Oscar Hammerstein.^[22] But today’s corporation acts go much further, including authorization for fully remote shareholder meetings.^[23]

Modern business associations laws also offer considerable flexibility with respect to transactional formalities, including permissive rules for organic changes. For example, in the 1980s, a partnership that reorganized as a corporation might need to first dissolve or take other steps to transfer assets and liabilities to a newly formed corporate entity. Today that partnership could conduct a cross-entity merger or a single-step “conversion” to the corporate form.^[24] In the 1980s, if a corporation wanted to change its governing law, the company organized a new corporation in the foreign state and then merged into it. Today a corporation or unincorporated entity can typically conduct a “domestication” transaction that changes its governing jurisdiction in a single step.^[25]

Conclusion

Despite all the changes I’ve seen over the past 40 years, the agency law foundations on which business associations are constructed haven’t changed at all. Nor have the fundamental purposes of business associations law: to mediate conflicts that inevitably arise in the life of a business entity between owners and managers, between majority owners and minority owners, and between the entity and third parties.

At the moment, everything old is new again, at least in some quarters. Debates concerning the proper objectives of business associations—debates that began in the 1930s and seemed settled in recent years—now rage anew in fights over corporate missions that include environmental, social, and governance (“ESG”) considerations. As Yogi Berra famously said, “It’s tough to make predictions, especially about the future.” While I wait to see what happens, my mantra is the same as when I took my first BA class in spring 1983: Take good notes!

Doré is the Richard M. and Anita Calkins Distinguished Professor of Law Emeritus, Drake University Law School. Professor Doré’s contact information at Drake is [email protected].

1. Matthew G. Doré, 5 & 6 Iowa Practice—Business Organizations (Thomson Reuters 2022–23) (latest annual edition). ↑

2. For a history of the Model Business Corporation Act’s evolution from 1928 through 2000, see Richard A. Booth, A Chronology of the MBCA, 56 Bus. Law. 63 (2000). ↑

3. Unif. P’ship Act (1997) (Unif. L. Comm’n, amended 2013). ↑

4. Unif. Ltd. P’ship Act (2001) (Unif. L. Comm’n, amended 2013). ↑

5. Unif. Ltd. Liab. Co. Act (2006) (Unif. L. Comm’n, amended 2013). ↑

6. Model Bus. Corp. Act (Am. Bar Ass’n 2020 rev., updated online Sept. 2021). ↑

7. See, e.g., Frank A. Easterbrook & Daniel R. Fischel, The Economic Structure of Corporate Law (1991) (an early, influential work). ↑

8. See, e.g., Model Bus. Corp. Act § 7.04(b)–(g) (optional procedures whereby corporate shareholders can act outside of a meeting with less than unanimous consent); Unif. Ltd. Liab. Co. Act § 105 (describing scope, function, and limitations of operating agreements). ↑

9. Smith v. Van Gorkom, 488 A.2d 858 (Del. 1985), which held that directors were not sufficiently informed when approving a corporate merger and thus not protected by the business judgment rule, is often cited as a catalyst for changes that followed. See, e.g., Bernard F. Sharfman, The Enduring Legacy of Smith v. Van Gorkom, 33 Del. J. Corp. L. 287 (2008). ↑

10. See Del. Code Ann. tit. 8 § 102(b)(7); Model Bus. Corp. Act § 2.02(b)(4). ↑

11. See, e.g., Unif. Ltd. Liab. Company Act § 105(d)(3)); Unif. Part. Act § 105(d) (1997) (Unif. L. Comm’n, amended 2013). ↑

12. Model Bus. Corp. Act §§ 8.30–.31. ↑

13. Id. §§ 1.45–.52, 2.02(b)(5)–(6), 2.08, 8.60–.63. ↑

14. Id. §§ 6.27, 7.32. ↑

15. Id. §§ 14.30–.34; Unif. Ltd. Liab. Company Act § 701(a)(4)(C)(ii). ↑

16. Rev. Rul. 88-76, 1988-2 C.B. 360. ↑

17. See Robert W. Hamilton, Registered Limited Liability Partnerships: Present at the Birth (Nearly), 66 Colo. L. Rev. 1065 (1995). ↑

18. For example, courts have had to decide whether and to what extent well-established judicial exceptions to limited liability apply in the new limited liability settings. See Matthew G. Doré, What, Me Worry? Tort Liability Risks for Participants in LLCs, 11 U.C.–Davis Bus. L.J. 267 (2011). For an overview of recent developments concerning charging orders issues, see Daniel S. Kleinberger, What Is a Charging Order and Why Should a Business Lawyer Care?, Bus. L. Today (Mar. 6, 2019). ↑

19. See, e.g., Christopher D. Hampson, Bankruptcy & the Benefit Corporation, 96 Am. Bankr. L.J. 93 (2022) (considering how traditional bankruptcy principles should apply to benefit corporations). ↑

20. See, e.g., Model Bus. Corp. Act §§ 1.20, 1.40 (defining “filing” rules for “documents” and encompassing both paper and electronic records). ↑

21. Id. § 1.41 (providing rules for notices and other communications). ↑

22. Oscar Hammerstein II, Kansas City, Oklahoma (1943) (“Ev’rythin’s up to date in Kansas City. They’ve gone about as fur as they could go.”). ↑

23. Model Bus. Corp. Act § 7.09 (permitting remote participation in shareholder meetings). ↑

24. Unif. Part. Act §§ 1121–26; 1141–46 (authorizing merger and conversion transactions). ↑

25. See, e.g., Model Bus. Corp. Act §§ 9.01–.24. In fact, one of the stated reasons for the 2016, or “fourth,” edition of the MBCA was to recognize and facilitate inter-entity transfers and to coordinate with unincorporated business association acts. ↑

The Mendes Hershman Student Writing Contest is a highly regarded legal writing competition that encourages and rewards law students for their outstanding writing on business law topics. Papers are judged on research and analysis, choice of topic, writing style, originality, and contribution to the literature available on the topic. The distinguished former Business Law Section Chair Mendes Hershman (1974–1975) lends his name to this legacy. Read the abstract of this year’s third-place winner, Max Londberg of University of Cincinnati College of Law, Class of 2023, below. Visit the University of Cincinnati Law Review website to read the full article, published in Volume 91.

Colorblind ideology has hindered the purpose of Title VII, which declared it unlawful to refuse to hire a job applicant because of their race, sex, or other traits. Recent federal court decisions have continued this trend, diminishing legitimate discrimination claims by failing to properly recognize one manifestation of racism and sexism in hiring. This form of bias surfaces when employers adjust their stated hiring criteria, de-emphasizing certain job applicant traits, such as education, held by a marginalized candidate, while emphasizing other traits, such as relevant experience, held by a non-marginalized candidate. Robust empirical research supports that such criteria shifting is motivated by an applicant’s gender or race. In numerous studies, participants hire marginalized candidates when race and gender are concealed but fail to hire them when such traits are revealed. They often rationalize their discrimination, and thus maintain a self-image of fairness, by invoking hiring criteria that they, consciously or not, manipulated to benefit non-marginalized candidates.

Several federal courts have failed to properly recognize this manifestation of discrimination, despite its identification in the social science literature. This piece provides an analysis of these cases interspersed with empirical findings, which together illustrate how inconsistent hiring criteria unlawfully hamper marginalized candidates, leading to adverse employment decisions based on protected traits. Courts must improve their analysis of this form of evidence. When a Title VII plaintiff demonstrates the presence of inconsistent hiring criteria, and when an employer hires an applicant outside the plaintiff’s protected class, courts should rarely grant employer motions for summary judgment. Decisions to the contrary contravene summary judgment standards and the scope of Title VII.

As the legal market moves through the first quarter of 2023, predictions from the team at Reveal-Brainspace have already become a reality—with many more ups and downs to come. From macro headwinds to advancements in AI and Web3 tech, the AI and LegalTech experts at Reveal have outlined the biggest moves that are already taking shape and the focus areas that will be taking much of legal practitioners’ attention for the rest of the year. One thing will stay consistent during 2023: AI will continue to have a multiplying effect on the legal vertical now and well into the future.

Overall market trends in LegalTech

The use of AI for eDiscovery is set to continue its rapid growth, driven by the successes experienced by early adopters in corporate legal departments, law firms, and legal services providers worldwide. The proliferation of artificial intelligence (machine learning (ML), natural language processing (NLP), ethical AI, AI-generated art, etc.) is a key driver of this growth, and 2023 will see a continued wave of AI adoption fueled by cost pressures and the need to accelerate time to evidence and insight. The increasing volume, variety, and velocity of data is also making AI a necessity rather than just a nice-to-have option.

In the area of eDiscovery, the growth and proliferation of new data types will drive innovation and create challenges for legal professionals. Direct connectors and data visualization purposes designed for these new data formats will take center stage in 2023, as more communication formats that don’t fit the traditional four corners of a page gain traction and legal professionals move towards modern eDiscovery.

In the business of law, Alternative Legal Service Providers (ALSPs) will likely continue to consolidate in 2023, in response to both economic pressures and the desire to expand their offerings beyond eDiscovery. More players are expected to enter the fields of information governance, compliance, and cyber functions to get closer to the data and remain stickier with their clients.

Massive advances in eDiscovery technology and use-cases

The mission to perfect AI-powered eDiscovery technology will continue, while new use cases will explode. We’re already experiencing this as we begin Q2 2023. eDiscovery technology will likely expand beyond its traditional boundaries as organizations look to leverage its power in areas such as cybersecurity incident response, privacy, information governance, and much more. Businesses and legal professionals will increasingly turn to the unstructured data analytics within eDiscovery to solve a range of challenges around human-generated and AI-generated data.

If you need any evidence of this already taking place, look no further than the explosion of generative AI tools like ChatGPT and DALL-E. These tools are going to be a major focus area for legal practitioners—creating new considerations and use cases for advanced eDiscovery solutions in a variety of situations.

Additionally, the technology underlying Web3 will continue to proliferate and raise complex legal questions, despite the slow rate of adoption of the Metaverse. For example, the conversion of real-world assets into digital ones with NFTs raises questions about the extent that real-world rights carry into augmented or virtual reality. As Metaverse or Web3 devices become less expensive and the user experience becomes more accessible, adoption and legal questions will continue to grow.

Softening of M&A activity

After several years of robust M&A activity, the market is expected to experience a dramatic slowdown in 2023, driven primarily by economic headwinds. If the global economy continues to experience a period of slow growth or uncertainty, it may make companies cautious about making new investments or acquisitions, with the LegalTech space no exception to the rule.

However, while M&A is softening, it will certainly remain relevant. The activity that will take place will be extremely deliberate, strategic, and meaningful to the companies involved. This is good for the industry, as it gives the entire space time to think, rethink, and make well-informed decisions.

Economic headwinds will drive AI-powered innovation in order to do more with less

While the economic uncertainty will likely affect M&A activity for the remainder of the year, it is simultaneously is driving greater adoption of legal technology to control budgets. Challenges in securing tech budgets may lead to corporate legal departments outsourcing to ALSPs that can provide access to the AI-powered tools they may not be able to directly procure in 2023. eDiscovery is expected to see increased use of AI to reduce document review costs in 2023.

The force multiplier effect of legal AI means it may see widespread adoption as practice groups and legal departments must do more with less. Crisis often is the most fertile time for organizational transformation, and 2023 is no different.

The growing importance of social considerations (the “S” in ESG) has appeared in numerous headlines, as companies learn the hard way that cutting corners in areas like supply chain and human capital does not pay off in the long run. In the past two years, a number of Fortune 500 companies have had to pay out large sums to mitigate the consequences of their poor choices surrounding overseas production. In this article we focus on the “S” aspects of ESG with regards to conducting M&A due diligence, and what companies should evaluate prior to approving an M&A deal.

As discussed in our prior ESG in M&A article, a large number of investors believe that companies with strong ESG initiatives are more lucrative investments, pose less risk, and are better positioned for the long term. Moreover, because of the SEC’s announced plan^[1] to create an ESG reporting framework that would complement the current financial reporting framework, targets with higher ESG scores are perceived, in many cases, as having higher market value. Environmental and governance aspects of ESG seem to be easier to measure, which may explain why companies find it easier to tackle those issues first. Acquirers often overlook the social aspects of ESG metrics, which can result in minimal evaluation of social issues during ESG due diligence.

The “S” part of ESG is a broad topic that covers a wide range of social issues; diversity and inclusion, fair pay, workplace safety and environment, employee turnover, company ethics, and reputation are among the factors that are evaluated when assessing a company’s “social” health in ESG metrics. Increasingly, we have seen companies reevaluating their production practices to address supply chain hiccups and questionable labor practices. Many companies have had significant problems resulting from cargo crime,^[2] the invasion of Ukraine,^[3] the growth of e-commerce, sudden shortages, centralized inventory, and a patchwork of logistics,^[4] all of which are significant supply chain problems that fall under the “S” in ESG. We will examine a few of these issues more closely.

1. Supply Chain Risks

Since the beginning of the COVID-19 pandemic, companies have been suffering frequent and major disruptions to global supply chains. Prominent examples include shortages of lumber to build houses and of semiconductor chips for vehicles and mobile phones. To address these issues, manufacturing companies often sought out alternative suppliers. The manufacturers often failed to conduct proper vetting of such alternative suppliers and in many cases wound up with less reputable vendors as a result. In some cases, improperly vetted alternative vendors may be less transparent with their “social” practices and also less ethical in general. Vendor practices are increasingly “broadcast” worldwide via online and social platforms such as TikTok and Instagram. The questionable practices of suppliers—after coming to light—are often viewed by third parties as a reflection of the manufacturer’s practices and ethics, with the publishers of ESG ratings, and sometimes even litigants, holding the manufacturer accountable for its vendors’ practices. Some of the examples of ethical issues in supply chains are:

• corruption and bribery;
• unsafe labor conditions;
• non-living wages or forced labor;
• child labor;
• cargo crime;
• environmental harm; and
• discriminatory work environment.

To combat these issues and demonstrate their commitment to social and environmental performance, more businesses are looking to third-party certification processes. For example, many companies dealing with these issues choose to become “B Corp” certified. B Corp certification of for-profit companies is offered by the B Labs Global. The designation confirms that a business is meeting high standards of verified performance, accountability, and transparency on factors from employee benefits and charitable giving to supply chain practices and input materials. As of September 2022, there were 5,697 certified B Corporations across 158 industries in 85 countries. Among some of the best known B Corp certified companies are Ben & Jerry’s,^[5] TOMS,^[6] and Patagonia.^[7] Many of these companies also donate their products to charity to match purchases by consumers. For example, for every pair of TOMS shoes purchased, a pair of new shoes is given to a child in need in partnership with humanitarian organizations.

According to Accenture Strategy’s Global Consumer Pulse Research, more than 60% of surveyed consumers closely consider a company’s ethical values and authenticity before a purchase. Moreover, the research showed that 42% of consumers “stopped doing business with a company because of its words or actions about a social issue.”^[8]

To illustrate this with a real-world example, a confectioner was struggling to ensure that harvesting the ingredients it used, like cocoa and soy, did not contribute to deforestation. Also, several confectioners were accused of child labor issues in recent years, and were named in a lawsuit over child labor in cocoa production countries. As a result, the company made changes, such as setting strict policies on deforestation and promising to train all of its buyers on human rights issues. Child labor, forced labor, deforestation, women’s rights, and living wages were among the most pressing human rights issues across the value chain for these companies. Another real-world case that attracted headlines was the investigation of fashion retailer Boohoo, which was accused of being aware of its suppliers underpaying their staff and exposing workers to life-threatening risks in their workplaces.^[9] As a result, multiple online retailers removed Boohoo’s products from their websites.^[10]

Some companies have chosen an alternative solution to supply chain social concerns: bringing manufacturing in house. However, the high costs, risks, and logistics associated with this option mean it is not always a feasible choice to address supplier concerns.

2. M&A Due Diligence and Supply Chain Risks

The great difficulty with addressing these social and ethical issues is that they are often not discussed or uncovered in the M&A process until the company becomes a defendant in a lawsuit, the subject of an investigation, or the object of press or social media attention. At that point, the company has already suffered severe damage to its reputation due to actions taken by another party, not to mention potential exposure to monetary damages resulting from pre-closing actions. It is hard to measure many of these practices when they are defined differently across industries and from country to country. It also requires significant corporate resources to monitor each vendor and each of their sites. Nevertheless, with the growing pressure from customers and investors, ethical production is a critical component to have a successful and sustainable business in the 21^st century.

So, how should a buyer assess a target company’s approach to social compliance in its supply chain? Buyers should confirm that the target company is communicating regularly and often with its vendors and conducting periodic site visits, if possible. It is a good idea for a company to include its ESG standards in its supplier contracts to ensure that the company’s ESG policies have been clearly communicated and vendors know its expectations in that regard. Another good practice is to ask whether the target uses supply chain mapping to maintain awareness of its production sites and those of its vendors. With effective supply chain mapping, a company divides its vendors into different categories, which can allow it to see weak points in its supply chain and avoid incurring costly issues.

What impact do social issues have for potential buyers and targets in M&A transactions? To start with, buyers need to be aware of the prevalence and impact of these issues and be proactive in identifying and evaluating them. According to a study conducted by Accenture during the early months of the COVID-19 pandemic, 94% of Fortune 1000 companies are seeing supply chain disruptions, 75% of companies have had “negative or strongly negative impacts” on their business, and 55% of companies plan to downgrade their growth outlook or have already done so.^[11] Based on a survey conducted by Datasite of 200 UK-based dealmakers, almost 20% stated that supply chain problems were the cause of at least one deal falling apart in 2021, and 22% identified supply chain issues as the number one cause that would trigger an M&A deal to fall through in 2022.^[12] Many companies that had order backlogs of one to two months prior to COVID-19 now have increased their estimate of the backlog by up to four times.^[13] For instance, a target that had backups for almost every component in their products but one key part with no alternate supplier had to be taken down from the market due to potential buyers’ concern.^[14] Such a potential outcome suggests that targets also would be well advised to conduct thorough internal due diligence on these topics prior to going to market.

3. Fair Labor Practices and Unionization

Fair labor practices are another important aspect of the social responsibility portion of ESG. More U.S. stakeholders are urging companies to improve labor practices and working environments. If a company’s ESG policies assert that they ensure equitable labor practices, they may face scrutiny if they fail to actively address workplace issues with their suppliers. Moreover, the recent resurgence of unionization activities is evidence of its importance. Unionization offers additional protection and benefits for employees, but can also pose extra costs and burdens on employers; oftentimes a company’s response to these activities is perceived as an indicator of a company’s labor practices and hence a part of its ESG assessment. A Starbucks store in Buffalo, New York, became the first Starbucks location in the U.S. to unionize in 2021.^[15] Since then, over 270 Starbucks stores have unionized.^[16] Starbucks, like other food and beverage companies, is bracing for the impact of the threat of higher labor costs due to unionization, and has also faced national scrutiny for its response to workers’ attempts to unionize.^[17]

In addition to the growing unionization in the U.S., more and more companies are addressing safe labor practices in their non-U.S. factories. One example of such an effort was the result of the tragic accident in Rana Plaza, a factory in Bangladesh that collapsed in 2013 killing over 1,100 people. Workers had noticed cracks in the structure before the building collapsed and begged not to be sent inside, but they were rebuffed by their employers.^[18] The collapse of the eight-story building, which housed five garment factories supplying at least 29 global brands, remains one of the deadliest industrial accidents to date.^[19] Such a “mass industrial homicide,” as union leaders called it, drew the attention of global organizations that took action to create safer working standards. These standards now show up in retailers’ ESG reports.

However, despite the aforementioned efforts to improve the conditions of factories in Bangladesh and other countries with significant garment sectors, the working environment for many employees remains far from ideal. A 2020 U.S. Senate Report titled “Seven Years After Rana Plaza, Significant Challenges Remain” discusses the unsafe practices of these factories, especially during the COVID-19 pandemic.^[20] The report found that in factories that remained in operation during the pandemic, workers were forced to work without adequate precautions, leaving them and their families at great risk of COVID-19 infection.^[21]

More recently, a fire at the Nandan Denim factory in India killed seven people in 2020.^[22] According to the Nandan Denim website, it is the biggest denim producer in India.^[23] The manufacturer sells jeans to more than twenty countries for many high street brands, and import data showed shipments entering the United States from the factory just one month before the fire occurred. Unfortunately, the Nandan Denim fire is not a rarity, as fires in retail factories are not an uncommon occurrence.^[24] Such occurrences can lead to damaged reputations as well as an influx of civil lawsuits and a criminal investigation. Following the Nandan Denim incident, the production facility came to a halt, and the director, general manager, and fire safety officer of Nandan Denim were taken into police custody. Additionally, six individuals from the factory’s parent group were charged with homicide and negligence.^[25]

In light of these frequent tragedies, more and more U.S. stakeholders are asking companies to improve their labor practices and working environments, with some even supporting union organization activity. Employers that don’t actively inquire into the workplace issues of their suppliers may find themselves under scrutiny if their ESG policies state that the company ensures fair labor practices outside of the United States. Further, where a company represents that it strives to ensure fair labor practices for its vendors, taking action to oppose union organization in the U.S. may be seen as inconsistent with such claimed commitment to fair labor practices.

4. ESG Due Diligence

It is advisable for buyers in M&A transactions to conduct due diligence investigations regarding ESG practices of the target not only to determine whether there are potential risks, but also to ensure that the target will integrate well into the buyer’s own ESG practices and policies. A buyer should request information on whether there have been recent changes in supply chain vendors and suppliers of the target company. Also, a buyer should gain an understanding of how the target company monitors its supply chain and review its applicable contracts. Specifically, a buyer should look into whether there are any contractual requirements outlining ESG expectations in a target’s agreements with vendors and suppliers. Furthermore, buyers should visit physical sites, review compliance certificates, and provide questionnaires in order to be better aware of a target’s supply chain practices. Some industries are likely to have more significant exposure to ESG issues in the supply chain than others, particularly businesses in the automotive, semiconductors, industrials, and retail industries. Lastly, even after conducting appropriate ESG due diligence, a buyer should consider including ESG-related provisions in the purchase agreement. These clauses can include ESG representation and warranties, closing conditions, and ESG-specific indemnities. Such provisions can go hand-in-hand with (and often enhance) a thorough diligence process to give the buyer the best chance of avoiding post-closing losses.

1. Allisson Herren Lee, “A Climate for Change: Meeting Investor Demand for Climate and ESG Information at the SEC,” U.S. Securities and Exchange Commission, March 15, 2021. (The SEC has “begun to take critical steps toward a comprehensive ESG disclosure framework aimed at producing the consistent, comparable, and reliable data that investors need.”) ↑

2. Rachel Layne, “Clogged U.S. supply chains lead to cargo theft,” CBS News, November 2, 2021. ↑

3. Knut Alicke et al., “Supply chains: To build resilience, manage proactively,” McKinsey & Company, May 23, 2022. ↑

4. Kyle VanGoethem, “What Are the 5 Biggest Supply Chain Issues Today?” Stord, May 3, 2022. ↑

5. “Ben & Jerry’s Joins the B Corp Movement,” Ben & Jerry’s, last accessed April 4, 2023. ↑

6. “TOMS, Certified B Corporation,” B Lab Global Site, last accessed April 4, 2023. ↑

7. “Patagonia Works, Certified B Corporation,” B Lab Global Site, last accessed April 4, 2023. ↑

8. Rachel Barton et al., “From me to we: The rise of the purpose-led brand,” Accenture, December 5, 2018. ↑

9. Archie Bland, “Boohoo knew of Leicester factory failings, says report,” The Guardian, September 25, 2022. ↑

10. Don-Alvin Adegeest, “Zalando, Next and Asos stop selling Boohoo brands after damning report,” Fashionunited, July 8, 2020. ↑

11. “Building supply chain resilience: What to do now and next during COVID-19,” Accenture, March 17, 2020. ↑

12. Datasite contributor, “Rising Inflation and Supply Chain Challenges: Will EMEA M&A Deals Be at Risk in 2022?” City A.M., February 17, 2022. ↑

13. Al Statz, “How Supply Chain Issues are Complicating M&A Dealmaking,” Exit Strategies, February 2, 2022. ↑

14. Id. ↑

15. Mary Yang, “Starbucks union organizing gave labor a jolt of energy in 2022,” NPR, December 9, 2022. ↑

16. “278+ STORES UNIONIZED AND 41,000+ UNION SUPPORTERS IN SOLIDARITY!” Starbucks Workers United, accessed January 30, 2023. ↑

17. Justin Stabley, “Why scrutiny of Starbucks’ alleged union violations is boiling over now,” PBS NewsHour, March 29, 2023. ↑

18. Michael Safi et al., “Rana Plaza, five years on: safety of workers hangs in balance in Bangladesh,” The Guardian, April 24, 2018. ↑

19. Shams Rahman and Aswini Yadlapalli “Years after the Rana Plaza tragedy, Bangladesh’s garment workers are still bottom of the pile,” The Conversation, April 22, 2021. ↑

20. A Minority Staff Report, 116^th Cong., “Seven Years After Rana Plaza, Significant Challenges Remain,” 116–17 (2020). ↑

21. “Bangladesh: Seven years on from Rana Plaza factory collapse, garment workers’ lives at risk again amid COVID-19,” Business & Human Rights Resource Center, April 24, 2020. ↑

22. Tara Donaldson, “Fire Kills Seven in Indian Factory that Made Denim For Major US Brands,” Rivet, February 10, 2020. ↑

23. “Nandan One World With Denim,” Nandan, accessed January 2, 2023. ↑

24. Express News Service, “Fire breaks out in footwear factory in Delhi’s Narela Industrial Area; no casualties yet, say officials,” The Indian Express, November 5, 2022. ↑

25. Clean Clothes Campaign, Deadly Indian Factory Fire Again Shows Need for Preventive Safety Measures and Justice for Workers, International Labor Rights Forum, February 17, 2020. ↑

We have seen a tsunami of cryptocurrency exchange bankruptcies—FTX, Celsius, and Voyager, to name a few. Often, disputes arise among stakeholders in these bankruptcy cases regarding whether cryptocurrency maintained by a customer with an exchange in a pure custody relationship is property of the customer or property of the bankruptcy estate. Usually the litigation turns on the account agreement, including what are often referred to as the “Terms of Service,” entered into between the customer and the exchange, and the application of nonstatutory common law contract and property law principles. Given the uncertainty evidenced by this litigation and out of concern for customer protection, federal and state regulators have called for greater clarity on the issue through new regulation or, given the lack of clear regulatory authority, legislation. Yet many customers, exchanges, regulators, and legislatures seem to be unaware of an already existing statutory tool for addressing and resolving the issue: Article 8 of the Uniform Commercial Code (“UCC”).

UCC Article 8: The Basics

The UCC, promulgated by the American Law Institute and the Uniform Law Commission, has been enacted in substantially uniform form by every state of the United States and the District of Columbia. Article 8 of the UCC provides a statutory scheme for the holding and transfer of investment securities, whether held directly by an investor from an issuer (so-called directly held securities) or held indirectly by an investor through a bank, broker, or other custodian acting for its customers, including the investor (so-called indirectly held securities). Of relevance here is the system for holding indirectly held securities (“indirect holding system”).

While the primary focus of Article 8 is generally on investment securities, Article 8’s indirect holding system provisions, contained in Part 5 of Article 8, can apply more broadly to any so-called financial assets as defined under Article 8. “Securities,” as defined in Article 8 (which may not coincide with the definition of securities under securities and other laws), are by definition financial assets. However, any other asset that the securities intermediary and its customer agree to treat as a financial asset is also a financial asset under Article 8 and is therefore within the scope of Article 8’s indirect holding system provisions. The agreement by which the exchange and the customer agree to treat an asset as a financial asset under Article 8 is referred to herein as a “financial asset election.”

Once the financial asset election is made and the financial asset is credited to the customer’s “securities account” at the securities intermediary, the customer (referred to in Article 8 as the “entitlement holder”) obtains a proprietary interest in, and contractual and statutory rights against the securities intermediary with respect to, the financial asset. That proprietary interest and contractual right are, together, referred to in Article 8 as a “security entitlement.”

A securities intermediary has a duty under Article 8, among other duties, at all times to maintain sufficient financial assets of each type to satisfy security entitlements to financial assets of that type. And, of chief importance here, financial assets to which the entitlement holder has a security entitlement are generally not property of the securities intermediary and are generally not subject to the claims of the securities intermediary’s creditors under Article 8.

Application of UCC Article 8 to Cryptocurrency in an Indirect Holding System

A cryptocurrency exchange could be a securities intermediary under Article 8, with the cryptocurrency held for the customer being treated as a financial asset credited to a securities account of the customer at the exchange under a financial asset election included in the account agreement. If that were the case, the cryptocurrency would generally not be property of the exchange and generally not be subject to the claims of the exchange’s creditors. If the exchange became a debtor under the Bankruptcy Code, absent contrary terms in the account agreement, the financial asset election under Article 8 would reduce, if not entirely eliminate, the need to litigate the terms of the account agreement over whether the cryptocurrency is customer or exchange property. This is because Article 8 states so clearly that financial assets maintained by a securities intermediary for its customer are generally not the securities intermediary’s property and are generally not subject to the claims of the securities intermediary’s creditors. In other words, in this circumstance, the cryptocurrency would be property of the customer rather than property of the exchange.

A securities intermediary is a person that in the ordinary course of its business maintains securities accounts for others and is acting in that capacity. It is true that the most common examples of securities intermediaries are clearing corporations holding securities for their participants, banks acting as securities custodians, and brokers holding securities on behalf of their customers. But nothing in the definition of the term securities intermediary as used in Article 8 limits securities intermediaries to clearing corporations, banks, or brokers. In addition, because a securities account is an account to which a financial asset is or may be credited in accordance with an agreement under which the person maintaining the account undertakes to treat the person for whom the account is maintained as entitled to exercise the rights that comprise the financial asset, and the definition of financial asset is not limited to “securities” as defined in Article 8, a person may be a securities intermediary even if that person does not credit securities to the account. Rather, the securities accounts that a securities intermediary maintains may consist exclusively of assets that the securities intermediary has agreed to treat as financial assets—even if the financial assets are not securities.

The assets could, indeed, be cryptocurrencies. In 2022, the American Law Institute and the Uniform Law Commission promulgated amendments to the UCC providing rules for digital assets, referred to in a new Article 12 of the UCC as “controllable electronic records.” Controllable electronic records include most cryptocurrencies. The Official Comments to the 2022 amendments, including amendments to Article 8, confirm that a cryptocurrency exchange can be a securities intermediary under Article 8. Furthermore, under the 2022 amendments, a controllable electronic record maintained by a customer with an exchange can be a financial asset if there is a financial asset election under Article 8.

Examples of other assets treated as financial assets that are sometimes credited to a securities account and that are not securities include negotiable instruments, banker’s acceptances, certificates of deposit, and cleared swap agreements.^[1] It is not necessary that the cryptocurrency be considered a security or commodity under other law for the asset to be a financial asset under Article 8.

Moreover, the indirect holding provisions of Article 8 are technologically neutral. To obtain financial asset status, it would not matter whether the cryptocurrency is maintained by the exchange on-chain or off-chain or whether the customer has its own private keys to any wallet maintained by the exchange for the customer but with the exchange having ultimate control over the cryptocurrency.

The policy rationale for this broad and flexible interpretation of Article 8 in the context of the indirect holding system is explained in Article 8 itself. The Prefatory Note to Article 8 states, “Rapid innovation is perhaps the only constant characteristic of the securities and financial markets. The rules of Revised Article 8 are intended to be sufficiently flexible to accommodate new developments.”^[2] And the Official Comments to Article 8 provide, “That question [of the scope of Part 5 of Article 8] turns in large measure on whether it makes sense to apply the Part 5 rules to the relationship.”^[3] Here, the rules of the indirect holding system fit well when the financial asset election is made. The customer obtains the benefits of the duties of a securities intermediary, set forth in Part 5 of Article 8, owed to the customer by the exchange—including the duty of the exchange to maintain sufficient cryptocurrency of each type to satisfy all customer security entitlements to the cryptocurrency of that type. The exchange assumes the Part 5 duties with the ability to modify those duties, to the extent permitted by Part 5 of Article 8, with the agreement of the customer. And, as is the case with indirectly held investment securities, cryptocurrencies held as financial assets credited to the securities accounts of customers generally are not subject to the claims of the exchange’s creditors. There is no obvious policy reason not to permit the exchange and the customer to agree to the benefits and burdens of the indirect holding provisions of Article 8.

Of course, some cryptocurrency exchanges may commingle their proprietary cryptocurrency with cryptocurrency of customers as part of a single fungible bulk. An exchange doing so does not in any way alter the result under Article 8 if there is a financial asset election. Article 8 contains no provision that requires a securities intermediary to segregate proprietary financial assets from customer financial assets. The key is for the books and records of the securities intermediary to reflect what quantity of financial assets of which type is subject to security entitlements and which customers hold the respective security entitlements. If there is a shortfall in the cryptocurrency necessary to satisfy security entitlements to the cryptocurrency of any type, the customers’ rights under their security entitlements will generally be superior to the proprietary interests of the exchange in the cryptocurrency of that type.

UCC Article 8 and Bankruptcy of a Cryptocurrency Exchange

Although there is so far no bankruptcy case addressing the issue, there is no reason why Article 8’s protections for customers’ cryptocurrency should not be recognized if the exchange were to become a debtor under the Bankruptcy Code. Based on the holding from the U.S. Supreme Court in Butner v. United States,^[4] the extent of a bankruptcy debtor’s interest in property is determined under applicable non-insolvency law, absent a compelling federal interest to the contrary—and there is no compelling federal interest why the applicable nonbankruptcy provisions of Article 8, after giving effect to financial asset election under Article 8, should not apply to determine the limitations of the exchange’s interest in the cryptocurrency maintained by the exchange for the customer. The interest of any creditor of the exchange would generally be similarly limited.

At most, the exchange’s interest would be limited to mere nominal title, which should not be problematic in the exchange’s bankruptcy case. Under Bankruptcy Code §§ 541(a)(1) and (d), the exchange’s nominal title is includable in the bankruptcy estate of the exchange. However, the bankruptcy estate’s nominal title in the cryptocurrency would remain subject to the limitations on the rights of the exchange as a securities intermediary, described above. The customer as the entitlement holder would have a security entitlement with respect to the cryptocurrency. Despite the exchange’s nominal title to the cryptocurrency, under Bankruptcy Code §§ 541(a)(1) and (d) the security entitlement itself remains the property of the customer and would not be included in the exchange’s bankruptcy estate. The customer may need relief from the automatic stay, and the assistance of the bankruptcy court in the bankruptcy case, for the cryptocurrency to be delivered out to another exchange or to the customer directly. If there is a shortfall in the cryptocurrency of the same type available to satisfy the security entitlements of all customers to cryptocurrency of that type, the customers would bear the shortfall ratably, and each customer would be treated as a general unsecured creditor of the exchange to the extent of the customer’s ratable share of the shortfall.

Caveats

To be sure, a cryptocurrency exchange and its customers making a financial asset election is not a panacea for what many see as the risks of owning cryptocurrency, or for the lack of regulation of cryptocurrency exchanges. A financial asset election under Article 8 in and of itself cannot prevent fraud, self-dealing, or even poor record-keeping by an exchange—or be a substitute for regulation of cryptocurrency as a security, commodity, or otherwise or for regulation of a cryptocurrency exchange as a money transmitter or other licensee. Moreover, the Article 8 protections, even with a financial asset election, may not apply under choice-of-law rules contained in Article 8 or in the Hague Securities Convention, when the customer permits the exchange to use the cryptocurrency for the exchange’s own benefit (including where the customer is promised a return from the exchange’s use of the cryptocurrency), or in exceptional circumstances referred to in Article 8.

Conclusion

Article 8 is clear and flexible, built to practically accommodate areas of expanding economic activity such as the emergence of cryptocurrency exchanges. Cryptocurrency exchanges and their customers should seriously consider the benefits of a financial asset election, and regulators and legislators should seriously consider requiring cryptocurrency exchanges to build a financial asset election into their Terms of Service or other account agreement provisions. An example of a statute requiring a financial asset election is the Uniform Law Commission’s proposed Supplemental Commercial Law for the Uniform Regulation of Virtual-Currency Businesses Act.^[5] The comments to that proposed supplemental act go into greater detail on the substantive provisions of Article 8 and related choice-of-law rules applicable to a financial asset election.

Carl S. Bjerre is the Kaapcke Professor of Business Law at the University of Oregon School of Law. Sandra M. Rocks is counsel emeritus at Cleary, Gottlieb, Steen & Hamilton LLP. Edwin E. Smith is a partner at Morgan, Lewis & Bockius LLP. Steven O. Weise is a partner at Proskauer Rose LLP. The views expressed in this article are the personal views of the authors and not of their respective organizations.

1. See generally Flener v. Alexander (In re Alexander), 429 B.R. 876 (Bankr. W.D. Ky. 2010), aff’d, Case No. 11-5054, 2011 WL 9961118 (6th Cir. Dec. 14, 2011) (treating a bank certificate of deposit as a financial asset credited to a securities account); Wells Fargo Bank, N.A. v. Est. of Malkin, 278 A.3d 53 (Del. 2022) (treating an insurance policy as a financial asset credited to a securities account). ↑

2. U.C.C. art. 8, prefatory n. (Am. L. Inst. & Unif. L. Comm’n 1994). ↑

3. Id. official cmts. ↑

4. 440 U.S. 48 (1979). ↑

5. Supplemental Commercial Law for the Uniform Regulation of Virtual-Currency Businesses Act (Unif. L. Comm’n 2017), https://www.uniformlaws.org/committees/community-home?CommunityKey=fc398fb5-2885-4efb-a3bb-508650106f95. ↑

Introduction

The Conference on Consumer Finance Law (“Conference” or “CCFL”) is probably best known to the members of the Business Law Section for its well-attended Frederick Fisher Memorial Program—named in honor of its chairman, Frederick G. Fisher Jr. (1921–1989) (figure 1)—that it has cosponsored at the Section’s Spring Meeting for many years. But it does more than that. The Conference’s law review, the Consumer Finance Law Quarterly Report (“Quarterly Report”) has been published since 1946, nearly as long as the seventy-eight-year history of The Business Lawyer. The Conference also hosts its own educational programs. It has been an affiliate of the American Bar Association (“ABA”) since its founding in 1927.

Fig. 1: Frederick G. Fisher Jr.

This article will give a summary of the CCFL’s history, based primarily on what has been published over the years in the Quarterly Report since 1946. A longer version of this history, including complete footnote references, will be published in the Quarterly Report in the near future.

The Founding of the CCFL

The CCFL was founded when two prominent attorneys, Reginald Heber Smith (1889–1966) (figure 2), known as both the father of legal aid and the father of the billable hour, and Edmund Ruffin Beckwith (1890–1949) (figure 3), known as judge advocate general of the New York State Guard and as the father of Beneficial Finance, brought together a group of about thirty attorneys who were interested in personal finance law at the Annual Meeting of the ABA in Buffalo, New York, in September 1927 to form the Conference.

Fig. 2: Reginald Heber Smith.

Fig. 3: Edmund Ruffin Beckwith.

Reginald Heber Smith

Smith joined the six-man Boston firm of Hale and Dorr as managing partner in 1919, and he remained in that position until 1956. The firm, now Wilmer Cutler Pickering Hale and Dorr LLP, reports on its website that Smith pioneered the use of the billable hour to rationalize the operations of the law firm, along with “[a]ccurate accounting methods, budgets, a mathematical system of profit distribution, [and] timesheets,” over the objections and resistance of his partners. He first made use of these techniques as counsel to the Boston Legal Aid Society after graduating from Harvard Law School in 1913, reducing the average net cost of handling a legal aid case from $3.93 to $1.63 in just two years.

Smith’s 1919 book, Justice and the Poor, based on his experiences as director of the Boston Legal Aid Society, has been called “one of the most important books about the legal profession in history” because of his finding that “people without money were denied access to the courts,” which “undermined the social fabric of the nation.”^[1] His book “shamed the elite bar into action and led to the creation of the modern legal aid movement” by arguing that “[w]ithout equal access to the law, the system not only robs the poor of their only protection, but places in the hands of their oppressors the most powerful and ruthless weapon ever invented.”^[2] His book led the ABA to create the Special Committee on Legal Aid Work, resulting in the establishment of legal aid programs across the country by the middle of the twentieth century. Smith also published four articles about the rationalization of law firm operations that the ABA published in book form in 1943 under the title Law Office Organization, which went through eleven editions by the early 1990s. Smith’s public service through the ABA also encompassed the creation of lawyer referral services for people of modest means, the establishment of client security funds, and advocating for vigorous professional discipline. Smith’s contributions to the ABA, which the ABA characterized as “prodigious,”^[3] led to his becoming the seventeenth recipient of the ABA Medal, its highest honor, in 1951.

Smith’s cofounding of the CCFL was of a piece with his other public service. His “Inaugural Statement” for the Quarterly Report in 1946 encapsulated some of his thoughts on the role of lawyers in society in connection with the field of consumer finance. For example, he asked, “[W]hat should be the maximum charge on a $25.00 loan? Economics says one thing, sociology says the opposite, and the law, forced to compromise, wavers in an unstable equilibrium.” He further noted that

[j]ustice in this country is administered 10% by judges in court rooms and 90% by lawyers in law offices. In that process we have learned that many of our severest battles are with our own clients; anger and vengeance have to be extirpated from their minds and emotions, and a sense of justice instilled. We have to teach them the limits of law; that, for example, no statute or code can rekindle the flame of love that has been extinguished between husband and wife.

Edmund Ruffin Beckwith

Cofounder Beckwith served as chairman of the Conference’s General Committee until his death in 1949.

Beckwith practiced law in Montgomery, Alabama, for ten years after his graduation from University of Alabama Law School in 1915 and then relocated to New York City to serve as counsel to “a group of companies engaged in the field of consumer finance,”^[4] which he combined to form Beneficial Industrial Loan Corporation, later known as Beneficial Finance Corporation.

Beckwith also joined the New York State Guard and became its judge advocate general in 1940, retiring from service with the rank of brigadier general. During World War II, “he perceived that the new citizen-army would insist on legal assistance as well as medical assistance” in all parts of the world.^[5] To achieve that goal, “he proposed to rally the whole force of the organized bar—national, state, and local” and successfully carried through on that unprecedented proposal despite the doubts and opposition of many “eminent lawyers and devout patriots” who maintained that “it could not be done and so would lead to disaster.”^[6]

Beckwith’s memorial stated that his work caused him to want to do something to benefit the public as well as his clients:

As he studied the economic matrix in which his corporate structure must be formed he was appalled to find that in our democracy the average man had so much difficulty in obtaining credit on simple, clean, and decent terms. He was enraged that the legal provisions were conflicting, inadequate, or altogether lacking.

He proposed to do something about it, and his sure instinct told him to proceed through the instrumentality of the legal profession.

Thus was born the Conference, of which he was the guiding spirit for the remainder of his life and the active head except for the periods when he was in the service of his country.^[7]

The Leadership and Activities of the Conference

Leadership of the Conference

In the first issue of the Quarterly Report in 1946, Beckwith was shown as chairman of the General Committee (“Committee”), which included eleven other men. Among them were Smith, who became president of the Conference the following year; Jackson R. Collins (1896–1978) (figure 4), secretary of the Committee from 1946 to 1963 and last survivor of the original 1927 group of thirty founders when he died in 1978; Linn K. Twinem (1903–1997) (figure 5), assistant secretary of the Committee, editor of the Quarterly Report, and general counsel of Beneficial Finance Corporation of New York; and James C. Sheppard (1898–1964) (figure 6), a founding member of the Los Angeles firm that would become Sheppard Mullin Richter and Hampton and Beckwith’s successor as Committee chairman in 1949. These men formed a close-knit group as they performed leadership functions for the Conference for many years.

Fig. 4: Jackson R. Collins.

Fig. 5: Linn K. Twinem.

Fig. 6: James C. Sheppard.

Fig. 7: George R. Richter Jr.

Sheppard remained chairman of the Committee through 1962, when his partner, George R. Richter Jr. (1910–2002) (figure 7), took over the chairmanship through 1979 after he had served in the newly created position of vice president from 1960 to 1962. Before that, Richter had been added as Commercial Code editor for the Quarterly Report in 1951 as the Uniform Commercial Code (“UCC”) was being drafted and finalized for submission to the state legislatures; he served in that function through 1986. Among other things, Richter was the California commissioner for the National Conference of Commissioners on Uniform State Laws, now the Uniform Law Commission, and was elected its president in 1959. He also served as chairman of the ABA Section of Corporation, Banking and Business Law, now the Business Law Section, from 1962 to 1963.

Activities of the Conference

The Conference held its twenty-fifth Annual Meeting at the ABA’s Annual Meeting in San Francisco in September 1952, indicating that it had held similar meetings each year after being founded in 1927. The same issue of the Quarterly Report that reported on the Conference’s Annual Meeting also announced that the General Committee of the Conference would hold its midyear meeting in Chicago in February 1953, in connection with the ABA’s midyear meeting, at which “[s]pecial projects of the Conference will be discussed and considered.” The same pattern holds true to the present as the Conference’s Governing Committee, as the General Committee was renamed in 1991, has held its Annual Meeting and midyear meeting in conjunction with ABA or Business Law Section meetings, discussing and considering projects for the Conference and other business.

The report on the twenty-fifth Annual Meeting consisted of several photographs that showed what the General Committee did. Chairman Sheppard handed out twenty-five-year awards to the three remaining founding members of the Conference. Other photos showed the judges and participants in the Annual Argument that the Conference staged on a current issue, with the participants being drawn from the ABA Young Lawyers Division. The Annual Argument was a prominent feature of the Quarterly Report from that point forward through 1989, with judges being prominent jurists like California Supreme Court Justice Roger J. Traynor or prominent attorneys like University of Texas School of Law Dean W. Page Keeton. In 1990, the Annual Argument was replaced by the first annual Frederick G. Fisher Jr. Memorial Lecture, also presented at the ABA or Business Law Section’s Annual or Spring Meeting until the COVID-19 pandemic upended all in-person meetings in 2019.

Along with the report on the twenty-fifth Annual Meeting, the Quarterly Report announced the Conference’s first annual law student writing contest, cosponsored by the ABA’s Law Student Program. For first, second, and third prizes of $500, $250, and $150, respectively, which in those days could pay for a significant portion of a year’s law school tuition, contestants were to write essays of not more than 2,500 words on a question about current interest rate caps in state statutes and constitutions where case law permitted amounts paid to third parties for collateral expenses to be charged, but not always if the lender’s employees rendered such services. The question to be answered was this:

What is the present state of the law, and what should be the policy of the law, with respect to reasonable charges made by the lender for services rendered by the lender or his staff? Should the lender be permitted to or should it be prohibited?^[8]

From its beginning through the commencement of the Quarterly Report, the Conference was largely concerned with the state laws that regulated, or failed to regulate, small personal loans and with case law developments on that subject because no federal law existed at that time that dealt with consumer finance issues. Even the UCC was nothing more than a gleam in some law professors’ eyes at that time.

When the UCC became a reality, it was clear to the leaders of the Conference that this was a momentous change, particularly the provisions of Article 9 that dealt with security for financial transactions. This development led Richter to produce a six-part series from the Winter 1951 issue through the Summer 1953 issue in which he and five other authors thoroughly explained what was in Article 9 and its ramifications for personal finance.

During this period, the Conference also began to sponsor stand-alone programs that presented panel discussions on the latest developments in consumer finance law for the benefit of the practicing bar. The first such program was presented at the New York University Law Center in April 1953.

The Next Generation

The early 1970s marked momentous changes for the Conference as the founders retired to emeritus status or passed away. The first federal consumer law, the Truth in Lending Act (“TILA”), which imposed a uniform system of disclosures on all forms of consumer credit but left interest rates for the states to regulate, was enacted in 1968. This was followed by many more federal laws that regulated consumer finance. The Federal Reserve Board also drafted sets of implementing federal regulations for these statutes that grew in length and complexity as the years rolled by.

Fig. 8: Lawrence A. Young.

Fig. 9: Alvin C. Harrell.

The Changing of the Guard

As the new federal regulatory regime for consumer finance emerged, a new editor for the Quarterly Report, Lawrence A. Young (1943–2022) (figure 8), who started his career at Beneficial Finance in New Jersey and then had a long private practice at firms in Houston, succeeded Twinem in 1977. Young edited the Quarterly Report through mid-1984, when Bernice B. Stein took over. She in turn was succeeded in 1988 by Alvin C. Harrell (figure 9), professor at Oklahoma City University School of Law, who edited the Quarterly Report until his retirement in 2017. Harrell also edited the “Annual Survey on Consumer Finance Law” in The Business Lawyer for twenty-two years, until 2013.

The leadership of the Conference also changed. Fisher, mentioned above, succeeded Richter as chairman from 1980 until his death in 1989. As Young often told the story at the start of the Frederick Fisher Memorial Program at the Spring Meeting of the ABA Business Law Section, a young Fred Fisher came to the public’s attention in 1954 when he was attacked by Senator Joseph McCarthy as a suspected Communist in an attempt to smear his boss, the U.S. Army’s counsel, Joseph Welch of Hale and Dorr, during the McCarthy-Army hearings in which McCarthy accused the Army of harboring Communists. Welch’s emotional defense of Fisher during the televised hearings turned the public mood against McCarthy and led to his eventual disgrace and downfall. During Fisher’s long tenure at Hale and Dorr, he held many positions in the ABA and became president of the Massachusetts Bar Association from 1973 to 1974.

Fig. 10: Walter F. Emmons.

Fig. 11: Lawrence X. Pusateri.

Upon his death, Fisher was succeeded as chairman by Walter F. Emmons (1928–2013) (figure 10) for two years and then by Lawrence X. Pusateri (1931–2005) (figure 11) from 1993 to 1998. Pusateri was the first summa cum laude graduate of DePaul University College of Law in Chicago when he graduated in 1953 and had a varied and interesting career thereafter. As an assistant staff judge advocate in the U.S. Army from 1954 to 1957, he was a prosecutor in the famed Bamberg, Germany, rape trial in which the seven defendants were convicted, which became the subject of the movie Town Without Pity in 1961. He then served two terms in the Illinois House of Representatives and became president of the Illinois State Bar Association. After serving as a justice of the Illinois Appellate Court, Pusateri reentered private practice and focused on consumer finance law.

Changes in the Quarterly Report

Young once told the author of this article that the Quarterly Report was “pamphlet-sized” before Harrell became its editor. This was confirmed by surveying the extant issues. The Quarterly Report under Twinem as editor had about 80 pages per year in 1947 and 1948, then grew to 100–160 pages from 1959 to 1976. Under Young as editor, it had a range of 76–108 pages from 1977 through 1984; it then had a range of 56–64 pages through 1987 under Stein as editor. One noticeable feature for today’s reader is the almost total absence of footnotes in the Quarterly Report from 1946 through 1987.

When Harrell became editor in 1988, the Quarterly Report suddenly became a full-fledged law review, with every article thoroughly footnoted. It also mushroomed in size, going from 56 pages in volume 41 under editor Stein to 224 pages in volume 42 under Harrell—and then to 274 pages in volume 43 and 398 pages in volume 45. Law professors’ articles began to be published with some frequency.

Even before the panoply of federal laws regulating consumer finance began to be enacted in 1968, the Quarterly Report’s growth in the 1950s reflected the expansion of its coverage beyond the regulation of personal loans. Consumer bankruptcy law, a subject of great importance to small loan lenders, became a frequent topic. Each state’s enactment of the UCC was chronicled. Mortgage lending and auto finance also became important topics.

In the 1960s and 1970s, each new federal consumer finance law received suitable coverage in the Quarterly Report, as did the development and state enactment of the Uniform Consumer Credit Code (“U3C”). For example, just as when Article 9 of the new UCC was discussed at length in a six-part series of articles, the proposed disclosure regimens in the TILA and the U3C were introduced to the readership of the Quarterly Report in 1967. When the TILA became law, another article explained what was in the final enactment. The “private attorney general” provisions of the TILA that enabled and encouraged private litigants to file class actions, which have been a fruitful source of employment for consumer finance litigators as well as fertile ground for legal commentators to the present day, were also covered in an early Quarterly Report article. The 1967 Annual Argument dealt with the question of whether a federal statute could validly prohibit discrimination by lending institutions well before the Equal Credit Opportunity Act was enacted in 1974.

The CCFL and the Quarterly Report Enter the Twenty-First Century

Fig. 12: Jerry D. Bringard.

At the turn of the twenty-first century, the CCFL’s leadership began a regular rotation. Jerry D. Bringard (figure 12), who had been president for six years during Pusateri’s chairmanship, became chairman for two years from 1999 to 2000. Young then became chairman from 2001 to 2002. The rotation of officers became institutionalized when the Governing Committee of the CCFL adopted bylaws in 2003. Three-year terms were established for the chairman, who was to be automatically succeeded by the president when the term ended, and the other officers.

The turn of the twenty-first century also brought programming changes to the CCFL. Harrell greatly expanded the CCFL’s programming by instituting specialized two-day seminar programs for bankruptcy, debt collection, mortgage lending, and auto finance in addition to an annual two-day overall compendium of consumer finance law issues similar to the Conference’s original 1953 consumer finance law program. However, attendance at the programs dwindled following the foreclosure crisis of 2007–2008 as financial institutions cut back on personnel and expenses. By the time Harrell presented Consumer Credit 2011 in October of that year, it had become uneconomical for such programming to continue, and the CCFL exited the legal education field.

Consumer finance law developments did not cease during this period, however, and the Quarterly Report continued to cover them in depth. The page count grew to a peak of 516 pages in 1994 and continued in the range of 300 or more pages from 1995 to 2005. Volume 60 carried a record 722 pages in 2006—and then the record was broken with 954 pages in volume 61. For the rest of Harrell’s tenure as editor, the Quarterly Report comprised 300 or more pages per volume. A myriad of consumer finance topics was covered, paying close attention to state law developments as well as all of the federal law developments both before and after the landmark sixteen-title Dodd-Frank Wall Street Reform and Consumer Protection Act was enacted in 2010 and a new federal agency, the Consumer Financial Protection Bureau, was created to oversee the federal law end of things.

Following Harrell’s retirement in 2017, changes were made to streamline the Quarterly Report and to more fully engage the members of the Governing Committee, which now has more than one hundred members drawn from law firms and in-house counsel offices in all parts of the country, in the operations of the CCFL. Professors Ramona L. Lampley and Chad J. Pomeroy of St. Mary’s University School of Law were recruited to serve as co–executive directors and coeditors of the Quarterly Report.

The CCFL reinstituted two-day seminars in 2016 in partnership with Loyola University Chicago School of Law and Texas A&M University School of Law. After the programs went virtual during the pandemic, live seminar programming resumed in 2022.

With an expanded group of officers as well as a large, diverse Governing Committee whose members are committed to participating in its mission to “encourage study and research in the field of consumer finance law,” to “promote, through education, the sound development of consumer finance law,” and to “provide a forum through which interested persons may exchange opinions,”^[9] the CCFL is well positioned to continue for its second century to exercise the leadership that it has exercised in this field since 1927.

John L. Ropiequet is of counsel to the Litigation Group at Saul Ewing LLP’s Chicago office, where he has practiced since 1973. John was chairman of the Conference on Consumer Finance Law from 2015 to 2018, is a fellow of the American College of Consumer Finance Lawyers, and has been coeditor of the “Annual Survey on Consumer Finance Law” in The Business Lawyer since 2012. He is also coeditor of The Law of Truth in Lending (4th ed. forthcoming 2023), has published scores of articles in The Business Lawyer and other publications, and is the author of countless thousands of footnotes.

1. See John M.A. DiPippa, Reginald Heber Smith and Justice and the Poor in the 21st Century, 40 Campbell L. Rev. 73 (2018) (abstract), https://scholarship.law.campbell.edu/clr/vol40/iss1/3/. ↑

2. See Justice and the Poor, https://en.wikipedia.org/wiki/Justice_and_the_Poor (last visited Dec. 23, 2022). ↑

3. Reginald Heber Smith, 1889-1966, 52 Am. Bar Ass’n J. 1138 (1966) ↑

4. See Jackson R. Collins, DeVane K. Jones & Reginald Heber Smith, Memorial Statement, 4 Q. Rep. 3 (1949). ↑

5. See id. at 4. ↑

6. Id. ↑

7. Id. at 3. ↑

8. See Announcement – 1953-54 Essay Contest, 7 Q. Rep. 98 (1953). ↑

9. See Mission Statement, 75 Consumer Fin. L.Q. Rep. ii (No. 4, 2021). ↑

Insurers like to make their coverage obligations someone else’s problem. One of the ways they do this is by saying that another insurer has to go first. In other words, insurers will sometimes take the position that another insurer has to pay its full policy limit before the first insurer pays anything. The insurers play this finger-pointing game by citing the “other insurance” provision, which is standard in most liability insurance policies. In certain circumstances, courts will “cancel out” dueling “other insurance” clauses and require each insurer to pay on a 50–50 basis when coverage truly overlaps. Other times, courts will establish a “proportional” split of responsibility if one insurer provided higher limits than the other insurer when multiple policies are triggered. As always, the precise words of the insurance policy will directly impact a court’s analysis of the disputed coverage provisions. Recently, the New Jersey Supreme Court tackled another “other insurance” dispute that does not often garner much attention but may be important for corporate policyholders to consider, especially if those policyholders “self-insure” a significant part of their insurance program. 

In Statewide Insurance Fund v. Star Insurance Company, a young boy sadly died on the beach in Long Branch. His family sued the town, and they settled the case. Long Branch was part of a “joint insurance fund,” or “JIF,” administered by Statewide, which was an organization of towns in New Jersey that pooled their resources and insurance risk exposures in one fund up to a certain threshold—$10 million. Long Branch also had a separate policy of insurance issued by Star that provided a $10 million limit. When Long Branch settled the claim with the family, Star refused to contribute, taking the position that it was “excess” coverage and Star was on the hook only after “other insurance,” i.e., the Statewide funding, was exhausted. Statewide filed a declaratory judgment action seeking to establish that its coverage was excess to any coverage provided under the Star policy. 

Sorting through the finger-pointing, the New Jersey Supreme Court determined that Star was solely responsible for the settlement of the claim. The Court took the commonsense approach that so-called “self-insurance” is not really “insurance” at all when considering the “other insurance” provision contained in the Star policy. That is because in a self-insuring pool such as the JIF, “members retain significant risk by paying claims from member assessments,”^[1] and the Court readily acknowledged that such risk pooling stands in stark contrast to typical insurance, where an insurer takes on risk in exchange for the payment of a premium. Accordingly, the Court held that the money Long Branch could get from the JIF was not “other insurance” and that Star had to honor its promise to serve as the primary insurer and was first in line to pay the claim.

The Court’s opinion makes clear that if an insured is responsible for its own loss, it is not to be considered “insured” at all and, therefore, should not lose the benefit of actually valid and collectible insurance available elsewhere. While insurers likely will want to declare this decision is an “outlier” or limited to the “unique” facts of a risk pooling program, the holding of Statewide has far broader implications because it draws a clear distinction between “self” insurance and “real” insurance.

Many corporate policyholders utilize “self” insurance to serve as primary coverage through captive insurance programs or by carrying large self-insured retentions and then having “real” excess coverage. In fact patterns where that same policyholder has additional insured rights under another party’s insurance policy—for example, in the context of a construction defect claim where an owner may have its own insurance coverage and have rights under insurance policies held by general contractors (GCs) or subcontractors—the “other insurance” clause may rear its head again. Insurers for the GC and/or the subs may try to draw the owner into paying for some or all of a claim by invoking their “other insurance” provisions. Relying on Statewide, owners now have an additional arrow in their quiver to push back against that contribution demand. Rather, owners would have the ability to take the position that they have no “other insurance” available because they are self-insured and the GC and subcontractor insurers are first in line to pay.

At bottom, corporate policyholders that utilize captive or fronting insurance, carry large self-insured retentions, or employ other bespoke risk transfer mechanisms need to take a careful look the next time they are told by an insurer that it wants to head to the back of the payment line based on an “other insurance” clause. As the Statewide decision demonstrates, the nuances associated with insurance programs and coverage disputes are complex but also important. Any policyholder that receives a denial of coverage based on an “other insurance” clause will be well served to review that disclaimer with experienced coverage counsel before agreeing to accept responsibility for any payment obligation.

1. Statewide Ins. Fund v. Star Ins. Co., — N.J. — (Feb. 16, 2023) (slip op. at 16) (emphasis deleted). ↑

The U.S. Trustee Program’s (USTP) rule entitled Uniform Periodic Reports in Cases Filed Under Chapter 11 of Title 11 (Final Rule) became effective on June 21, 2021, and provided for the filing of a single Monthly Operating Report and a single Post-Confirmation Report in non-small business Chapter 11 cases.^[1] This article highlights key benefits of the two reports, provides an update on enhancements made to the reporting process since June 2021, and shares important practice tips.^[2]

The New Reports

To help bankruptcy professionals transition to the new Monthly Operating Reports (MORs) and Post-Confirmation Reports (PCRs), USTP staff provided training nationwide on how to complete, finalize, and file the new forms. In July 2021, the first new forms were filed, and since then bankruptcy professionals have filed thousands of MORs and PCRs with bankruptcy courts across the country. The bankruptcy community appears to have made a smooth transition to reporting under the Final Rule. The success of the transition is a credit to the bankruptcy community and reflects the shared and ongoing commitment to greater transparency and efficiency in the bankruptcy system.

Benefits of the New Reports

In addition to the uniformity and consistency provided by having a single MOR and PCR for use in every non-small business Chapter 11 case, the updated forms confer several other new and important benefits.

Modernization: The new MORs and PCRs represent a significant advance in Chapter 11 periodic reporting. The data-embedded “smart forms” allow users to enter and save data in interactive, fillable PDF forms. Plus, with embedded data, the forms offer enhanced searching and extraction capabilities. To simplify data extraction, the forms employ standard barcode technology used widely across government and industry, such as on postage stamps, RealID driver licenses, common carrier shipping labels, and boarding passes issued by commercial airlines. To enhance the user experience with periodic reporting, the USTP introduced MORs and PCRs that are compatible with Windows and Mac operating systems.

Simplicity: The MOR and PCR forms contain easy to understand questions and are accompanied by clear and concise instructions that guide filers through the steps required to complete, save, and finalize reports for filing with bankruptcy courts on CM/ECF.

Transparency: Transparency is a vital pillar of the bankruptcy system. To advance that important interest, the Final Rule requires that MORs and PCRs be filed with bankruptcy courts on CM/ECF. Prior to the effective date, there was no universal filing requirement. Publicly accessible reports promote transparency by providing non-party stakeholders—including members of Congress, the public, academics, and the press—access to information across cases and districts. With greater access to data summarizing Chapter 11 debtors’ post-petition operations, stakeholders can more effectively analyze and report on the operational results of the bankruptcy system.

Enhancements to the Reporting Process

The Final Rule, new forms, and accompanying instructions are the byproduct of the USTP’s collaboration with numerous stakeholders in the bankruptcy system, both before and after the effective date. In response to internal and external stakeholder feedback, the USTP acted quickly to implement certain items that already have enhanced the reporting process. Some key examples follow.

The USTP recognized the need for an efficient and effective way to share important information about periodic reporting with stakeholders across the country. To fulfill that need, the USTP created the “Chapter 11 Operating Reports Email Updates” feature on its website. Presently, almost 1,000 stakeholders nationwide have enrolled to receive email updates from the USTP about periodic reporting. Recent updates were provided in late 2022, when the USTP: (i) announced that updated instructions for MORs and PCRs were posted on its website for immediate use; and (ii) explained how to avoid a mismatch between data reflected on the face of a form and the data embedded in the barcodes by highlighting the need to generate new barcodes any time a report is edited after the “Generate PDF for Court Filing and Remove Watermark” step has been completed.

In December 2021 (about six months after the effective date of the Final Rule), the USTP incorporated barcode technology into the MOR and PCR forms. The barcodes contain the embedded data reflected on the face of the forms, and they provide visual confirmation that the forms have been finalized properly for filing with the bankruptcy court on CM/ECF. Specifically, the presence of barcodes signifies that each field on the form has been completed and that the forms’ data embedded features have been activated properly, thereby preventing the filing of incomplete or flattened forms. The barcodes are generated at the end of the forms automatically after filers complete the “Generate PDF for Court Filing and Remove Watermark” step. Additionally, the barcodes further the Congressional mandate in the Bankruptcy Abuse Prevention and Consumer Protection Act that the new forms “facilitate compilation of data” and maximize public access to the data contained on the forms by providing parties-in-interest, the public, academics, and the press an efficient means of aggregating data from a high volume of reports filed across the country.^[3]

The USTP has also helped several national financial advisory firms transition to reporting under the Final Rule. These firms routinely represent hundreds of debtors in large cases across the country. In addition to answering substantive, procedural, and technical questions through ongoing discussions, the USTP provided schema and data dictionaries for the MORs and PCRs to help the firms design electronic tools to expedite the process of populating individual reports for debtors in large jointly administered Chapter 11 cases. During the ongoing collaboration, the USTP also tested numerous forms prepared by the firms to ensure that their respective methods successfully embedded data in the new forms.

In response to stakeholder feedback received since the effective date, the USTP issued updated Instructions for both the MOR and PCR forms in December 2022. With several substantive, procedural, and technical revisions, the updated Instructions help clarify certain questions raised by stakeholders. The updated Instructions are available on the USTP’s website.

An important feature of the USTP’s commitment to efficiency in the reporting process is the on-demand technical support that it provides to all stakeholders. In addition to offering user-friendly “Troubleshooting Tips” on its website, the USTP provides email access to a team dedicated to responding to technical inquiries related to MORs and PCRs. By emailing inquiries to [email protected], stakeholders can obtain individualized assistance when the need arises. The USTP immediately acknowledges receipt of every email with an automated response that provides troubleshooting tips addressing many commonly asked questions. Quite often stakeholders quickly reply to the automated response indicating that it was all they needed to resolve their inquiry. For instance, one of the most common inquiries involves stakeholders using the prior version of the forms that were deactivated and removed from the USTP’s website in December 2021. Once directed to the active forms on the USTP’s website and provided a hyperlink for quick access, those inquiries are resolved. If these common answers do not resolve the issue, a USTP representative contacts the inquirer directly to work out a solution. Since the effective date in June 2021, the USTP team has successfully resolved hundreds of inquiries from across the country.

On the rare occasion when inquiries are too complex to be resolved by email, the USTP team engages with stakeholders telephonically or by video conference. In one recent instance, a debtor’s counsel had difficulty generating barcodes on an MOR despite using the correct version of the form and following the instructions step by step. To ensure that the forms could be finalized and filed prior to the impending deadline, two members of the USTP team immediately video-conferenced with counsel, working together for an hour. During that time, the USTP team not only diagnosed and corrected the problem—an incorrect default computer setting—but ensured that counsel understood how to finalize and file forms on their own. Since then, counsel has continued to file forms without the need for further USTP assistance.

Whether substantive, procedural, or technological, the post–effective date enhancements will continue to promote the efficiency and transparency of the reporting process.

Practice Tips

Efficiency in the bankruptcy process is a mission priority for the USTP. To further that priority, the USTP recommends that stakeholders responsible for preparing or filing MORs and PCRs adopt the practice tips that follow.

• Take the time to become familiar with the reports and the completion and filing processes. Get acquainted with the periodic reporting resources that the USTP offers by visiting its “Chapter 11 Operating Reports” webpage where stakeholders can find updates, forms, Instructions, Troubleshooting Tips, and other resources and information.
• Always start your reports by downloading the latest version of the form from the USTP website. To start the reporting process, download the latest version of the MOR or PCR form from the USTP website. Be sure to select the form that is compatible with the filer’s operating system (i.e., Windows or Mac). After downloading the MOR or PCR, launch Adobe Reader or Adobe Acrobat to complete the PDF version of the form—do not attempt to complete the form in an internet browser. For step-by-step assistance with this process, consult the Guide for Opening the MOR/PCR Forms posted on the USTP’s website. Note that once you download the latest version of the forms, you can begin by working from an editable version from a prior reporting period, rather than downloading a new form each month or quarter.
• Always complete the forms electronically without inserting or attaching anything. Complete the MOR and PCR forms electronically and do not flatten the forms when finished (i.e., do not print and scan the forms before filing). In addition, do not insert or attach additional pages to the forms. Any supporting documentation, including exhibits, explanatory notes, or bank statements, must be filed as separate PDF attachments.
• Follow the MOR or PCR instructions to prepare your reports for filing. Once all the required information has been entered onto the MOR or PCR and an editable version has been saved, select the “Generate PDF for Court Filing and Remove Watermark” button at the end of the form. Although this step will not file a report with a bankruptcy court, it is required to remove the watermark, embed data, and generate barcodes on the report. To ensure that all data is embedded in the version of the form to be filed with the bankruptcy court, do not edit a report after the watermark has been removed. If last-minute changes to a report are required, revert to the editable version of the report and simply repeat the “Generate PDF for Court Filing and Remove Watermark” step after making the edits. For step-by-step guidance on this process, consult the Instructions for the MOR and PCR posted on the USTP’s website.
• File your reports using the correct CM/ECF docket entry as a stand-alone PDF. When filing forms with the bankruptcy court, select the correct docket entry on CM/ECF established by the local court for MORs or PCRs. In addition, file all pages of each report, including all barcodes. File each report as a stand-alone PDF, and do not combine multiple reports or barcodes into a single PDF.
• Use the technical assistance available on the USTP website and through a dedicated help email. Visit the “Troubleshooting Tips” page on the USTP’s website for technical guidance. If further assistance is required, filers can request technical assistance with MORs and PCRs by emailing inquiries to [email protected]. The USTP has a team dedicated to responding to MOR- or PCR-related technical inquiries. Case-related inquiries may be directed to the local USTP office overseeing the Chapter 11 case, as before.
• Sign up for the USTP’s subscription service to receive all updates on the forms and Instructions. Finally, stay informed by taking advantage of the USTP’s subscription service. Subscribers will receive emails about updated forms, Instructions, and other important information related to periodic reporting under the Final Rule. To subscribe, visit the Chapter 11 Operating Reports webpage.

Conclusion

Periodic reporting remains a vital part of every Chapter 11 case. Fiduciaries have an obligation to account for estates’ operational and financial performance, both pre- and post-confirmation. With those fiduciaries reporting on the modernized and streamlined MORs and PCRs for over a year now, stakeholders in the bankruptcy system have benefitted from increased uniformity, consistency, and transparency. With almost 39,000 MORs and PCRs filed with bankruptcy courts across the county, the USTP is encouraged by stakeholders’ performance under the Final Rule, and it looks forward to the enhanced efficiency and transparency in the bankruptcy system that the new MORs and PCRs provide.

1. 28 C.F.R. § 58.8. The forms promulgated under the Final Rule are designated as UST Form 11-MOR and UST Form 11-PCR. These forms are applicable only in judicial districts where the USTP operates. ↑

2. For an extensive discussion of the rule-making process, including discussion of the public comments, testimony at the public hearing and the USTP’s response, refer to the article entitled Introducing the USTP’s New Chapter 11 Periodic Reports, published in the February 2021 edition of the American Bankruptcy Institute Journal, at page 24. ↑

3. 28 U.S.C. § 589b(b). ↑

As cybercriminals become increasingly sophisticated, they find new ways to infiltrate systems and disrupt operations. Corporations, legal and other firms, nonprofit organizations, academic institutions and government agencies are among the countless victims of data breaches every year.

Until recently, breaches largely involved encryption where threat actors accessed networks and locked down systems, causing business interruption and often demanding a ransom for their release. While this tactic remains a common tool in most breaches, the growing threat that emerged in 2022 is incorporating data exfiltration into the toolkit. Now—with increasing frequency—multiple threat factors are becoming involved in a single incident: encrypting systems, stealing and selling data they have accessed, and threatening to expose the fact that an organization’s data was stolen unless they are paid the requested ransom. Among the many breaches experts handled in Q4 of 2022, very few did not include an element of exfiltration, which is in stark contrast to the first half of 2020, where less than 30% of data extortion incidents included exfiltration.

Due to the rise of exfiltration, lawyers should be on guard and ensure they are compliant with Rule 1.6(c) of the American Bar Association’s Model Rules of Professional Responsibility: “A lawyer shall make reasonable efforts to prevent the inadvertent or unauthorized disclosure of, or unauthorized access to, information relating to the representation of a client.” If lawyers do not take “reasonable efforts,” they may risk sanctions, disbarment, and legal liability in the event of a data breach. The ABA issued an opinion^[1] on Model Rule 1.6 clarifying that what constitutes a reasonable effort is not a “hard and fast rule,” but rather a flexible set of factors that are weighed on a case-by-case basis.

The ABA opinion’s factors to be weighed include:

• the sensitivity of information;
• the likelihood of disclosure if additional safeguards are not employed;
• the cost of employing additional safeguards;
• the difficulty of implementing the safeguards;
• and the extent to which the safeguards adversely affect the lawyer’s ability to represent clients.

The ABA Standing Committee on Ethics and Professional Responsibility stresses that attorneys should assess the risk of inadvertent disclosure of client information before connecting to unsecure networks, using computers and servers without anti-virus software, and sending unencrypted communications.^[2]

In some cases of data exfiltration, the threat actors download a copy of the data; in other cases, they download a copy of the data and then also delete it from the network from which it was taken. The latter scenario reinforces the importance of regularly backing up all systems and the data they contain, so that in the event of deletion during a breach, the organization can reinstall a recent version of that data to reduce the impact on regular business operations.

Once stolen, data is often sold or threatened to be sold. Data may be posted on the dark web, or the threat actor may have a buyer already identified before the theft. Regardless of what the criminals do with exfiltrated data, dealing with this type of breach is a logistical nightmare. In many cases the stolen data includes trade secrets or the personally identifiable information of employees and/or clients of the organization, posing a substantial risk to everyone involved.

Among the growing impacts of data breaches is the risk of class-action lawsuits. As more people understand the effects of having their data compromised, more are taking action by initiating or joining class actions. And this isn’t limited to breaches that occur in large organizations like Equifax, Twitter, or Uber, for example. Smaller companies dealing with breaches affecting as few as 1,000 data subjects—small by previous standards—are now facing litigation as well. While the number of impacted data subjects may be relatively small, the scope of the impact felt by the data subjects and the organization is often the same as in larger breaches.

Companies can’t do much to prevent these lawsuits once a data breach has occurred, but they can take steps to help mitigate the consequences:

• Pre-event: Establish strong security protocols upfront, which will help in passing a reasonableness test in the event a suit is filed. If an organization can prove to a court that it took reasonable care in protecting customer data and to prevent a breach, it is more likely to prevail against negligence claims in a suit. Examples of reasonable security measures an organization might point to include having a dedicated security officer, maintaining ISO 27001 and SOC 2 certifications, mandating multi-factor authentication, and providing quarterly cybersecurity training for all employees.
• Post-event: Likewise, if the company can demonstrate it has followed all regulatory compliance requirements, met deadlines, and taken reasonable and necessary steps to address the situation without delay and with as much transparency as possible, it can lower the risk of penalties and fines.

Key tips for dealing with cyberattacks:

1. Lawyers should ensure that their organizations or clients take every incident seriously and put in place mandatory, periodic employee cybersecurity training to help employees understand what incidents might look like, how to prevent them, and to immediately report anything suspicious to IT. From a compliance perspective, lawyers should instruct their organizations or clients not to dismiss something strange as nothing if they do not encounter any immediate impacts, as the company may be vulnerable to a further attack or breach at a later time. Recently a Reddit employee contacted Reddit’s IT department shortly after falling victim to a spear-phishing attack—which led to a website that cloned Reddit’s internal systems and allowed threat actors to steal credentials and second-factor tokens. Had the employee not made that notification, the results could have been disastrous.^[3]
2. The legal department should be informed immediately of a potential incident and should encourage the organization or their client to take immediate action. This is important from both a compliance and mitigation standpoint, as well as the potential for privilege to apply to certain communications in the case of post-event lawsuits. Do not delay, and do not assume that a threat has been resolved once it has been identified, as it may be ongoing. In the Reddit scenario discussed above, because the employee reported the incident right away and Reddit’s IT department took immediate action on the threat, the attacker’s window of opportunity was reduced, and the damage was limited.
3. Lawyers should instruct their organizations or clients to consider retaining a third-party digital forensics expert to verify the risk is contained and that it is safe to conduct business. Digital forensics experts can check all systems and networks to ensure the threat is resolved and that there is no additional risk of ongoing or subsequent threats. This will provide the company and its customers with peace of mind and will limit the business repercussions, to a degree. The third-party digital forensics report and corresponding forensics expert can provide compelling facts in eventual litigation as well.

Importantly, an ounce of prevention is worth a pound of cure. Cybersecurity awareness training remains a critical function for every organization, but it typically does not get the attention it deserves. Threats are constantly evolving, so your training should, too. Keep all employees up to date on the latest protocols and best practices to prevent breaches, as they are your first line of defense against cyberattacks.

1. See American Bar Association Standing Committee on Ethics and Professional Responsibility, Formal Opinion 477R*. Issued May 11, 2017, revised May 22, 2017. Pages 4–5. Available at: https://www.americanbar.org/content/dam/aba/administrative/professional_responsibility/aba_formal_opinion_477.pdf. ↑

2. See id. at pages 6–7. ↑

3. See Reddit Press Release, “We had a security incident. Here’s what we know.” February 5, 2023. Available at: https://www.reddit.com/r/reddit/comments/10y427y/we_had_a_security_incident_heres_what_we_know/. ↑

Mergers and acquisitions (M&A) play a major role in modern economies. Since 2010, there have been more than 500,000 merger and acquisition deals worldwide. According to Statista, in 2021 alone, there were more than 63,000 international M&A transactions.

Due diligence is an essential part of the M&A process. However, many obstacles can get in the way of effective due diligence, including language barriers and cultural differences. This is where legal translation steps in: this specialized field can help smooth the way to a successful transaction.

The Importance of Legal Translations in the M&A Due Diligence Process

The purpose of due diligence during an M&A transaction is to gather all the information needed about the target company to determine if a deal is viable. This allows businesses considering a merger or acquisition to pin down the potential risks and opportunities in the transaction.

Language barriers and cultural differences can complicate due diligence in international M&A transactions. Each country and region has its own legal system and regulations, so any lack of knowledge of these specific complexities can lead to a deal falling apart. Cultural differences can also bring about misunderstandings and miscommunication, which can negatively impact the overall success of the deal.

This is where legal translation services become essential. This domain of translation not only requires that translators be fluent in another language, but they must also have an in-depth understanding of the legal systems of both invested parties as well as cultural awareness and knowledge of specific legal jargon.

Legal translations are crucial in ensuring that cross-border transactions are free of any miscommunication and misunderstandings; certified translation of any foreign-language documentation involved in the process can ensure that the language barrier won’t be a reason a deal is not successful.

Translating contracts and agreements ensures that both parties are on the same page and that their obligations, rights, and liabilities are all properly met. By translating financial statements, parties can have a detailed analysis of the target company’s financial performance, which is critical in determining the deal’s viability.

Despite the rise of AI translation software, it is essential to have language professionals who are specialized in legal translations as part of the process, as there are aspects of law and linguistic nuances that machine translation is not able to reliably convey. Language professionals can also be held responsible if any aspect of the translation goes awry.

Best Practices for Legal Translation in M&A

How do you ensure that a legal translation meets the criteria of something as complex and integral to the M&A process as due diligence? Here are a few of the best practices you can implement to guarantee you are on the path to success.

1. Work with Legal Translators Specialized in M&A

Not all legal translators have experience dealing with corporate finance due diligence and M&A. That’s why it is important to make sure you collaborate with an expert in the field who has experience in the specific countries relevant to the deal. This will help ensure that all the needed information has been laid out effectively.

2. Develop Cultural Awareness

An M&A deal is the beginning of another chapter for the companies involved. The long-term success of an M&A transaction depends on how management is prepared to assimilate into the new culture. Translations during the deal process facilitate effective information sharing and therefore serve as a way for both parties to develop trust and transparency.

3. Quality Assurance and Accuracy

Many legal translation services have documents undergo a thorough quality assurance process that involves the use of state-of-the-art translation tools and human expertise to evaluate the translated documents’ clarity and accuracy. It’s also vital that, from your end, you conduct quality assurance and review documents to ensure that all the details are found in the agreement.

4. Data Security and Privacy

The pandemic didn’t just bring change to the process and practice in due diligence for M&A, but it also changed how transactions are being made. As remote work and hybrid arrangements have become prevalent and more deal closings are occurring digitally, concerns about data security and privacy protocols in place have become more significant. It is important to ensure that the platform used for sharing translations and other aspects of a transaction is secure.

Conclusion

Although according to PwC’s 26^th Annual Global CEO Survey 73% of CEOs didn’t have a positive view of global economic growth in the coming year, about 60% of them stated that they do not plan delay deals in 2023. International M&A due diligence will continue to be important, and having experts in legal translations to bridge cultural and linguistic barriers is a necessity. Businesses looking to close global deals should consider the impact of legal translations on their due diligence process and use the best practices in this article to help minimize the risks and maximize the opportunities associated with cross-border M&A transactions.