Is a single-member limited liability company (“SMLLC”) that is taxed as a “disregarded entity” and has to date not had its own employer identification number (“EIN”) required to apply for an EIN in anticipation of filing beneficial ownership information reports as required by the Corporate Transparency Act (“CTA”)?^[1] And even if not required, should it?

Short answers: no and yes.

CTA Reporting Regulations

Under the CTA, a limited liability company (“LLC”) is a “reporting company”^[2] that, absent the availability of any of twenty-three exemptions,^[3] must file a beneficial ownership information report identifying itself and its “beneficial owners” and, if formed on or after January 1, 2024, its “company applicant(s).” Those reports will be filed with the Financial Crimes Enforcement Network (“FinCEN”) office of the Department of the Treasury via the Beneficial Ownership Secure System (“BOSS”) interface and database. In identifying itself on its BOSS report, a reporting company must provide its EIN.^[4]

Many SMLLCs, being for tax purposes “disregarded entities,”^[5] do not have their own EIN but rather use, where the sole member is a natural person, the sole member’s Social Security number^[6] or, where the sole member is a business entity, the sole member’s EIN.

The Internal Revenue Service (“IRS”) has made all of this, as considered from the perspective of CTA compliance, unintelligible, writing:

For federal income tax purposes, a single-member LLC classified as a disregarded entity generally must use the owner’s social security number (SSN) or employer identification number (EIN) for all information returns and reporting related to income tax. For example, if a disregarded entity LLC that is owned by an individual is required to provide a Form W-9, Request for Taxpayer Identification Number (TIN) and Certification, the W-9 should provide the owner’s SSN or EIN, not the LLC’s EIN.

For certain Employment Tax and Excise Tax requirements discussed below, the EIN of the LLC must be used. An LLC will need an EIN if it has any employees or if it will be required to file any of the excise tax forms listed below. Most new single-member LLCs classified as disregarded entities will need to obtain an EIN. An LLC applies for an EIN by filing Form SS-4, Application for Employer Identification Number. See Form SS-4 for information on applying for an EIN.

A single-member LLC that is a disregarded entity that does not have employees and does not have an excise tax liability does not need an EIN. It should use the name and TIN of the single member owner for federal tax purposes. However, if a single-member LLC, whose taxable income and loss will be reported by the single member owner needs an EIN to open a bank account or if state tax law requires the single-member LLC to have a federal EIN, then the LLC can apply for and obtain an EIN.^[7]

This IRS guidance both predates the January 1, 2024, effective date of the CTA reporting regulations and is focused upon compliance under the Internal Revenue Code. Meanwhile, the release accompanying the CTA reporting regulations,^[8] in discussing the requirement that a reporting company provide its EIN, did not address the issue of disregarded entity LLCs and wrote as well that “the vast majority of reporting companies will have a TIN or will easily be able to obtain one.”^[9] Not helpful is the IRS’s suggestion that a Form SS-4 should be filed only when the SMLLC wants a tax classification other than as a disregarded entity,^[10] especially when there are numerous situations already recognized by the IRS where an SMLLC will desire disregarded entity classification even as an EIN is either desired or necessary.

Neither the Beneficial Ownership Information Reporting FAQs^[11] nor the Small Entity Compliance Guide,^[12] each issued by FinCEN, shed any additional guidance on the issue, and certainly there is nothing in the CTA or the reporting regulations that mandates that an SMLLC that is a reporting company apply for its own EIN.

So, is the EIN of the sole member of a disregarded entity LLC, whether a Social Security number of the sole natural person member or the EIN of the sole business entity member, appropriate for the SMLLC’s CTA beneficial ownership information report? And even if the answer is yes, is it better practice for an SMLLC owned by a natural person to apply for its own EIN for inclusion in its CTA filings?

Short answers: yes and yes.

Benefits of an SMLLC Having Its Own EIN

For an SMLLC that is taxed as a disregarded entity and does not already have its own EIN, it may file its CTA beneficial ownership information report using the sole member’s EIN, which in the case of a natural person sole member will be the person’s Social Security number. But it is entirely permissible for that LLC to request from the IRS its own EIN and file the CTA report using that number.^[13]

This approach may be seen as better in that it will not require submitting on behalf of the reporting company the beneficial owner’s Social Security number. True, if the BOSS database is hacked, the beneficial owner’s personal identifying information^[14] may be divulged, but at least her or his Social Security number will not be part of the information leaked or stolen.^[15] That said, this implicit expectation to use a federal EIN will oft have unacknowledged costs such as updating of tax filings, updating of information at the bank or other financial institution at which funds are transacted, differentials in treatment of employment tax remissions, and a parallel obligation to then apply for a state taxpayer identification number.

In addition, it may be that multiple SMLLCs filing BOSS reports with FinCEN, all using the same EIN, will encounter problems or, at minimum, additional unwanted scrutiny. In promulgating the reporting regulations, FinCEN wrote that “FinCEN believes that a single identification number for reporting companies is necessary to ensure that the beneficial ownership registry is administrable and useful for law enforcement, to limit opportunities for evasion or avoidance, and to ensure that users of the database are able to reliably distinguish between reporting companies.”^[16] Furthermore, in characterizing its determination of the deadline for filing an initial beneficial ownership information report, FinCEN said that the final rule “provide[s] more time to reporting companies to acquire TINs and other identifying information, which is critical to the ability of FinCEN to distinguish reporting companies from one another, which in turn is necessary to create a highly useful database.”^[17] So, it may well be that there is going to be a problem with using a sole member’s EIN to make BOSS filings for multiple SMLLCs—an issue that may arise regardless of whether the sole member is an individual or an entity. Until the end of June the BOSS system would at least some of the time not accept an initial filing with the same EIN as a prior filing (updates and corrections were not so affected). This was not a feature of BOSS intended to prevent multiple initial BOIRs from being filed under the same EIN, but rather a programming bug that has now been remedied.^[18]

Conclusion

So, must an SMLLC get its own EIN before filing its initial beneficial ownership information report with FinCEN? Probably not. But, in order to avoid potential problems and as a concession to the brevity of life, should an SMLLC get its own EIN before filing its initial beneficial ownership information report with FinCEN? Almost certainly yes.

1. The CTA was adopted as part of the Anti–Money Laundering Act of 2020, which was part of the 2021 National Defense Authorization Act for Fiscal Year 2021 (“NDAA”). The full name of the NDAA is the William M. (Mac) Thornberry National Defense Authorization Act for Fiscal Year 2021. Pub. L. No. 116-283 (H.R. 6395), 134 Stat. 338 (116th Cong., 2d Sess.). Congress’s override of the president’s veto was taken in Record Vote No. 292 (Jan. 1, 2021). The anti–money laundering provisions are found in sections 6001–6511 of the NDAA. The CTA consists of sections 6401–6403 of the NDAA. Section 6402 of the NDAA sets forth Congress’s findings and objectives in passing the Corporate Transparency Act, and section 6403 contains its substantive provisions, primarily adding § 5336 to title 31 of the U.S. Code. ↑

2. CTA, 31 U.S.C.A. § 5336(a)(11)(A); 31 C.F.R. § 1010.380(c)(1)(i)(B). While there are slightly separate treatments under the CTA for LLCs formed in the U.S. and those formed in other countries, this discussion is focused upon U.S.-organized LLCs. ↑

3. CTA, 31 U.S.C.A. §§ 5336(a)(11)(B)(i)–(xxiii); 31 C.F.R. §§ 1010.380(c)(2)(i)–(xxiii). ↑

4. 31 C.F.R. § 1010.380(b)(1)(i)(F) (requiring “[t]he Internal Revenue Service (IRS) Taxpayer Identification Number (TIN) (including an Employer Identification Number (EIN)) of the reporting company”). ↑

5. It bears noting that the definitions of who is a member for state law and tax purposes are different, so it is possible that an LLC can be a single-member LLC from a state law perspective and a multiple-member LLC for tax purposes, and vice versa. See generally Thomas E. Rutledge, When a Single-Member LLC Isn’t and When a Multiple-Member LLC Is, J. Passthrough Entities, July/Aug. 2015, at 49. Here, we are referring to an SMLLC from the tax perspective. ↑

6. An individual Social Security number is a type of an EIN. See Taxpayer Identification Numbers (TIN), IRS.gov (reviewed/updated June 14, 2024). ↑

7. Single Member Limited Liability Companies, IRS.gov (reviewed/updated Aug. 2, 2023). ↑

8. Beneficial Ownership Information Reporting Requirements, 87 Fed. Reg. 59,498 (Sept. 30, 2022). ↑

9. Id. at 59,517. ↑

10. Instructions for Form SS-4 (12/2023), IRS.gov (reviewed/updated Jan. 17, 2024) (“Don’t file Form 8832 if the LLC accepts the default classifications above.”). ↑

11. Beneficial Ownership Information: Frequently Asked Questions, FinCen.gov (Apr. 18, 2024). ↑

12. Fin. Crimes Enf’t Network, U.S. Dep’t of the Treasury, Small Entity Compliance Guide: Beneficial Ownership Information Reporting Requirements (Dec. 2023). ↑

13. In completing section 10 of the Form SS-4, presumably the box for “Other” should be checked and the reason given as “CTA compliance.” ↑

14. 31 C.F.R. § 1010.380(b)(1)(ii). ↑

15. Admittedly, this horse may be out of the barn. See, e.g., Eva Rothenberg, AT&T Says Personal Data from 73 Million Current and Former Account Holders Leaked onto Dark Web, CNN (Mar. 30, 2024) (noting that the data leak includes customer Social Security numbers). ↑

16. Beneficial Ownership Information Reporting Requirements, supra note 8, at 59,517. ↑

17. Id. at 59,511. ↑

18. See CT Corporation, Key update on beneficial ownership reporting (email newsletter) (June 27, 2024). ↑

As business transaction or litigation counsel, you will be the initial line of contact in a patent dispute. You will have the first conversations with the client, and probably opposing counsel. When the dispute involves accused products sold through Amazon, you will want to keep the APEX program, and its potential drawbacks, in mind as an early, less expensive alternative to drawn-out patent litigation.

Under Amazon’s Patent Evaluation Express (APEX) program, a patent owner initiates its claim against a seller on Amazon’s platform by submitting an APEX agreement form identifying the seller and a claim of one patent, which may be asserted against as many as twenty Amazon-listed products. Amazon sends the agreement to the accused seller, who has three alternatives: (1) agree to continue in the APEX proceeding and have a neutral evaluator make a decision; (2) informally resolve the claim directly with the patent owner; or—significantly here—(3) file a lawsuit for declaratory judgment of patent invalidity and noninfringement against the patent owner. Failure to respond is not an option. If a seller does not act within twenty-one days, Amazon will simply remove the seller’s product listing, thus ending its sales through Amazon.

The APEX program, formally launched in 2022, is a new weapon for patent owners. It provides a low-cost, expedited option for patent owners to prevent infringing sales on Amazon’s platform. For clients who think they can’t afford patent litigation, that’s the good news.

However, here’s the bad news: Sometimes, patent owners wind up in the decisively “wrong” court anyway because they invoked APEX, which the owners could have avoided.

So, what’s the rub? It’s the third, “declaratory relief” option.

What usually happens in declaratory judgment actions?

Outside the APEX system, the rules for patent infringement cases in federal court are well established. Suppose the seller is located in my home district, Northern California, and the patent owner is a Delaware corporation, doing business there. The patent owner must sue the accused infringer in the latter’s state of California.^[1] If the accused infringer chooses to initiate suit instead, in order to request declaratory relief that it is not infringing, it must generally sue the declaratory defendant patent owner in Delaware, the owner’s state of incorporation.^[2] The rationale is that the patent owner must purposefully have availed itself of the benefits of the seller’s jurisdiction, which is not satisfied by its sending a mere cease-and-desist letter. In other words, under the established pattern, the initiating party does not get to sue in its own home district, in either case.

The SnapRays decision.

The APEX procedure likely changes that result. In the May 2024 decision of SnapRays v. Lighting Defense Group, No. 2023-1184 (Fed. Cir. May 2, 2024), a Delaware-based patent owner initiated an APEX enforcement proceeding against a Utah-based alleged infringer. The seller opted for “door number three”: It filed a declaratory relief action of noninfringement. Contrary to usual practice, however, the seller did not file suit in the patent owner’s home state of Delaware. Instead, the accused infringer filed in its own home state of Utah. After appeal, the Federal Circuit Court of Appeals upheld this forum choice.

The court reasoned that, by initiating an APEX proceeding, the patent owner had purposefully directed its enforcement activities at the accused infringer in Utah by affecting its sales and marketing in Utah through the Amazon platform. Foreseeably, Amazon would notify the accused infringer and inform it of its options, and the accused infringer’s Amazon listings could be removed, injuring its marketing, sales, and other activities within Utah.

So, under APEX, the patent owner loses its right to be sued only in its home state in a declaratory relief action. As in other distant litigation matters, some inconvenience is incurred. The patent owner will have to hire remote counsel to defend its patent in the distant district court. It must bring its witnesses to that forum. It must accept any “home court” advantage the suing party may have with a sympathetic judge or jury.

If the standards for proceeding ahead with a patent infringement case were the same in each federal district, that would be no big deal. But what if the standards differ? What if it’s easier to knock out a patent infringement case in one’s home district than that of the patent owner?

The APEX program changes the declaratory judgment landscape after SnapRays.

APEX poses a potentially more significant disadvantage for the patent owner. In our example, the Northern District Court of California would be the forum chosen by the accused infringer, rather than submitting to Delaware. The Northern District of California is significantly more likely to grant motions to dismiss patent infringement cases than one would face in most other active districts. Defendants, in other words, can sometimes wield a unique “knockout” weapon there.

In the old days of required “Form 18” pleading, motions to dismiss patent infringement cases were virtually nonexistent. In 2015, that gave way to current fact pleading requirements. Under the Twombly/Iqbal standards,^[3] a plaintiff must plead facts that plausibly could entitle it to relief, rather than mere recitation of the elements of infringement. In patent cases, motions to dismiss arise based on arguments that either there is no subject matter eligibility (an Alice challenge)^[4] or a critical element of the asserted patent claim is not alleged and cannot be. Different district courts apply the standards differently, at least statistically.

In a 2020 study, for example, the difference was stark. A motion to dismiss on eligible subject matter succeeded 86 percent of the time in the Northern District of California, but only 48 percent of the time in the District of Delaware and zero percent in the Eastern District of Texas. This no doubt is due not simply to a given judge’s predilections but also to emerging case law developing in each district for such pleading standards.^[5]

Similarly, rulings have diverged on how much must be pleaded to satisfy the Twombly/Iqbal standard. A Northern District of California patent complaint may be dismissed based on intense scrutiny of the allegations of a key element.^[6] This evolved from the district’s dismissal practice, requiring “factual allegations that the accused product practices every element of at least one exemplary claim.”^[7] In the Eastern District of Texas, it may be sufficient simply to identify the accused product and to give merely “fair notice” of the nature of the factual issue.^[8] Likewise, in the District of Delaware, recent cases have not been overly demanding of the allegations.^[9] The dilemma for patent owners is, sometimes the greater specificity required in pleading is more than a “do-over” nuisance. Instead, the more specific pleadings invite greater scrutiny into whether a particular patent claim element really exists in the accused product, thus leading to increased dismissals at the earliest stages of patent litigation.

So, the takeaway for both patent owners and accused infringers is clear: While patent owners and accused infringers should consider resolving their dispute through the APEX program, a pitfall looms for the former and an opportunity may appear for the latter. If the accused seller sits in a district that robustly dismisses poorly pleaded infringement claims, plaintiff’s counsel must tread carefully, and defense counsel should think boldly. This is especially so if the patent infringement case is weak: Then the choice of district may make a considerable difference, in both case viability and settlement value.

1. TC Heartland LLC v. Kraft Foods Grp., 581 U.S. 258, 137 S.Ct. 1514 (2017). ↑

2. Red Wing Shoe Co. v. Hockerson-Halberstadt, Inc., 148 F.3d 1355 (Fed. Cir. 1998). ↑

3. Ashcroft v. Iqbal, 556 U.S. 662, 129 S. Ct. 1937 (2009); Bell Atl. Corp. v. Twombly, 550 U.S. 544, 127 S.Ct. 1955 (2007). ↑

4. Alice Corp. v. CLS Bank Int’l, 573 U.S. 208, 134 S.Ct. 2347 (2014). ↑

5. Brandon Rash, Andrew Schreiber, and Brooks Kenyon, “Overlooked Patent Cases: Lessons on Section 101 Motions,” Law360, September 22, 2020. ↑

6. Coop. Ent. Inc., v. Kollective Tech., Inc., No. 5:20-cv-07273-EJD, Dkt. 51, at *7 (N.D. Cal. Feb. 5, 2024) (no plausibility despite defendant’s admission of segmentation); Viavi Sols., Inc. v. Platinum Optics Tech., Inc., No. 21-cv-06655-EJD, Dkt. 146, at *6 (N.D. Cal. Feb. 23, 2024) (alleged same design and filter stack as in previous complaint); Cyph, Inc. v. Zoom Video Comm., 642 F.Supp.3d 1034, 1044 (N.D. Cal. 2022) (use of “social media service channel” not plausibly pleaded by “social accounts” of user); Cyboenergy, Inc. v. No. Electric Pwr. Tech., Inc., No. 23-cv-06121-JST, Dkt. 21, at 4–5 (N.D. Cal. Mar. 6, 2024). ↑

7. Novitaz, Inc. v. inMarket Media, LLC, No. 16-CV-06795-EJD, 2017 WL 2311407, at *3 (N.D. Cal. May 26, 2017). ↑

8. Plano Encryption Techs., LLC v. Alkami Tech., Inc., No. 2:16-CV-1032-JRG, 2017 WL 8727249, at *3–4 (E.D. Tex. Sept. 22, 2017); Headwater Rsch. LLC v. Samsung Elecs. Co., No. 2:23-CV-00103-JRG-RSP (Mar. 5, 2024); STA Grp. v. Motorola Sols., Inc., No. 2:22-CV-0381-JRG-RSP (July 7, 2023). ↑

9. Robocast, Inc. v. Netflix, Inc., 640 F.Supp.3d 367 (D. Del. 2022); Cleveland Med. Devices, Inc. v. Resmed, Inc., No. 22-794-GBW (D. Del. Oct. 2, 2023). ↑

Federal and state antitrust enforcement agencies, as well as private plaintiffs, are actively investigating and challenging companies within the same industry using common pricing algorithms, along with the software vendors or the data analytics firms that provide pricing recommendations or industry reports related to pricing. The challenges are industry-agnostic, thus far covering algorithms used in multifamily rental housing, health insurance, and hotels, as well as agricultural data reporting. Most recently Assistant Attorney General Jonathan Kanter told the New York Times, “If your A.I. fixes prices, you’re just as responsible. If anything, the use of A.I. or algorithmic-based technologies should concern us more because it’s much easier to price-fix when you’re outsourcing it to an algorithm versus when you’re sharing manila envelopes in a smoke-filled room.”

Recently, a Nevada federal court dismissed a private class action alleging that several Las Vegas hotel operators violated Section 1 of the Sherman Act by agreeing to set hotel room prices using pricing algorithms from the same vendor. The latest decision contrasts with a federal court’s decision late last year in the multifamily rental cases, where the private plaintiffs’ allegations were allowed to proceed. The Las Vegas hotel operators’ decision also adds to the ongoing debate over algorithmic price fixing and whether, without more, antitrust law prohibits competitors from using the same price-related data reporting company or price recommendation software vendor.

The court’s dismissal hinged on several key findings.

• The hotel operators had signed up for the pricing software services at different times, undermining the plaintiffs’ allegations of a coordinated effort to fix prices.
• There was no evidence that the defendants had exchanged confidential information, which was inconsistent with the plaintiffs’ need to prove a concerted arrangement.
• The defendants had not agreed to be bound by the software’s pricing recommendations, suggesting that they maintained independent control over their pricing decisions.

The Nevada court also rejected the plaintiffs’ theory that they “need not allege the exchange of non-public information” so long as the algorithmic pricing software was trained using machine learning on defendants’ nonpublic information. The court found that the rate information “exchanged” was instead publicly available and that the defendants often rejected the vendor’s algorithmic price recommendations, further suggesting that the hotel operators maintained independent control over their pricing decisions.

The Nevada court’s decision is unlikely to deter the Antitrust Division of the Department of Justice (DOJ) and the Federal Trade Commission (FTC) from their recent efforts to persuade courts that the existing antitrust laws are flexible enough to reach the independent decisions of competing firms to use a common price-related data or algorithm vendor. For example, the agencies have submitted statements of interest in support of class action plaintiffs in three separate lawsuits challenging the use of software to assist in pricing decisions. The agencies argue that even if the defendants did not wholly delegate pricing decisions to the algorithm or agree to accept the algorithm’s recommendations, the use of this common technology alone constitutes a per se illegal tacit agreement. The agencies also highlight that competitors do not need to communicate directly with each other, particularly when the competitors are allegedly working in concert with a single vendor. The focus of this approach is on one “concerted action”—the decision to use the same software or vendor that is also used by your competitors—rather than an agreement or contract to raise, fix, or maintain prices.

Key Takeaways

• State attorneys general, the DOJ, and the FTC will continue to advocate against price-related algorithms and for interpretations of the antitrust laws that deem them automatically illegal.
• Whether or not the antitrust agencies are effective in those efforts, Congress will also look for legislative solutions, such as Senate Bill 3686, the Preventing Algorithmic Collusion Act of 2024.
• Companies considering third-party sourced price-related algorithms should consider conducting diligence around the potential antitrust risks, including a review of the company’s antitrust compliance training/policies.
• Counsel should review the vendor’s marketing materials and public statements regarding its role in the industry, the objectives of its services, or any impact its products might have on price.
• Companies should consider revising and supplementing their antitrust compliance programs and training to address the increased risk associated with price-related vendors.
• Commitments to adhere to vendor price or output recommendations should be avoided.
• It is important for companies to understand how the algorithm or recommendations work, whether the company has the ability to and will customize the product, and whether the use of the vendor will diminish the company’s independent decision-making.
• Companies should not consult with their competitors or use competitors as references for the vendor, product, or service.
• After a vendor selection has been made and the service implemented, companies should conduct routine legal audits of the relationship and the impact of the product.
• The results of diligence and audits should not be ignored, particularly if those results raise antitrust concerns.

As the legal landscape continues to evolve, it is crucial for businesses to stay informed and adapt their practices accordingly.

The legal profession is undergoing a significant transformation. Traditionally, lawyers honed their skills and built their careers within the confines of a single office, surrounded by colleagues and mentors. Today, the landscape is markedly different. Law firms are increasingly global, with attorneys collaborating across multiple offices and often working in hybrid environments. This shift necessitates a new approach to professional development, one that extends beyond the traditional office setting.

Board service provides a unique avenue for lawyers to expand their professional horizons. Through roles that demand strategic decision-making, leadership, and governance, lawyers acquire skills that enhance their legal practice. Participation in board activities fosters improved team leadership and conflict resolution capabilities, which are crucial for managing legal teams and client relationships. Board leadership opens doors to greater visibility and extensive networking opportunities, essential for both career advancement and business growth. By aligning with corporations or organizations that reflect their personal values, lawyers can enhance their reputations as committed and thoughtful leaders. This involvement not only polishes their professional image but also imbues a sense of personal fulfillment, allowing them to contribute positively to societal causes and enrich their professional lives.

Professional Development Benefits of Board Service

Serving on a board offers lawyers a wealth of professional development opportunities that are difficult to replicate in a traditional legal setting. Attorneys on boards are often involved in high-level planning processes that require a long-term perspective. This experience sharpens their ability to foresee potential challenges and opportunities, a skill that is directly transferable to their legal practice.

Exposure to different organizational structures is another key benefit of board service. Lawyers gain firsthand experience with nonprofit and corporate governance, enriching their understanding of diverse operational models and strategies. By understanding how different organizations operate in practice, lawyers can offer more informed and strategic advice in their work.

Decision-making is another critical skill honed through board service. Lawyers are accustomed to making decisions based on legal precedents and statutes, but board roles often require a more nuanced approach. Decisions must balance legal considerations with business, ethical, and community factors. By navigating complex board decisions, attorneys become adept at weighing various factors and making informed choices that benefit their clients and their practice.

Team leadership is also significantly enhanced through board participation. Working with a diverse group of board members, each with their own expertise and viewpoints, in the effort of steering an organization involves collective leadership and strategic collaboration. This team environment fosters a dynamic approach to governance and decision-making. Additionally, board membership usually offers opportunities to lead committees and task forces, providing even more avenues for developing leadership capabilities. Lawyers learn to motivate and manage teams effectively, fostering collaboration and resolving conflicts. These leadership skills are invaluable when managing legal teams and coordinating with clients.

Deborah Dixon, managing partner at The Dixon Firm, shared her experience:

My board experience has been instrumental in my development, and I am sure in ways I may not fully recognize. I now feel a sense of confidence that I understand how board meetings should be run, the rules that generally apply to board meetings (e.g., Robert’s Rules of Order), [and] how to properly prepare agendas, call for votes, and use bylaws or policies as guidance for decisions.

Career and Business Development Advantages of Board Service

Board service offers substantial career and business development advantages for lawyers. One of the most immediate benefits is increased visibility within the professional community. Serving on a board places lawyers in the spotlight, showcasing their leadership and strategic capabilities to a broader audience. This visibility can lead to new opportunities, such as speaking engagements, media features, and invitations to join other prestigious boards.

Alejandro Moreno, San Diego office managing partner at Sheppard Mullin, noted, “Legal periodicals are always looking for stories of lawyers doing ‘good.’ Board service is a good platform to promote stories about the board and your own service to the community, which can increase a lawyer’s visibility and profile in the community.”

Networking opportunities are another significant advantage of board service. Lawyers on boards interact with a diverse group of professionals, including business leaders, other attorneys, and community advocates. These interactions can lead to valuable connections that might not occur within the confines of a traditional legal practice.

Moreno emphasized the importance of these relationships:

One of the best features of professional board service is that it brings together many different types of lawyers. Our board includes everything from consumer advocates to corporate defense counsel. Having these various cross-sections of the legal community sit on the same board promotes good relationships between counsel and civility.

These connections can result in referrals, collaborations, and new client relationships, enhancing a lawyer’s professional network and reputation.

Aligning with an organization whose mission resonates personally is crucial for successful board service. Lawyers should choose to serve organizations that align with their values and passions, fostering genuine commitment and effectiveness. When attorneys serve on boards of organizations they care about, their contributions have a greater impact, and the experience is more fulfilling.

Lawyers can select board roles that highlight their existing expertise, allowing them to share unique skills and demonstrate their professional capabilities. This visibility enables more professionals to see what it is like to work with these attorneys. Additionally, they can choose roles to develop new skills, such as finance or marketing, broadening their knowledge and enhancing their business acumen.

Personal Growth and Broader Perspective from Board Service

Board service also offers lawyers a broader perspective and significant personal growth. Engaging with people from various industries and backgrounds exposes practitioners to new viewpoints and problem-solving approaches. This diversity of thought enhances their empathy and cultural competence.

Brian Condon, senior counsel at Arnold & Porter, shared, “Serving on the board of a nonprofit providing pro bono legal services allows me to understand the unmet legal needs in our community, and what resources there are to provide representation.”

This exposure to societal issues is both eye-opening and rewarding, providing lawyers with a deeper understanding of the challenges faced by a range of communities.

Additionally, serving on boards facilitates connections with like-minded professionals who often become mentors, mentees, and friends. These relationships are invaluable, providing personal and professional support, fostering collaboration, and enhancing the sense of community within the profession. The friendships formed through board service add a layer of fulfillment and camaraderie that enriches the professional journey of a lawyer.

Conclusion: The Importance of Board Service for Lawyers

Board service is a powerful tool for attorneys seeking to enhance their professional and personal development. It offers a unique platform to develop strategic thinking, decision-making, and leadership skills, all of which are directly transferable to legal practice. Lawyers gain increased visibility and networking opportunities, which can lead to new career and business prospects. By aligning with organizations whose missions resonate with their personal values, lawyers can not only enhance their professional image but also find personal fulfillment in contributing to meaningful causes.

Board service can also enhance lawyers’ commitment to equity and access to legal services for underserved communities. Michael Geibelson, California managing partner at Robins Kaplan, LLP, underscored this point: “As professionals, we have a duty to ensure access to legal services for those who cannot afford them. As a complement to pro bono work on individual cases, board work for legal service organizations is a powerful way to fulfill that duty.”

By supporting board service, law firms can foster a culture of leadership and community engagement, ultimately benefiting their clients and the broader community. Encouraging board participation is an investment not just in individual lawyers but also in the firm’s long-term success and the societal contribution of its attorneys.

As money continues to flow into the private credit investment strategy, it is worth considering what effect this movement will have on corporate credit generally and, more specifically, on restructurings. Key differences between private and syndicated debt often lead to vastly different restructuring options and outcomes. The divergence in options and outcomes has become more pronounced by recent trends over the last three to five years in the syndicated loan market with respect to stressed and distressed companies, including earlier lender organization, cooperation agreements, and non–pro rata “liability management” transactions.

What Is Private Credit?

What is private credit? No one knows, but it sounds provocative; it gets investors going. Jokes aside, a recent report from the Federal Reserve has a good definition: non-publicly-traded debt provided by non-bank entities that “involves the bilateral negotiation of terms and conditions to meet the specific needs and objectives of the individual borrower and lender, without the need to comply with traditional regulatory requirements.”^[1] Private credit lending deals typically involve a single direct lender or a “club” of a few unaffiliated lenders. Since borrowers and sponsors choose their lenders in connection with financing, private credit is a relationship business. The sponsors usually have a relationship with at least one of the lenders prior to doing a new deal, and the lenders usually have relationships among themselves. In times like the present, where the amount of private credit capital available to deploy exceeds the opportunities, these relationships are especially important.^[2] Private credit is typically not rated, nor broadly traded with public pricing quotes. Private credit loans are less liquid than syndicated loans, and they are less likely to be traded due to borrower financial distress and/or for purposes of avoiding involvement in a restructuring transaction.

Restructuring Trends in the Syndicated Loan Market

Public Trading and Ratings; Lender Organization

In contrast to private credit, syndicated loans are rated and broadly traded with public pricing quotations. Moreover, the originating lenders may sell the loan if a borrower becomes stressed (or distressed), often at a price well below par to a fund not previously invested in the credit. Further, such buyer may be purchasing the loan specifically in anticipation of restructuring or a liability management transaction.

Importantly, as a result of these dynamics, lenders often proactively organize into “ad hoc” groups at the first sign of operational or balance sheet stress, in anticipation of a restructuring transaction or new money capital raise. Lender organization itself may increase volatility, as news of lenders organizing will often get leaked to the market and cause lenders to sell out of the loan, which may cause loan trading prices to decrease further. In a worst-case scenario, vendors, customers, and landlords may cut exposure to the borrower (e.g., tighten trade credit). Early lender organization may frustrate the sponsor and/or the borrower; however, if it causes loan trading prices to decline, this may present an opportunity for the sponsor and borrower to capture discount via debt purchases or exchanges.

Non–Pro Rata Liability Management Transactions

Lenders often view the benefit of ensuring participation in an ad hoc group and inclusion in the “Required Lender” group as outweighing any costs or downsides of early organization. In contrast to private credit deals—where the lenders know who the co-lenders are and how much of the loan they hold—syndicated loan holdings are not disclosed unless the vehicle holding the loan, such as a business development company (“BDC”) or collateralized loan obligation (“CLO”) fund, has to publicly report its holdings. Thus, the lenders are in a literal race to join an ad hoc group that holds loans in the aggregate constituting “Required Lenders,” which permits (or ostensibly permits) a wide range of amendments and other restructuring transactions.^[3]

While there have always been economic benefits to controlling Required Lenders, the economic value has significantly increased owing to the well-documented trend of non–pro rata liability management transactions—colloquially referred to as “lender-on-lender violence.” The crux of these transactions—which come in many different flavors—is that the borrower receives new money from the ad hoc group, and the loans of the ad hoc group are elevated in lien and/or payment priority compared to the loans held by those not in the ad hoc group. This may also come with other bells and whistles, like a significant make-whole or double-dip structure.^[4]

A corollary of the opacity of lender identity and holdings in syndicated deals is the potential fluidity of the Required Lenders. An ad hoc group that holds 60 percent of outstanding loans today and, therefore, constitutes the Required Lenders could easily lose that status. The remaining 40 percent of outstanding loans could be held by twenty different institutions holding 2 percent each, or it could be held by one institution. In the latter scenario, there is a real risk that the 40 percent lender could either persuade a few members of the initial ad hoc group to disband and join the 40 percent lender’s new group, or just buy their loans and then constitute Required Lenders by itself.

Lender identity and holdings opacity significantly increase restructuring process risk and volatility in a world where non–pro rata liability management transactions are common. Ostensibly to address this risk, lawyers now encourage lenders of an ad hoc group to sign a cooperation agreement. Of course, the cooperation agreement itself is often viewed by lenders as a sign that a non–pro rata liability management transaction is in the cards, and it may cause lenders excluded from the coop group to sell their loans.^[5]

Private Credit v. Syndicated Loan Restructurings

A borrower will necessarily have more restructuring options when it is negotiating with a single or a few lenders as compared to potentially dozens of unaffiliated lenders. As a practical matter, it is easier to implement an out-of-court restructuring, maturity extension, or payment-in-kind (“PIK”)/defer cash interest—or any other transaction implicating “sacred” rights (i.e., amendments that require the consent of all lenders instead of just Required Lenders)—if only a few lenders need to consent. Further, given that private credit is a relationship business, the borrower/sponsor may feel more comfortable engaging in restructuring/recapitalization negotiations or sharing information with lenders far earlier than they would with respect to a syndicated loan facility. The private credit lenders are likely to be aligned with each other on a general restructuring philosophy well before making the loan. In contrast, in the syndicated loan market, different lending vehicles have different strategies (e.g., compare a CLO manager with a loan-to-own hedge fund).

Finally, and most importantly, given the relationships that private credit lenders typically have with each other—which can be leveraged as part of originating and documenting the loan and later in connection with any subsequent liability management or restructuring transaction—non–pro rata liability management transactions among private credit lenders are rare. Such transactions often divide a single class of lenders into winners and losers, which may eliminate as viable options a balance sheet restructuring/recapitalization effectuated out of court or via a prepackaged Chapter 11 plan. In a worst-case scenario (e.g., Serta, Robertshaw), expensive intercreditor litigation among the “winners and losers” may reduce recoveries for all stakeholders, as the incremental cash costs of such litigation are significant.^[6]

That being said, private credit is not all a bed of roses. The same dynamics that add restructuring optionality to private credit—fewer lenders, lender/sponsor relationships, lack of price discovery and trading—may result in more “can kicking.” Further, lack of trading and price discovery also mean less liquidity, which, as Jamie Dimon recently suggested, may create additional downside risk in an economic downturn.^[7] Finally, while aggressive liability management transactions may create more restructuring costs and reduce options on the back end, they present the sponsor and borrower with significantly more opportunity to capture debt discount, which reduces leverage and increases equity value.

1. Fang Cai and Sharjil Haque, “Private Credit: Characteristics and Risks,” FEDS Notes, Board of Governors of the Federal Reserve System, February 23, 2024. ↑

2. John Sage and Carmen Arroyo, “Private Credit Has Too Much Cash and Not Enough Places to Put It,” Bloomberg, May 23, 2024. ↑

3. The broad rights of “Required Lenders” are described in my article “Key Issues in Standing to Challenge Liability Management-Related Transactions,” The Review of Banking & Financial Services 39, no. 10 (October 2023): 121–129. ↑

4. See “How Did They Do It? At Home Group and the ‘Double Dip’ Claim Financing Structure,” King & Spalding LLP. ↑

5. Reshmi Basu and Jill R. Shah, “The Gulf Between Restructuring’s Winners and Losers Is Growing,” The Brink (newsletter), Bloomberg, June 29, 2024. ↑

6. See In re Serta Simmons Bedding, LLC, No. 23-90020 (DRJ) (Bankr. S.D. Tex. filed Jan. 24, 2023); In re Robertshaw US Holding Corp., No. 24-90052 (CML) (Bankr. S.D. Tex. filed Feb. 15, 2024). Both of these cases involved costly intercreditor litigation over prepetition liability management financings. ↑

7. Hannah Levitt, “Dimon Says ‘Could Be Hell to Pay’ If Private Credit Sours,” Bloomberg, May 29, 2024. ↑

The recent growth in state healthcare transaction review laws is requiring parties to healthcare transactions to dust off their due diligence and closing checklists to conform to new requirements. Within the past few years, an increasing number of states^[1] have enacted legislation designed to review the impact of certain healthcare transactions on cost, quality, access, need, competition, and other related issues, affecting entities and transactions that have not previously been the focus of regulatory scrutiny (“Transaction Review Laws”).^[2] Anyone considering a healthcare transaction, particularly those with healthcare services providers, should be aware that Transaction Review Laws exist and are on the rise; they should factor them into their regulatory analysis and appreciate how transaction reviews by state regulators have and will change the nature of certain transactions. This article provides an overview of how to navigate Transaction Review Laws by the types of transactions that are reviewable, parties subject to review, notice and approval requirements, and applicable exceptions.

While there is some variation in the policy priorities driving different state initiatives, most states have an emphasis on addressing competition, market concentration, quality, accessibility of services, and cost containment. A few states also give attention to health equity and equitable access to care. Some states want to create more transparency and inform the public by creating oversight over investor-backed entities and unlicensed entities involved in the provision of healthcare.

Key Elements

Most states define the types of transactions covered by the applicable law as a “material transaction” or a transaction that results in a “material change.” Many states include any transaction that involves a change of control in the definition of “material transaction” or “material change.” Some states have thresholds of what constitutes “material” and also consider whether a transaction is part of a series of related transactions that take place over a specified period of time for purposes of meeting a threshold. As examples:

• New York defines a “material transaction”^[3] as a merger with a healthcare entity; an acquisition of one or more healthcare entities; an affiliation agreement or contract between a healthcare entity and another person; or the formation of a partnership, joint venture, accountable care organization, parent organization, or management services organization to administer contracts with health plans, third-party administrators, pharmacy benefit managers (“PBMs”), or healthcare providers as prescribed by the commissioner by regulation. Notice is required for any “material transaction,” whether in a single transaction or through a series of related transactions that take place within a rolling twelve-month period.
• California defines a “material change”^[4] to include both transactions with financial thresholds and transactions without financial thresholds. Transactions with financial thresholds involve healthcare services that have a fair market value of at least $25 million; will more likely than not (to be determined based on financial information submitted) increase annual California revenue of any healthcare entity party by at least $10 million or 20 percent of annual California revenue; involve the formation of a new healthcare entity projected to have $25 million in annual California revenue; or involve healthcare entities joining, merging, or affiliating where any entity has at least $10 million in annual revenue. Transactions without financial thresholds are those that involve a transfer or change of control of a healthcare entity; a sale, transfer, lease, or other disposition of 25 percent or more of the California assets of any healthcare entity; and a change in the form of ownership of a healthcare entity. For purposes of determining the revenue thresholds and asset and control circumstances, the law applies if the transaction (i) is part of a series of related transactions for the same or related healthcare services occurring over the past ten years involving the same healthcare entities or entities affiliated with the same entities or (ii) involves the acquisition of a healthcare entity by another entity and the acquiring entity has consummated a similar transaction or transactions over the past ten years.

States such as Colorado, Connecticut, New Mexico, Rhode Island, and Vermont have no materiality thresholds.

Even in states where a threshold may seem clear, applying the threshold can be a challenge. For example, Indiana’s law requires a healthcare entity involved in an acquisition or merger with another healthcare entity with total assets of at least $10 million (including combined entities and holdings) to provide notice, but the law does not state whether the $10 million applies to all assets or only Indiana assets. Similarly, Oregon’s law applies if one entity to a transaction has at least $25 million in annual revenue and one entity has at least $10 million in annual revenue (in each, average over the last three years), but the law does not specify if it is in-state revenue or all revenue.

States differ on the type of healthcare entities that are subject to a transaction review. Almost all states include group practices, hospitals, and hospital systems. Certain states include management service organizations and similar entities that provide administrative or management services to physician practices, and some also include organizations that represent healthcare providers in contracting with carriers and third-party administrators for the payment of healthcare services. Some states include health insurance plans, insurers, PBMs, payors, and Medicare advantage plans. As examples:

• Minnesota defines healthcare entities to include hospitals, hospital systems, captive professional entities, medical foundations, healthcare provider group practices, and any entities that are controlled by, or that exercise control over, any of the foregoing healthcare entities.^[5]
• Delaware defines entities covered by the law as including any not-for-profit healthcare entity seeking to engage in a not-for-profit healthcare conversion transaction.^[6]
• Indiana defines healthcare entity to include providers of healthcare services, health and accident insurers, health maintenance organizations (“HMOs”), PBMs, administrators, and private equity partnerships, regardless of where located, entering into a transaction with any of the foregoing.^[7]

Just as states differ in the types of entities subject to Transaction Review Laws, they differ on which transactions and entities are not subject to review. As examples:

• Nevada excludes transactions involving businesses that are under common ownership or have a contracting relationship that was established before October 1, 2021, from review.^[8]
• Massachusetts excludes providers or provider organizations with less than $25 million in net patient service revenue from review.^[9]

All Transaction Review Laws require parties to provide notice with some waiting period prior to closing. Some laws also require pre-closing approval of the transaction. As examples:

• New York requires that notice of a material transaction be provided to the New York State Department of Health (“DOH”) thirty days before the transaction’s closing date. The DOH does not approve or disapprove any transaction; rather, the DOH must immediately forward the notice to the New York Attorney General’s antitrust, healthcare, and charities bureaus. Post-closing notice to the DOH is also required.
• New Mexico requires that notice be provided to the Office of the Superintendent of Insurance at least 120 days prior to a transaction closing.
• Oregon requires pre-closing approval by the Oregon Health Authority (“OHA”). Notice must be submitted to the OHA no later than 180 days prior to closing of the transaction. The OHA then has thirty days to approve, approve with conditions, or decide to conduct a more comprehensive review of the transaction.

Practical Considerations

In addition to understanding the fundamentals of Transaction Review Laws, there are a few practical issues to consider involving the timing of the review, the information to be disclosed, and the structure of a transaction.

Reviews, whether involving an approval or notice, will have an effect on transaction timing. Counsel and parties to transactions should monitor the process and timing from notice to completion, particularly because a transaction review may not align with other regulatory review and approval requirements. While advance notice requirements generally range from thirty days to ninety days prior to closing, regulators often request additional information, which can extend timelines. For example, in Massachusetts, Oregon, and California, the regulator may conduct a more extensive review, extending the pre-transaction review period to 180 days or more. Complete applications and thoughtful communication with regulators can make for a more efficient review process.

Parties to transactions that have to comply with Transaction Review Laws must be aware that they will likely be subject to public disclosure of transaction documents, ownership information, and equity and debt structures. Some statutory schemes may have exceptions to public disclosure based on the confidentiality of business-related information; however, many do not. More often, in the schemes that do have such protections, parties must request protection prior to any type of disclosure.

One of the most notable features of many Transaction Review Laws is how a particular regulatory framework ensures the law applies to scenarios in which not simply ownership, but some type of effective control has been assumed. This often comes up in the context of entering into a management services relationship that fits within a state’s definition of “material change” or “material transaction.” These kinds of frameworks also raise other questions as to whether the definitions might extend, for example, to a management and lease arrangement between a landlord and an operator of a senior housing facility. Parties to contractual arrangements where significant “control” might be exercised must carefully review whether entering into the contractual arrangement itself may trigger review. Many states with Transaction Review Laws are also states with corporate practice prohibitions. Parties to arrangements between professionals and management companies may have to rethink their normal operating processes if the control that is exercised via the business relationship does not violate corporate practice prohibitions but does trigger review.

Below are some general recommendations for parties to transactions that are subject to Transaction Review Laws:

• Early in the deal process, closely consider the statutory review factors such as overall cost, equity, competition, and availability of healthcare services, and document the review and analysis.
• Update due diligence processes to identify issues that will be subject to scrutiny or could result in disapproval.
• Be aware of the potential for increased transaction costs, and update budgets and pro formas accordingly.
• Be prepared for new levels of transparency that result from the review process.
• Understand the requirements for disclosure of proprietary information or the necessity for a request that certain information not be subject to public disclosure.
• Educate business development, operations, and transaction teams about these laws and the lengthier transaction timelines they entail.

Conclusion

In summary, several states have enacted Transaction Review Laws designed to review healthcare entities and transactions that have traditionally not been subject to review. States differ on how they determine which entities and transactions are reviewable. Parties to healthcare transactions need to understand which states have enacted laws, which states are considering them, and how a particular state’s law will affect either a current or future transaction. As Transaction Review Laws expand, patience and thoroughness will be key for parties when navigating processes and requirements that are not always clear and may raise more questions than answers.

Table of Current State Transaction Review Laws

1. Many states have modeled their legislation on the National Academy for State Health Policy’s Model Act for State Oversight of Proposed Health Care Mergers. See A Model Act for State Oversight of Proposed Health Care Mergers, National Academy for State Health Policy (Nov. 12, 2021). ↑

2. A full list of current state Transaction Review Laws is included at the end of this article. ↑

3. N.Y. Pub. Health L. § 4550(4)(a). ↑

4. Cal. Code Regs. tit. 22, § 97435(c). ↑

5. 2023 Minn. Laws page no. 225. ↑

6. Del. Code Ann. tit. 29 § 2532. ↑

7. Senate Enrolled Act No. 9 ch. 8.5 § 2(a). ↑

8. Nev. Rev. Stat. § 598A.370(2)(b). ↑

9. Mass. Gen. Laws ch. 6D § 10(a). ↑

Consumers often are able to effect transactions by providing payment authorization ahead of time. How often a consumer may authorize a prescheduled transaction differs slightly under Regulation E and the National Automated Clearing House Association (“NACHA”) Operating Rules and Guidelines (“NACHA Rules”). Very generally, Regulation E governs preauthorized electronic fund transfers (“EFTs”), while the NACHA Rules govern standing authorizations. However, both provide certain sets of rules and guidelines of how this can occur, and each is beneficial to the consumer.

At a high level, Regulation E provides guidelines for consumers and banks or other financial institutions in the context of EFTs, including point-of-sale transactions, ACH transactions and systems, and automated teller machines (“ATMs”). The requirements of Regulation E apply to a consumer account when there is an agreement for EFT services to or from the account between a consumer and a financial institution or between a consumer and a third party. A preauthorized EFT is a transaction that is authorized by the consumer in advance of a transfer that will take place on a recurring basis at substantially regular intervals. After the debit is authorized, further authorization or action by the consumer to initiate a transfer will not be required. In the scenario of a consumer and third-party relationship, the account-holding institution will receive notice of the agreement for preauthorized EFTs.

The NACHA standing authorization permits advanced authorization of future debits initiated by a consumer at varied, unscheduled intervals, without requiring either a single or recurring authorization. The standing authorization must specify how the consumer may initiate future subsequent debits or “subsequent entries,” and each subsequent entry must be separately initiated by an affirmative act by the consumer. Examples of such permissible affirmative acts include, but are not limited to, text messages, mobile app confirmations, emails, telephone calls, and ATM or point-of-sale terminal transactions. All authorizations must be in clear and understandable terms, as well as readily identifiable.

There is some overlap between standing authorizations and preauthorized EFTs; generally, both types of transaction authorizations can be provided in writing or electronically. Regulation E’s requirements are more stringent, requiring a writing signed or similarly authenticated by the consumer. By contrast, standing authorizations can be provided orally, electronically, or in writing. Further, each governing scheme specifies the timing of how such authorizations must be provided to an originator, bank, or other financial institution in order to process the transaction; they also require record retention after the transaction settles. Practically, both types of transactions should simplify electronic payments for consumers by reducing the frequency at which a consumer needs to initiate an EFT.

While the preauthorized EFT provides consumers with a mechanism for consistent and convenient debits—which often come into play with, for example, certain monthly or quarterly transactions, such as making a car payment or mortgage payment—the standing authorization provides consumers with more flexibility to initiate EFTs for transactions that occur frequently enough to justify preauthorization, but not on a set schedule. The lack of rigidity coupled with the provision of a separately initiated subsequent entry by the consumer gives consumers greater access to financial services. Additionally, the standing authorization allows originators a middle ground between a single authorization/entry and recurring ones. Ultimately, both payment schemes provide consumers and originators with greater payment access.

The Eleventh Circuit Court of Appeals recently affirmed a decision on appeal from the United States District Court for the Middle District of Florida (which also affirmed the bankruptcy court’s decision), with notable implications for Chapter 15 cases.^[1] The central question at issue was whether 11 U.S.C. § 109(a), which governs who may be a debtor under title 11, applies to cases brought under Chapter 15 of the Bankruptcy Code. Despite the Bankruptcy Code’s plain text stating that section 109(a) (as well as all of Chapter 1) applies to Chapter 15 cases, the Eleventh Circuit found itself bound by precedent in In re Goerg, 844 F. 2d 1561 (11th Cir. 1985), wherein the Eleventh Circuit held that the Bankruptcy Code’s debtor eligibility language does not apply to cases ancillary to a foreign proceeding. Thus, the Eleventh Circuit held that the debtor eligibility requirements in section 109(a) do not apply to Chapter 15 cases and affirmed the lower courts’ decisions.

Chapter 15 Generally

Chapter 15 of the Bankruptcy Code is designed to help the U.S. recognize foreign insolvency proceedings and increase international cooperation among insolvency courts to effectively address cross-border insolvency issues. Chapter 15 was enacted as part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”) in 2005 and repealed its predecessor, section 304 of the Bankruptcy Code. Chapter 15 codifies the Model Law on Cross-Border Insolvency in substantially the same way it was written by the United Nations Commission on International Trade Law. It provides for recognition of a foreign insolvency proceeding before a U.S. bankruptcy court can provide automatic, provisional, or permissive relief.

Factual Background

In 2015, the appellant, Talal Qais Abdulmunem Al Zawawi and his wife, Leila Hammoud, moved to the United Kingdom with their children. In 2017, Hammoud petitioned for dissolution of marriage. In March 2019, Hammoud obtained a divorce decree and a judgment in her favor for £24,075,000 from a U.K. court. In April 2019, the U.K. court issued a worldwide freezing order against Al Zawawi, enjoining him from disposing any of his assets until the judgment was paid in full. Roughly one year later, Hammoud petitioned the U.K. court to place Al Zawawi in involuntary bankruptcy, alleging that he had failed to make payments on the March 2019 judgment. On June 29, 2020, Al Zawawi was adjudged bankrupt, and the court appointed Colin Diss, Hannah Davie, and Michael Leeds as joint trustees (the “Foreign Representatives”).

On March 24, 2021, the Foreign Representatives filed a Chapter 15 Petition for Recognition of a Foreign Proceeding in the U.S. Bankruptcy Court for the Middle District of Florida, which, if granted, would subject Al Zawawi’s U.S. assets to the automatic stay and open the door to discovery and other relief relating to those assets. The Foreign Representatives argued that the requirements of section 1517 were met and therefore an order granting recognition was warranted. Al Zawawi did not dispute whether the petition satisfied section 1517. He argued, however, that the case should be dismissed on the basis that he was not eligible to be a debtor under section 109(a) because he did not reside or have a domicile, place of business, or any property in the U.S.

The bankruptcy court granted recognition, determining that section 109(a) does not apply to Chapter 15 cases and that, even if section 109(a) did apply, Al Zawawi had property interests in the U.S. Al Zawawi appealed the bankruptcy court’s decision, and the district court affirmed without addressing the alternative finding that Al Zawawi nonetheless had property in the U.S. Al Zawawi again appealed, this time to the Eleventh Circuit Court of Appeals.

Eleventh Circuit’s In re Goerg Decision Binds It to Interpretation Differing from Plain Text

The Eleventh Circuit first addresses the central issue by confronting the plain text of section 103(a), which states that “this chapter, sections 307, 362(o), 555 through 557, and 559 through 562 apply in a case under chapter 15.”^[2] “This chapter,” as used in section 103(a), refers to Chapter 1 of the Bankruptcy Code, which includes section 109(a) and the eligibility requirements listed therein. However, unlike other circuits that have held the above plain language settles this issue, the Eleventh Circuit is bound by prior precedent wherein it held otherwise: In re Goerg.

In In re Goerg, the Eleventh Circuit dealt with the question of whether a hypothetical debtor in a case brought under Chapter 15’s predecessor—section 304, titled “Cases ancillary to foreign proceedings”—must fall within Chapter 1’s definition of a “debtor.” The court ultimately said no. In coming to that decision, the Eleventh Circuit had to wrestle with the Bankruptcy Code’s anomalous definitions of “debtor” and “foreign proceeding,” wherein a debtor was defined as a person with a bankruptcy case under title 11, and a foreign proceeding was defined as a proceeding concerning such a debtor but need not even be a bankruptcy proceeding. To resolve the anomaly, the Goerg court adopted the view the term “debtor,” as used in the section 304 context, incorporates the definition of “debtor” used by the foreign proceeding forum. Using this view, the bankruptcy court could entertain the section 304 petition so long as the debtor qualified for relief under applicable foreign law and the foreign proceeding was for the purpose of liquidating an estate; adjusting debts by composition, extension, or discharge; or effecting a reorganization—the definition of “foreign proceeding” under the Bankruptcy Code. In choosing this option, the court relied on section 304’s purpose to prevent piecemeal litigation as to a debtor’s assets in the U.S. and to generally help further the efficiency of foreign insolvency proceedings involving worldwide assets. In light of that understanding, the Eleventh Circuit in Goerg held that the debtor in an ancillary assistance case under section 304 need only be subject to a foreign proceeding (as defined in the Bankruptcy Code) and that debtor eligibility under the Bankruptcy Code was not a prerequisite to section 304 ancillary assistance.

Ultimately, since the Bankruptcy Code’s current definitions of “debtor” and “foreign proceeding” still present a similar anomaly for Chapter 15 as they did for section 304, Goerg counseled the Al Zawawi court to consider the purpose of Chapter 15 (as it did with section 304) in holding that debtor eligibility under Chapter 1 is not a prerequisite for the recognition of a foreign proceeding under Chapter 15. While there are differences between the former section 304 and its successor Chapter 15 (e.g., section 304 did not entitle debtors to the automatic stay), the purposes of section 304 and Chapter 15 are the same. Both aim to provide effective mechanisms for dealing with cases of cross-border insolvency. Based on that purpose, the Eleventh Circuit in Goerg determined that a debtor in a case ancillary to a foreign proceeding need only be properly subject, under applicable foreign law, to a “foreign proceeding” as defined by the Bankruptcy Code. In In re Al Zawawi, the Eleventh Circuit followed that logic and held that based on the current definition of “foreign proceeding” in section 101(23), debtor eligibility under section 109(a) is not required to grant recognition of a foreign proceeding under Chapter 15. Al Zawawi was properly subject to a “foreign proceeding,” and the requirements for recognition under section 1517 were met; thus, the bankruptcy court’s order granting recognition was affirmed.

Takeaway

The Eleventh Circuit’s decision in In re Al Zawawi opens the door for bankruptcy courts in Alabama, Florida, and Georgia to recognize foreign proceedings so long as the debtor is properly subject to a foreign proceeding, which may lead to an influx of similar cases. The decision^[3] may also set the stage for the Supreme Court to weigh in, given the circuit split with the Second Circuit and the juxtaposition of the court’s reasoning with the plain text of the Bankruptcy Code.

1. In re Al Zawawi, No. 22-11024, 2024 WL 1423871 (11th Cir. Apr. 3, 2024). ↑

2. 11 U.S.C. § 103(a). ↑

3. See also In re Bemarmara Consulting a.s., Case No. 13-13037 (KG) (Bankr. D. Del. Dec 17, 2013). ↑

Among the factors in the devolution of the law from a learned profession to a trade is competition amongst an ever-growing pool of lawyers for an ever-shrinking pool of clients. Particularly in “eat what you kill” economic circumstances, there is tremendous pressure to generate client revenues. Law firms emphasize marketing more than ever before. So when a client prospect comes to you, and all that marketing and reputation seems to be paying off at last, you have every incentive to explore the prospect’s needs and persuade that person that you are the right person to handle the matter. Right?

Not so fast.

Recent ABA Formal Opinion 510 provides worthwhile guidance on some uncertainties in Model Rule 1.18 regarding conflicts of interest related to client prospects. Before considering the uncertainties, however, let’s first consider the rule.

A Brief Tour of Model Rule 1.18

Model Rule 1.18 begins in paragraph (a) by defining a term (not found in the Terminology section)—prospective client—simply as a person who consults a lawyer “about the possibility of forming a client-lawyer relationship with respect to a matter.” The definition is not triggered, according to Comment 2 to Model Rule 1.18, where someone “provides information to a lawyer in response to advertising that merely describes the lawyer’s education, experience, areas of practice, and contact information, or provides legal information of general interest.” The comment regards such information as having been communicated “without any reasonable expectation that the lawyer is willing to discuss the possibility of forming a client-lawyer relationship.”

Be aware, however, that not all legal ethics rules are identical, which underscores the importance for lawyers of always checking the rules in each jurisdiction in which they are admitted to practice. New York’s version of this rule, for example, contains an additional paragraph (e)—not found in the Model Rule—articulating two exceptions to the term prospective client: It does not include anyone who “(1) communicates information unilaterally to a lawyer, without any reasonable expectation that the lawyer is willing to discuss the possibility of forming a client-lawyer relationship; or (2) communicates with a lawyer for the purpose of disqualifying the lawyer from handling a materially adverse representation on the same or a substantially related matter.”^[1] These exceptions in the blackletter of the New York rule track guidance in the Model Rule’s Comment [2].

Paragraph (b) of Model Rule 1.18 provides that the lawyer may not use or reveal information learned from a prospective client, even where no client-lawyer relationship ever materialized. In other words, information is protected when imparted by the “client that never was.”^[2] Notice that this prohibition is unqualified and applies to any information, not just information that could be harmful to the prospective client. There is, however, an exception encompassing information of the same sort that Model Rule 1.9 would allow to be used or revealed in the case of a former client.^[3]

That exception is admittedly rather opaque. First of all, Rule 1.9(c), which deals with use or revelation of information, applies only to information “relating to the representation,” which does not track well as an exception to a rule, like Rule 1.18, that applies only when there never was any representation. Be that as it may, Rule 1.9(c) does provide an exemption, “except as these Rules may permit or require,” which would encompass, for example, exceptions to confidentiality in Rule 1.6(b). In addition, Rule 1.9(c)(1) carves out using information that is “generally known,” but there is no comparable carve-out for revealing such information in Rule 1.9(c)(2).

Paragraph (c) of Rule 1.18 then contains two ukases. First, it prohibits a lawyer subject to paragraph (b) from representing a client with interests materially adverse to those of a prospective client in the same or a substantially related matter if the lawyer received information from the prospective client that could be “significantly harmful” to that person in the matter.^[4] Second, such disqualification is imputed to other lawyers in a firm with which the disqualified lawyer is associated.

Both of these are subject to exceptions provided in paragraph (d), which is the focus of Formal Op. 510. These exceptions will permit a representation adverse to the prospective client if their elements are satisfied.

The first exception is informed consent confirmed in writing under paragraph (d)(1), and that consent must come from both the affected client and the prospective client. Such mutual consent will likely be rather rare—probably mere wishful thinking on the part of the drafters.^[5]

The second exception, under (d)(2), is more likely but involves several steps, all of which must be scrupulously performed. The lawyer consulted by the prospective client (A) must have taken “reasonable measures to avoid exposure to more disqualifying information than was reasonably necessary to determine whether to represent the prospective client”; (B) must have been timely screened from any participation in the representation; and (C) can receive no part of the fee. In addition, the prospective client must promptly be given written notification.

Formal Op. 510

Formal Op. 510 focuses on imputation under Rule 1.18(d)(2), which will be required unless the lawyer “took reasonable measures to avoid exposure to more disqualifying information than was reasonably necessary to determine whether to represent the prospective client . . .” (emphases added). The opinion observes that there has heretofore been little guidance on these phrases.

What information is “reasonably necessary”?

Despite the laudable efforts of Formal Op. 510 to provide that guidance, Rule 1.18(d) will inevitably remain something of a gray area. As the opinion acknowledges, “It is easier to show that the lawyer’s conduct was intended to serve a legitimate purpose than to show that it was necessary to serve that purpose.”

To begin with, it is clear that many a lawyer will seek to elicit lots of information from a prospective client, perhaps to impress the client with the lawyer’s acumen and experience in order to get new business. None of that is unusual or unethical. Eliciting information to facilitate self-promotion or touting the law firm’s abilities does, however, run the risk of obtaining information that is potentially disqualifying down the road. An example given in Formal Op. 510 involved lawyers who had pitched a prospective client without making efforts to limit their inquiry beyond what was “reasonably necessary” and subsequently moved to another law firm, which ended up being disqualified.^[6]

Formal Op. 510 identifies as “reasonably necessary” information relating to a lawyer’s professional responsibilities, including whether:

• there is a conflict of interest (see Model Rule 1.7 et seq.);
• the legal work is something the lawyer can perform competently (see Model Rule 1.1);
• the prospective client’s goals will abuse the judicial process or are frivolous (cf. Model Rule 3.1); and
• the prospective client may be seeking a lawyer’s assistance in perpetrating a crime or fraud (see Model Rules 1.2(d) and 1.16(a)(4)).^[7]

The opinion also counts as “reasonably necessary” information pertinent to the business decision whether to take on the client, which would incorporate assessments of the duration and quantum of work required, potential revenues and likelihood of getting paid,^[8] professional reputation aspects, consonance with law firm policies, etc.

“Reasonable measures” to limit information to the “reasonably necessary”

Whether a lawyer, during initial conversations with a prospective client, can successfully limit the scope of their interaction so as to avoid getting information beyond what is “reasonably necessary” is uncertain. Certainly, it is worth a try. Limiting the information intake to just what is necessary to perform a conflicts check is possible, but that does not satisfy the other professional responsibilities mentioned above.

Formal Op. 510 suggests that lawyers provide a warning that they’ve not yet agreed to take on the matter and information should be limited only to what’s necessary for the lawyer to determine whether to move forward. Such an approach, even if it could be effective with a garrulous prospective client, could well prove awkward at the outset of a potential lawyer-client relationship. Moreover, as a practical matter, that inefficacy and that awkwardness could be magnified where the conversation is not in person but is conducted by telephone or over an online communications platform.

The opinion’s discussion of this issue is a well-motivated attempt to provide guidance, but unavoidably it displays an “Alice in Wonderland” quality. It seems unrealistic to believe that a lawyer can curtail the information flow when the details of the transaction or litigation are an indispensable part of the lawyer’s calculus—even if not, when viewed with the benefit of hindsight, “reasonably necessary” within the meaning of the Rule—in determining whether to take on the engagement.

Furthermore, the opinion does not touch on how to avoid misunderstandings or disputes about what was and was not communicated by the prospective client. It would seem prudent for the lawyer to ask the client’s consent (if in a jurisdiction where consent is required) to record the conversation; alternatively, someone else from the firm should be there to take copious notes of the discussion.

On the “timely screening” requirement, Formal Op. 510 deems it unnecessary in the ordinary course to commence the screen of the lawyer who dealt with the client that never was, unless and until “the law firm becomes aware of information that there is a potential conflict. The alternative of erecting an appropriate screen for each potential client would be an unnecessary and unreasonable burden and is not required by Rule 1.18.”

Remember to Check Your Own Rules

Formal Op. 510 interprets the Model Rules, but these are not the law anywhere unless they have been adopted in haec verba by the relevant jurisdiction. Many states (e.g., Ohio, Massachusetts) have adopted Model Rule 1.18 essentially verbatim, but not all have. We have already identified one state variation in New York’s definition of “prospective client.” Some other variations:

• Whereas Model Rule 1.18(c) addresses only information from the prospective client that, if used when representing a person with interests adverse to the prospective client in the same or a substantially related matter, “could be significantly harmful to that person” (emphasis added), Florida’s version seems broader in that it applies to information that “could be used to the disadvantage of that person.”
• D.C.’s version doesn’t mention any degree of harm and applies not to mere “information” but to a “confidence or secret” received from the prospective client. Those words are defined (not in the Terminology section but in D.C.’s Rule 1.6): “‘Confidence’ refers to information protected by the attorney-client privilege under applicable law, and ‘secret’ refers to other information gained in the professional relationship that the client has requested be held inviolate, or the disclosure of which would be embarrassing, or would be likely to be detrimental, to the client.”^[9]
• Illinois’s version of Rule 1.18(d)(2) does not require written notice (prompt or otherwise) to the prospective client.
• In California’s version, a “prospective client” expressly includes a person’s authorized representative, and the substance of the definition arguably sweeps more broadly than forming a lawyer-client relationship, as it refers to someone who “consults a lawyer for the purpose of retaining the lawyer or securing legal service or advice from the lawyer in the lawyer’s professional capacity . . . .”
• Texas does not have a version of Rule 1.18.

1. N.Y. Comp. Codes R. & Regs. tit. 22, § 1200.1.18(e) (2024). Cf. Restatement (Third) of the Law Governing Lawyers § 15 cmt. c (“[A] tribunal may consider whether the prospective client disclosed confidential information to the lawyer for the purpose of preventing the lawyer or the lawyer’s firm from representing an adverse party rather than in a good-faith endeavor to determine whether to retain the lawyer.”). ↑

2. With apologies to Ewen Montagu, The Man Who Never Was (1954), and the 1956 film adaptation of the same name starring Clifton Webb. ↑

3. With regard to information not exempted under Model Rule 1.9, note that Comment [3] thereof explains that the question is whether confidential information could have been shared, not whether confidences were in fact shared. Accord Analytica Inc. v. NPD Research, 708 F.2d 1263, 1266 (7th Cir. 1983). ↑

4. An earlier ABA ethics opinion concluded that whether information learned by the lawyer could be significantly harmful is a fact-based inquiry depending on a variety of circumstances, including the length of the consultation and the nature of the topics discussed. See ABA Formal Op. 492 (June 9, 2020). That topic is also, of course, addressed in Model R. 1.18 cmts. [1]–[2]. ↑

5. Ethics issues relating to seeking to increase the likelihood by getting written consent in advance are beyond the scope of this discussion. ↑

6. Formal Op. 510 at 8, n.13 (citing Skybell Technologies v. Ring, Inc., No. SACV 18-00014 JVS (JDEx), 2018 BL 481288, 2018 U.S. Dist. LEXIS 217502 (C.D. Cal. Sep. 18, 2018)). ↑

7. The opinion mentions in passing, at 6 n.11, but does not dwell on, the enhanced due diligence the ABA has recently sought to impose on lawyers to prevent money laundering and the financing of terrorism under Model Rule 1.16 and its Comment [2]; those categories should assuredly be part of what is “reasonably necessary” for purposes of Rule 1.18(d). ↑

8. Formal Op. 510 cites as an example Vaccine Ctr., LLC v. Glaxosmithkline LLC, No. 2:12-cv-01849-JCM-NJK, 2013 BL 414523, 2013 U.S. Dist. LEXIS 60046, *4–5 (D. Nev. Apr. 25, 2013) (finding that a lawyer sufficiently limited exposure to disqualifying information where the lawyer requested information necessary to assess whether a contingency matter would be economically feasible, even though such a determination “requires a thorough analysis and understanding of liability and damages issues because the attorney must weigh the significant amount of money and time that will be invested in representing the plaintiff with the ultimate likelihood of prevailing and recovering damages”). ↑

9. See also D.C. Bar Op. 374 (2018) (information from prospective client is protected from disclosure to the same extent as client information is protected by D.C. Rule 1.6). ↑

Recently, the Bureau of Consumer Financial Protection (the “Bureau” or the “CFPB”) survived an appropriations-based challenge to its funding mechanism. In a challenge brought by Consumer Financial Services of America based on the appropriations clause of the Constitution,^[1] the Fifth Circuit in 2022 had invalidated that mechanism, but in a decision issued on May 16, 2024, the U.S. Supreme Court reversed.^[2]

No stranger to existential constitutional challenges, the Bureau fared less well in the 2016 Supreme Court decision in the Seila Law case. There, a divided Court held that the Bureau was unconstitutionally constituted. Writing for the majority on the structural issue, Chief Justice Roberts concluded that the combination of a single agency director and termination only for “inefficiency, neglect of duty, or malfeasance” violated Article II of the U.S. Constitution.^[3] Although the Constitution says nothing about removal of executive officials, the majority reasoned that presidents cannot discharge the duty to “take care” unless they have the ability to remove appointees for any reason or none. The requirement of removal for cause “clashe[d] with constitutional structure by concentrating power in a unilateral actor insulated from Presidential control.”^[4]

Background

In the omnibus 2010 Dodd-Frank legislation, Congress addressed by problem of weak consumer financial protection at the federal level by relieving the federal prudential banking regulators of jurisdiction over federal consumer financial protection laws and transferring authority for administering those laws to the CFPB, then newly created as an independent bureau within the Federal Reserve System to regulate consumer financial products and services. That regulation included not just the authority to promulgate its own rules—covering the entire consumer financial services market and all consumer financial services providers—but also the power to enforce certain rules issued by the Federal Trade Commission (including rules regarding telemarketing sales and cooling-off periods for sales made at homes); to implement Dodd-Frank’s prohibition on unfair, deceptive, and abusive acts and practices in consumer financial services; and to supervise certain nonbank firms offering consumer financial products and services (including authority to examine and require reports from entities including mortgage bankers, brokers, and servicers; private student lenders; payday lenders; “larger participants” in the markets for other consumer financial products and services; and other covered entities determined to pose risk to consumers). In addition, the Bureau is empowered to enforce federal consumer financial laws against nonbank entities and enjoys the authority to conduct investigations, issue subpoenas and civil investigative demands, initiate administrative adjudications, assess civil money penalties (as well as seek restitution and disgorgement), and prosecute civil actions in federal court.

Congress also gave the Bureau authority to supervise certain depository institutions that historically had been supervised by other regulators for compliance with consumer financial protections. Specifically, the Bureau is responsible for supervising depository institutions with total assets of over $10 billion, and their affiliates, for compliance with federal consumer financial laws. The Bureau coordinates that supervision with other federal and state bank regulators, who retain supervisory authority over those same entities for safety and soundness, among other things. The CFPB’s supervisory authority encompasses the power to enforce the federal consumer financial laws against these entities.

In an effort to insulate the CFPB from politics on Capitol Hill, Congress exempted the agency from the normal appropriations process. Instead, Congress is left out of the loop, and the Bureau receives its funding from the Federal Reserve, which is itself funded outside the appropriations process through bank assessments. Although the Bureau is an independent agency, it is housed within the Federal Reserve System.^[5] Congress allowed the CFPB to demand from the Federal Reserve Board up to 12 percent of the Federal Reserve’s budget to help fund the Bureau’s operations.^[6] Interestingly, the Federal Reserve’s budget is, in turn, funded not by direct congressional appropriations but through Reserve Bank operations, including interest on government securities acquired as part of those operations, and by assessments on the banks the Board supervises.^[7]

The Appropriations Clause Challenge

The CFPB v. Community Financial Services Association case arose in connection with a challenge to the agency’s Payday Lending rule, which had been promulgated to regulate payday, vehicle title, and certain high-cost installment loans that the Bureau found “unfair” and “abusive.”^[8] In addition to administrative law challenges to the rule, the plaintiffs argued that the Bureau’s funding mechanism violates the Appropriations Clause. The district court rejected that claim on summary judgment,^[9] but the U.S. Court of Appeals for the Fifth Circuit reversed.^[10]

Referring to the Bureau’s “anomalous . . . self-actualizing, perpetual funding mechanism,”^[11] the Fifth Circuit held it unconstitutional as it constituted an unprecedented “double insulation” of the Bureau from Congress’s purse strings.^[12] In the Fifth Circuit’s view, not only did Congress abdicate its role in the agency’s appropriations process, as the CFPB receives its funds from another agency that is also not subject to regular appropriations, but whereas the Board must normally remit to the Treasury excess or unused funds and thereby remains “tethered” to some form of political accountability, there is no comparable tether for the CFPB, making it essentially unaccountable.^[13]

The Supreme Court granted certiorari in February 2023, but extensions of time for brief filings delayed resolution of the case. Ultimately, however, the Court upheld the Dodd-Frank Act’s CFPB funding mechanism.

Authored by Justice Thomas, the majority opinion concluded that “the Constitution’s text, the history against which that text was enacted, and congressional practice immediately following ratification” demonstrate that “appropriations need only identify a source of public funds and authorize the expenditure of those funds for designated purposes to satisfy the Appropriations Clause.”^[14] Reviewing pre-Founding English and colonial sources, the Court found that the word “appropriations” would have been understood at the founding simply to mean the legislature’s authorization of expenditures.

Justice Thomas wrote that Bureau’s funding mechanism “fits comfortably within the First Congress’ appropriations practice” as it “authorizes the Bureau to draw public funds from a particular source—‘the combined earnings of the Federal Reserve System’—in an amount not exceeding an inflation-adjusted cap. And it specifies the objects for which the Bureau can use those funds—to ‘pay the expenses of the Bureau in carrying out its duties and responsibilities.’”^[15] Finally, the majority concluded, neither the CFPB’s ability to request an amount of funds to be drawn (subject to a cap) nor the fact that the Bureau’s appropriation is not time-limited was material to the funding mechanism’s constitutionality. Justice Kagan wrote a concurring opinion joined by three other Justices,^[16] and Justice Jackson authored a separate concurrence.^[17]

Justice Alito, joined by Justice Gorsuch in dissent, took the majority to task for turning the Appropriations Clause “into a minor vestige.”^[18] They would have held that the Appropriations Clause “imposes on Congress an important duty that it cannot sign away”^[19] without undermining the separation of powers.

Unexpected by many, the Supreme Court’s decision will likely affect certain lower court challenges to CFPB rules on credit card late fees^[20] and small business lending data reporting,^[21] which had been stayed in reliance on the Fifth Circuit’s invalidation of the funding mechanism. Whether those rules, like the payday lending rule at issue in the Community Financial Services of America litigation, are upheld will have to await decisions on their respective merits.

1. U.S. Const. art. I, § 9, cl. 7. ↑

2. Cmty. Fin. Servs. Ass’n of Am. v. CFPB, 51 F.4^th 616 (5^th Cir. 2022), rev’d, 2024 U.S. LEXIS 2169 (May 16, 2024). ↑

3. The majority’s constitutional analysis was grounded in the “take care” clause of Article II, which vests “[t]he executive Power . . . in a President” and commands the president to “take Care that the Laws be faithfully executed.” U.S. Const. art. II, § 1, cl. 1; id. art. II, § 3, cl. 1. ↑

4. Seila Law LLC v. Consumer Fin. Prot. Bureau, 140 S. Ct. 2183, 2192 (2020). ↑

5. 12 U.S.C. § 5491(a). ↑

6. 12 U.S.C. § 5497(a)(1)-(2). ↑

7. See, e.g., Seila Law, 140 S. Ct. at 2194. ↑

8. See Bureau of Consumer Financial Protection, Payday, Vehicle Title, and Certain High-Cost Installment Loans, 82 Fed. Reg. 54,472 (Nov. 17, 2017), amended, 84 Fed. Reg. 4252 (Feb. 14, 2019), 85 Fed. Reg. 41,905 (July 13, 2020), 85 Fed. Reg. 44,382 (July 22, 2020) (codified at 12 C.F.R. § 1041.1 et seq.). ↑

9. Cmty. Fin. Servs. Ass’n of Am. v. CFPB, 558 F. Supp. 3d 350 (W.D. Tex. 2021). ↑

10. Cmty. Fin. Servs. Ass’n of Am. v. CFPB, 51 F.4^th 616 (5^th Cir. 2022), rev’d, 2024 U.S. LEXIS 2169 (May 16, 2024). ↑

11. 51 F.4^th at 638. This was not the first ominous language foreshadowing the holding on the funding mechanism. The Fifth Circuit’s opinion began as follows:

    “An elective despotism was not the government we fought for; but one which should not only be founded on free principles, but in which the powers of government should be so divided and balanced . . . , as that no one could transcend their legal limits, without being effectually checked and restrained by the others.” The Federalist No. 48 (J. Madison) (quoting Thomas Jefferson’s Notes on the State of Virginia (1781)). In particular, as George Mason put it in Philadelphia in 1787, “[t]he purse & the sword ought never to get into the same hands.” 1 The Records of the Federal Convention of 1787, at 139–40 (M. Farrand ed. 1937). These foundational precepts of the American system of government animate the Plaintiffs’ claims in this action. They also compel our decision today.

    51 F.4^th at 623. ↑

12. Id. ↑

13. Id. at 639. “Congress cut that tether for the Bureau, such that the Treasury will never regain one red cent of the funds unilaterally drawn by the Bureau.” Id. ↑

14. Consumer Fin. Prot. Bureau v. Cmty. Fin. Servs. Assn of Am., 2024 U.S. LEXIS 2169 at *14 (May 16, 2024). ↑

15. Id. at *27–*28. ↑

16. Id. at *38–*44 (Kagan, J., with Sotomayor, Kavanaugh & Barrett, JJ., concurring). ↑

17. Id. at *44 (Jackson, J., concurring). ↑

18. Id. at *48 (Alito, J., with Gorsuch, J., dissenting). ↑

19. Id. at *47. ↑

20. See Chamber of Com. of the U.S. v. Consumer Fin. Prot. Bureau, 2024 U.S. Dist. LEXIS 85078 (N.D. Tex. May 10, 2024). ↑

21. See Texas Bankers Ass’n v. Consumer Fin. Prot. Bureau, 2023 U.S. Dist. LEXIS 134913 (N.D. Tex. July 31, 2023). ↑