The Computer Fraud and Abuse Act of 1986 (“CFAA”)[1] addresses fraud and related activities in connection with computers, including prohibiting unauthorized access to “protected computers” and obtaining information through such access. The CFAA can impose civil and criminal liability on anyone who “access[es] a computer without authorization” or by “exceeding authorized access” to a “protected computer.”[2] In several cases employers have tried using the CFAA to pursue ex-employees for alleged violations of workplace computer use policies. Depending on the facts, it has not worked out well for those employers.
In a recent case, NRA Group, LLC vs. Durenleau,[3] the U.S. Court of Appeals for the Third Circuit had occasion to review a case in which the plaintiff (National Recovery Agency) alleged that two ex-employees had violated the CFAA and the federal Defend Trade Secrets Act (“DTSA”),[4] among other allegations. The defendants counterclaimed with allegations including sexual harassment, negligent hiring and retention, and retaliation under state and federal law.
On cross-motions for summary judgment, the district court entered judgment for the employees, Durenleau and Badaczewski, on all claims against them, staying their remaining sexual harassment claims against NRA pending appeal.
In analyzing the CFAA, the Third Circuit considered the U.S. Supreme Court decision in Van Buren v. United States.[5] In its opening paragraph, the Court states, “In the wrong hands, the law becomes a hammer in search of a nail. This is one such case.” In applying Van Buren, the Court held that “[u]nder Van Buren, the ‘gates’ of access were ‘up’ for both women—neither hacked into NRA’s systems. No doubt Durenleau and Badaczewski violated NRA’s policies, but as employees they had access to the systems: Durenleau by the fact of her employment, and Badaczewski with Durenleau’s credentials. No one hacked anything by deploying code to enter a part of NRA’s systems to which they had no access.” The Court adopted the definition of “authorization” under the CFAA used by the district court by finding “an employee is authorized to access a computer when his employer approves or sanctions his admission to that computer.”
The Court went on to “hold that, absent evidence of code-based hacking, the CFAA does not countenance claims premised on a breach of workplace computer-use policies by current employees.” Affirming the district court’s grant of summary judgment for the ex-employees on all of NRA’s claims under the CFAA, it noted, “With today’s holding, we mean to turn future litigants to other causes of action so that we do not make ‘millions of otherwise law-abiding citizens [into] criminals.’ Van Buren, 593 U.S. at 394.”
In addressing the plaintiff’s DTSA claims, the Court stated that the statute protects information that, among other things, “‘derives independent economic value, actual or potential,’ from being kept secret.”[6] The Court’s analysis focused on subpart (b) of 18 U.S.C. § 1839(3) and whether a password spreadsheet could have independent economic value to elevate it to the level of a trade secret. It held that “because the revealed content would have no economic value to NRA, there is no serious claim the passwords would either. That is because it is what the passwords protect, not the passwords, that is valuable.” The Court pointed out that “while the leak of actual trade secrets with independent economic value can endanger a business, NRA immediately remedied the problem by simply changing the passwords,” thereby blocking “the proprietary information that did have independent economic value: NRA’s business records and customer databases.” Bringing closure on the trade secret issue, the Court agreed with the district court and held that the passwords had no independent economic value and, as such, were not trade secrets under the DTSA.
In summary, the NRA Group, LLC, case underscores the need for businesspeople and their legal counsel to have a robust discussion when considering the appropriateness of bringing a CFAA claim. This includes consideration of the facts and how they align with the CFAA at that time. By way of example, without limitation:
Did defendants engage in “unauthorized access” or exceed authorized access?
Can the plaintiff demonstrate a qualifying loss exceeding $5,000 within a one-year period and which losses are related to the investigation, repair, or restoration of computer systems?
Do the facts and applicable law support potential causes of actions other than the CFAA, such as breach of contract, business torts, negligence, fraud, etc., that may provide a remedy for employers when employees grossly transgress computer-use policies?
The bottom line is that employers and their legal counsel need to carefully consider claims they allege under the CFAA against ex-employees.
In furtherance of prior statements as to its intent,[1] on March 26, 2025, the Financial Crimes Enforcement Network (“FinCEN”) published in the Federal Register a new interim final rule (“IFR”)[2] governing the application of the Corporate Transparency Act (“CTA”)[3] that significantly amended the until-then extant Reporting Rules.[4] In so doing, FinCEN, following direction from the current administration, essentially destroyed the CTA.[5] What was to be an integrated reporting requirement for all domestically organized business organizations (estimated to now number some thirty-five million) and foreign organized organizations qualified to transact business in one or more of the states (estimated to number twelve thousand), with respect to their beneficial owners and company applicants, will now address only the foreign organized companies. Furthermore, the foreign organized companies will benefit from a narrowed reporting regimen that will not require reporting of information as to any “United States person”[6] who is a beneficial owner thereof.[7]
This article is part of a series, comprised of three components, in which we will switch up the order in which matters are addressed. In this first installment we will first consider the general residential real estate geographic targeting orders (“GTOs”) that have been periodically updated over several years; next, we will consider the current status of FinCEN’s Southwest U.S. border GTO, both as issued and as most recently updated; finally, we will address the current status of the non-financed residential real estate reporting regulations. In the second installment of the series, we return to the CTA itself: building upon prior articles published in Business Law Today in, respectively, January,[8] February,[9] and March[10] of this year, we review the terms of the IFR published in March of this year, the numerous comments that were submitted in connection therewith, and the status of the multitude of lawsuits that were filed challenging the CTA’s constitutionality; and share our thoughts on the deficiency of the IFR (i.e., it may not be a legitimate regulatory action and should be set aside). In the third and last installment of the series we will turn our attention to New York’s LLC Transparency Act and its status vis-à-vis the (to be generous) gutting of the CTA.
On August 2, 2017, the Countering America’s Adversaries Through Sanctions Act to facilitate sanctions, particularly against the Russian Federation and Iran, was approved.[12] Section 243 thereof required the secretary of the Treasury to submit a report detailing steps taken to address various financial activities relating to the Russian Federation; those steps include the expansion of the number of GTOs or “other regulatory actions, as appropriate, to degrade illicit financial activity relating to the Russian Federation in relation to the financial system of the United States.”[13] On August 22, 2017, in response to this mandate, FinCEN announced the issuance of residential real estate GTOs that require U.S. title insurance companies to identify the natural persons behind shell companies used to pay cash for high-end residential real estate in seven metropolitan areas; FinCEN also published an advisory to provide financial institutions and the real estate industry with information on the money-laundering risks associated with real estate transactions, including those involving luxury property purchased through shell companies, particularly when conducted without traditional financing.
Under the revised GTOs, title insurance companies are required to collect information on (i) “covered transactions” (certain acquisitions); (ii) by a “legal entity” (a corporation, limited liability company (“LLC”), partnership, or other similar business entity, whether formed under the laws of a state or of the United States or a foreign jurisdiction); (iii) of residential real property in certain locations made without a bank loan or similar form of external financing; (iv) that in part use currency or a cashier’s check, a certified check, a traveler’s check, a personal check, a business check, or a money order in any form, or a funds transfer. The information to be collected and reported includes the identity (including obtaining a copy of this individual’s driver’s license, passport, or other similar identifying documentation) of the individual primarily responsible for representing the purchaser and each “beneficial owner,” defined as each individual who, directly or indirectly, owns 25 percent or more of the equity interests of the purchaser. The report is made on a FinCEN Currency Transaction Report.[14]
A number of GTOs have been issued over time, with differing (but typically cumulative) applications to different cities and regions and transaction thresholds (all for residential real estate),[15] with the penultimate GTO issued April 19, 2025, covering the following transactions:
City or Jurisdiction
Threshold Amount
Baltimore, Maryland
$50,000
Bexar, Tarrant, Dallas, Harris, Montgomery, Webb, and Travis Counties, Texas
$300,000
Miami-Dade, Broward, Palm Beach, Hillsborough, Pasco, Pinellas, Manatee, Sarasota, Charlotte, Lee, and Collier Counties, Florida
$300,000
Brooklyn, Queens, Bronx, Staten Island, and Manhattan, New York
$300,000
San Diego, Los Angeles, San Francisco, San Mateo, and Santa Clara Counties, California
$300,000
Hawaii, Maui, Kauai, and Honolulu Counties and the city of Honolulu, Hawaii
$300,000
Clark County, Nevada
$300,000
King County, Washington
$300,000
Suffolk, Middlesex Bristol, Essex, Norfolk, and Plymouth Counties, Massachusetts
$300,000
Cook County, Illinois
$300,000
Montgomery, Anne Arundel, Prince George’s, and Howard Counties, Maryland
$300,000
Arlington and Fairfax Counties and the cities of Alexandria, Falls Church, and Fairfax, Virginia
$300,000
Fairfield and Litchfield Counties, Connecticut
$300,000
Adams, Arapahoe, Clear Creek, Denver, Douglas, Eagle, Elbert, El Paso, Fremont, Jefferson, Mesa, Pitkin, Pueblo, and Summit Counties, Colorado
$300,000
District of Columbia
$300,000
That GTO expired on October 9, 2025; and in anticipation of that event, a new GTO was issued on October 8. The new GTO tracked the prior GTO as to its geographic application and price thresholds. In the press release issued in the continuation with the delayed effective date of the RRE Rules reviewed below,[16] FinCEN wrote, “To implement this extension, FinCEN issued a temporary order granting exemptive relief from the reporting requirements. In the interim, any Real Estate Geographic Targeting Orders will remain in effect.”[17]
To date, the burden of complying with these GTOs has been limited to the title insurance companies that participate in the transactions that are within the geographic range and are purchases of residential real property purchased by a legal entity without a bank loan or similar financing with payment by “currency or a cashier’s check, a certified check, a traveler’s check, a personal check, a business check, a money order in any form, a funds transfer, or virtual currency.”[18] For these purposes, “legal entity” is defined as “a corporation, limited liability company, partnership, or other similar business entity, whether formed under the laws of a state, or of the United States, or a foreign jurisdiction,” but excluding entities that are traded on a securities exchange or a subsidiary thereof. In turn, the beneficial owners of each legal entity must be identified, with “beneficial owner” defined as “each individual who, directly or indirectly, owns 25% or more of the equity interests of the Legal Entity purchasing real property in the Covered Transaction.”[19] “Residential real estate” is not defined in the GTOs and is not defined in the general definitions used by FinCEN.[20]
Southwest States GTO
Earlier this year, March 14 to be exact, FinCEN issued a GTO applicable only in certain counties in California, Arizona, and Texas along the United States’ southwest border with Mexico (“SW Border GTO”).[21] Under this GTO, any money services business[22] handling a transaction either initiated or completed in one of those identified counties that was for more than $200, up to a cap of $10,000, was obligated to file a Currency Transaction Report. The legitimacy of this effort, adopted “in furtherance of Treasury’s efforts to combat illicit finance by drug cartels and other illicit actors along the southwest border of United States,”[23] has been challenged and a preliminary injunction issued against its enforcement, which relief has been stayed pending appeal.[24] By its own terms, that GTO expired on September 9, 2025. Most recently, a new GTO was issued that both expanded its geographic applications while raising the lower threshold for reports from $200 to more than $1,000.[25]
As to our theme of developments in the law of beneficial ownership reporting, if you drill down into a Currency Transaction Report, you will find that in certain instances, where either the originator or the recipient of a money transfer is a business organization, certain information as to its beneficial ownership is required.[26]
Non-Financed Residential Real Estate Reporting
On August 29, 2024, FinCEN published its Anti–Money Laundering Regulations for Residential Real Estate Transfers.[27] These rules, hereinafter the “RRE Rules,” mandate the reporting—on a streamlined version of a Suspicious Activity Report (“SAR”), referred to as a “Real Estate Report”—of a wide range of information by persons associated with real estate transactions involving non-financed residential real estate closings and settlements.[28]
These rules impose recordkeeping and reporting duties with respect to certain transfers of real property (or interests therein) to a transferee entity or transferee trust (“reportable transfer”). A reportable transfer is a transfer having three characteristics: (1) one or more of the parties is not an individual, (2) the real property is U.S. residential real estate, and (3) the real estate transfer does not involve the extension of credit to all transferees.[29]
The person responsible for collecting the information (“reporting person”) is the person engaged within the United States as a business in the provision of real estate closing and settlement services; under the cascading list of who will be a reporting person, in most cases the reporting person will be a settlement agent or title insurance person, but it is possible that a lawyer will have the duties of a reporting person.[30] The persons who fall within the set of potential reporting persons for a particular transaction may determine among themselves who will—and, by exclusion, who will not—discharge the reporting obligations.[31]
Effective Date
While the initial effective date of the new RRE Rules was to have been December 1, 2025,[32] FinCEN announced on September 30, 2025, a delay in the initial effective date to March 1, 2026,[33] and released a mock-up of the revised Real Estate Report Form.[34]
The Rule’s Contents and Exemptions
The scope of the RRE Rules can be drawn from the headings to the primary subdivisions of the regulation, namely, “General”;[35] “Reportable transfer”;[36] “Determination of reporting person”;[37] “Information regarding the reporting person”;[38] “Information regarding the transferee”;[39] “Information regarding the transferor”;[40] “Information concerning the residential real property”;[41] “Information concerning payments”;[42] “Information concerning hard money, private, and other similar loans”;[43] “Reasonable reliance”;[44] “Filing procedures”;[45] “Retention of records”;[46] “Exemptions”;[47] and “Definitions.”[48]
While this review of the RRE Rules generally follows largely in the order set forth in the regulation, it is worthwhile to begin with some significant exceptions. Again, the scope of the reporting regime is a transfer of real property or interests therein to a business organization or a trust without typical bank financing, a category that reaches huge numbers of everyday transfers accomplished for estate planning and similar objectives. Fortunately, most (or at least many) of those transactions will not be subject to these reporting rules, which exclude the following from the definition of “reportable transfer”:[49] (i) the grant/transfer/revocation of an easement;[50] (ii) a transfer consequent to death;[51] (iii) a transfer incident to divorce or dissolution of a marriage or civil union;[52] (iv) a transfer to a bankruptcy estate;[53] (v) any other transfer supervised by a court in the United States;[54] (vi) a transfer without consideration by an individual either alone or with their spouse to a trust for which that individual, the spouse, or both of them are the settlers/grantors;[55] (vii) transfers to an I.R.C. § 1031 qualified intermediary;[56] and (viii) any transfer in which no reporting person is involved.[57] Transfers in which the transferee is an individual are outside the scope of a reportable transfer even if it is a non-financed cash transaction.[58]
General
It is perhaps most helpful to review the entirety of this provision in order to understand the structure of the RRE Rules, which provide as follows:
A reportable transfer as defined in paragraph (b) of this section shall be reported to FinCEN by the reporting person identified in paragraph (c) of this section. The report shall include the information described in paragraphs (d) through (i) of this section. The reporting person may reasonably rely on information collected from others under the conditions described in paragraph (j). The report required by this section shall be filed in the form and manner, and at the time, specified in paragraph (k) of this section. Records shall be retained as specified in paragraph (l) of this section. Reports required under this section and any other information that would reveal that a reportable transfer has been reported are not confidential as specified in paragraph (m) of this section. Terms not defined in this section are defined in 31 CFR 1010.100.[59]
Reportable Transfer
A reportable transfer subject to the RRE (save as exempted, as outlined above)[60] involves a non-financed[61] transfer to either a transferee entity[62] or a transferee trust of residential real property:
(i) Real property located in the United States containing a structure designed principally for occupancy by one to four families;
(ii) Land located in the United States on which the transferee intends to build a structure designed principally for occupancy by one to four families;
(iii) A unit designed principally for occupancy by one to four families within a structure on land located in the United States; or
(iv) Shares in a cooperative housing corporation for which the underlying property is located in the United States.[63]
Why the RRE Rules encompass a plan to build four townhouses on a particular parcel but exclude from their scope one intended to have five or more is not entirely clear.[64] However, the fact of the up-to-four cap will serve to exempt many transfers from the RRE Rules’ scope and from the ability to identify the activities that nefarious actors will want to exploit—all that must be done to obscure a nefarious intention is to build five or more units, and the RRE Rules will not apply.[65]
Determination of Reporting Person
The “reporting person” is the person charged to effect the filing of the RRE Report with FinCEN and will be a “person engaged within the United States as a business in the provision of real estate closing and settlement services.”[66] It bears noting that the actual parties to the transaction at issue will almost never be the reporting person because they are not participants in the “real estate closing and settlement services” industry. From there, the RRE regulations provide a cascade of potential reporting persons to aid in assessing who is the reporting person:
(i) The person listed as the closing or settlement agent on the closing or settlement statement for the transfer;
(ii) If no person described in paragraph (c)(1)(i) of this section is involved in the transfer, then the person that prepares the closing or settlement statement for the transfer;
(iii) If no person described in paragraph (c)(1)(i) or (ii) of this section is involved in the transfer, then the person that files with the recordation office the deed or other instrument that transfers ownership of the residential real property;
(iv) If no person described in paragraphs (c)(1)(i) through (iii) of this section is involved in the transfer, then the person that underwrites an owner’s title insurance policy for the transferee with respect to the transferred residential real property, such as a title insurance company;
(v) If no person described in paragraphs (c)(1)(i) through (iv) of this section is involved in the transfer, then the person that disburses in any form, including from an escrow account, trust account, or lawyers’ trust account, the greatest amount of funds in connection with the residential real property transfer;
(vi) If no person described in paragraphs (c)(1)(i) through (v) of this section is involved in the transfer, then the person that provides an evaluation of the status of the title; or
(vii) If no person described in paragraphs (c)(1)(i) through (vi) of this section is involved in the transfer, then the person that prepares the deed or, if no deed is involved, any other legal instrument that transfers ownership of the residential real property, including, with respect to shares in a cooperative housing corporation, the person who prepares the stock certificate.[67]
It is noteworthy that realtors / real estate agents are not within the cascade of potential reporting persons.[68] Issues specific to attorneys as reporting persons are discussed below.[69] If an individual falls within the scope of the “reporting person” definition because that individual is an employee or agent of or a partner in a partnership, then the employer, principal, or partnership is the reporting person.[70] Applying this rule, if that employer/principal is a financial institution that has in place an anti–money-laundering (“AML”) program, then the employee/agent is not a reporting person, and that role falls to someone else in the cascade.[71]
The persons who are within the set of potential reporting persons for a particular transaction[72] may enter into a transaction-specific written agreement by which one of their number is designated as the reporting person,[73] with the RRE regulations spelling out the minimum requirements of that agreement.[74] All parties to a designation agreement are obligated to maintain a copy of thereof.[75]
Information Regarding the Reporting Person
With regard to the reporting person, who may be an individual or a business entity, the RRE Report requires the person’s full legal name, the category of the definition of “reporting person” into which they fall, and the reporting person’s principal place of business address.[76]
Information Regarding the Transferee
The reporting requirements as to the transferee(s) are rather involved, and it is at this point in the RRE Rules that we first encounter the manner in which they require beneficial ownership information. Keep in mind, though, that the RRE Rules impact only transfers to an entity or a trust.[77]
FinCEN, as set forth in the release accompanying the RRE Rules, anticipates that partnerships and other organizational forms may be transferee entities.[78] The path by which this is achieved in the RRE Rules is less than direct. The definition of “transferee entity” provides in relevant part that “‘transferee entity’ means any person[79] other than a transferee trust or an individual.”[80] In turn, “person” is defined as “[a]n individual, a corporation, a partnership, a trust or estate, a joint stock company, an association, a syndicate, joint venture, or other unincorporated organization or group, an Indian Tribe (as that term is defined in the Indian Gaming Regulatory Act), and all entities cognizable as legal personalities.”[81] Absent an exemption because of either the nature of the transaction[82] or the characteristics of the transferee entity,[83] the RRE Rules reach any transfer to a transferee entity or to a transferee trust—meaning that the RRE Rules will apply, and an RRE Report will need to be filed.
It will be necessary to report as to each transferee entity all of the following:[84] its full legal name; any assumed (d/b/a) names; the entity’s principal place of business street address;[85] and its unique identifying number, typically an IRS TIN with alternatives if the transferee does not have one.[86] Then, as to that transferee, the following must be reported as to each of its beneficial owners:[87] full legal name;[88] date of birth;[89] current residential street address;[90] citizenship;[91] and a unique identifying number, typically an IRS TIN with alternatives if that beneficial owner does not have an IRS TIN.[92] Then, as to each person signing the documents on behalf of a transferee (“signing individual”),[93] there must be submitted[94] that person’s full legal name; date of birth; current residential street address; unique identifying number, typically an IRS TIN with alternatives if the signing person does not have one;[95] and a description of the capacity in which they are acting.[96]
But wait—there’s more if the transferee is a trust and if the trustee is a legal entity.[97] As to the transferee trust, there must be set forth its legal name, such as the full title of the agreement establishing the transferee trust;[98] the date the trust instrument was executed;[99] the trust’s IRS TIN, with alternatives if the transferee does not have one;[100] and whether the trust is revocable.[101] Then, if the trustee of the transferee trust is a legal entity, the RRE Rules require the disclosure of[102] its full legal name; any assumed (d/b/a) names; the entity’s principal place of business street address;[103] and its unique identifying number, typically an IRS TIN with alternatives if the legal entity trustee does not have one.[104]
As for trustees of transferee trusts that are individuals: “For purposes of this section, an individual trustee of the transferee trust is considered to be a beneficial owner of the trust. As such, information on individual trustees must be reported in accordance with the requirements set forth in paragraph (e)(2)(iii) of this section.”[105] Specifically, for each beneficial owner[106] of the transferee trust, there must be set forth[107] full legal name; date of birth; current residential street address; citizenship; a unique identifying number, typically an IRS TIN with alternatives if the transferee does not have one;[108] and “the category of beneficial owner, as determined in paragraph (j)(1)(ii) of this section.”[109]
Information Regarding the Transferor
The RRE Report will provide a variety of information as to transferor of the property, the nature of the disclosure depending upon whether the transferor is an individual, a business entity, or a trust.
For an individual transferor, the RRE Report will set forth the person’s full name;[110] date of birth;[111] current residential address;[112] and his or her IRS TIN, with alternatives if the transferor does not have one.[113]For a transferor that is a business entity, the RRE Report will set forth the entity’s legal name;[114] any trade (d/b/a) names;[115] current principal place of business address if in the U.S., with alternative treatment if it is not;[116] and its IRS TIN, with alternatives if the transferee does not have one.[117]
For a transferor that is a trust, the RRE Report will set forth the trust’s “full legal name, such as the full title of the agreement establishing the trust,”[118] the date of the trust instrument,[119] and its IRS TIN, with alternatives if the transferee does not have one.[120] Then, as to each individual who is a trustee of the transferor trust, there will be set forth the individual’s name,[121] current residential address,[122] and his or her IRS TIN, with alternatives if he or she does not have one.[123] Last, if the trustee of the transferor trust is a business entity, the RRE Report will set forth the legal name of the business entity,[124] any trade (d/b/a) names,[125] its complete address,[126] and its IRS TIN, with alternatives if the transferor does not have one.[127]
Information Concerning the Residential Real Property
As to the residential real property being conveyed,[128] the reporting person on the RRE Report must set forth its street address, if any; a “legal description, such as the section, lot, and block”; and the date of closing.[129]
Information Concerning Payments
The reporting person will, on the RRE Report, submit information as to payments, namely, the payment amount;[130] the manner in which it was made;[131] if the payment was made from an account at a financial institution, the name thereof;[132] and the “name of the payor on any wire, check, or other type of payment if the payor is not the transferee entity or transferee trust.”[133]
Then, with regard to any payment not “disbursed from an escrow or trust account held by a transferee entity or transferee trust, that is made by or on behalf of the transferee entity or transferee trust regarding a reportable transfer,” the reporting person will submit information regarding:
the amount of the payment;
the method by which the payment was made;
if the payment was paid from an account held at a financial institution, the name of the financial institution and the account number; and
the name of the payor on any wire, check, or other type of payment if the payor is not the transferee entity or transferee trust.[134]
Further, the reporting person shall report “the total consideration paid or to be paid by the transferee entity or transferee trust regarding the reportable transfer, as well as the total consideration paid by or to be paid by all transferees regarding the reportable transfer.”[135]
Note that there is excluded from this reporting obligation those payments “disbursed from an escrow or trust account held by a transferee entity or transferee trust, that is made by or on behalf of the transferee entity or transferee trust regarding a reportable transfer.”[136]
Information Concerning Hard Money, Private, and Other Similar Loans
The reporting person, on the RRE Report, will report “whether the reportable transfer involved credit extended by a person that is not a financial institution with an obligation to maintain an anti–money laundering program and an obligation to report suspicious transactions under this chapter.”[137]
Reasonable Reliance
In a marked departure from the CTA and its rejection of a reliance standard as to the certification of the beneficial ownership of a reporting company,[138] under the RRE Rules a reporting person may rely on information provided by others “absent knowledge of facts that would reasonably call into question the reliability of the information provided to the reporting person.”[139] As to information reported regarding the beneficial ownership of a transferee entity[140] or a transferee trust,[141] the reporting person may rely upon a written certification of accuracy of the information provided, again conditioned upon the absence of knowledge to the contrary.[142]
Filing Procedures
All real estate reports are filed electronically with FinCEN[143] by the later of the last day of the month following the month in which the date of the closing occurred or thirty days after the date of the closing.[144] Note that “date of closing” is a defined term.[145]
Retention of Records
The RRE Rules contain a pair of express record retentions obligations. First, the reporting person is obligated to retain copies of all certifications received from a “transferee or a person representing the transferee in the reportable transfer” as to the information that person certified as accurate.[146] In addition, every party thereto must maintain a copy of each designation agreement.[147] Neither provision provides a time period for which the records must be retained. While not express in the text of the regulations, according to the accompanying release, the time requirement is five years.[148]
Exemptions
This subsection of the RRE Rules sets forth not exceptions to the reporting obligations but rather exemptions from other laws.
The first exemption is as follows:
Reporting persons, and any director, officer, employee, or agent of such persons, and Federal, State, local, or Tribal government authorities, are exempt from the confidentiality provision in 31 U.S.C. 5318(g)(2) that prohibits the disclosure to any person involved in a suspicious transaction that the transaction has been reported or any information that otherwise would reveal that the transaction has been reported.[149]
The second exemption states that having an obligation to file one or more RRE Reports does not create an obligation on the reporting person to put in place an AML program.[150]
Definitions
Last,[151] the RRE Rules set forth a series of defined terms—some incidental, such as “date of closing,”[152] and some of crucial importance, especially the definition of “beneficial owner.”[153] The other defined terms are “closing or settlement agent,”[154] “closing or settlement statement,”[155] “non-financed transfer,”[156] “ownership interest,”[157] “recordation office,”[158] “signing individual,”[159] “statutory trust,”[160] “transferee entity,”[161] and “transferee trust.”[162]
Before returning to the definition of “beneficial owner,” the defined term “closing or settlement agent” is utilized in the definition of “reporting person,”[163] as is the defined term “closing or settlement statement.”[164] The defined term “date of closing” is used in a variety of places, including to ascertain who are the “beneficial owners,”[165] to describe the transaction,[166] and to determine when the RRE Report is due.[167] The defined term “non-financed transfer” is used in the definition of what is a reportable transfer.[168] The defined term “ownership interest” is utilized in the definition of what is a reportable transfer[169] and with respect to determining what is the “date of closing.”[170] The term “recordation office” is used in the cascade that determines who is the reporting person.[171] The term “signing individual” is used in the listings of information to be set forth in the RRE Report.[172] The defined term “statutory trust” is utilized only in the definition of a “transferee trust”[173] and to exclude statutory trusts from that definition.[174] The definition of “transferee entity” operates from an exclusionary perspective. First, it encompasses any “person other than a transferee trust or an individual”;[175] then it excludes a wide category of business organizations such that they will not be “transferee entities”—that is, transfers to them will not fall within the scope of the RRE Rules.[176] From there, the defined term is utilized in the definition of a reportable transfer,[177] the required contents of a designation agreement,[178] and the required contents of the RRE Report.[179]
Last, before returning to the definition of who is a beneficial owner, the defined term “transferee trust” provides:
(i) Except as set forth in paragraph (n)(11)(ii) of this section, the term “transferee trust” means any legal arrangement created when a person (generally known as a grantor or settlor) places assets under the control of a trustee for the benefit of one or more persons (each generally known as a beneficiary) or for a specified purpose, as well as any legal arrangement similar in structure or function to the above, whether formed under the laws of the United States or a foreign jurisdiction. A trust is deemed to be a transferee trust regardless of whether residential real property is titled in the name of the trust itself or in the name of the trustee in the trustee’s capacity as the trustee of the trust.
(ii) A transferee trust does not include:
(A) A trust that is a securities reporting issuer defined in 31 CFR 1010.380(c)(2)(i);
(B) A trust in which the trustee is a securities reporting issuer defined in 31 CFR 1010.380(c)(2)(i);
(C) A statutory trust; or
(D) An entity wholly owned by a trust described in paragraphs (n)(11)(ii)(A) through (C) of this section.[180]
While at first blush it may appear that transfers to a statutory trust are exempt from the RRE Rules, that is not correct; a statutory trust is still a transferee entity.[181] The net effect of this provision is to provide that the disclosure made with respect to a statutory trust (as defined) involved in a particular transaction, whether as a transferor or as a transferee, will be that appropriate for an entity rather than that appropriate for a trust. That said, transactions involving a Delaware statutory trust and a business/statutory trust organized under statutes not patterned on the Uniform Act will be treated as transferor or transferee trusts.
The definition of “beneficial owners” is divided into two subdivisions: (1) “Beneficial owner of transferee entities”[182] and (2) “Beneficial owners of transferee trusts.”[183] For both categories, the determination of who are the beneficial owners is made as of the “date of closing.”[184]
Beneficial owners of transferee entities
The beneficial owners of a transferee entity are those persons who are beneficial owners under the CTA’s Reporting Rules.[185] This brings us back to the “substantial control” and 25 percent ownership tests set forth therein[186]—and a significant fly in the ointment. The CTA’s Reporting Rules were significantly modified by the IFR,[187] including the amendment of the definition of who is a beneficial owner. As to a beneficial owner who is “established as a non-profit corporation or similar entity,” the CTA Reporting Rules’ definition of “substantial control” will be applied to determine who are its beneficial owners.[188] Under the Reporting Rules as amended by the IFR, subsection 380(d)(4) was added, providing thus:
Exemptions.
(i) Reporting companies are exempt from the requirement in 31 U.S.C. 5336 and this section to report the beneficial ownership information of any United States persons[189] who are beneficial owners.
(ii) United States persons are exempt from the requirements in 31 U.S.C. 5336 and this section to provide beneficial ownership information with respect to any reporting company for which they are a beneficial owner.[190]
The incorporation by reference of the CTA Reporting Rules’ definition of who is a beneficial owner into the RRE Rules long predates the addition of this exemption, but the simple fact is that it is there; and while it could be asserted that the exemption extends only so far as Beneficial Ownership Information Reports under the CTA, the chain is as follows: the RRE Rules say that a beneficial owner is as specified in 380(d), and 380(d) says U.S. persons are not part of the set otherwise defined in 380(d). This entire issue could have been avoided if the addition of the 380(d)(4) exemption had been qualified with “except as incorporated by reference in the RRE Rules,” but this did not happen; and in the Loper Bright era, “clearly that is not what we meant” is likely going to carry little, if any, weight.[191]
Beneficial owners of transferee trusts
Turning to the determination of the beneficial owners of a transferee trust, they include (i) the trustee(s) or (ii) any individual who is not a trustee “with the authority to dispose of transferee trust assets.”[192] Similar to the rule employed in the CTA Reporting Rules, a person who is the sole income beneficiary or who has the right to withdraw substantially all of the trust corpus is a beneficial owner,[193] as is a trust settlor who has the capacity to either withdraw the corpus or terminate the trust.[194] If there is a business entity that is a trustee, a settlor, or otherwise a beneficial owner of a transferee trust, unless exempt,[195] “beneficial ownership of any such legal entity is determined under 31 CFR 1010.380(d), utilizing the criteria for beneficial owners of a reporting company.”[196] This bring us back to the issue identified above regarding 380(d)(4). There is also a provision that deals with stacked trusts.[197]
Setting aside that (significant) point, the sometimes baffling issues that arise as to the application of the CTA Reporting Rules’ definition of who exercises substantial control and who owns 25 percent or more of an entity will continue to plague us, but only more so. Under the CTA and the Reporting Rules, a general partnership (a set that includes a limited liability partnership) was not a “reporting company” in that general partnerships do not come into existence consequent to a secretary of state filing.[198] However, a general partnership does fall within the class of a transferee entity under the RRE Rules,[199] and for that reason the RRE Rules and those seeking to apply them will in time need to address inadvertent partnerships[200] that lack a required TIN for recordation in the RRE Report. Further, there are partnerships either that have either elected out of subchapter K[201] or that are qualified joint ventures[202] that are not partnerships for tax purposes and that will for that reason not have a TIN. These and other circumstances will add complexity to the reality of creating the RRE Report for a particular transaction.
Other Issues Under the RRE Rules
Penalties
Noticeably absent from the RRE Rules is a penalty provision. This is not because there are no penalties for noncompliance but because those rules exist elsewhere.[203]
Attorneys as Reporting Persons
As noted above, a lawyer may become a reporting person (and thus bear reporting obligations) if the lawyer provides any of closing and settlement services listed in the RRE Rules’ reporting person cascade.[204] Unless the parties agree otherwise[205] or the lawyer is listed as the closing or settlement agent on the closing or settlement statement, the lawyer will be the reporting person;[206] the lawyer may fall within the cascade by preparing the closing or settlement statement,[207] recording the deed,[208] underwriting title insurance,[209] disbursing funds (particularly from the lawyer’s trust account),[210] providing a title opinion,[211] or preparing the deed or other document of transfer.[212] Obviously, if the lawyer can avoid performing any of the services listed in the cascade, the lawyer may avoid the responsibilities of the RRE reporting person. Thus, it would appear that a lawyer who is involved in structuring a transaction but does not engage in any of the specific actions listed in the cascade such as drafting or filing deeds, rendering opinions on title, or disbursing funds may be entirely outside of the cascade. Even in those circumstances in which an attorney is in the cascade of persons who may be, as to that transaction, a reporting person, that role and its attendant obligations may be avoided by having another person in the cascade perform that function pursuant to a designation agreement.
The release setting forth the RRE Rules go on at some length to argue that a lawyer that fits within one of the tranches of the reporting cascade would not be ethically constrained from providing the information required as a reporting person.[213] Interestingly, however, this is unlike the case of the CTA under which FinCEN, perhaps in pursuance of the desire to comply with proposed conduct encouraged by the Financial Action Task Force (“FATF”),[214] imposed greater obligations on lawyers to report themselves as company applicants.[215] Thus, lawyers may be able to judiciously avoid becoming reporting persons more easily than they could avoid being company applicants. This is important because the burdens on reporting persons to parse the beneficial ownership in an RRE transaction are greater than the reporting burden imposed on attorneys as company applicants under the CTA; and under the RRE requirements, more types of organizations, such as general partnerships that are not created by filings with the secretary of state, are covered by the RRE.
Although a lawyer may not be a reporting person under the RRE Rules and may not be subject to the requirements of the CTA, a vestigial ethical rule adopted in 2023, which was intended to reinforce the anti–money-laundering regime of which the CTA was the capstone, may create some concern for lawyers even if they have no obligations under the RRE Rules or CTA. Even before the change that took place in 2023, lawyers had an obligation not to knowingly assist a client in the perpetration of a crime or fraud.[216] Resolution 100 was approved by the ABA House of Delegates after a contentious debate created (or confirmed) a lawyer’s duty to conduct client due diligence beyond that necessary in order to lawfully accomplish the client’s objectives.[217] The effect of these changes has yet to be determined; they have been the subject of one formal opinion of the ABA Standing Committee on Ethics and Professional Liability.[218] Whether this rule will impose additional burdens on attorneys even where the CTA and RRE Rules do not remains to be seen.
Application of the RRE Rules
Following are a number of scenarios drafted to explore the application of the RRE Rules to particular fact patterns. They are based upon certain assumptions and the available published guidance and are intended to be nothing more than illustrative.[219]
1. Wife and Husband own Blackacre, on which is located a lake house. Wife (an ob-gyn) and Husband (a CPA) form an LLC by filing articles of organization using the secretary of state’s online form. Husband then finds online a form of a quitclaim deed; they copy to it the legal description of Blackacre and after execution file it with the appropriate county land records.
The RRE Rules do not apply.
While Blackacre is residential real property,[220] a transfer to an LLC is not an exempt transaction,[221] and the transaction was not financed,[222] however, no reporting person was involved in the transaction,[223] so it is therefore exempt.[224]
2. Amy and Michelle, sisters, inherited Whiteacre from their mother; they hold title as joint tenants. Whiteacre is vacant but is zoned for single-family dwellings. At the recommendation of Attorney, they are putting Whiteacre in trust for the benefit of their respective heirs. In connection with creating that trust, Attorney has prepared a quitclaim deed of Whiteacre into said trust. Title insurance is being issued in the names of the trustees in their capacities as trustees.
The RRE Rules may apply.
The question turns on whether Whiteacre is intended to be residential real property. If at the time of transfer it can be attested that there is no intention to erect a residence on the property, then the property is not residential real property.[225] The person who would be the reporting person, be that the title insurance company or the attorney, may rely upon the representation of no intent to develop the property.[226]
3. Amy inherited Whiteacre from her mother. Whiteacre is vacant but is zoned for single-family dwellings. Amy intends to gift the property to her son Aiden so that he can build thereon a single-family dwelling. Attorney has prepared a quitclaim deed for Whiteacre to Aiden, and he is getting title insurance thereon so that he can proceed to get a construction loan.
The RRE Rules do not apply.
There is no financing in the transaction,[227] Whiteacre is residential real property,[228] and both Attorney and the title insurer are in the cascade of reporting persons.[229] However, there was no transfer to a transferee entity or to a transferee trust,[230] so it is not a reportable transaction.[231]
4. Wife and Husband own Blackacre, on which is located a lake house. In consultation with Attorney, they transfer title to an LLC in which they are the only members. Attorney prepared both a deed and the LLC’s articles of organization and operating agreement.
The RRE Rules apply.
Blackacre is residential real property,[232] a transfer by spouses to an LLC is not an exempt transaction,[233] LLC is a transferee entity,[234] the transaction was not financed,[235] and Attorney, having prepared the deed (formation of the LLC is not a relevant consideration), is a reporting person.[236]
5. Wife and Husband own Blackacre, on which is located a lake house. Because Attorney does not understand the effect of a trust, Attorney recommended to them that for “asset protection” they should put the property in a trust. Attorney has prepared a trust instrument and a quitclaim deed. The existing title insurance policy will receive a rider to the effect that it includes the title as in the trust.
The RRE Rules do not apply.
While Blackacre is residential real property,[237] the transaction was not financed,[238] and both Attorney and the title insurance company are each a reporting person involved in the transaction,[239] a transfer of title from married individuals to a trust for which they are the settlors is exempt from the RRE Rules.[240]
6. Tony and Shawn have decided to enter the residential real estate development industry and will start by erecting three townhouses on property they will acquire. They have identified Whiteacre as a property they would like to acquire and develop. They have organized a Delaware statutory trust to take title to Whiteacre; that statutory trust does not have the capacity to create series. The initial acquisition will be funded with their respective cash contributions to the statutory trust. The deed for the property will be prepared by the title insurance company and reviewed by the attorney whom Tony and Shawn retained to advise as to choice of entity and who drafted the governing instrument for the statutory trust.
The RRE Rules apply.
The development of three townhouses is residential real property,[241] the property is being acquired in a non-financed transaction,[242] and the title insurer will be the reporting person.[243] Further, because the statutory trust is organized under Delaware law, and as the Delaware Statutory Trust Act is not an enactment of the Uniform Statutory Trust Act,[244] it is not exempt from classification as a transferee trust,[245] and the disclosure appropriate for a transferee trust[246] (as contrasted with a transferee entity)[247] will be made.
7. Larry and Bob have decided to get involved in the residential real estate development industry. They have identified Whiteacre as a property they would like to acquire and develop. They have organized a statutory trust with series in Kentucky to take title to Whiteacre. The initial acquisition will be funded with their respective cash contributions to the statutory trust. The deed for the property will be prepared by the title insurance company and reviewed by the attorney whom Bob and Larry retained to advise as to choice of entity and who drafted the governing instrument for the statutory trust.
The RRE Rules might apply.
Initially, the nature of the development needs to be determined. The plans that have been prepared are for several (four or five) townhouses on Whiteacre. If it is to be the lower number, then we have residential real property; but if it is the higher number (and that is the number on the requested building permit), then it is not.[248] However, the plans have not been approved and the permit has not been issued, and both Larry and Bob acknowledge that fitting five units into the property is a slight stretch.
The title insurance company has advised that if Larry and Bob cannot assure them that there will be more than four units[249] they will treat the transaction as involving residential real estate. As the Kentucky Uniform Statutory Trust Act[250] is patterned on the Uniform Act, the RRE Report will treat the statutory trust as a transferee entity.
8. Alan and Pia have decided to jointly purchase real estate for investment. They have identified an existing property: it is a small strip mall in which the tenants are a laundromat, a “Chinese restaurant,” a tanning spa, and a marijuana dispensary. They have organized an LLC that will take title to the property. Alan is taking out a loan secured by a mortgage on his primary residence in order to have on hand the funds necessary to close on the strip mall property; Pia is paying cash she has on hand. The title insurance company is seeing to the necessary deed.
The RRE Rules do not apply.
The property is not residential real property,[251] so there is no reportable transaction.
9. Pia and Alan, after the success of their first investment, have identified another piece of property, a similar strip mall featuring as tenants a bicycle shop, a package liquor store, and a franchise sandwich shop. Unlike the first property, the building has two stories, and the second story features four apartments, two of which are subject to long-term leases and two of which are kept for short-term rentals. They have organized an LLC that will take title to the property. Again, Alan is taking out a loan secured by a mortgage on his primary residence in order to have on hand the funds necessary to close on the strip mall property; Pia is paying cash she has on hand.
The RRE Rules apply.
The property is residential real property[252] in that it includes four housing units.[253] The fact that two of them are intended to be employed as short-term rentals does not detract from the treatment as residential real property. The acquisition is not financed as Alan’s loan against his primary residence is not an extension of credit “to all transferees”[254] and is not “secured by the transferred real property.”[255] The title insurance company is a reporting person,[256] and the LLC will be a transferee entity.
Litigation and Other Challenges to the RRE Rules
There is, as of this writing, pending in Congress both Senate Joint Resolution 15[257] and House Joint Resolution 55,[258] which, if passed, would render the RRE Rules of “no force or effect.” As of this writing there has been no action on either since introduction.
In addition, as of this writing, there are pending several lawsuits challenging the legitimacy of the RRE Rules, which, if successful, could render the reporting system either moot or require its significant modification.[259] With the delay of the initial effective date from December 1, 2025, to March 1, 2026, there is reduced pressure on the courts to issue their opinions, but the reality of the pressures on the legal and business community to comply is not significantly reduced.
The Relationship of the Real Estate GTOs and the RRE Rules
It would seem, although there does not seem to have been an explicit statement to that effect, that FinCEN will cease the GTO program once the RRE Rules are in effect, writing in the press release accompanying the effective October 10, 2025, GTO that “[i]n light of the RRE Rule’s reporting requirements, the residential real estate GTOs will expire on February 28, 2026, with the GTOs continuing to provide valuable data on the purchase of residential real estate by persons possibly involved in various illicit enterprises.”[260]
Below is a comparison of the GTOs issued to date against the RRE Rules:
Only for publicly traded legal entities and wholly owned subsidiaries thereof[271]
Numerous exclusions and then all wholly owned subsidiaries thereof[272]
Stay Tuned
When we next pick up this story we will review the impact of the IFR upon the CTA and the Reporting Rules, including a discussion as to why the IFR may be illegitimate.[273]
See 31 U.S.C. § 5336. For a review of the CTA and the Reporting Rules (pre-IFR) generally, see 1 Larry E. Ribstein, Robert R. Keatinge & Thomas E. Rutledge, Ribstein and Keatinge on Limited Liability Companies, at ch. 4A (Nov. 2024). ↑
The current state of the Corporate Transparency Act and the Reporting Rules as impacted by the IFR are reviewed in the second installment of this three-part article. ↑
“United States person” is a defined term in the Reporting Rules, adopted by a cross-reference to I.R.C. § 7701(a)(30):
United States person. The term “United States person” means—(A) a citizen or resident of the United States, (B) a domestic partnership, (C) a domestic corporation, (D) any estate (other than a foreign estate, within the meaning of paragraph (31)), and (E) any trust if—(i) a court within the United States is able to exercise primary supervision over the administration of the trust, and (ii) one or more United States persons have the authority to control all substantial decisions of the trust.
The following is adapted from 1 Larry E. Ribstein, Robert R. Keatinge & Thomas E. Rutledge, Ribstein and Keatinge on Limited Liability Companies § 4A:6 (Dec. 2025). ↑
Pub. L. No. 115-44 (Aug. 2, 2017), as amended by Pub. L. No. 117-81 (Dec. 27, 2021). ↑
SeeCurrency Transaction Report form (aka “FinCEN Form 112” or “FinCEN CTR (Form 112) Reporting of Certain Currency Transactions for Sole Proprietorships and Legal Entities Operating Under a ‘Doing Business As’ (‘DBA’) Name”). See alsoCurrency Transaction Reporting (Feb. 2021); Notice to Customers: A CTR Reference Guide, Fin. Crimes Enf’t Network (last visited Nov. 11, 2025). Note that a Currency Transaction Report is different from a FinCEN Suspicious Activity Report (Form 111). ↑
A cumulative table listing all of the non-financed residential real estate GTOs issued through April 2025 is set forth in Ribstein, Keatinge & Rutledge, supra note 11, § 4A:6. ↑
Defined at 31 C.F.R. § 1010.100(ff). This regulation has seven subsections that reference various formats of a “money services business.” Those subject to these rules will typically be identified at 31 C.F.R. § 1010.00(ff)(5). ↑
The U.S. Department of the Treasury’s (Treasury) Financial Crimes Enforcement Network (FinCEN) is issuing this Alert to urge money services businesses (MSBs) to be vigilant in detecting, identifying, and reporting suspicious activity connected to cross-border funds transfers involving illegal aliens, i.e., individuals without legal status in the United States. FinCEN is issuing this Alert as part of the U.S. Department of the Treasury’s effort to prevent the exploitation of the U.S. financial system by illegal aliens seeking to move illicitly obtained funds, including by moving those funds across the border. This Alert is also consistent with Executive Order 14159, Protecting the American People Against Invasion, which notes that illegal aliens “present significant threats to national security and public safety” and highlights the need to “dismantle cross-border human smuggling and trafficking networks.” ↑
Those cases are as follows:
Novedades y Servicios, Inc. v. Fin. Crimes Enf’t Network, No. 25-CV-886 JLS (DDL), 2025 WL 1167372 (S.D. Cal. Apr. 22, 2025) (temporary restraining order (“TRO”) granted); Novedades y Servicios, Inc. v. Fin. Crimes Enf’t Network, No. 25-CV-886 JLS (DDL), 2025 WL 1501936 (S.D. Cal. May 21, 2025) (preliminary injunction issued); Novedades y Servicios, Inc. v. Fin. Crimes Enf’t Network, No. 25-CV-886 JLS (DDL), 2025 WL 2146861 (S.D. Cal. July 28, 2025) (granting stay of preliminary injunction pending appeal). At the U.S. Court of Appeals for the Ninth Circuit, the appeal is docketed at Case No. 25-4238. The government submitted its merits brief on August 6 (docket item 17), with the plaintiffs’ response brief filed on September 3 (docket item 24). The government filed its reply brief on September 24 (docket item 38). An amicus was filed on September 10 (docket item 29). As of October 10, the docket does not show that oral argument has been scheduled.
Valuta Corp. v. FinCEN, No. 3:25-cv-00191 (W.D. Tex. complaint filed May 30, 2025). A motion for a TRO was filed with the complaint (docket item 5). The government filed its response to the motion for a TRO on June 9 (docket item 20), and the plaintiffs replied on June 10, 2025 (docket item 18 (note that the ordering of certain items in the docket is not precisely in chronological order)). On June 24, a TRO was issued on the basis that the SW Border GTO is “arbitrary and capricious” (docket item 31). On July 2, the plaintiffs moved for class certification (docket item 36). Just a day later, on July 3, the plaintiffs filed their combined motion for summary judgment, entry of final judgment under rule 65(a)(2), and a preliminary injunction (docket item 41). On July 11, the government filed its response (docket item 45), and the plaintiffs replied on July 15 (docket item 46). A preliminary injunction was granted on July 22. The government’s notice of appeal was filed on September 22. On September 22, the court ordered the parties to file briefs addressing, in light of the September 8 revision of the SW Border GTO, how it “affect[s] the pending complaint’s viability, the TRO, and the preliminary injunction, and whether the parties’ arguments supporting and opposing the TRO, the preliminary injunction, and the pending summary judgment motion are, in whole or in part, moot” (docket item 64). On September 29, the plaintiffs filed their brief as to the impact of the revised GTO (docket item 65), as did the government that same day (docket item 66). Both sides agreed that the issuance of the revised GTO did not moot the case. A further preliminary injunction was issued on October 6, 2025 (docket item 69). Notices of appeal and cross-appeal to the 11th Circuit have been filed (docket items 63 and 67).
Tex. Ass’n of Money Servs. Bus. v. Bondi, No. 5:25-cv-00344-FB (W.D. Tex. May 19, 2025) (complaint filed Apr. 1, 2025). A motion for a TRO was submitted by the plaintiffs on April 9 (docket item 5), with an order scheduling a hearing thereon for April 11 (docket item 6). The government submitted its response in opposition on April 10 (docket item 8), and the plaintiffs responded on April 11 (docket item 11). That day, a TRO was entered (docket item 13). An amended complaint was filed on April 18 (docket item 15), and that day the plaintiffs sought an extension of the TRO (docket item 21) and an application for a temporary injunction (docket item 22). The TRO was extended on April 21 (docket item 26) in anticipation of full briefing and a hearing as to the requested preliminary injunction. A briefing schedule was set on April 28 (docket item 30). That hearing was held on May 12 (docket item 56), and the temporary injunction was issued on May 19 (docket item 59). On April 27, the judge issued an interesting “For what it is worth” notice (docket item 61). That same day, a “show-cause” order was issued against the government with respect to allegations that the government had sought to retaliate against witnesses in the proceeding (docket item 62 (see also docket item 60)). The government responded to that show-cause order on June 6 (docket item 63). The matters with respect to the alleged witness intimidation were transferred on June 6 to the Valuta case discussed above as the witness in question is a party to that suit (docket item 65) on the preliminary injunction and the pending summary judgment motion (docket item 64). That appeal is docketed at the U.S. Court of Appeals for the Fifth Circuit as Case No. 25-50481; the plaintiffs have filed a cross-appeal (docket item 69). In connection therewith, the government moved to hold the proceeding in abeyance (docket item 75). The plaintiffs responded on July 15 (docket item 78), and the government replied on July 21 (docket item 79). On July 22, the court ordered the case be held in abeyance pending its appeal (docket item 80).
In cases where multiple businesses share a common owner, FinCEN guidance states that the presumption is that separately incorporated entities are independent persons. This FinCEN guidance indicates that the currency transactions of separately incorporated businesses should not automatically be aggregated as being on behalf of any one person simply because those businesses are owned by the same person. It is up to the bank to determine, based on information obtained in the ordinary course of business, whether multiple businesses that share a common owner are, in fact, being operated independently depending on all the facts and circumstances. Consistent with this FinCEN guidance, if the bank determines that the businesses are independent, then the common ownership does not require aggregation of the separate transactions of these businesses.
However, if the bank determines that these businesses (or one or more of the businesses and the private accounts of the owner) are not operating separately or independently of one another or their common owner (e.g., the businesses are staffed by the same employees and are located at the same address, the bank accounts of one business are repeatedly used to pay the expenses of another business, or the business bank accounts are repeatedly used to pay the personal expenses of the owner), the bank may determine that aggregating the businesses’ transactions is appropriate because the transactions were made on behalf of a single person. Consistent with this FinCEN guidance, once the bank determines that the businesses are not independent of each other or of their common owner, then the transactions of these businesses should be aggregated going forward.
FFIEC, Currency Transaction Reporting, BSA/AML Examination Manual 2–3 (citations omitted) (last visited Nov. 14, 2025); see also 31 C.F.R. § 1010.312 (“Before concluding any transaction with respect to which a report is required under § 1010.311, § 1010.313, § 1020.315, § 1021.311 or § 1021.313 of this chapter, a financial institution shall verify and record the name and address of the individual presenting a transaction, as well as record the identity, account number, and the social security or taxpayer identification number, if any, of any person or entity on whose behalf such transaction is to be effected.”). ↑
See id. § 1031.320(b); see also RRE Release, 89 Fed. Reg. at 70259 (citation omitted):
Most transfers of residential real estate are associated with a mortgage loan or other financing provided by financial institutions subject to AML/CFT program requirements. As non-financed transfers do not involve such financial institutions, such transfers can be and have been exploited by illicit actors of all varieties, including those that pose domestic threats, such as persons engaged in fraud or organized crime, and foreign threats, such as international drug cartels, human traffickers, and corrupt political or business figures. Non-financed transfers to legal entities and trusts heighten the risk that such transfers will be used for illicit purposes. Numerous public law enforcement actions illustrate this point. As such, FinCEN believes that the reporting of non-financed transfers to legal entities and trusts will benefit national security by facilitating law enforcement investigations into, and strategic analysis of, the use of residential real estate transfers having these particular characteristics to facilitate money laundering. ↑
The reporting person described in paragraph (c)(1) of this section may enter into an agreement with any other person described in paragraph (c)(1) of this section to designate such other person as the reporting person with respect to the reportable transfer. The person designated by such agreement shall be treated as the reporting person with respect to the transfer. If reporting persons decide to use designation agreements, a separate agreement is required for each reportable transfer. ↑
Press Release, supra note 33. That form is available on FinCEN’s website: Real Estate Report Form, OMB No. 1506-0080 (Dec. 1, 2025). In an undated letter that post-dates September 9 from the American Land Title Association to FinCEN Director Andrea Gacki, a delay in the effective date of the RRE Rules was sought on basis including “if for no other reason than a final reporting form has not been released by FinCEN.” ↑
See RRE Release, 89 Fed. Reg. at 70267–69 (discussing exempt transfers); id. at 70261:
FinCEN has also made other amendments in the final rule that are intended to clarify and simplify the reporting requirements, such as clarifying the definition of residential real property. Additionally, the rule excludes several additional transfers from needing to be reported, including one designed to exempt certain transfers commonly executed for estate and tax planning purposes. ↑
Id. § 1031.320(b)(2)(vi). It should be emphasized that this exemption is limited by its terms to a transfer to a trust and does not encompass a transfer to a business entity. See also RRE Release, 89 Fed. Reg. at 70268 (“FinCEN also does not believe that this same logic can be extended to justify excepting transfers of property by an individual to a legal entity owned or controlled by such individual, as some commenters suggested.”). ↑
See Snejana Farberov, Federal Anti–Money Laundering Rule Cracks Down on All-Cash Home Purchases—Here’s Who Will Be Affected, SFGate.Com (Sept. 12, 2025) (“The language of the rule makes it clear that it does not apply to property purchases in which the buyer is an individual. In other words, a house hunter looking to buy a $500,000 single-family home without a mortgage will not be expected to report the deal. . . .”). ↑
See 31 C.F.R. § 1031.320(a); see alsoid. § 1031.320(c)(1) (setting forth a functional definition of “reporting person”). ↑
“Non-financed transfer” is a defined term. Id. § 1031.320(n)(5) (“The term ‘non-financed transfer’ means a transfer that does not involve an extension of credit to all transferees that is: (i) Secured by the transferred residential real property; and (ii) Extended by a financial institution that has both an obligation to maintain an anti–money laundering program and an obligation to report suspicious transactions under this chapter.”); see also RRE Release, 89 Fed. Reg. at 70259 (footnote omitted):
As non-financed transfers do not involve such financial institutions, such transfers can be and have been exploited by illicit actors of all varieties, including those that pose domestic threats, such as persons engaged in fraud or organized crime, and foreign threats, such as international drug cartels, human traffickers, and corrupt political or business figures. Non-financed transfers to legal entities and trusts heighten the risk that such transfers will be used for illicit purposes. Numerous public law enforcement actions illustrate this point.
As such, FinCEN believes that the reporting of non-financed transfers to legal entities and trusts will benefit national security by facilitating law enforcement investigations into, and strategic analysis of, the use of residential real estate transfers having these particular characteristics to facilitate money laundering.
The definition of “financial institution” is set forth at 31 C.F.R. § 1010.100(t); the incorporation of that defined term is directed by 31 C.F.R. § 1031.320(a). ↑
The defined term “transferee entity” exists in the exclusion, meaning, with one exception, “any person other than a transferee trust or an individual.” 31 C.F.R. § 1031.320(n)(10)(i). Note, however, that this defined term is not employed in the exceptions to the defined term “transferee entity.” Seeid. § 1031.320(n)(10)(ii). ↑
See 31 C.F.R. § 1031.320(b)(1); see also RRE Release, 89 Fed. Reg. at 70277 (“For clarity, the term ‘Residential real property’ is removed from the list of definitions found in 31 CFR 1031.320(n) and is instead defined in 31 CFR 1031.320(b).”). The term “cooperative housing corporation” is curious in that it is not defined in the RRE Rules or in FinCEN’s general definitions. See 31 C.F.R. §§ 1031.320(n), 1010.100. The term is employed in the Internal Revenue Code, but there it defines the treatment of certain payments made to and by an organization that meets the statutory requirements and limitations—it does not set forth an objective definition. I.R.C. § 116. It bears noting that the definition of “cooperative housing corporation” there is introduced by the phrase “For purposes of this section.” Id. § 116(b). Still, it goes on to provide:
The term “cooperative housing corporation” means a corporation—
(A) having one and only one class of stock outstanding,
(B) each of the stockholders of which is entitled, solely by reason of his ownership of stock in the corporation, to occupy for dwelling purposes a house, or an apartment in a building, owned or leased by such corporation,
(C) no stockholder of which is entitled (either conditionally or unconditionally) to receive any distribution not out of earnings and profits of the corporation except on a complete or partial liquidation of the corporation, and
(D) meeting 1 or more of the following requirements for the taxable year in which the taxes and interest described in subsection (a) are paid or incurred:
(i) 80 percent or more of the corporation’s gross income for such taxable year is derived from tenant-stockholders.
(ii) At all times during such taxable year, 80 percent or more of the total square footage of the corporation’s property is used or available for use by the tenant-stockholders for residential purposes or purposes ancillary to such residential use.
(iii) 90 percent or more of the expenditures of the corporation paid or incurred during such taxable year are paid or incurred for the acquisition, construction, management, maintenance, or care of the corporation’s property for the benefit of the tenant-stockholders.
I.R.C. § 116(b)(1). In order to fall within I.R.C. § 116(b)(1), an entity must be classified as a tax corporation. Without a bespoke definition of a “cooperative housing corporation,” it would seem that a limited liability company (“LLC”) taxed as a partnership or otherwise intentionally falling outside the scope of I.R.C. § 116(b)(1) could acquire a condominium complex, sell LLC interests that afford the owner a right of occupancy in (and even a right of subletting) a particular unit of the condominium, and avoid the reach of the RRE Rules. ↑
The definition of “single-family housing” as utilized in the Federal Home Loan Banks Housing Goals regulations provides, in part, that “single-family housing means a residence consisting of one to four dwelling units.” See 12 C.F.R. § 1281.1. Likely this is more coincidence than an effort at conformity. ↑
See also RRE Release, 89 Fed. Reg. at 70266:
The revised definition addresses the difficulty raised by commenters in determining whether vacant or unimproved land is zoned or permitted for residential use by focusing on whether the transferee intends to build on the property a structure designed principally for occupancy by one to four families. Furthermore, the new provision added to the rule concerning reasonable reliance permits the reporting person to reasonably rely on information provided by the transferee to determine such intent. ↑
See 31 C.F.R. § 1031.320(c)(1); seealsoid. § 1031.320(d) (principal place of business address of reporting person must be a U.S. address). ↑
Id. § 1031.320(c)(i)–(vii). Note that each of “closing or settlement agent,” “closing or settlement statement,” and “recordation office” are themselves defined terms. Id. §§ 1031.320(n)(2), (3), (7). ↑
See also RRE Release, 89 Fed. Reg. at 70270 (“Associations representing real estate agents agreed with the absence in the cascade of functions typically associated with real estate agents, while two escrow industry commenters proposed including real estate agents as reporting persons.”). ↑
See 31 C.F.R. § 1031.320(c)(2) (“If an employee, agent, or partner acting within the scope of such individual’s employment, agency, or partnership would be the reporting person as determined in paragraph (c)(1) of this section, then the individual’s employer, principal, or partnership is deemed to be the reporting person.”). ↑
Seeid. § 1031.320(c)(3) (“A financial institution that has an obligation to maintain an anti–money laundering program under this chapter is not a reporting person for purposes of this section.”). ↑
See id. § 1031.320(c)(4) (“If reporting persons decide to use designation agreements, a separate agreement is required for each reportable transfer.”); see also RRE Release, 89 Fed. Reg. at 70272 (“The agreement must be in writing and contain specified information, with a separate agreement required for each reportable transfer.”); id (“accordingly the final rule does not permit a blanket designation agreement in lieu of a separate designation agreement for each relevant transfer.”). ↑
See 31 C.F.R. § 1031.320(c)(4)(i) (“The reporting person described in paragraph (c)(1) of this section may enter into an agreement with any other person described in paragraph (c)(1) of this section to designate such other person as the reporting person with respect to the reportable transfer. The person designated by such agreement shall be treated as the reporting person with respect to the transfer.”).
It should be noted that the person identified as the “reporting person” pursuant to a designation agreement must be a person in the cascade; it is not permitted that the designation agreement designate a person (whether an individual or an entity) who is outside the set of persons identified in the cascade. See 31 C.F.R. § 1031.320(c)(4)(i) (“The reporting person described in paragraph (c)(1) of this section may enter into an agreement with any other person described in paragraph (c)(1) of this section to designate such other person as the reporting person with respect to the reportable transfer.”) (emphasis added). See also RRE Release, 89 Fed. Reg. at 70263 (“as that attorney might allow other parties in the reporting cascade to file the Real Estate Report through a designation agreement”) (emphasis added); RRE Release, 89 Fed. Reg. at 70272:
The final rule also does not allow for third-party vendors who are not described in the reporting cascade to be designated as a reporting person, as such vendors are not financial institutions that can be regulated by FinCEN; a reporting person could outsource the preparation of the form to a third-party vendor, but the ultimate responsibility for the completion and filing of the report would lie with the reporting person. ↑
Seeid. § 1031.320(c)(4)(ii):
(ii) A designation agreement shall be in writing, and shall include:
(A) The date of the agreement;
(B) The name and address of the transferor;
(C) The name and address of the transferee entity or transferee trust;
(D) Information described in paragraph (g) identifying transferred residential real property;
(E) The name and address of the person designated through the agreement as the reporting person with respect to the transfer; and
(F) The name and address of all other parties to the agreement. ↑
Seeid. § 1031.320(d). The address provided must be a U.S. address, effectively excluding from the scope of “reporting person” anyone whose work address is outside the U.S. ↑
Seeid. § 1031.320(b) (“. . . to a transferee entity or a transferee trust”). ↑
See RRE Release, 89 Fed. Reg. at 70269:
The definition of transferee entity was meant to include, for example, a corporation, partnership, estate, association, or limited liability company. Among the exceptions FinCEN proposed was an exception for any legal entity whose ownership interests are controlled or wholly owned, directly or indirectly, by an exempt entity. ↑
For these purposes, “person” is defined as “[a]n individual, a corporation, a partnership, a trust or estate, a joint stock company, an association, a syndicate, joint venture, or other unincorporated organization or group, an Indian Tribe (as that term is defined in the Indian Gaming Regulatory Act), and all entities cognizable as legal personalities.” See 31 C.F.R. § 1010.100(mm); see alsoid. § 1031.320(a). ↑
If that address is not in the United States, there must be reported as well “the street address of the primary location in the United States where the transferee entity conducts business, if any.” Seeid. § 1031.320(e)(1)(C). ↑
Seeid. § 1031.320(e)(1)(i)(D) (“(2) If the transferee entity has not been issued an IRS TIN, a tax identification number for the transferee entity that was issued by a foreign jurisdiction and the name of such jurisdiction; or (3) If the transferee entity has not been issued an IRS TIN or a foreign tax identification number, an entity registration number issued by a foreign jurisdiction and the name of such jurisdiction.”). ↑
The determination of who is a beneficial owner is based on a definition discussed below. See 31 C.F.R. § 1031.320(n)(1); infra notes 185–202 and accompanying text. ↑
Seeid. § 1031.320(e)(1)(ii)(E) (“Unique identifying number consisting of: (1) An IRS TIN; or (2) Where an IRS TIN has not been issued: (i) A tax identification number issued by a foreign jurisdiction and the name of such jurisdiction; or (ii) The unique identifying number and the issuing jurisdiction from a non-expired passport issued by a foreign government.”). ↑
See alsoid. § 1031.320(n)(8):
The term “signing individual” means each individual who signed documents on behalf of the transferee as part of the reportable transfer. However, it does not include any individual who signed documents as part of their employment with a financial institution that has both an obligation to maintain an anti–money laundering program and an obligation to report suspicious transactions under this chapter. ↑
Seeid. § 1031.320(e)(1)(iii)(D) (“(1) An IRS TIN; or (2) Where an IRS TIN has not been issued: (i) A tax identification number issued by a foreign jurisdiction and the name of such jurisdiction; or (ii) The unique identifying number and the issuing jurisdiction from a non-expired passport issued by a foreign government to the individual.”). ↑
Seeid. § 1031.320(e)(1)(iii)(E) (“Description of the capacity in which the individual is authorized to act as the signing individual; and (F) If the signing individual is acting in that capacity as an employee, agent, or partner, the name of the individual’s employer, principal, or partnership.”). ↑
Seeid. § 1031.320(e)(2)(i)(C) (“Unique identifying number, if any, consisting of: (1) IRS TIN; or (2) Where an IRS TIN has not been issued, a tax identification number issued by a foreign jurisdiction and the name of such jurisdiction.”). ↑
Seeid. § 1031.320(e)(2)(ii)(C) (“(1) The street address that is the trustee’s principal place of business; and (2) If such principal place of business is not in the United States, the street address of the primary location in the United States where the trustee conducts business, if any.”). ↑
Seeid. § 1031.320(e)(2)(ii)(D):
Unique identifying number, if any, consisting of: (1) The IRS TIN of the trustee; (2) In the case that a trustee has not been issued an IRS TIN, a tax identification number issued by a foreign jurisdiction and the name of such jurisdiction; or (3) In the case that a trustee has not been issued an IRS TIN or a foreign tax identification number, an entity registration number issued by a foreign jurisdiction and the name of such jurisdiction. ↑
The definition of who is a beneficial owner with respect to a trust is reviewed below. Seeid. § 1031.320(n)(1)(ii); infra notes 192–97 and accompanying text. ↑
Seeid. § 1031.320(e)(2)(iii)(E) (“Unique identifying number consisting of: (1) An IRS TIN; or (2) Where an IRS TIN has not been issued: (i) A tax identification number issued by a foreign jurisdiction and the name of such jurisdiction; or (ii) The unique identifying number and the issuing jurisdiction from a non-expired passport issued by a foreign government.”). ↑
Seeid. § 1031.320(f)(1)(iv) (“(A) An IRS TIN; or (B) Where an IRS TIN has not been issued: (1) A tax identification number issued by a foreign jurisdiction and the name of such jurisdiction; or (2) The unique identifying number and the issuing jurisdiction from a non-expired passport issued by a foreign government to the individual.”). ↑
Seeid. § 1031.320(f)(2)(iii) (“Complete current address consisting of: (A) The street address that is the legal entity’s principal place of business; and (B) If the principal place of business is not in the United States, the street address of the primary location in the United States where the legal entity conducts business, if any.”). ↑
Seeid. § 1031.320(f)(2)(iv) (“(A) An IRS TIN; (B) In the case that the legal entity has not been issued an IRS TIN, a tax identification number issued by a foreign jurisdiction and the name of such jurisdiction; or (C) In the case that the legal entity has not been issued an IRS TIN or a foreign tax identification number, an entity registration number issued by a foreign jurisdiction and the name of such jurisdiction.”). ↑
Seeid. § 1031.320(f)(3)(iii) (“(A) IRS TIN; or (B) Where an IRS TIN has not been issued, a tax identification number issued by a foreign jurisdiction and the name of such jurisdiction.”). ↑
Seeid. § 1031.320(f)(3)(iv)(C) (“(1) An IRS TIN; or (2) Where an IRS TIN has not been issued: (i) A tax identification number issued by a foreign jurisdiction and the name of such jurisdiction; or (ii) The unique identifying number and the issuing jurisdiction from a non-expired passport issued by a foreign government.”). ↑
Seeid. § 1031.320(f)(3)(v)(C) (“Complete current address consisting of: (1) The street address that is the legal entity’s principal place of business; and (2) If the principal place of business is not in the United States, the street address of the primary location in the United States where the legal entity conducts business, if any.”). ↑
Seeid. § 1031.320(f)(3)(v)(D) (“(1) An IRS TIN; (2) In the case that the legal entity has not been issued an IRS TIN, a tax identification number issued by a foreign jurisdiction and the name of such jurisdiction; or (3) In the case that the legal entity has not been issued an IRS TIN or a foreign tax identification number, an entity registration number issued by a foreign jurisdiction and the name of such jurisdiction.”). ↑
“Residential real property” is defined not in subsection (n) of the RRE Rules, but rather as part of the definition of “reportable transfer.” Seeid. § 1031.320(b)(i)–(iv). ↑
See id. § 1031.320(g). Note that “date of closing” is a defined term. Id. § 1031.320(n)(4) (“The term ‘date of closing’ means the date on which the transferee entity or transferee trust receives an ownership interest in residential real property.”). ↑
See id. § 1031.320(i); see alsoid. § 1031.320(b) (definition of “reportable transfer”). ↑
Seeid. § 1010.380(b); see also Fin. Crimes Enf’t Network FAQs, FAQ K.4 (Dec. 12, 2023); Beneficial Ownership Information Reporting Requirements, 87 Fed. Reg. at 59513:
In addition, the final rule does not adopt a good faith or other standard regarding the requirements to update or correct reports. The CTA places the reporting responsibility on reporting companies, and this responsibility includes the obligation to report accurately. The CTA also requires reporting companies to update information when it changes. ↑
See id. 31 C.F.R. § 1031.320(j)(1):
Except as described in paragraph (j)(2) of this section, the reporting person may rely upon information provided by other persons, absent knowledge of facts that would reasonably call into question the reliability of the information provided to the reporting person.
See also RRE Release, 89 Fed. Reg. at 70261:
The final rule imposes a reporting requirement on “reporting persons” that are involved in certain kinds of transfers of residential real property. In response to comments, the rule adopts a reasonable reliance standard, allowing reporting persons to, in general, reasonably rely on information obtained from other persons. ↑
For purposes of reporting information described in paragraphs (e)(1)(ii) and (e)(2)(iii) of this section, the reporting person may rely upon information provided by the transferee or a person representing the transferee in the reportable transfer, absent knowledge of facts that would reasonably call into question the reliability of the information provided to the reporting person, if the person providing the information certifies the accuracy of the information in writing to the best of the person’s knowledge.
See also RRE Release, 89 Fed. Reg. at 70258:
The final rule adopts a reasonable reliance standard, allowing reporting persons to rely on information obtained from other persons, absent knowledge of facts that would reasonably call into question the reliability of that information. For purposes of reporting beneficial ownership information in particular, a reporting person may reasonably rely on information obtained from a transferee or the transferee’s representative if the accuracy of the information is certified in writing to the best of the information provider’s own knowledge.
Id. at 70263 (citations omitted):
In 31 CFR 1031.320(j), the final rule adopts a reasonable reliance standard that allows reporting persons to reasonably rely on information provided by other persons. As a result, the reporting person generally may rely on information provided by any other person for purposes of reporting information or to make a determination necessary to comply with the final rule, but only if the reporting person does not have knowledge of facts that would reasonably call into question the reliability of the information. This reasonable reliance standard is consistent with that used by certain financial institutions subject to customer due diligence requirements.
This reasonable reliance standard is slightly more limited when a reporting person is reporting beneficial ownership information of transferee entities or transferee trusts. As expressed in the proposed rule, and as adopted in the final rule, when a reporting person is collecting the beneficial ownership information of transferee entities and transferee trusts. In those situations, the reasonable reliance standard applies only to information provided by the transferee or the transferee’s representative and only if the person providing the information certifies the accuracy of the information in writing to the best of their knowledge. ↑
See id. § 1031.320(n)(4) (“The term ‘date of closing’ means the date on which the transferee entity or transferee trust receives an ownership interest in residential real property.”). In turn, “ownership interest” is a defined term. Id. § 1031.320(n)(6). ↑
See id. § 1031.320(l)(1); see alsoid. § 1031.320(j)(2). ↑
Seeid. § 1031.320(l)(1); see also 31 C.F.R. § 1031.320(c)(4). ↑
See RRE Release, 89 Fed. Reg. at 70276 (“The final rule retains the requirement that certain records be kept for five years.”). ↑
See 31 C.F.R. § 1031.320(m)(1); see also 31 U.S.C. § 5318(g)(2):
(A) In general.—If a financial institution or any director, officer, employee, or agent of any financial institution, voluntarily or pursuant to this section or any other authority, reports a suspicious transaction to a government agency—
(i) neither the financial institution, director, officer, employee, or agent of such institution (whether or not any such person is still employed by the institution), nor any other current or former director, officer, or employee of, or contractor for, the financial institution or other reporting person, may notify any person involved in the transaction that the transaction has been reported or otherwise reveal any information that would reveal that the transaction has been reported[]; and
(ii) no current or former officer or employee of or contractor for the Federal Government or of or for any State, local, tribal, or territorial government within the United States, who has any knowledge that such report was made may disclose to any person involved in the transaction that the transaction has been reported, or otherwise reveal any information that would reveal that the transaction has been reported, other than as necessary to fulfill the official duties of such officer or employee.
See also RRE Release, 89 Fed. Reg. at 70276:
As in the NPRM, FinCEN recognizes that the confidentiality provision in 31 U.S.C. 5318(g)(2) applying to financial institutions that file SARs is not feasible with the Real Estate Report, as reporting persons needs to collect information directly from the subjects of the Report, thus revealing its existence. Moreover, all parties to a non-financed residential real estate transfer subject to this rule would already be aware that a report would be filed, given such filing is non-discretionary, rendering confidentiality unnecessary. ↑
See 31 C.F.R. § 1031.320(m)(2) (“A reporting person under this section is exempt from the requirement to establish an anti–money laundering program, in accordance with 31 CFR 1010.205(b)(1)(v).”). ↑
Seeid. § 1031.320(n)(9) (“The term ‘statutory trust’ means any trust created or authorized under the Uniform Statutory Trust Entity Act or as enacted by a State. For the purposes of this subpart, statutory trusts are transferee entities.”). Note that this definition does not include the Delaware Statutory Trust, Del. Code tit. 12, § 3801 et seq., as that statute predates and is not an adoption of the Uniform Act. See also Thomas E. Rutledge & Ellisa O. Habbart, The Uniform Statutory Trust Entity Act: A Review, 65 Bus. Law. 1055 (Aug. 2010). ↑
Seeid. § 1010.320(n)(9) (“For purposes of this subpart, statutory trusts are transferee entities.”); see also RRE Release, 89 Fed. Reg. at 70269 (“Similarly, the proposed rule excluded statutory trusts from the definition of a transferee trust but, instead, proposed to capture statutory trusts within the definition of a transferee entity.”). ↑
See id. § 1031.320(n)(1)(i)(A) (“The beneficial owners of a transferee entity are the individuals who would be the beneficial owners of the transferee entity on the date of closing if the transferee entity were a reporting company under 31 CFR 1010.380(d) on the date of closing.”); see alsoRRE FAQ D.3 (“This definition is derivative of the definition of this term in the FinCEN’s Beneficial Ownership Information (BOI) Reporting Rule.”). ↑
See 31 C.F.R. § 1010.380(d) (“Beneficial owner. For purposes of this section, the term ‘beneficial owner,’ with respect to a reporting company, means any individual who, directly or indirectly, either exercises substantial control over such reporting company or owns or controls at least 25 percent of the ownership interests of such reporting company.”). For an exegesis of this definition in the Reporting Rules, see Ribstein, Keatinge & Rutledge, supra note 11, §§ 4A:12–4A:15. ↑
The impact of the IFR upon the CTA and the Reporting Rules is reviewed in the second installment of this article. ↑
31 C.F.R. § 1031.320(n)(1)(i)(B). In the CTA’s Reporting Rules, in contrast with the RRE Rules, a nonprofit under I.R.C. § 501(c) was not a “reporting company” that needed to assess its beneficial owners under the substantial control test. See 31 U.S.C. § 5336(a)(11)(B)(xix); seealso 31 C.F.R. § 1010.380(c)(2)(xix). To address the gap, the RRE Rules provide a rule for assessing the “beneficial owners” of a nonprofit organization, directing that they are to be assessed under only the substantial control test, to the exclusion of the ownership test. This is not much of a clarification except to make it clear that an ownership analysis is not required, which if undertaken would in almost every instance yield no results. ↑
See also 31 C.F.R. § 1010.380(f)(10) (definition of “United States person”). ↑
Seeid. § 1031.320(n)(1)(ii)(F) (“A beneficial owner of any trust that holds at least one of the positions in the transferee trust described in paragraphs (n)(1)(ii)(A) through (D) of this section, except when the trust meets the criteria set forth in paragraphs (n)(11)(ii)(A) through (D). Beneficial ownership of any such trust is determined under this paragraph (n)(1)(ii), utilizing the criteria for beneficial owners of a transferee trust.”). ↑
See I.R.C. § 761(a); see also 2 Larry E. Ribstein, Robert R. Keatinge & Thomas E. Rutledge, Ribstein and Keatinge on Limited Liability Companies § 22:20 (Dec. 2025). ↑
See I.R.C. § 761(f); see alsoRibstein, Keatinge & Rutledge, supra note 201, § 22:18. ↑
See also RRE Release, 89 Fed. Reg. at 70264 (citations omitted):
Consistent with the NPRM, FinCEN believes that it is unnecessary to list potential penalties in the regulatory text because the applicable penalties are already set forth by statute. Negligent violations of the final rule could result in a civil penalty of, as of the publication of the final rule, not more than $1,394 for each violation, and an additional civil money penalty of up to $108,489 for a pattern of negligent activity.
Willful violations of the final rule could result in a term of imprisonment of not more than five years or a criminal fine of not more than $250,000, or both.
Such violations also could result in a civil penalty of, as of the publication of the final rule, not more than the greater of the amount involved in the transaction (not to exceed $278,937) or $69,733.
This penalty structure generally applies to any violation of a BSA requirement.
FinCEN intends to conduct outreach to potential reporting persons on the need to comply with the final rule’s requirements. ↑
Seeid. § 1031.320(c)(1)(v). It should be noted that use of the lawyer’s trust account for disbursal is often cited as of great concern to FinCEN and, for a lot of reasons, this should be approached with caution. ↑
See RRE Release, 89 Fed. Reg. at 70262–63 (III(B)(3) (Attorneys as Potential Reporting Persons)) (arguing, based upon case law interpreting lawyers’ duties under the Bank Secrecy Act dealing with reporting with respect to the payment of funds to lawyers as fees or into their trust accounts, that lawyers are broadly obligated to comply with FinCEN’s AML rules). ↑
See,e.g., Fin. Action Task Force, Guidance for a Risk-Based Approach for Legal Professionals, at Recommendations 10 (2019) (regarding verification of beneficial ownership of the client and of any beneficial owners of the client, including “the types of activities in which the [client] participates”). ↑
CompareFrequently Asked Questions, Fin. Crimes Enf’t Network, CTA FAQs E-3, E-5, E-6 (last visited Nov. 14, 2025) (which appear to go out of their way to require that an attorney be listed as a company applicant even where others were performing the actions of a company applicant by referring to the “primarily responsible for overseeing, preparation and filing of a reporting company’s incorporation documents” or “if more than one person is involved in the filing of the document, the person who is primarily responsible for directing or controlling the filing”), with 31 C.F.R. § 1031.320(c) (which speaks of the reporting person as “the person that prepares the closing and settlement statement” or “the person that files . . . the deed or other instrument that transfers ownership . . .” or “the person that prepares the deed . . .”). See also 31 C.F.R. § 1031.320(n)(2) (which defines a “closing or settlement agent” as “any person, whether or not acting as an agent for a title agent or company, a licensed attorney, real estate broker, or real estate salesperson, who for another and with or without a commission, fee, or other valuable consideration and with or without the intention or expectation of receiving a commission, fee, or other valuable consideration, directly or indirectly, provides closing or settlement services incident to the transfer of residential real property.”); id. § 1031.320(c)(1)(i) (defining the reporting person as the person designated as “settlement or closing agent.”). ↑
SeeModel Rules of Pro. Conduct r. 1.2(d) (Am. Bar Ass’n 2025) (“A lawyer shall not counsel a client to engage, or assist a client, in conduct that the lawyer knows is criminal or fraudulent.”). ↑
See Robert R. Keatinge, Comments on Changes to Rule 1.16, SSRN (Oct. 4, 2024); see alsoRibstein, Keatinge & Rutledge, supra note 11, §§ 3:2, 4A:1, 4A:37. ↑
ABA Standing Comm. on Ethics & Pro. Resp., Formal Op. 24-513 (Aug. 23, 2024). ↑
To put it bluntly, rely upon them at your own risk; we are not your attorneys or attorneys for your clients. ↑
The 31 C.F.R. § 1031.320(b)(2)(vi) exemption is limited by its terms to a transfer to a trust and does not include a transfer to a business entity. See also RRE Release, 89 Fed. Reg. at 70268 (“FinCEN also does not believe that this same logic can be extended to justify excepting transfers of property by an individual to a legal entity owned or controlled by such individual, as some commenters suggested.”). ↑
Seeid. § 1031.320(j)(1); see also RRE Release, 89 Fed. Reg. at 70266:
The revised definition addresses the difficulty raised by commenters in determining whether vacant or unimproved land is zoned or permitted for residential use by focusing on whether the transferee intends to build on the property a structure designed principally for occupancy by one to four families. Furthermore, the new provision added to the rule concerning reasonable reliance permits the reporting person to reasonably rely on information provided by the transferee to determine such intent. ↑
Seealso id. § 1031.320(j)(1); see also RRE Release, 89 Fed. Reg. at 70266:
The revised definition addresses the difficulty raised by commenters in determining whether vacant or unimproved land is zoned or permitted for residential use by focusing on whether the transferee intends to build on the property a structure designed principally for occupancy by one to four families. Furthermore, the new provision added to the rule concerning reasonable reliance permits the reporting person to reasonably rely on information provided by the transferee to determine such intent. ↑
To address comments that requested clarity on whether mixed-use property qualifies as residential real property, the definition of residential real property also clarifies that separate residential units within a building, such as individually owned condominium units, as well as entire buildings designed for occupancy by one to four families, are included. ↑
Senate Joint Resolution 15 provides in substance: “That Congress disapproves the final rule submitted by the Financial Crimes Enforcement Network relating to ‘Anti–Money Laundering Regulations for Residential Real Estate Transfers’ (89 Fed. Reg. 70258 (August 29, 2024)), and such rule shall have no force or effect.” S.J. Res. 15, 119th Cong. (2025–2026). ↑
House Joint Resolution 55 provides in substance: “That Congress disapproves the rule submitted by the Financial Crimes Enforcement Network relating to ‘Anti–Money Laundering Regulations for Residential Real Estate Transfers’ (89 Fed. Reg. 70258 (August 29, 2024)), and such rule shall have no force or effect.” H.J. Res. 55, 119th Cong. (2025–2026). ↑
In the Flowers Title case, a summary judgment briefing schedule was set on July 17, 2025 (docket item 9). An amended complaint was filed on July 15 (docket item 11), and thereafter the plaintiffs filed their motion for summary judgment on July 16 (docket item 12). The government filed its response on August 15 (docket item 14), and on August 29 a reply was filed by the plaintiffs (docket item 17), with a further reply filed by the government on September 12 (docket item 18). An amicus brief was also filed (docket item 20). On November 14 a scheduling order was entered setting the argument of the pending motions for summary judgment for December 17, 2025 (docket item 23). However, on November 18 a superseding order was issued delaying that hearing until January 13, 2026 (docket item 26).
In the Corley case, a motion for summary judgment was filed by the plaintiffs on May 8, 2025 (docket items 10–12). However, it was only on July 8 that a briefing schedule for summary judgment was entered (docket item 15). Both sides filed for summary judgment on August 12 (docket items 16 and 17), with responses filed on August 26 (docket items 18 and 19). The government filed a reply brief on September 11 (docket item 20); the docket does not reflect the filing of a reply brief by the plaintiffs. As of October 1, no oral argument had been scheduled.
Turning to the Fidelity National case, it was referred to a magistrate judge on May 28 for ruling on all nondispositive motions and the issuance of a report and recommendations on dispositive motions (docket item 12). On July 30, after a hearing (docket item 26), a briefing schedule for summary judgment was issued (docket item 27.). The plaintiff filed their motion for summary judgment on August 25 (docket item 35) and that day also filed a motion for a preliminary injunction against the enforcement of the rules pending resolution of the suit (docket item 36). A briefing schedule as to that motion was entered on August 29 (docket item 40). Oral argument on the motion for a preliminary injunction was scheduled for September 30, 2025 (docket item 63). The government filed its cross-motion for summary judgment on September 26, 2025 (docket item 64). By a joint motion, the scheduled oral argument on the requested injunctive relief was canceled until March 1, 2026, in light of the delay of the RRE Rules’ effective date (docket items 69 and 70). Oral argument was rescheduled for November 18 (docket item 77), and the matters were taken under advisement (docket item 79).
See also RRE Release, 89 Fed. Reg. at 70268 (“FinCEN also does not believe that this same logic can be extended to justify excepting transfers of property by an individual to a legal entity owned or controlled by such individual, as some commenters suggested.”); RRE FAQ B.3. ↑
The built environment encompasses all human-made spaces and structures where people live, work, and move. On September 19, at the American Bar Association (“ABA”) Business Law Section Fall Meeting, a CLE program presented by the Corporate Sustainability Law Committee explored how evolving legal, financial, and insurance frameworks are shaping physical structures, land use, systems, and services for sustainable real estate development.
The panelists for the CLE program—Elizabeth Beardsley with the U.S. Green Building Council, Jenna Kirkpatrick Howard with Lockton, Amanda Schermer MacVey with Venable LLP, and Elizabeth Yazgi with LSTA, Inc.—addressed sustainability considerations for new and existing buildings, financing mechanisms for energy efficiency and decarbonization retrofits and new builds, risk mitigation strategies amid climate resilience considerations, and practical solutions to implementation barriers. Attendees gained insights essential for competence in advising clients on emerging standards, legal requirements, and best practices for property ownership and the future of our nation’s buildings, parks, transportation systems, bridges, and other human-made spaces and structures that shape how people live, work, and recreate.
Howard began the program by offering data and statistics on the growth in number, severity, and cost of climate-related events. She noted property insurers have closely monitored the financial and economic impacts of changing climate and weather, with the 2020s off to an ominous start. She reported that there was $89 billion in average annual incurred property insurance losses between 2020 and 2023 and twenty-seven events in the United States alone in 2024 that caused at least $1 billion in economic damage with combined disaster costs of $182.7 billion. She warned that climate-related disasters are projected to cause economic losses of $12.5 trillion worldwide by 2050.
MacVey discussed the role of attorneys in guiding clients through evolving laws, codes, and regulations relating to the construction and operation of buildings, which surprisingly account for approximately 33 percent of carbon dioxide emissions. MacVey noted the expanding role of local building and energy codes and explained the ethical standards adopted by industry organizations for design professionals and engineers. She touched upon the impact of the ABA’s House of Delegates approval of Resolution 513 on August 5, 2024, regarding the importance of incorporating sustainability into the practice of law. She also spoke of the Building Code Adoption Tracking (“BCAT”) program of the Federal Emergency Management Agency (“FEMA”), which analyzes adoption of provisions related to natural hazard resistance, and discussed the significance of residential and commercial energy codes, especially in states that enacted significant legislation in 2024 and 2025 to advance sustainability objectives such as California, Hawaii, Maine, New York, Florida, and Vermont. MacVey insisted that business lawyers with clients in real estate development or use in these states in particular must have some level of competence in this rapidly changing landscape.
Beardsley described the range of policies for high-performing green buildings, including green building adoption for public buildings as well as incentives and permit conditions for private buildings, and how state and local governments use certifications to implement their goals for the built environment. She highlighted certain financial products for deep energy retrofits, efficiency upgrades, and new sustainable developments. She touched upon the evolution of LEED standards for sustainable building, and the latest version, LEED v5, which requires that all building projects conduct a climate resilience assessment. She also provided the essential concepts of green financial products such as Property Assessed Clean Energy (“PACE”) financing, energy performance contracts, and green mortgages that deliver both environmental benefits and economic returns. In a world of political backlash to environmental, social, and government (“ESG”) practices, Beardsley explained how the drivers of sustainable investing, climate risk, resource scarcity, and social resilience remain intact. As Triodos Investment Management put it in one of its commentary pieces, the “ESG backlash doesn’t make economic sense”—the backlash is political, not financial.
Yazgi discussed the factors driving financial market participants’ interest in sustainable debt financing and provided a walkthrough of the LSTA’s “framework documentation” governing the critical sustainable lending instruments available in the market—namely, sustainability-linked loans and use-of-proceeds, or thematic, instruments (“green,” “social,” and “transition” loans). She detailed how ESG products fit within the broader financial markets, noting the continued interest by lenders and investors in projects that contribute to specific social or environmental objectives and that direct capital towards sustainable investments. She also highlighted the inaugural Transition Loans Guide from the LSTA, Loan Market Association (“LMA”), and Asia Pacific Loan Market Association (“APLMA”), which reflects the advance of transition instruments. The latter have become increasingly adopted as entities in high-emitting sectors seek financing to transition from high-carbon to low-carbon operations and develop business models that contribute meaningfully to the decarbonization of the real economy. She closed by noting that, despite recent regulatory rollback and government retreat from ESG priorities, sustainable finance remains an important opportunity for companies and investors and illustrates that lending can be a critical source of capital.
The panelists each noted that all those involved in real estate development and use (and the lawyers that advise them) are adjusting to the legal and regulatory changes prompted by the evolving risk of weather-related disaster events. Industry standards are shifting toward strategic foresight, anticipating climate-related challenges and disruptions, and allocating resources for long-term value creation. Strategies for overcoming barriers facing sustainable projects—whether in financing, legal compliance, or risk mitigation—are essential. There is an emerging transformation of industry standards in our built environment that will result in changes to legal standards. Whether we look at soft or hard law, sustainability issues are core to existing and future real estate and relevant to multiple business units including, but not limited to, finance, procurement, and supply chains.
Howard ended the program by discussing the current state of the insurance marketplace for real estate development and use, changes to modeling based on the rapid pace of climate change, and how volatile insurance rates impact projects. She shared examples of how insurers incentivize property owners to sustainable investments. The session wrapped up with risk considerations factors when considering a location for real estate development.
Not touched upon during the panel discussion because of lack of time but also relevant given the program’s content is the pressing need for companies to prepare to protect their employees in the face of a climate-related crisis. Two pending litigations—Elijah Johnson et al. v. Mayfield Consumer Products, filed in the Graves County Circuit Court in Kentucky on December 16, 2021, and Peterson Family v. Impact Plastics, Inc. and Gerald O’Connor, filed in the Tennessee State Court on October 14, 2024—allege the defendant employers denied employees’ pleas to evacuate during severe weather warnings, with tragic results. Best practices now clearly require companies to not only adopt a written emergency plan but also approach climate-related risks as triggering Occupational Safety and Health Administration (“OSHA”) requirements to maintain a safe workplace.
While no one can predict when known regional threats such as hurricanes or wildfires will strike, employers can certainly plan for what to do if such crises unfold. Preparing for climate-related disasters will mitigate against legal risk, assure (as well as possible) employee safety, foster communication, and clarify realistic compensation and leave expectations. The climate-related emergency plan should address at a minimum: (i) clear and direct communication prompts; (ii) mass alert systems via text, email, or phone, if feasible; (iii) where employees should shelter physically in the workplace during a disaster if evacuation is not possible; (iv) what safety protocols are in place for on-site or essential workers; (v) when and how business operations will close or reopen; and (vi) training with emergency drills or simulations. OSHA’s How to Plan for Workplace Emergencies and Evacuations is a great resource.
Note that, under the Fair Labor Standards Act, nonexempt employees must be paid for hours actually worked. If employees are at work but are unable to work, like in the event of a power outage, pay is still required. If employees are sent home, assuming no employment-related tasks are performed at home, pay is not required. Exempt employees must receive their full salary if they work any part of the week. Employees may be required to use paid time off during closures, but such a policy should be in place and clearly communicated to employees in advance if the employer hopes to avoid confusion and complaints. Disasters are unpredictable, but violations of workplace safety and compensation statutes despite known severe weather risks are.
While the term “climate change” may be considered polarizing or politically charged, businesses and the attorneys that represent them must address the reality of changes in climate patterns and the growing number of severe climate-related events. Like all other foreseeable business-related risks, all applicable federal, state, and local laws must be reviewed in the due diligence assessment of such risk.
This article is related to a CLE program titled “Sustainability in Real Estate: State, Local, and Private Requirements and the Future of the Built Environment” that took place during the ABA Business Law Section’s 2025 Fall Meeting. To learn more about this topic, listen to an audio recording of the program, free for members.
This is the eleventh installment in the Year in Governance Series from the In-House Subcommittee of the ABA Business Law Section’s Corporate Governance Committee. Each month, the series will share key tips on a different corporate governance topic. To get involved in the Corporate Governance Committee, please visit the committee’s webpage.
A message from Kathy Jaffari: “As Chair of the Corporate Governance Committee, I would like to extend my sincere appreciation to the authors for this publication. The Corporate Governance Committee has ongoing opportunities for writing and volunteering with various projects, whether it’s an article you want to publish or a CLE that you want to present. Our Committee is dedicated to helping you promote informative resources for corporate governance practitioners. You may contact me at [email protected] to get involved.”
Executive sessions of a board of directors enable directors to speak freely, voice concerns openly, and arrive at informed decisions without external pressure. Ensuring that these sessions are properly conducted, documented, and legally compliant requires careful attention to both procedural and substantive considerations. A well-run session protects the corporation and builds trust and confidence in the decision-making process.
Differentiate between three types of executive sessions. The board should recognize three distinct types of executive sessions: (a) directors-only sessions for candid, non-legal discussions about board culture or dynamics; (b) privileged sessions with counsel present to provide legal advice; and (c) committee-level sessions, such as audit committee meetings with external auditors. Each type has different attendance rules, documentation requirements, and privilege implications. Codifying these distinctions in governance guidelines prevents confusion about who should attend and when privilege applies.
Schedule sessions strategically—and mix it up. Consider placing executive sessions on every regular board meeting agenda to normalize the practice and avoid signaling crisis. For listed companies, regular executive sessions are not optional—listing requirements mandate them. A regular cadence satisfies regulatory expectations while providing consistent opportunities for independent discussion, even when no pressing matters exist. Rather than leaving the sessions until the end (often the default approach), some boards include executive sessions at the midpoint of meetings or immediately following key discussions.
Use a “CEO in/out” protocol. During executive sessions, first invite the CEO for a portion to exchange candid feedback on strategic matters, then excuse the CEO for truly independent discussion. This approach maintains open communication while preserving independence. Designate the lead independent director or chair as the single voice for post-session feedback to the CEO, which can help to prevent sending mixed messages. Document who attends each portion of the session and when transitions occur, and apply the same discipline for other executives or advisors.
Go on the record to confirm privileged discussions. When counsel joins to provide legal advice, begin with a clear oral statement such as: “I would like to confirm for the record that the purpose of this portion of the session is to provide the board with privileged legal advice regarding [topic].” This creates a contemporaneous record of intent, which may be helpful in the event of litigation. Make sure that counsel announce when the privileged segment begins and ends, and excuse all nonessential parties before privileged discussions begin, so as to preserve the privilege.
Match documentation to the session. For general discussions, keep minimal records; the board minutes should simply note something like, “The independent directors met in executive session. No formal actions were taken.” For formal actions, document the resolution (e.g., CEO compensation decision), but not the discussion. For legal advice, have counsel personally prepare privileged legal minutes, mark them privileged, and maintain them in legal department files, not the corporate minutes book. Do not record individual director comments or create detailed transcripts that could become problematic in any future litigation.
Address CEO succession. Reserve executive session time at least annually for both emergency and long-term succession planning. This is a critical oversight duty. In the minutes, record that succession planning was reviewed and readiness was confirmed, as well as next steps, if any—without summarizing the discussion. If counsel is advising on employment, disclosure, or litigation risk, move that portion into a privileged segment of the session and keep privileged minutes (maintained by counsel) for that discussion.
Orchestrate the post-session “feedback loop.” Predictably, executive sessions can create significant anxiety for management. Designate the lead independent director (or chair) as the single voice to deliver the debrief after synthesizing the board’s feedback and framing it constructively. The lead director should deliver feedback consistently, covering general themes and any decisions or action items, but should not reveal individual director positions or comments.
Tailor executive sessions to committee needs. Audit committees must meet regulatory obligations for private sessions with external auditors. Compensation committees may need time with independent consultants to discuss sensitive pay matters. Nominating and governance committees address board composition, independence assessments, and director performance privately. And know when to recuse yourself: if the session addresses investigation of the entire executive team including counsel, the board needs independent outside counsel.
Implement technology and communication controls. As always, be particularly cautious with email—directors using employer systems may lack the privacy expectation necessary to maintain privilege. Use secure board portals for all session materials and restrict access appropriately. Establish clear protocols about destroying drafts and maintaining only official records. Remind directors that informal texts or personal emails about session topics can expand discovery and jeopardize confidentiality if there is litigation.
Codify the executive session process in a formal policy. Consider adopting a short executive session guideline that addresses when sessions are held, who attends which sessions, who sets the agendas, what documentation standards apply, and how feedback flows to management. This policy can serve as a training tool and help manage expectations. Keep in mind that executive session materials, while confidential, are discoverable in litigation, and so proper procedures provide essential legal protection.
The views expressed in this article are solely those of the authors and not their respective employers, firms or clients.
Nowadays, arbitration agreements are ubiquitous in the consumer finance context; some studies indicate that more than 90 percent of certain consumer contracts contain mandatory arbitration agreements. Over the years, many states and various government agencies have attempted to curtail or outright ban the use of arbitration agreements with little success. That has not stopped the California state legislature, however, which in recent years has attempted to limit arbitration in various ways.
California is back at it again with the passage of S.B. 82, which seeks to limit the scope of arbitrable claims in “consumer use agreements.” The law, which becomes effective January 1, 2026, is almost sure to be challenged in court on preemption and other grounds.
What Does S.B. 82 Do?
S.B. 82 limits arbitrable claims in consumer use agreements (broadly defined as an agreement to “use, receive, or otherwise enjoy a good, service, money, or credit”) to claims arising out of and relating to the contract containing the agreement to arbitrate. Broadly speaking, this means that a claim or dispute separate and apart from the contract (like a later injury or a tort claim that is unrelated to the original contract) is no longer arbitrable even if such a claim would fall within the arbitration agreement’s definition of a “claim” or “dispute.”
California then went further and made clear that any arbitration agreement that violates this limitation is “void and unenforceable”: any waiver of this new law contained in an arbitration agreement is deemed contrary to public policy and unenforceable.
Supporters Say an End to “Infinite” Arbitration Clauses Is Necessary
Proponents of the bill say it is necessary to end “infinite” arbitration clauses. As Senator Thomas Umberg, the chair of the California Senate Judiciary Committee, stated, “No one should be denied their day in court because they clicked ‘I agree’ to a streaming trial or grocery app years ago. SB 82 makes sure arbitration applies only to the contracts people actually sign, not to every future dispute corporations can dream up.”
Senator Umberg also criticized so-called “infinite” arbitration clauses as producing “absurd and unfair” results, pointing to a widely publicized case in which Disney initially attempted to compel arbitration of a wrongful death lawsuit on the basis that the decedent had agreed to an arbitration clause when he signed up for a Disney+ trial account.
An End-Around the FAA?
S.B. 82 will most likely be challenged in court on a number of grounds, including whether it is preempted by the Federal Arbitration Act (“FAA”), 9 U.S.C. §§ 1 et. seq. The FAA was enacted by Congress nearly a century ago and was designed to overcome longstanding judicial hostility to arbitration. To that end, the FAA mandates that courts liberally construe arbitration agreements in favor of arbitration. Also, while the FAA does not include an express preemption clause, courts, including the Supreme Court, have routinely found state laws that unfairly target arbitration or treat arbitration agreements differently from other contracts are preempted by the FAA.
Challenges to the text of the bill itself will almost assuredly follow as well.
What’s Next?
While S.B. 82’s future will most likely be decided in court, financial services companies that contract with and do business with California consumers would be well served to re-review their arbitration agreements now to address the enactment of the bill. If the bill survives judicial scrutiny, businesses will need to revise their broad arbitration agreements to account for it.
In addition, businesses would be well served to include a delegation clause in their arbitration agreements. Delegation clauses indicate who decides threshold questions of arbitrability: a court or an arbitrator? Absent such a clause, threshold questions as to arbitration, including the scope of an agreement, are for a court to decide. S.B. 82 arguably raises such threshold questions, and delegating those questions to an arbitrator may be appropriate.
Ultimately, California’s S.B. 82 represents a significant legislative shift in consumer arbitration law, targeting the overreach of so-called “infinite” arbitration clauses. If it survives potential legal challenges, it will likely reshape how businesses structure arbitration clauses and how consumers can contest them in California and elsewhere.
An Exploration of the Curious Near-Total Disappearance of “Fiduciary Out” Provisions in Private Company Sale Transactions.
Few practitioners will be surprised to learn that virtually all public company merger agreements include customary “fiduciary out” provisions.[1] However, many might be surprised to learn that virtually no recent private company acquisition agreements include “fiduciary out” provisions,[2] especially since the core fiduciary duties owed by the directors of public and private target companies are essentially the same.
What accounts for this stark difference? After a brief summary of the rationales for “fiduciary out” provisions, this article will:
review why most private company acquisitions can be safely completed without fiduciary out provisions;
discuss the limited set of circumstances when private company targets should strongly consider requesting fiduciary out provisions; and
offer hypotheses on:
why so few attorneys representing private company targets have succeeded in including fiduciary out provisions in their clients’ acquisition agreements; and
whether the increasing use of artificial intelligence tools will revive the use of fiduciary outs in private company transactions.
I. Rationales for Fiduciary Out Provisions
The fiduciary duties of corporate directors emanate principally from centuries-old principles of agency and trust law, both of which recognize the need to safeguard the interests of persons who confer legal powers over their affairs to other persons. To protect against abuses of power, the fiduciary is charged with the duty to act in the best interest of the beneficiary.[3]
In most cases, fiduciaries can operate free of liability if they act in good faith and with a reasonable level of care.[4] In the corporate setting, this general deference to fiduciary decision-making has been embodied in the business judgment rule, first articulated in the United States by the Louisiana Supreme Court in the 1829 case of Percy v. Millaudon.[5] But in Revlon v. MacAndrews and other decisions, Delaware courts have long held that sales of corporate control require a more exacting standard of judicial review.[6] This higher level of judicial scrutiny is premised on several factors, including the “omnipresent specter that a board may be acting primarily in its own interests” and the recognition that the sale of control is a critical one-time corporate event necessitating heightened judicial vigilance.[7]
The Delaware courts have further held that target company directors cannot contractually disclaim in an acquisition agreement their fiduciary duties regarding the target’s subsequent receipt of an improved offer. As stated in QVC, any contractual provision that purports to limit the directors’ exercise of their fiduciary duties is “invalid and unenforceable.”[8] These cases sharply conflict with the understandable desire of the acquiror to document its right to complete its acquisition on the terms contractually agreed to by the parties, which creates a tension between the target board’s desire for deal optionality to meet the Revlon standard and the parties’ mutual contractual commitments to expeditiously close their transaction. In response to this tension, practitioners have crafted “fiduciary out” provisions that expressly permit the target to pursue alternative transactions in a narrowly defined set of circumstances. In the words of a former Delaware chancellor, these provisions provide an “escape hatch” to a target corporation that excuses nonperformance of a merger agreement in the event of a superior proposal or intervening event.[9]
Fiduciary out provisions vary in terms of their breadth and scope, but they generally fulfill the central purposes of (i) enabling target directors to pursue the best deal available in accordance with Revlon without breaching their contractual commitments to the acquiror and (ii) allowing target stockholders to reap the benefit of any superior intervening offer. In a 2000 article, former Chancellor William T. Allen suggested an intriguing additional rationale for fiduciary out provisions. Chancellor Allen noted that judges are fallible human beings charged with broad equitable powers to scrutinize complex transactions under a standard of review that requires them to substantively review ex-post the reasonableness of the directors’ prior decisions to sell their companies. Chancellor Allen further noted that the judicial contours of directors’ duties and the “reasonableness” of their actions are not clearly marked. This creates risk that judges might “mistakenly” impose liability on directors who acted in good faith after due deliberations. Although Chancellor Allen conceded that some sales transactions can safely proceed with no fiduciary out, he warned that “there invariably is some degree of risk associated with this strategy (because courts are imperfect at distinguishing true from feigned good faith).”[10] According to Chancellor Allen, directors seek protection from these risks, and they are key beneficiaries of fiduciary out provisions.[11]
Other commentators have argued that stockholders are the primary beneficiaries of fiduciary outs, while yet others have noted that even acquirors can benefit from them by ensuring that acquirors will receive a contractually negotiated termination payment rather than being confronted with an unenforceable contract.[12] Regardless, however, most commentators agree that the primary purposes of fiduciary outs are to foster value maximization in favor of target stockholders and liability minimization in favor of target directors.[13]
II. Factors Limiting the Need for Fiduciary Outs in Private Sales
Stockholders and directors of target companies, whether publicly or privately held, generally seek to maximize transaction value and minimize legal risk. Consequently, it is reasonable to assume that practitioners representing private company targets would attempt to attain either or both of these goals through fiduciary outs. However, as noted above, in recent years practitioners have rarely been successful in obtaining such language in their agreements.
There are various reasons for the absence of fiduciary outs in private sales transactions. Several of these are obvious, many are well-reasoned, and most are interrelated. But some are less tenable than generally believed.
First, in tightly held corporations, the directors might beneficially own all of the stock. If so, there are no unaffiliated stockholders who need protection from potentially abusive or careless directors, or who could potentially benefit from alleging a breach of a fiduciary duty (absent highly unusual facts). Moreover, these individuals negotiating the transaction will invariably possess adequate information to assess the relative benefits of a fiduciary out and to make an informed and enforceable decision to forego the protections afforded thereby. A similar dynamic applies if the directors own only a portion of the stock, but have close relations with the small number of other stockholders. Here too, this group of individuals will embody all of the key beneficiaries of a fiduciary out and should possess sufficient information to knowingly agree amongst themselves to forego the related protections.
Second, stockholders in closely held corporations may be uninterested in the deal optionality promoted by fiduciary outs. Family-controlled companies may prioritize transaction speed upon the death or impending retirement of their CEO if there is no available successor or if a controlling block of stockholders demands a prompt sale to provide near-term liquidity. Undercapitalized or thinly staffed targets might also prefer a quick sale to limit transaction expenses or managerial distraction. In addition, companies backed by private equity might favor transaction speed if faced with pressures to return capital to limited partner investors. In each of these cases, the target’s stockholders would likely prioritize deal certainty over the potential benefits of a fiduciary out.[14]
Third, private company directors may be less successful policing private company sales processes, where personal industry relationships play a significantly greater role than in public sales. Unlike public company directors, directors of many closely-held corporations may be family members or long-standing friends or associates of the company’s founder or CEO. These directors may be less inclined to resist the plan of such founder or CEO to sell the company to a predetermined acquiror quickly without the benefit of a fiduciary out. These directors may also lack sufficient transaction acumen to hire experienced advisors or resist the advice of financial advisors to accept the first acceptable offer.[15] This dynamic should, of course, raise concerns for any attorney representing a private target, because any suggestion that the sales process was unduly cloistered will substantially increase the risk of a court subsequently questioning the reasonableness of the directors’ decision-making.
Fourth, the risk of a private company or its directors being sued based on an alleged breach of fiduciary duties in connection with a sales transaction will almost always be lower than the comparable risk faced by a public company and its directors. There are many reasons for this. Most significantly, private companies will, in nearly all cases, have far fewer stockholders than public companies, and therefore fewer potential litigants. Plus, in closely-knit private companies, passive stockholders may be less inclined to sue the company’s board. In addition, private companies frequently have lower valuations, which reduces the size of potential recoveries for litigants seeking damages. Finally, unlike public companies, private companies are generally not legally obligated to announce their entry into a sales agreement. This lack of public disclosure significantly maximizes the likelihood that the transaction can be closed without a competing bid, which in turn reduces the likelihood of an ensuing judicial inquiry into the reasonableness of the directors’ actions. This diminished risk profile is likely a key factor in target corporations foregoing fiduciary outs when confronted with an acquiror’s vehement objection to including this feature in the acquisition agreement.
But diminished risk is not the same as no risk. In certain circumstances, the risk may not be sufficiently reduced to warrant foregoing a fiduciary out. If, for instance, management of a highly valuable target with a disparate group of stockholders agrees to sell without an adequate sales process, foregoing a fiduciary out could entail significant risk, especially if intra-family animosities increase the risk of judicial challenges.
Fifth, many private companies rely on Optima[16] and its progeny to promptly secure stockholder approval of private company sales, often within twenty-four hours, by written consent. In Optima, the Delaware Chancery Court refused to enjoin a merger agreement approved by the target’s stockholders within twenty-four hours of the board’s approval thereof, notwithstanding the subsequent emergence of a higher offer. The court found that the target company’s board had satisfied Revlon by conducting a thorough process, and it further noted that “[n]othing in the [Delaware General Corporation Law] requires a particular period of time between a board’s authorization of a merger agreement and the necessary stockholder vote.”[17] Accordingly, under the right set of circumstances, a target can quickly secure stockholder consent to a sale and rely on Optima and subsequent cases to conclude that a fiduciary out is unnecessary.[18]
There are important constraints, however, on use of a rapid stockholder consent process. It may be impractical, or invite a hostile stockholder reaction, to expect stockholders to consent to a sales transaction this quickly, especially if the terms are complex or management has conflicting interests. A rushed approval process could cause directors to furnish a faulty stockholder information package that violates their duty of candor,[19] or could result in an ill-informed stockholder approval that is subsequently voided by a court on the basis of inequitable process or inadequate disclosure.[20] Moreover, prior to closing, stockholders who fail to consent (and potentially stockholders who do consent) will still be free to allege that the directors’ process failed to meet the Revlon standard. Because many private transactions require a substantial amount of time to obtain governmental or third-party consents, it is quite possible that leaked news of a pending sale will enable third parties to offer competing bids before the sale can be closed, thereby inviting legal challenges. In short, Optima should not be viewed as an all-encompassing panacea that absolves a target company from considering the merits of requesting a fiduciary out.[21]
III. When Should Private Company Targets Request a Fiduciary Out?
Chancellor Allen’s warning cited in Section I above about judicial fallibility, coupled with the discussion above in Section II, suggest various scenarios where privately held target companies should be wary of proceeding without a fiduciary out. These include:
sales by private companies with large stockholder bases, especially if (i) a block of stockholders is hostile to the management team, (ii) confidentiality concerns preclude management from canvassing the company’s stockholders to gauge their support prior to signing the acquisition agreement, or (iii) the transaction is large enough to entice interest from the plaintiffs’ bar;
transactions approved solely or predominantly by non-independent directors, which are apt to draw more judicial scrutiny than transactions approved by independent directors;
a sales process not reasonably designed to identify the most likely prospective bidders;
transactions that suggest that management was unduly motivated by the desire to sell quickly or to a pre-determined acquiror at the expense of a careful review of all options; and
transactions involving conflicts of interest, complex terms, or other features precluding rapid stockholder approval, which thereby create a window for competing bids and stockholder suits to emerge.
IV. Why Have Fiduciary Outs Virtually Disappeared from Private Sale Transactions, and Will Artificial Intelligence Tools Impact This Trend?
Without an exhaustive search of the specific circumstances governing each of the private company sales reflected in recent survey data, it is difficult to speculate with certainty why nearly all private target companies are currently foregoing fiduciary out protections. It is possible that most of the private companies reflected in the data are closely-held, tightly knit companies that believe they can forego fiduciary out protection at minimal risk. But this seems questionable because the number of complex, widely-held target private companies (often with hundreds of stockholders) is growing, not contracting. It is also possible that practitioners have concluded that the Delaware courts have lost their zeal for policing the reasonableness of sales processes under Revlon. But this would conflict with the near universal use of fiduciary outs in public company transactions.
A more likely explanation is that acquirors are using survey data to argue that fiduciary outs are “off-market” in private company sales, and that it is therefore patently unreasonable for any target company to request including one in a sales agreement. If, over time, this argument continuously prevails, the number of private company sales with fiduciary outs would be expected to continuously ratchet down.[22]
Over the past couple of decades, survey data has, on balance, had a profoundly positive impact on dealmaking by allowing practitioners to more quickly resolve differences of views on negotiated terms, thereby freeing them to focus on more mission-critical tasks. But survey data can also become a crutch that forestalls substantive debate on when an “off-market” provision is justified in a sales agreement.
The manner in which artificial intelligence (“AI”) platforms are trained could have a significant impact on whether fiduciary outs in private company acquisitions remain rare or experience a resurgence. If AI platforms are trained to focus narrowly on the most prevalent terms used in recent deals, their use would likely reinforce the current trend towards the near-disappearance of fiduciary outs in private company acquisition agreements. Conversely, AI platforms trained to focus broadly on the full range of deal terms used in an expansive set of acquisition agreements could have the opposite effect by prompting sellers’ counsel to assess the potential benefits of including fiduciary outs in their private company sale transactions. If so, it would be quite ironic if AI helped to reinvigorate the open-minded debate over fiduciary outs that survey data has apparently squelched in recent years.
V. Conclusion
The discussion above clearly indicates that most private company sale transactions can be safely pursued with no fiduciary out provisions. But this discussion also suggests that, in certain limited instances, a private company target should vigorously seek the protections afforded by fiduciary outs. In these circumstances, counsel for the target should aggressively pursue the best interests of their client, and resist any attempt by the purchaser’s counsel to use survey data as a blunt weapon to preclude an objective debate over the reasonableness of the target’s position.
Seegenerallydeal points survey data published by the Mergers & Acquisitions Committee of the American Bar Association Business Law Section. ↑
According to survey data on private-target M&A transactions published in 2024 and 2025 by SRS Acquiom Inc., 0 percent and 2 percent of private company sales included fiduciary outs in 2023 and 2024, respectively. Prior SRS Acquiom survey data reflects a slightly higher incidence of these provisions in prior years, whereas a deal points study published in 2023 by the Mergers & Acquisitions Committee of the American Bar Association Business Law Section notes that 17 percent of private company sales in 2008 included fiduciary outs, with the number falling steadily thereafter. ↑
Julian Velasco, Fiduciary Duties and Fiduciary Outs, 21 Geo. Mason L. Rev. 157, 159–160 (2013). ↑
Deborah A. DeMott, The Oxford Handbook of Fiduciary Law (2017), citing Restatement (Third) of Agency (A.L.I. 2006). ↑
Percy v. Millaudon, 8 Mart. (N.S.) 68, 78 (La. 1829); see also Gerald V. Mantese & Emily S. Fields, The Business Judgment Rule, 99 Mich. Bar J. 30 (Jan. 2020). ↑
This article focuses on Delaware law, which has strongly influenced the jurisprudence of other states. ↑
Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173, 180 (Del. 1986) (quoting Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946, 954 (Del. 1985)). See also J. Travis Laster, Revlon Is a Standard of Review: Why It’s True and What It Means, 19 Fordham J. Corp. & Fin. L. 1, 5 (2013) (citing multiple cases cataloguing the financial and nonfinancial conflicts of interest raised by sales of corporate control). ↑
Paramount Communications, Inc. v. QVC Network, Inc., 637 A.2d 34, 51 (Del. 1993) (“QVC”). ↑
William T. Allen, Understanding Fiduciary Outs: The What and the Why of an Anomalous Concept, 55 Bus. Law 653, 653 (February 2000). A target company can also seek a different exemption from its contractual commitments to the acquiror in the form of a “go-shop” provision, whereby the acquiror expressly permits the target to seek competing offers. This article, however, focuses solely on fiduciary outs. ↑
Id. at 656–658. Similarly, in Ace Ltd. v. Capital Re Corp., 747 A.2d 95, 107 (Del. Ch. 1999), Vice Chancellor Leo E. Strine Jr. suggested there were some “limited circumstances” where a board may proceed without a fiduciary out, but he further noted that the absence of a fiduciary out would be “less justifiable” in most change of control transactions requiring a stockholder vote. ↑
Velasco, supra note 3, at 171–175; see also Lou R. Kling & Eileen T. Nugent, Negotiated Acquisitions of Companies, Subsidiaries and Divisions § 4.04 (2025 ed.). ↑
Granted, similar pressures could potentially arise in public corporations, but this dynamic is far more common in private corporations. ↑
Typically, financial advisors are structurally incentivized to close a large number of briskly paced transactions at acceptable prices rather than a materially smaller number of slower-paced transactions at the maximum available price. ↑
Transcript of Oral Argument on Plaintiff’s Motion for Preliminary Injunction and Ruling of the Court, Optima International of Miami, Inc. v. WCI Steel, Inc., No. 3833 (Del. Ch. June 27, 2008) (ruling from the bench). ↑
Practitioners typically assume that Revlon’s enhanced standard of review is inapplicable to a post-closing damages action challenging a transaction not subject to the entire fairness standard if the transaction has been approved by a fully informed, uncoerced vote of the stockholders, citing Corwin v. KKR Financial Holdings LLC, 125 A.3d 304 (Del. 2015) and multiple subsequent cases citing Corwin. ↑
Delaware courts have required directors to fully and fairly disclose material information to stockholders when soliciting their approval, including a duty to provide “accurate, full, and fair” disclosure once the board elects to speak. Arnold v. Society for Savings Bancorp, Inc. 650 A.2d 1270, 1280 (Del. 1994). See also William M. Lafferty, Lisa A. Schmidt, & Donald J. Wolfe Jr., A Brief Introduction to the Fiduciary Duties of Directors Under Delaware Law, 116 Penn St. L. Rev. 837, 848–849 (2012). ↑
For a critique of the Optima decision, see Guy Firer & Adi Libson, Out with Fiduciary Out?, 49 Iowa J. of Corp. L. 138, 33–35 (2023). See also Alexander B. Johnson & Roberto Zapata, Optima Is Optional: Sidestepping Omnicare in Private Company M&A Transactions, Deal Points (Committee on Mergers and Acquisitions, ABA Business Law Section) (Summer 2009). ↑
See the historical data presented above in note 2, which suggests that the incidence of fiduciary outs in private sales agreements over the past twenty years has in fact gradually decreased from being infrequent to nearly nonexistent. ↑
I regularly advise clients on employee separations, and often, clients inquire whether it would be better to style a performance-based separation as a “reorganization.” The answer is almost always no. Quite simply, semantics do not insulate employers from wrongful termination claims. This article addresses best practices for employers with respect to position eliminations and reductions in force (“RIFs”), with a focus on nonprofits.
Most nonprofit employees are at-will employees, meaning that they can be terminated for any reason or no reason, except an unlawful reason. The employer must be able to prove that a legitimate business reason prompted the termination. A position elimination or a RIF prompted by a strategic reorganization is a legitimate business reason for an employee termination.
Simple, right? Well, not exactly. Assume that you eliminate a position due to a strategic reorganization. An aggrieved employee may argue that the position elimination was a pretext for an unlawful motive. The nonprofit organization must be able to prove otherwise. But how? The following practical advice sets forth best practices for structuring lawful position eliminations and reorganizations.
1. Identify the Triggering Event.
A position elimination or reorganization is a strategic undertaking that should be orchestrated with great thought and memorialized in written business records. A range of events may trigger a reorganization. Perhaps the organization is facing some sort of financial exigency. Perhaps a consultant identified redundancies or gaps in organizational structure. Perhaps a recently appointed executive director desires to pursue a new vision and, in so doing, de-emphasizes old priorities. Whatever the underlying motive for the position elimination or reorganization, it should be documented at the outset of restructuring efforts in an internal memorandum or emails among senior leadership.
2. Identify Relevant Policies and Contracts.
While it is most common for nonprofit organizations to execute written contracts only with the CEO or executive director, sometimes, nonprofits execute written employment agreements with other senior-level executives as well. Employment contracts may influence how an employer carries out a position elimination or reorganization. You must read contractual terms carefully, in consultation with counsel, if a potential reorganization implicates an employee with an employment contract. Similarly, an employee handbook may guarantee employees certain procedural protections in connection with position eliminations or reorganizations. As is the case with all policies, you must follow your policies to a tee.
3. Consider Alternatives.
Especially when a reorganization is driven by financial strain, leadership may want to evaluate alternative options. Might a furlough allow the employer to recover enough costs to continue standard operations during a financial downturn? Might salary reductions (if federal and state law allow them) save enough money to carry the organization through the end of the fiscal year without eliminating any positions? Might voluntary sabbaticals, voluntary leaves of absence, or voluntary separations allow for cost savings? Would a hiring freeze allow unrestricted funds to be reallocated? Is it possible to freeze staff overtime to recapture enough funds to continue operations without interruption? It may be that the only sound business decision is to eliminate a position, but alternatives should be considered if they exist.
4. Establish and Document Objective Selection Criteria.
Once you have determined that a reorganization is necessary (whether it ultimately impacts one position or more), establish and document lawful and objective selection criteria, consistent with the business needs of the organization. Objectivity is key: The most defensible criteria are objective criteria. A nonexhaustive list of objective selection criteria includes but is not limited to:
Elimination of grant that previously funded the equivalent of one or more full-time employees
Organizational redundancies that could be consolidated more efficiently
Outsourcing certain responsibilities to contractors for financial cost savings
Program discontinuation
Length of service to the organization
Job classification
This is just a sampling. While it is not unlawful to consider job performance as a component of a lawful RIF, it does open the door to arguments about pretext, so proceed with caution.
Once you have identified objective selection criteria, memorialize the criteria in writing in a business record. This could be through a memorandum or an email. Most optimally, have a separate decision-maker approve the recommendations. For example, the chief operating officer or human resources director could present the objective criteria as recommendations to the executive director in an internal, confidential memorandum, with the executive director approving the objective plan. Though not required as a matter of law, this kind of arrangement best shields the organization from individual employee claims that the position elimination or restructuring was a pretext for intentional discrimination targeting a single individual.
5. Conduct a Case-by-Case Analysis.
No employee termination is without risk. In consultation with counsel, conduct a case-by-case risk analysis looking at each impacted employee. Did any of the impacted employees recently blow the whistle on alleged fraudulent activity? Take protected leave to care for themselves or a family member? Report discrimination or harassment? Participate in an internal investigation? Disclose a disability or request a disability accommodation? These are protected activities, and while none of these facts preclude you from proceeding with a position elimination or a reorganization, they do impact the risk of doing so, especially when the protected activity occurs in close proximity to the adverse action (position elimination). The risk calculus may inform whether to offer severance pay (in exchange for a release of all claims) and how the organization structures severance packages.
6. Conduct a Disparate Impact Analysis.
You should also analyze the impact of the reorganization on employee diversity, again in consultation with counsel. Imagine that you employ ten full-time employees. You must eliminate five positions. As it turns out, all five of the separated employees are over age sixty, and all five of the retained employees are under age thirty-five. The optics of this outcome are not ideal and again impact the risk calculus. In this circumstance, you will want to make sure that biases did not infect the process in any way, such that a separated employee could reasonably suspect that age discrimination played a role in the decision. As with the case-by-case analysis, the disparate impact analysis may also inform whether to offer and how to structure severance packages.
7. Consider Severance Packages.
Reorganizations usually are not based on performance. Almost always, they take place at no fault of the separated employee or employees. When equipped with the financial resources to do so, nonprofit organizations typically offer severance packages to separated employees in exchange for a full release of all claims. Nonprofit leaders sometimes want to offer transition services (usually at a de minimis cost to the employer) as part of severance packages to help separated employees obtain new employment. Where an employee separation results from a position elimination as opposed to performance concerns, severance packages often guarantee a positive or mutually agreed-upon job reference. The terms of any severance package are negotiable, although again, it will be important to cross-check internal policies, as some employee handbooks specify a minimum amount of severance for position eliminations.
Conclusion
Getting back to the original question—would it be better to call it a reorg? At the end of the day, semantics are meaningless unless you can show your work. Only then can you overcome a claim that the legitimate business reasons underlying the decision to eliminate a position are not a pretext for an unlawful motive.
For more information, please contact the author at [email protected].
A German attorney, a New York attorney, and a Canadian attorney walk into a bar and stay until last call. Despite the mental lubrication of the bar’s finest offerings, they only agree that they all disagree on what the word “knowledge” means and what a “legal opinion” is. Such is the murky world of cross-border legal opinion practice.
In an effort to bring clarity, an esteemed “who’s who” of experts in the world of legal opinions convened in Toronto in September 2025 for a sober yet animated panel discussion on the underlying work required to support a firm’s legal opinion, and—with the help of Canadian counsel—a comparative United States / Canada cross-border analysis on the same subject. The discussion examined the best practices, including what qualifies as “customary diligence,” the universe of authoritative literature, and how firms teach their teams the skills and knowledge to properly form and issue opinions.
The panel was moderated by Christina M. Houston, partner at DLA Piper (Wilmington, Delaware), and featured Arthur A. Cohen, partner at Haynes and Boone, LLP (Houston, D.C., and NYC); Aaron S. Emes, partner at Torys LLP (Toronto); Timothy G. Hoxie, of counsel at Jones Day (San Francisco); Ettore A. Santucci, partner at Goodwin Procter LLP (Boston); and Steven O. Weise, partner at Proskauer Rose LLP (Los Angeles). Karina S. Oshunkentan, counsel at Haynes and Boone, LLP (Washington, D.C.), was the materials coordinator. The program was sponsored by the firm of Young Conaway Stargatt & Taylor, LLP (Wilmington, Delaware) (where this author is an attorney).
Customary Practice in Opinion Giving
The concept of “customary practice” provides both a safeguard and a responsibility for attorneys. Weise informed the audience that “the various restatements of torts and of the law governing lawyers have said that in testing whether you were negligent or not, an important component is customary practice and customary diligence.” Therefore, the stakes are high. Weise continued, “Understanding what customary practice requires and what it means, and what you should do, is going to be critical if you ever have to defend a lawsuit on an opinion letter.”
In discussion, Weise and Cohen explained that a lawsuit could be based on the tort of misrepresentation, but that a legal opinion recipient can only sue on the grounds of something it would have been reasonable to rely upon. Weise stated that “the recipient expects, reasonably, that you are going to follow customary practice,” and the recipient cannot “reasonably expect more than what customary practice might call for.” Cohen humorously summarized, “They can’t. [Because i]t’s not reasonable.” According to Hoxie, an “opinion recipient is entitled to expect the giver has acted within customary diligence, [and . . . an] opinion giver is entitled to expect the recipient is to be aware of customary practice.”
Because each transaction is unique, Cohen explained that what an opinion author needs to do “is a function of your professional practice as modified by customary practice.” If you diverge from customary practice, it should be disclosed through a carve-out or assumption. So how does an attorney know if they have met the bar of customary practice?
Opinions Determine the Diligence
Hoxie advised opinion givers to ask themselves, “What opinion am I giving, and what is required to support that opinion?” The set of opinions being given informs the customary diligence required to back those opinions; and customary diligence is comprised of factual diligence and legal diligence. Diligence requires understanding what facts are needed to reach a conclusion, and how to determine those facts. Through those specific and established facts, opinion givers apply the law.
Factual diligence is an important focus because while the facts vary, the law usually does not. Hoxie observed therefore that “usually, if there is a problem, it is a factual issue and not a problem of understanding the law.” But opinion givers should be aware that endless diligence is not a workable solution to uncertainty. According to Weiss, “Customary diligence is a floor, but it is also a ceiling.” He further explained, “Customary diligence also has a cost-benefit analysis: What does it make sense to do in a deal? Is it cost effective for the transaction?” When push comes to shove on feasible diligence, Hoxie and Cohen agreed that divergence from customary diligence is okay if it is clearly disclosed and the parties relying upon the opinions understand what has been done.
Reports prepared by the TriBar Opinion Committee (“TriBar”) provide significant guidance for opinion givers, including what various opinions mean and what is needed to produce them. But each circumstance, transaction, and governance scheme creates a case-by-case determination for what is necessary and customary. The TriBar Reports and a trove of other opinion resources are available online at the Legal Opinions Resource Center, which Hoxie called “the best one-stop compendium of all of this literature.” These publications and reports study and document what becomes considered customary practice and customary diligence. State and local bar associations also often have publications, which might be most relevant to opinions in particular fields.
Cross-Border Comparisons
“Local customs and practice matter a great deal,” according to Santucci. Santucci stated that it is a “bedrock principle” that “U.S. lawyers giving third-party legal opinions in cross-border transactions rely on the same customary practice on which they rely when they give domestic opinions.” However, those practices cannot be applied to contracts governed by non-U.S. laws.
The discussion revealed that customary practice is far less consistent across national borders than state borders. Santucci provided a few examples of varying global practice. In London, “legal opinions are part of client advice, and not a legal opinion at all.” In Germany, “an opinion is a lawyer’s reasoned analysis of applicable law, often coming to no conclusion at all.”
Perhaps given their proximity, U.S. and Canadian legal opinions are more alike. It is understood that the laws covered in a U.S. or Canadian legal opinion—and therefore the analysis provided—are only the laws of the jurisdiction covered (if stated), and only the laws an experienced lawyer in the relevant jurisdiction would think are applicable and appropriate. In the United States and in Canada, tax, securities, and antitrust laws are customarily understood to be excluded unless expressly covered.
Emes detailed further similarities between Canada and U.S. legal opinions:
Choice of law opinions are given in Canada, subject to public policy exception, the same as in the United States.
Enforcement of foreign judgements opinions are based on common law, but Canada does not require reciprocity for enforceability.
Enforcement of foreign arbitral award opinions are almost identical to those given in the United States.
Emes also noted some differences between Canadian and U.S. practice, including the following:
Unlike in U.S. practice, Canadian practice will provide underwriting agreement enforceability opinions, but they include indemnity carve-outs because of the possibility of a court taking a public policy position on indemnity.
Intellectual property opinions are not common in Canadian practice, so U.S. practice is influential in those opinions.
Negative assurance letters are not given in domestic opinions, but they can be given in cross-border opinions with a disclaimer regarding the meaning of “material facts” (which relates to “knowledge”).
Good standing opinions are not given; the relevant Canadian authorities provide certificates of corporate status, which only state that an entity is not dissolved.
Given the complexity of cross-border opinions, Santucci recommended a foolproof methodology for cross-border practitioners: “Start every cross-border opinion not with a form of opinion, but with a chart: Who is doing what to whom, where, and—ideally—why and how. And then annotate that chart with choice of law and forum selection.” The 2023 publication “Good Practice in Cross-Border Legal Opinion Practice” is also recommended as an excellent resource.
Conclusion
When preparing a legal opinion letter, an author should identify the facts required to come to a sound legal conclusion. The legal standards relevant to that law define the relevant facts, and customary practice and the contours of the transaction itself define the customary diligence.
Learning the facts and the law are often easier than learning customary practice. But learning customary practice is essential for competency in the practice of opinion giving. Therefore, maintaining knowledge of customary practice is a communal project of conferring with colleagues directly and through legal publications.
Just as languages—and accents within the same language—vary as the globe rotates, customs vary as well, including the customs underpinning legal opinions. To avoid any misunderstandings, cross-border opinion givers should use extra care when entering murky international waters.
Thankfully, we are not in the “age of discovery” with opinion practice, and there are many experts and resources to rely upon both for domestic and cross-border opinion giving.
This article reports on a CLE program titled “What Work Do You Need to Do to Support a Legal Opinion? A Cross-Border Perspective,” which was presented during the ABA Business Law Section’s 2025 Fall Meeting. To learn more about this topic, view the program as on-demand CLE, free for Business Law Section members.
The exclusions clause of an insurance policy sets forth a series of exceptions to coverage under the policy, either as to types of event or subject matter or as to types of loss.[1] Unlike other clauses of an insurance policy, for which the burden of proof is typically on the insured, in the case of the exclusions clause of an insurance policy, the burden of proof is typically on the insurer.[2] Insurance policy exclusions are like wolves in the fold: they prey on events, subject matters, or losses that would otherwise be covered by the policy.
However, in a modern representation and warranty insurance (“RWI”) policy, the fines or penalties exclusion has evolved to become a sheep in wolf’s clothing. The typical fines or penalties exclusion in a modern RWI policy effectively acts to confirm coverage for fines or penalties[3] unless a very rigorous series of conditions can be met by the insurer that would exclude coverage. This article sets forth a typical example of the fines or penalties exclusion in a modern RWI policy[4] and explains how the exclusion should be applied and interpreted in furtherance of its inclusionary effect. This inclusionary effect can be particularly significant for RWI policies written in industries such as healthcare, where fines and penalties can represent one of the most significant potential risks of a regulatory representation and warranty breach.
Example of the Exclusion
An example of the fines or penalties exclusion in full is as follows:
The Insurer shall not be liable to pay, nor shall the Retention be eroded by, that portion of any Loss to the extent that such portion constitutes:
. . .
(ii) fines or penalties, but only if such fines or penalties are prohibited at law from being insured as to the Named Insured under the applicable law of the Most Favorable Jurisdiction;
An example of a Most Favorable Jurisdiction definition in full is as follows:
Most Favorable Jurisdiction means, with respect to the interpretation of coverage for fines and/or penalties under this Policy, the law of the jurisdiction most favorable to the insurability of fines and penalties, provided that such jurisdiction either: (1) has a substantial relationship to any Insured, the matter in which the fines or penalties were imposed, the claim for which the fines or penalties were imposed, or the conduct or occurrence for which the fines or penalties were imposed; (2) is the state in which the Insurer is incorporated or maintains its principal place of business, or where this Policy was made, or the laws of which govern this Policy pursuant to the governing law provision of this Policy; or (3) is any other jurisdiction the laws of which could be chosen by the parties to apply to this Policy, such matter, and such interpretation and which would allow such insurance of the Named Insured with respect thereto.
Anatomy and Meaning of the Exclusion
“but only if such fines or penalties are prohibited at law from being insured”
Meaning of This Portion of the Exclusion
In early versions of RWI policies, the exclusion for fines or penalties often began and ended with “fines or penalties.” However, the exclusion evolved to add everything that follows “fines or penalties,” starting with the phrase “but only if.” The effect of that phrase is to nullify the exclusion for fines or penalties unless each of the conditions following that phrase is met. Effectively, the added language turns the exclusion on its head.
That turning on its head starts with the phrase “are prohibited at law from being insured.” If and only if applicable law prohibits fines or penalties from being insured does the exclusion even potentially come into play to preclude coverage.[5]
Applicable Law as to the Exclusion
No RWI Law Prohibiting the Insurability of Fines or Penalties
The first problem for an RWI carrier trying to meet its burden of proving that the fines or penalties exclusion applies to prohibit insurability is the dearth of applicable law prohibiting fines or penalties from being insurable under an RWI policy.[6] Because of the unique nature of an RWI policy, as discussed below in the “as to the Named Insured” section, an insured can (and should) take the position that recourse to applicable law regarding other types of insurance policies or other types of loss is inapposite.
Very Limited Law as to Other Types of Insurance Policies
Even as to non-RWI types of insurance policies, there is very little in the way of applicable law.[7] Moreover, what limited reported law that does exist rarely provides a bright-line rule prohibiting insurability in all cases, focusing instead on the type of violation (in particular, whether it was criminal or civil); the measure of culpability (such as intent, recklessness, negligence, moral reprehensibility, or moral turpitude);[8] or the purpose of the fine or penalty in question (such as punishment, deterrence, or compensation).
In any event, even if law applicable to other types of insurance is determined to be relevant, a threshold question is whether the exclusion requires a determination as to the specific type of fine or penalty, the measure of culpability, or the purpose of the law, or whether instead the exclusion only applies if the jurisdiction in question has a bright-line rule prohibiting the insurability of fines or penalties in all instances.[9]
Analogous Law Regarding the Insurability of Punitive Damages
The most analogous issue of law regarding insurability of fines or penalties is insurability of punitive damages. However, there is no RWI law prohibiting the insurability of punitive damages. Thus, an insurer trying to meet its burden of proving that the fines or penalties exclusion in an RWI policy is applicable would have to establish not only that applicable law prohibits the insurability of punitive damages but also that this prohibition is so analogous as to compel the conclusion that fines and penalties are not insurable under an RWI policy. Such a conclusion is a bridge too far.
“as to the Named Insured”
Meaning of This Portion of the Exclusion
This portion of the exclusion means that the determination of insurability of fines or penalties is to be made as to the buyer, which is almost always the named insured in a buyer-side RWI policy.[10] However, the insured that is the subject of the wrongdoing that gives rise to the fines or penalties assessment in question will in all instances have been a member of the target group prior to the acquisition of the target by the buyer, when the target group was still owned by the seller.
Why the Focus on the Named Insured Makes a Difference as to the Exclusion
Requiring the insurability determination to be made as to the named insured may well be the most inclusionary aspect of the fines or penalties exclusion. In many jurisdictions, the reason for prohibiting insurability of fines or penalties is public policy based on moral hazard: that an insured will “exercise less care to avoid incurring an insured loss than would be exercised if the loss were not insured.”[11] In other jurisdictions, the public policy rationale for prohibiting insurability is to require the wrongdoer to bear the responsibility and consequences of the wrongdoing—and, in particular, fines or penalties imposed by a governmental agency for the wrongdoing. By shifting the focus of the insurability determination to the buyer instead of the member of the target group whose wrongdoing caused the fines or penalties to be imposed, the fines or penalties exclusion puts the insurability determination in the best possible light to favor coverage.
The unique nature of RWI comes into play as to both public policy rationales. The normal insurance context for a public policy prohibition is liability insurance, including directors’ and officers’ (“D&O”) and errors and omissions (“E&O”) insurance. For liability insurance, the insured risk is prospective. The insured (or its parent organization) arranges insurance for the purpose of protecting itself from loss for wrongdoing of the insured that has not yet occurred and therefore is unknown.
In the RWI context, the insured risk is retrospective, even though the consequences may be prospective. The buyer arranges insurance for the purpose of protecting itself from loss for wrongdoing by a member of the target group that occurred prior to the acquisition and is unknown to the buyer.[12] The seller, rather than the buyer, will have been the owner of the target group at the time of the wrongdoing, and the loss incurred by the buyer will be to the value of the target business it acquired. It is this unique nature of RWI that should make the shift in focus to the buyer as named insured conclusive as to the determination of insurability of fines or penalties in favor of coverage.[13]
“under the applicable law of the Most Favorable Jurisdiction”
Meaning of This Portion of the Exclusion
This portion of the exclusion has the effect, through the definition of Most Favorable Jurisdiction, of requiring the determination of insurability to be made as to a number of potential jurisdictions. If, and only if, all such jurisdictions prohibit the insurability of fines and penalties does the exclusion apply.[14]
Why the Focus on the Most Favorable Jurisdiction Makes a Difference as to the Exclusion
The focus on the Most Favorable Jurisdiction likely seals the deal in favor of coverage of fines or penalties as it relates to the RWI policy exclusion, even if there is still a question after applying all the other factors in favor of insurability.[15] Choosing among a number of potentially applicable jurisdictions under the “Most Favorable Jurisdiction” definition and still ending up with a prohibition of insurability is hard to imagine.
Conclusion
A fines or penalties exclusion in an RWI policy that looks anything like the example provided in this article should not be feared, but instead embraced, by attorneys for insureds. Even though it is among exclusions and appears to be one, it contains inclusionary considerations that effectively make it an “anti-exclusion.”
Practice Tips for Attorneys for Insureds
Consider the following:
In the policy arrangement and negotiation phase, try to get a fines or penalties exclusion that looks like the example provided.
If the exclusion says anything more than “[criminal/civil] fines and penalties,” it may be more of an inclusion than an exclusion.
Be prepared to push back on any attempt by the insurer to deny coverage based on such an exclusion, including emphasizing the burden of proof being on the insurer.
Search for applicable law specific as to RWI, and if there continues to be none, be prepared to make your stand on that basis as to any analogy assertions, based on the unique nature of RWI.
Consider how any public policy consideration might apply differently to a buyer who did not own the target group at the time of the wrongdoing in question.
Be prepared to assert the M&A indemnification replacement argument in favor of coverage, particularly if there continues to be no unfavorable law in that context.
Review the “Most Favorable Jurisdiction” definition carefully, and be prepared to try to stretch its boundaries.
Watch out for rules/regulations applicable to the fines or penalties in question that contain their own prohibition on insurability.
Consider the purpose of the fines or penalties in question, specifically whether they are criminal in nature and have a punitive or deterrent purpose, but even then be prepared to push back on a denial of coverage that is based on such an exclusion.
This article is the fifth in the RWI Practice Insights series by John T. Capetta.
This article focuses on U.S. RWI policies and U.S. law. For an excellent compendium of the laws of other countries regarding the insurability of fines or penalties under directors’ and officers’ (“D&O”) insurance policies, see Dominik Skrobala, et al., A Global Guide to the Insurability of Fines and Penalties, Marsh / Clyde & Co(Oct. 19, 2022) (available in the “Insights” section of each of those firms’ websites). This article also focuses on buyer-side RWI policies. Whether a public policy argument regarding insured wrongdoing may have more purchase in the case of a seller-side RWI policy is beyond the scope of this article. ↑
Although, under applicable law, the burden of proof typically shifts back to the insured with respect to the applicability of an exception to an exclusion, see, e.g., E.I. du Pont de Nemours & Co. v. Admiral Ins. Co., 711 A.2d 45, 53–54 (Del. Super. Ct. 1995), the inverted wording of a typical fines or penalties exclusion (i.e., fines or penalties are excluded but only if coverage is prohibited under specified applicable law based on very limited conditions) should mean that the burden of proof is on the insurer fully to prove the applicability of the exclusion. ↑
This effect of the fines or penalties exclusion is sometimes referred to in this article as the “inclusionary effect.” ↑
No distinction is made in this article between exclusions for criminal fines or penalties and for civil fines or penalties, even though some RWI policies have separate exclusions for each type. As discussed in this article, whether a fine or penalty is criminal or civil in nature, regardless of whether it is technically so classified, may be relevant to a determination of insurability. ↑
However, see the discussion later in this article about whether the inclusionary effect of this exclusion can ever overcome an actual prohibition of insurability under applicable law. ↑
This dearth of law may simply be a function of the dearth of case law regarding RWI policies generally, resulting from the prevalence of settlement or arbitration as the method of resolving RWI policy coverage disputes. However, even in the case of indemnification for a private company acquisition, where the formal method of resolving a dispute is more likely to be a judicial proceeding, there appears to be a dearth of case law to the effect that the acquiror cannot be indemnified by the seller for a fine or penalty incurred by a target company with respect to a third-party claim. ↑
The term law in this context may refer to case law, statute, or regulation/rule. For a discussion of the insurability of civil fines or penalties under law generally, see Kenneth S. Abraham, The Insurability of Civil Fines and Penalties, Torts, Trial & Ins. Prac. L.J. (Fall 2023). ↑
Many liability insurance policies, including D&O and errors and omissions (“E&O”) policies, contain “conduct” provisions that may serve to exclude coverage for losses such as criminal fines or penalties, even in the absence of a provision in the policy’s exclusions clause to that effect. And some liability insurance policies provide coverage only for “damages,” which some courts have construed to exclude fines or penalties. RWI policies do not include comparable conduct and loss limitation provisions. ↑
In this regard, whether the antecedent such in “such fines or penalties” in the exclusion is intended to be all fines or penalties or the specific fines or penalties in question is indeterminate. ↑
While it is conceivable that a different insured in the buyer group could be the named insured in a buyer-side RWI policy, there is no good reason for a different insured to be the named insured and many good reasons for the buyer to be the named insured. ↑
The buyer will, among other things, sign a no-claims declaration (“NCD”) to help ensure that any insured risk is unknown to the buyer. ↑
In the context of M&A indemnification, the buyer is normally seeking indemnification from the seller, which owned the target group at the time of the wrongdoing. This may help explain the dearth of M&A cases in which the seller tries to assert a public policy rationale to prohibit its indemnification of the buyer for fines or penalties. That RWI functions as a replacement for most or all seller indemnification in the private company acquisition context should be a factor favoring coverage of fines or penalties. ↑
How a jurisdiction could prohibit insurability and still be the Most Favorable Jurisdiction as to insurability is a mystery. ↑
One important caveat here: the inclusionary effect provisions of the exclusion only apply to the question of whether the RWI policy exclusion applies. If there is a jurisdiction out there with laws that apply to the question of whether the RWI policy covers fines or penalties, and those laws prohibit insurability, then the insurer could still try to deny coverage based on that prohibition. However, the named insured then should assert the inclusionary effect of the RWI policy exclusion as evidence that it was the intent of the insurer and the named insured to provide coverage of fines or penalties. ↑
Generally, a debtor-in-possession may assume or reject any executory contract. Franchise agreements are integral assets in a franchisee debtor’s bankruptcy case. The agreements often represent the core of the business operations—controlling brand identity, trademarks and licenses, system operations, and other essential resources. The issue of whether, and to what extent, a debtor franchisee may assume a franchise agreement over the franchisors’ objection has created a deepening divide among courts interpreting section 365 of the Bankruptcy Code. There are also considerable concerns about conflicts with federal law governing intellectual property, including the Lanham Act.[1] Circuit court decisions on the issue reflect differing interpretations of section 365(c)(1) of the Bankruptcy Code. This article considers the varying legal approaches to resolving the issue; recent developments in the law; and practical implications for franchisors, franchisees, and counsel.
I. The Legal Frameworks: Hypothetical v. Actual Tests
Active franchise agreements are, by their nature, executory.[2] Such contracts depend on continuing performance and cooperation of both the franchisor and franchisee. Often, the franchisor holds a trademark and other intellectual property that it licenses to the franchisee for use subject to certain payment and compliance conditions.[3] Section 365(c)(1) of the Bankruptcy Code prohibits a trustee (or debtor-in-possession) from assuming or assigning an executory contract where applicable nonbankruptcy law excuses the nondebtor party from accepting performance or rendering performance to a party other than the debtor.[4] The apparent purpose of the statute is to preserve the rights of nondebtor parties to a franchise agreement. In the franchising context, the rights at issue include prohibitions against third-party assignment under the Lanham Act.
In determining whether the prohibition is applicable in a particular case, courts have taken varying approaches to interpreting section 365(c)(1) of the Bankruptcy Code. Those courts employing the “Hypothetical Test” examine nonbankruptcy law and preclude assumption where such law would prohibit a debtor from assigning the agreement, regardless of whether a third-party assignment is proposed or intended to be made. Theses courts, including the Third, Fourth, Ninth, and Eleventh Circuit Courts of Appeal, center their analysis on a plain reading of the statute irrespective of the subjective intent of the debtor-in-possession.[5] Some objectors also maintain that an assumption by a debtor estate necessarily results in an assignment to an entity other than the one that contracted for the prebankruptcy use rights. Courts applying the “Actual Test,” including the First and Fifth Circuit Courts of Appeal, consider the intent of the debtor and whether there is actual risk to the nondebtor party (franchisor) of being compelled to accept performance from a third party.
Applying the Hypothetical Test, a Western District of Pennsylvania bankruptcy court determined a purported exclusive license granted to a debtor as licensee of two software patents could be assumed by the trustee under a bankruptcy plan. The court acknowledged that patent license agreements are generally nonassignable, but it focused on language in the agreement authorizing assignment to “successors in interest.” The court determined the language was sufficient to meet the Third Circuit’s Hypothetical Test, overriding the general prohibition against assignment and allowing assumption by the trustee.
In its application of the Hypothetical Test, an Eastern District of California bankruptcy court recognized the often-devastating effects this test has on a Chapter 11 debtor’s ability to reorganize. Indeed, the court referred to the franchisor creditor’s ability to withhold consent as an effective veto power. But compelled by Ninth Circuit precedent and applicable nonbankruptcy law prohibiting assignment without consent—the Lanham Act and California’s Franchise Relation Act[8]—the court denied the debtor’s motion to assume the franchise agreement.
Applying the Actual Test, a Southern District of Ohio bankruptcy court determined that a debtor-in-possession would not be prohibited from assuming a franchise agreement, where it had no intention of assigning the franchise agreement to a third party. Considering the facts, the court reasoned that assumption by the debtor presented no risk to the franchisor of having to accept performance from or provide performance to a third party. Under the circumstances, prohibiting assignment was unwarranted.
III. Statutory and Policy Considerations
Proponents of the Actual Test maintain that a strict focus on a plain reading of section 365(c)(1) of the Bankruptcy Code contradicts bankruptcy policy objectives of facilitating successful reorganizations and maximizing the value of estate assets. The argument is that no creditor should be allowed to effectively veto a debtor’s ability to reorganize in bankruptcy.
Advocates of the Hypothetical Test, meanwhile, point to the intellectual property rights bestowed on patent and license holders to limit the transfer of their intellectual property and exert exacting standards for consent.
IV. Practical Implications for Business Lawyers
For the franchisee debtor, there is no question that the ability to retain the franchise agreement is critical.
Key considerations for business lawyers advising on franchise agreement assumption in bankruptcy include:
Status of the agreement as of the petition date (i.e., default history, termination, etc.)
Applicable law governing assignment
Intent of the debtor (i.e. assumption, assignment, or both)
What intellectual property is involved
Whether rights and restrictions (such as IP licenses and limitations) are bundled in a single agreement or separate
Jurisdictional authority on assumption and assignment
Venue selection
Monique D. Hayes and Miles Taylor are co-chairs of the ABA Business Bankruptcy Committee’s Executory Contracts Subcommittee.
Lanham Act, Pub. L. No. 79-489, Ch. 540, 60 Stat. 427 (1946) (codified as amended in scattered sections of 15 U.S.C.). ↑
An executory contract is “a contract under which the obligation of both the bankrupt and the other party to the contract are so far unperformed that the failure of either to complete performance would constitute a material breach excusing the performance of the other.” Vern Countryman, Executory Contracts in Bankruptcy: Part I, 57 Minn. L. Rev. 439, 460 (1973). ↑
Evans v. S.S. Kresge Co., 394 F. Supp. 817, 844 (W.D. Pa. 1975). ↑
In re Trump Ent. Resorts, Inc., 526 B.R. 116, 125 (Bankr. D. Del. 2015); RCI Tech. Corp. v. Sunterra Corp. (In re Sunterra Corp.), 361 F.3d 257, 269 (4th Cir. 2004); Perlman v. Catapult Ent., Inc. (In re Catapult Ent., Inc.), 165 F.3d 747, 754 (9th Cir. 1999); United States v. TechDyn Sys. Corp. (In re TechDyn Sys. Corp.), 235 B.R. 857, 861–62 (Bankr. E.D. Va. 1999). ↑
In re Crivella Holdings Ltd. v. MeSearch Media Tech. Ltd. (In re MeSearch Media Tech. Ltd.), 668 B.R. 828 (Bankr. W.D. Pa. 2025). ↑
