Almost three years ago, the ABA Business Law Section launched businesslawtoday.org, the Section’s premier digital platform for timely content on business law topics. The launch culminated a two-year project, in which I was part of a task force assigned to “reimagine” the Section’s longstanding print magazine, led by indefatigable former Section chair Chris Rockers. Our project ultimately resulted in a complete overhaul of how the Section sources, distributes, features, and promotes articles and other content from across the Section’s committees, and thanks to the leadership of Chris and the hard work of the other members of the task force, we were able to launch an entirely new BLT website in the late fall of 2017. This is my look back at that project and my tenure as BLT Editor-in-Chief, along with some highlights of how BLT may develop further after I hand the job over to new Editor-in-Chief Lisa Stark this September.

Reimagining… Content Distribution and Organization

Part of the goal in shifting to a web-based format was to bring more content to members more frequently and in new formats. Based on market research and member surveys, we decided to focus on providing shorter articles and topical month-in-brief-pieces that could be edited and posted to the site quickly. And we wanted to do this with a fresh look and feel in an easily navigable format, with plenty of links to related relevant content but without too much clutter. With the help of outside designers and strategy consultants hired for the “Reimagine BLT” project, we tried to focus on members’ user experience to make sure readers would easily find what they were looking for and would have plenty of reasons to frequently revisit the site.

When the site launched in November 2017, these were the key elements of the new BLT:

• 8 Practice Areas and 36 Topics.

Rather than organizing the site around the Section’s 52 substantive committees and relying on each of them to fill an allocated slot with content, we created 8 larger “Practice Areas.” These serve as general silos in which to gather written articles and other content that has some loose connection or logical relationship but not a uniform source. Each Practice Area is organized into 2 or more Topics, with a total of 36 topics across the website. With this content hierarchy, written pieces from many individual members and multiple committees might end up organized in the same section of the site, increasing the diversity of contributors and perspectives and offering an organizational scheme that is intuitive regardless of a reader’s familiarity with the Section’s committee structure.

• Heightened Author Recognition.

We wanted to make sure the site would highlight its authors and their contributions in a way that would encourage members to continue to write for BLT and that would invite new authors to contribute. At the end of each article, the site features an author photo and the author’s bio (of whatever desired length) with links to his or her other articles and related content.

• Month-in-Briefs—Short, Timely, Targeted.

Along with short, non-law-review-format articles on all of BLT’s topics, the site launched with its new “Month-in-Brief” pieces. These are very short and timely alerts about recent cases and legislation in each of the Practice Areas, and they are designed to make sure members always find something timely and useful on the site in each of the areas of law they follow.

• In Front of the Paywall.

Another important decision made at launch: the website is accessible to all. You don’t have to log in as a Section member in order to access nearly all its content, apart from a handful of reprinted articles from the Section’s academic journal, The Business Lawyer. The purpose was to promote Section content to business law practitioners and others beyond our membership. And with nearly half of web traffic to the site coming from organic search (Google and other search engines) over the last year, it is very likely many new readers are seeing the written work of Business Law Section members through BLT.

• In Living Color.

Not only did the site launch with a new logo, it added color, images, and design elements to BLT. We wanted to make sure the site was modern, fresh, and lively, and we think the images and design elements of the site add to a lively and engaging experience.

Reimagining… Content Elements

Right away we understood something our consultants warned us about: a good and useful website can’t be static—it will always need corrections, additions, and enhancements. BLT leadership has never been without a long and always-changing wish list of additional elements for the site, although we have realized some of our further goals for augmenting user experience and layering in more types of content. These include:

• Video

In 2018 we began posting interviews of Section authors, speakers, and members recorded from a BLT stage area within the Section lounge at each BLS Spring and Annual meeting. These video interviews picked up where we left off with the old “Member Spotlight” series, composed of written interviews included periodically in the old BLT magazine. We expanded them to include “Author Spotlight” and “Program Spotlight” interviews, highlighting the work of the Section’s prolific authors and program chairs and speakers. Expect more of these interviews and new types of interviews in the months to come.

• Business of Law

In 2019 we added a new top-level menu to the site, our new “Business of Law” practice area, with underlying topics Pro Bono, Diversity & Inclusion in the Profession, Professional Development, and Law Practice Management. Since the beginning, many Section members had asked for a place on BLT to post content in these areas, and we were happy to add a place for content that many Section committees and members have written about, and cared deeply about, for a long time.

• Podcasts

Earlier in 2020 the Business Law Section launched its “To the Extent That…” podcast series, and we quickly made a place on BLT where all Section podcasts can be accessed. Look for more additions in the months to come.

Reimagining… Content Promotion and Marketing

We have also expanded the ways in which BLT can be used as a resource for coordinating, promoting, and advertising the Section’s content and the many webinars and events the Section produces. The home page features promotion of upcoming webinars, which are free for Section members, and the site also now features advertisements for Section books.

Moving into the 2020–2021 bar year, our readers can expect to discover more features and more opportunities to engage with the Business Law Section through BLT. We will offer more video content on the site, more access to podcasts and other audio content through the site, and more ways for our committees, sponsors, and advertisers to connect with our members.

…Even more than we imagined!

By this year’s Virtual Section Annual Meeting, Businesslawtoday.org will have reached important milestones: In the 2019–2020 bar year, we will have distributed more content than ever through BLT: around 175 articles, 350 month-in-briefs, and 20 video interviews went live on BLT.

With the high volume we have been able to maintain the high quality… but only because of the incredible efforts of our full time dedicated staff and our stellar lineup of incredible volunteers. Huge thanks, kudos, and much appreciation go out to the Business Section’s Content Guru (because he is o-so-much-more than a mere “content guy”) Rick Paszkiet, aka keeper-of-the-slush-pile, aka breakfaster-in-chief. Rick juggles dozens of book projects and brings record-setting numbers of them to the finish line, while keeping his eye on incoming article proposals and managing a deep pile of unsolicited and solicited submissions, from which pieces are periodically selected, tamed, edited, and posted to the site. Meanwhile, double kudos and millions of thanks to fulltime Section BLT editor par excellence, Sarah Claypoole, who has managed the editorial process across the site from day one in a way that looks seamless to the outside and keeps all the glitches, author mishaps, and editorial challenges at bay. And meanwhile, Sarah has developed an uncanny ability to understand and stay on top of the Section’s content creation process across a multitude of committees and personalities, for which she is a tremendous asset to BLT and the Section.

Thank you very much to our Executive and Managing editors who have continued to source our regular month-in-brief pieces… and for the many times you have simply written them yourselves, and to our regular contributors and Contributing Editors. Your work to source, write, edit and simply turn over month-in-brief pieces along with a slew of stellar articles are what makes this site actually work.

As I complete my term as Editor-in-Chief of Business Law Today, I couldn’t be more confident about the coming transition. As of the Business Law Section’s Virtual Section Annual Meeting this September, my vice-editor-in-chief, Lisa Stark, takes over the Editor-in-Chief role. Lisa is an experienced M&A, corporate, and securities lawyer partner with K&L Gates in Wilmington DE, and she is a co-chair of the Jurisprudence Subcommittee of the Private Equity & Venture Capital Committee of the Business Section. Lisa has been a steadfast and indefatigable vice chair and has personally contributed much private equity, partnerships and M&A content to BLT. Thank you, Lisa, for your tremendous contributions to date, and congrats and good luck as you steer things forward.

The mail is slowing down. Packages and letters that used to arrive in days are in some cases taking weeks. Data suggests that since the beginning of July, on-time rates for delivery of first-class mail has slipped by 10–30 percent depending on the area and region. Although much of the focus of the media’s coverage concerning these delays has centered around the upcoming 2020 election and questions surrounding funding for the United States Postal Service (USPS), such delays can create serious issues concerning parties’ commercial agreements. Despite the fact that unquestionably more and more transactions are completed through the exchange of scanned and emailed documents, mailing requirements in contractual agreements are still common and remain a part of how business gets done. Many attorneys may not have thought about the “mailbox rule” since their contracts class in law school, so it is worth reexamining during this period of postal uncertainty.

The Mailbox Rule

The mailbox rule is a common-law concept of contract law that governs the time at which an offer is considered accepted. Section 63 of the Restatement (Second) of Contracts provides that “[u]nless the offer provides otherwise, . . . an acceptance made in a manner and by a medium invited by an offer is operative and completes the manifestation of mutual assent as soon as put out of the offeree’s possession, without regard to whether it ever reaches the offeror . . . .” In other words, an offer is accepted the moment it is placed in the mail. The rule notably excludes option contracts by stipulating “an acceptance under an option contract is not operative until received by the offeror.” Further, although an offer may be revoked at any time prior to acceptance, revocation is typically effective only at the time of receipt, whereas an acceptance is effective upon dispatch.[1]

Issues That May Arise

The Buchbinder Tunick & Co. v. Manhattan Nat’l Life Ins. Co. matter out of New York provides an interesting example of the legal and factual issues that can be at play concerning mailings. The case involved whether an 80-year-old insured in failing health, after falling behind on his insurance payments, timely mailed premium payments to extend his life insurance despite the insurance carrier’s notice of cancelation.

On August 28, Manhattan National Life Insurance Company sent Mr. Buchbinder a letter that it would go on to claim was a reminder that unless he sent payment by August 31, his life insurance policy would be canceled. However, the court rejected the claim that the letter was a reminder based on ambiguous language in the letter that could have been read to extend Mr. Buchbinder’s time to pay for 31 days based off the standard mailing time between New York and Ohio. The court reasoned that because the expected mailing time of the August 28th letter was five days, the letter could not have been intended as a reminder because it would not have been received by the insured until after expiration of his time to make the payment. Accordingly, the court determined the letter was in fact an offer to provide the insured additional time to keep his insurance by making a payment within the next 31 days.

However, after the offer letter, the insurance company’s system autogenerated an additional letter on September 17 canceling the insureds policy for nonpayment. Although the court found that the September 17 letter qualified as a revocation of the prior August 28 offer, on September 24 the insured mailed his premium check, thus accepting the August 28 offer under the mailbox rule. Without a clear answer in the record, the case was remanded to the trial court to answer the factual question of whether the insured received the insurance company’s September 17 revocation, which unlike acceptance of an offer, became effective only upon receipt.

Accordingly, whether the carrier was able to cancel coverage would turn on whether the carrier could prove when it mailed the revocation and, more importantly, when it was received by the insured. Although what ultimately occurred to Mr. Buchbinder’s policy does not appear available in the public record, it is easy to see the uphill battle the insurer would have if this played out in today’s climate. With reports suggesting that as much as 30 percent of first-class mail is delayed, a party may be able to present a compelling case against presuming standard delivery times and that delivery was made by a certain date.

Although things have probably not yet reached a point where courts will bring into question the longstanding doctrine of presumption of regularity, which requires a court to presume a letter or notice that is mailed is received by the addressee, such presumption may become open to attack if conditions worsen. In Republic of Sudan v. Harrison[2], the U.S. Supreme Court found that mail must be sent to a foreign minister’s office in his home country, not the embassy on U.S. soil, to be effective. The Court relied on section 66 of the Restatement (Second) of Contracts, which lays out the standards to ensure that acceptance is actually made upon dispatch. Outside of the “properly addressed” requirement relied on by the Court, section 66 offers insight into “other precautions” that may be relevant in light of recent concerns with the management of USPS:

The other precautions to be taken depend on what is ordinarily observed to insure safe transmission of similar messages. In cases of acceptance by mail, the postal regulations are ordinarily controlling on such matters as the necessity for prepayment of postage. In unusual circumstances, however, as when the mails are stopped by war, reasonable diligence may require more than compliance with postal regulations. Unless the offeror manifests a contrary intention, an acceptance is not effective on dispatch if the offeree knows or has reason to know that it will not reach the offeror.

Accordingly, if the trend of issues with the USPS continues or worsens, arguments may become available that current issues amount to “unusual circumstances” where mailing alone is inadequate.

What To Do?

Although the first answer that comes to mind is to not use the USPS, it is important for businesses to check the specific language in any contract to determine whether a specific method of delivery is required. This is particularly true in the case of insurance agreements, leases, and mortgage contracts, which often contain antiquated boilerplate language. These provisions must be strictly complied with because courts still regularly hold that delivery and notice provisions must be followed in accordance with the specific terms of the agreement.[3]

With that said, there are still some simple steps parties can take to protect themselves:

• Review your agreements and ensure you understand any method of transmission requirements.
• Where the agreement provides for methods beyond the USPS, use those methods.
• Document your mailings: if you are mailing a document that must be sent by first-class mail, additionally send an email providing a copy of the document and memorializing that it was mailed that day.
• Avoid sending offers and revocations that are not effective until receipt by mail and instead use means of instant communication where available.
• Ensure new agreements do not limit the means of notice to the USPS and modify existing agreements to allow for alternative means.
• Expect delays in receiving mailed materials and do not take adverse action until a reasonable time has passed.

Until the issues with the USPS are resolved, attorneys and businesses should take extra precautions to ensure they are protected.

[1] See e.g., Buchbinder Tunick & Co. v. Manhattan Nat’l Life Ins. Co., 219 A.D.2d 463, 466 (1st Dep’t 1995).

[2] Republic of Sudan v. Harrison, 139 S. Ct. 1048, 1057 (2019)

[3] See e.g., JPMorgan Chase Bank, Nat’l Ass’n v. Nellis, 122 N.Y.S.3d 673 (2d Dep’t 2020) (“The plaintiff similarly failed to establish, prima facie, that it mailed a notice of default to the defendant by first-class mail as required by the terms of the mortgage as a condition precedent to acceleration of the loan.”).

The Small Business Reorganization Act of 2019 (SBRA),[1] effective February 19, 2020, has created timely opportunities for individuals to confirm a Chapter 11 plan. Prior to the enactment of this legislation, individuals who did not qualify for Chapter 13, generally because their debts exceeded statutory limits, were forced to use the business reorganization provisions in Chapter 11. These provisions subjected individuals to the cramdown requirements of the absolute priority rule and made it difficult for individual debtors to confirm a Chapter 11 plan of reorganization. Thankfully, however, mere months before the COVID-19 pandemic, Congress passed the SBRA and eliminated the absolute priority rule for qualifying small businesses, which can include individuals.

The absolute priority rule was derived under Chapter X of the Chandler Act, which was the predecessor to the Bankruptcy Code enacted in 1978.[2] Under the Bankruptcy Code, the absolute priority rule generally applies when a class of unsecured creditors did not vote in favor of the plan treatment (cramdown) and required the debtor to pay in full the allowed unsecured claims of the rejecting class if any junior interests, such as equity holders, were retaining their interest.[3] In the case of an individual, the Supreme Court held in Norwest Bank Worthington v. Ahlers^[4] that the individual debtor should be regarded as an equity class, junior to unsecured creditors. This made it extremely difficult for an individual to confirm a Chapter 11 plan unless the creditors consented or the creditors were receiving full payment. Alternatively, the debtor could perhaps propose a new value plan to get around the absolute priority rule and retain their interest in their property, but such plans were difficult because the Supreme Court required significant new value and monies’ worth up front, and a promise to provide future labor was not enough to qualify as new value.^[5]

Congress confirmed that the absolute priority rule applied to individual debtors through the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA).^[6] This legislation appeared to make significant changes for individuals in Chapter 11 cases by acknowledging that individuals were subject to the absolute priority rule, but it did provide an exception: “in a case in which the debtor is an individual, the debtor may retain property included in the estate under section 1115 . . . .” Section 1115, in turn, added to property of the estate in an individual Chapter 11 case income the debtor earned post-petition, thus making the individual Chapter 11 case similar to a Chapter 13 case. The big advantage was that there is no debt limit in Chapter 11; thus, the individual could confirm a plan by satisfying the requirements of section 1129(a)(15). This provision permitted a plan to be approved when the debtor paid his or her “projected disposable income” to be accumulated over a 60-month period.

Although insolvency professionals welcomed the new provisions under section 1129(a)(15), the confirmation requirements were still subject to the remaining confirmation requirements under section 1129(a), thus requiring the acceptance of creditors (contrary to Chapter 13), and when that acceptance was not forthcoming, the individual debtor was still subject to the absolute priority rule when a class of unsecured creditors objected to the plan. This would not have been a major obstacle, however, if the exception to the absolute priority rule that was added by BAPCPA had been interpreted broadly. Unfortunately for individual debtors, the failure of Congress to make it clear in any legislative history when BAPCPA was enacted that Congress intended the exception to be interpreted broadly (thus eliminating the absolute priority rule as it applied to individuals) created concerns among the circuit courts that the exception should be interpreted narrowly to only except the debtor’s post-petition income that was added by section 1115.^[7] Consequently, in a normal Chapter 11, individual debtors are unable to confirm a plan that allows them to retain their nonexempt property over the objection of unsecured creditors unless such objecting unsecured creditors are paid in full. Alternatively, individual debtors can retain their nonexempt property if they convince the court that they are able to provide “new value” that will circumvent the requirements of the absolute priority rule. Given that the requirements of the new value are rather stringent, this is rarely achieved.

Congress appears to have come to the rescue of individual debtors through the passage of the SBRA. This statute created a new Subchapter V within Chapter 11 that is available to electing small-business debtors who have secured and unsecured debts less than $2,725,625.00. Given that there is no exclusion for individuals, these provisions will apply to individuals, provided that their debts are primarily business debts, they otherwise fit within the debt limits, and they are “engaged in commercial or business activities.”[8] In response to the COVID-19 pandemic, Congress increased the debt limit for Subchapter V cases to $7,500,000.00 for one year, ending March 27, 2021.^[9]

Although there are many aspects of the new Subchapter V that are beneficial to an individual debtor, the most significant is the elimination of the absolute priority rule. The new Subchapter V does not include a limitation on equity retaining ownership if a class of allowed unsecured claims votes against the plan. A debtor may confirm a plan over the objection of an unsecured creditor class so long as (1) all “projected disposable income” of the debtor to be received in a three-year period, or such longer period as the court may approve but not to exceed five years, will be applied to the plan, or (2) the value of the property to be distributed under the plan in the three- to five-year period is not less than the “projected disposable income” of the debtor.^[10]

Other advantages of Subchapter V to an individual are as follows:

Plan exclusivity. Only the debtor may file a plan in Subchapter V.[11] Thus, there is no exclusivity period that expires after 120 days like a normal Chapter 11 case,[12] or 180 days in the case of a traditional small business.^[13]

Reduced administrative expenses. There are no U.S. trustees fees in a Subchapter V case,[14] thus reducing the administrative expenses to the debtor. Further, unless the bankruptcy court orders otherwise, a committee of creditors may not be appointed in a Subchapter V case and the individual debtor will not have to pay the expenses of such committee.[15]

Easier retention of counsel. In a typical Chapter 11, the court will not approve retention of the debtor’s counsel if they are owed any amounts for prebankruptcy services.[16] Subchapter V has a special rule and allows retention of counsel or other professionals so long as the debtor’s prepetition fees do not exceed $10,000.^[17] Thus, attorneys who provide services to an individual will still be able to represent the individual in the bankruptcy case even though there are some fees owed when the Subchapter V case is filed.

Modification of certain mortgages on principal residences. The restrictions on modification of a mortgage on the debtor’s residence were modified by Subchapter V to enable the debtor to modify such claims when the proceeds of the relevant mortgage were “used primarily in connection with the small business of the debtor.”^[18] Although most mortgages are typically purchase money security interests and would still be prohibited from modification, this unique provision in Subchapter V will allow mortgage modification if the individual debtor had used a majority of the value in the debtor’s home to finance business operations.[19]

Limited post-confirmation plan modifications. Only the debtor may modify a plan after confirmation in Subchapter V.^[20] This is a distinct advantage because section 1127(e) permits the trustee, U.S. trustee, or holders of an allowed unsecured claim to seek a modification to increase the amount of payments or extend or reduce the time for payments in a normal individual Chapter 11 case. Limiting plan modification to only the debtor excludes these parties from the threat of increasing plan payments when the debtor’s operations turn out to be more favorable than projected when the plan was confirmed. On the other hand, if the debtor’s projections were too generous, the debtor has the power to seek modification in order to reduce plan payments in a Subchapter V case. This modification right expires upon “substantial consummation”[21] when the plan is a consensual plan approved pursuant to section 1191(a), but can be accomplished at any time after confirmation when the plan is approved over the objection of a class of unsecured creditors pursuant to section 1191(b).

Paying administrative expenses over term of plan. Subchapter V permits the debtor to pay administrative expenses over the life of the plan, provided the plan was approved pursuant to the cramdown provisions of section 1191(b). A plan that is a consensual plan approved under section 1191(a) must provide for the payment of administrative expenses on the effective date of the plan in the same manner as a typical Chapter 11 plan under section 1129(a)(9)(A).^[22]

Possibility of early discharge. Subchapter V allows an individual to obtain a discharge on the effective date of the plan, provided the plan was a consensual plan approved under section 1191(a). ^[23] In a cramdown plan approved under section 1191(b), the debtor’s discharge does not occur until the completion of the plan payments.[24] This latter requirement is similar to the discharge granted under section 1141(d)(5) in a non-Subchapter V Chapter 11 case, subject, however, to the exceptions to dischargeability of certain debts under section 523, which continue to apply to the individual debtor in Subchapter V.[25]

No limitation on cramdown of car loans. Subchapter V does not incorporate the requirements of section 1325(a) (hanging paragraph) that requires a Chapter 13 debtor to pay the full amount of a personal motor vehicle loan incurred within 910 days prior to the bankruptcy filing instead of the value of that collateral that normally is required for a secured claim under section 506(b). This means that the individual in a Subchapter V case will be able to force the vehicle lender to accept payments equal to the value of the vehicle even though the value is less than the full amount of the vehicle loan.

Greater protection of the automatic stay. Subchapter V does not invoke the exceptions to the automatic stay under section 362(n) that applies to a “small business case” that is filed within two years after the confirmation or dismissal of a prior small business case.^[26] Thus, an individual in a Subchapter V case may file a second case within two years of the prior case and stay the actions of creditors that were pursuing the debtor.

Although there are many advantages to the Subchapter V for individual debtors, there are certain disadvantages that an individual must consider before heading down this path.

Limitations on eligibility. As previously discussed, there are debt limits for individuals seeking to take advantage of Subchapter V, and not less than 50 percent of the debts at issue must have arisen from the commercial or business activities of the debtor.[27] Furthermore, the debtor must be “engaged in commercial or business activities.” At least one court has ruled that an individual debtor met this requirement because he was “addressing residual business debt” arising from his defunct, closely held companies.[28]

Appointment of Subchapter V trustee. Each Subchapter V case requires the appointment of a trustee.^[29] This does not require that the debtor turn over operations to the trustee because the trustee’s duties are similar to a trustee under Chapter 12. The Subchapter V trustee is tasked primarily with assisting the debtor in proposing and confirming a plan as well as making distributions under the plan. The debtor is responsible for the Subchapter V trustee’s fees. When the debtor has proposed a consensual plan, the trustee may be removed upon the substantial consummation of the plan, which generally occurs on or about the effective date of the plan when payments have been initiated to creditors.^[30] In a nonconsensual plan, the trustee is responsible for making plan distributions to creditors until the plan is complete. At that time, the trustee will file a final accounting and a final report.

Plan deadlines and other mandatory procedures. A Subchapter V debtor has only 90 days to file a plan. This is a tighter deadline than a typical Chapter 11. Additionally, the court will hold a status conference within 60 days after the order of relief, and two weeks prior to that status conference the debtor must file a notice with the court explaining the debtor’s progress in confirming a consensual plan and providing such other information as the court may require.^[31] This cuts in half the timing requirement for filing a plan in a small business case as provided under section 1121(e). A debtor may obtain an extension of the plan filing deadline, but the grounds for such an extension are limited under the statute to circumstances beyond the debtor’s control.^[32]

Remedies upon plan default. Section 1191(c) requires the plan to provide appropriate remedies to protect the holders of claims in interest in the event that planned payments are not made. The normal requirements under Chapter 11 are merely that the plan is feasible pursuant to section 1129(a)(11), which does not require remedies to protect creditors. The only way to avoid this requirement is to convince the court with certainty that the debtor will be able to make all payments under the plan. Meeting such a standard is unlikely unless the plan already proposes a liquidation and more certain distributions to creditors. Any payment plan based on projected disposable income is not likely to have that certainty. The advantage provided to creditors by this provision is that when a plan includes a remedy, the creditor will have good grounds to force the debtor to pursue those remedies in lieu of dismissal of the Chapter 11 case or subsequent new filing of a Chapter 11 case (Chapter 22). It is also likely that courts will not view further reorganization as an adequate remedy, but rather may force a liquidation to protect the interests of creditors.

Despite these burdens on debtors, it is clear the advantages to eligible individuals under Subchapter V, particularly the elimination of the absolute priority rule, will make it substantially easier for individuals to confirm Chapter 11 plans. The plan will not depend on approval of an impaired class, and the debtor may retain assets without paying unsecured claims in full. These benefits, in tandem with the higher debt limits under the CARES Act through March 2021, will likely increase the number of individuals eligible for and taking advantage of the new Subchapter V. No doubt the current economic decline caused by the COVID-19 pandemic will result in a surge of debtors in need of bankruptcy protection. Thus, Subchapter V could not have been enacted at a more opportune time.

[1] Pub. L. No. 116-54, 133 Stat. 1079 (2019).

[2] H.R. Rep. No. 959, 95th Cong., 1st Sess. 413 (1978).

[3] 11 U.S.C. § 1129(b)(2)(B)(ii).

[4] 485 U.S. 197, 108 S. Ct. 963 (1988) (case involving an individual farmer).

[5] See Norwest, 485 U.S. at 202–06, 108 S. Ct. at 966–68 (rejecting argument that the “sweat equity” of the farmer after confirmation of the plan was sufficient new value for the farmer to retain his interest in farm).

[6] Pub. L. 109-8, 119 Stat. 23 § 321 (Apr. 20, 2005).

[7] See Zachary v. Calif. Bank & Trust, 811 F.3d 1191 (9th Cir. 2016); In re Ice House America, LLC, 751 F.3d 734 (6th Cir. 2014); In re Lively, 717 F.3d 406 (5th Cir. 2013); In re Stephens, 704 F.3d 1279 (10th Cir. 2013); In re Maharja, 449 B.R. 484 (Bankr. E.D. Va. 2011), aff’d , 681 F.3d 335 (4th Cir. 2012); In re Woodward, 537 B.R. 894 (8th Cir. BAP 2015).

[8] 11 U.S.C. § 101(51D) (defining “small-business debtor”).

[9] CARES Act, Pub. L. No. 116-136, 134 Stat. 281 (Mar. 27, 2020).

[10] 11 U.S.C. § 1191(b), (c).

[11] Id. § 1189(a).

[12] Id. § 1121(d)(2).

[13] Id. § 1121(e).

[14] 28 U.S.C. § 1930(a)(6).

[15] See 11 U.S.C. §§ 1102(a)(3), 1181(b).

[16] See id. § 327(a) (authorizing retention of professional persons “that do not hold or represent an interest adverse to the estate, and that are disinterested persons”); id. § 101(14) (defining “disinterested person” as a person that “is not a creditor”).

[17] Id. § 1195.

[18] Id. § 1190(3).

[19] The recent case of In re Ventura, 2020 WL 1867898 (Bankr. E.D.N.Y. Apr. 10, 2020), identified certain factors to consider before allowing modification of a mortgage on a principal residence in Subchapter V.

[20] 11 U.S.C. § 1193.

[21] Id. § 1101(2).

[22] Id. § 1191(e).

[23] Id. § 1192.

[24] Id. § 1181(c).

[25] See id. §§ 523(a), 1141(d), 1181(c), and 1192(2).

[26] Id. § 362(n)(1).

[27] Id. § 101(51D).

[28] See In re Wright, 2020 WL 2193240 (Bankr. D.S.C. Apr. 27, 2020).

[29] Id. § 1183.

[30] Id. § 1101(2).

[31] Id. § 1188(c).

[32] Id. § 1188(b).

As organizations begin to reintroduce people back into workplaces and schools during the COVID-19 pandemic, they face a unique set of privacy issues that arise from the use of screening processes and technologies. Organizations must design and implement new procedures to protect the health and safety of workers, students, and staff, but these procedures, the technology deployed to implement them, and the data that is collected in support of them can run afoul of the legal protections set forth in privacy and security laws, not to mention labor and employment laws. The laws that impact each organization will also vary depending on whether the organization is a government or a private entity and in which jurisdiction(s) the organization operates.

Generally, bringing people back to work and school involves implementing some combination of the following strategies: (1) written rules and procedures to be followed, (2) prescreening to determine who can return to work or school, (3) symptom tracking and health screening on an ongoing basis, and (4) contact tracing and quarantining if exposure to COVID-19 is suspected. Each of these strategies creates a series of issues that must be addressed.

Although written procedures must be consistent with changing public health guidelines, they still might not be enforceable. For example, many public schools have created written procedures for athletes who are returning to their sports at the high-school and college levels.[1] Although these procedures are designed to protect and ensure safety for athletes, they often cross the boundary between encouraging athletes to follow the rules and asserting that athletes have assumed the risks of participating—constituting a waiver—with questionable enforceability.[2]

Closely related to privacy concerns is the fact that prescreening of employees to determine whether they can return to work may violate employment laws. The EEOC has already asserted that the use of COVID-19 antibody tests as a vehicle for prescreening employees to determine whether they can return to work violates the Americans with Disabilities Act’s “job related and consistent with business necessity” standard for medical examinations or inquiries for current employees because CDC guidelines provide that antibody test results “should not be used to make decisions about returning persons to the workplace.”[3]

Symptom tracking and health screening raise a number of privacy issues, from what questions can be asked for screening, to how the data that is collected should be treated. The EEOC guidance for covered employers specifies that employers may ask employees whether they are exhibiting symptoms associated with COVID-19, consistent with current CDC-specified symptoms and guidelines, or those of other public health authorities and reputable medical sources. Employers may also take the body temperature of employees during the pandemic consistent with recommendations of the CDC and state and local health authorities. All information collected must be treated as an employee medical record, with the associated implications for protecting the privacy of that data and limits on maintaining and sharing such information. It is important to note that employers are allowed to share medical information with public health agencies.

The use of contact tracing for determining whether a person has been exposed to COVID-19, or has exposed others, raises a plethora of new issues. Contact tracing can be performed manually, but is often implemented through mobile applications that communicate with each other. The Google/Apple partnership, for example, has developed a common application programming interface (API) that will be available on all mobile phones that run either the Android or iOS operating systems.[5] This API allows public health agencies and medical organizations to develop contact tracing applications. The underlying technology enables phones to contact each other when they are in proximity and share anonymous information that can later be used to develop contact lists if a person is diagnosed with COVID-19.[6] This technology is subject to a number of privacy and security concerns, including device tracking to identify and locate users,[7] sharing of personally identifiable[8] and confidential health information, and use of that data for other purposes by either the technology companies or public health organizations. These applications must also be deployed carefully by employers to prevent labor law issues associated with surveillance outside of work hours.[9] Existing privacy laws are still in effect for the data collected as part of contact tracing, and some states are weighing in to create new privacy laws to specifically address contact tracing.[10]

Finally, the collection of data also creates record retention issues. Organizations may be tasked with keeping certain records to establish compliance with privacy mandates or to otherwise address broader regulatory concerns, particularly for human resources records. Add to that the fact that some data, even if it does not rise to the level of a record, may need to be retained for statistical or other metrics measurements. These data retention issues must be carefully balanced against strict privacy regulations at the national and international levels. To that end, litigation discovery concerns could also rear their ugly heads. This is where processes and systems for record retention and disposition are most critical.

On the whole, organizations face a difficult set of privacy issues arising from the use of screening processes and technologies to reintroduce workers and students to workplaces and schools during the COVID-19 pandemic. The landscape of legal privacy issues is going to continue to change as CDC guidance changes over time and as more governments pass new legislation to specifically address COVID-19-related challenges.

* Joan Wrabetz is a J.D. candidate, 2021, at Santa Clara University. John Isaza, Esq. is Vice President of Information Governance Solutions at Access Corp in Boston. Mr. Isaza can be reached at [email protected].

[1] Washington Interscholastic Activities Ass’n, Guidance for Opening Up High School Athletics and Activities (June 22, 2020); NCAA Sport Science Institute, Resocialization of Collegiate Sport: Developing Standards for Practice and Competition (Aug. 14, 2020).

[2] Zachary Zaggar, NCAA Teams’ COVID-19 Risk Forms May Fall Flat In Court, Law360, June 19, 2020.

[3] U.S. Equal Employment Opportunity Commission, What You Should Know About COVID-19 and the ADA, the Rehabilitation Act, and Other EEO Laws (Jun 17, 2020).

[4] Surveillance and Data Analytics, Centers for Disease Control and Prevention, Coronavirus Disease 2019 (COVID-19) (June 29, 2020).

[5] Rebecca Pifer, Apple-Google COVID-109 contact tracing software released, Healthcaredive, May 20, 2020.

[6] Apple/Google, Exposure Notification—BluetoothÒ Specification, V. 1.2, April 2020, at 8.

[7] See generally Michael Kasdan, et al., Tracking Technologies: Privacy and Data Security Issues, Thomson Reuters Practical Law Practice Note, June 20, 2020; see also Federal Trade Commission, Cross-Device Tracking: An FTC Staff Report (Jan. 2017), at 8.

[8] Privacy International, Bluetooth tracking and COVID-19: A tech primer (Mar. 31, 2020).

[9] Vin Gurrieri, Privacy Risks Lurk in Tech-Heavy Return-To-Work Plans, Law360, June 5, 2020.

[10] Kansas Introduces the COVID-19 Contact Tracing Privacy Act, Security Magazine, June 9, 2020.

Gregory Monday, American Bar Association Business Law Section member and shareholder with the law firm of Reinhart Boerner Van Deuren, in Madison, Wisconsin, is the author of The Lawyer’s Guide to Family Business Succession Planning: A Step-by-Step Approach for Lawyers, Business Owners, and Advisors, which the Business Law Section published in June 2020. Gregory offers his insights and expertise on family succession planning in this Q&A.

Question: What triggered your interest in family business succession planning?

Answer: Before I attended law school, I worked in several family businesses, and I enjoyed those experiences. I learned to respect the courage of entrepreneurs and owner-operators. I appreciate the contribution that family businesses make to the economy and the communities in which they operate. Also, I love my job because I can help make families happier. That’s a pretty good way to spend my work hours.

Question: In your book, you detail the planning process for business succession. What common mistakes do business owners make when it comes to succession?

Answer: The biggest mistake is not planning at all. Proper business succession planning can help a family business in many ways.  It can avoid succession crises, but it also can lead to tax savings, better business practices, greater financial security for the senior generation, and opportunities for personal development for members of the next generation. A second big mistake is not planning for a change of governance mechanisms to adapt them to successor ownership. For example, when ownership passes from the founder to the founders’ children, the business’s governance structure needs to change to accommodate and define the input of multiple new owners. A third big mistake is not planning for the senior generation’s life after exit from the business. This mistake can cause senior generation managers to stay too long or to suffer lifestyle impairments in retirement.

Question: I found it interesting how retirement is linked with succession. Do they go hand in hand or does one trigger the other?

Answer:  Often senior generation retirement is inextricably linked to ownership and leadership succession. First, senior generation leaders may be unwilling or unable to retire until members of the next generation are ready to take over managing the business. Often this requires a succession plan that adapts governance and management structures to optimally support the leadership skills and participation of the next generation owners. Second, senior generation leaders may be unwilling or unable to retire because they remain economically dependent on the business and its continuing success. Business succession planning can provide a secure and viable economic future for senior generation owners after they retire and transfer their ownership interests.  Unless the senior owners can retire, there may be no business succession until they die. That’s a circumstance that is bad for everyone involved.

Question: The appendix material in your book is fantastic! The lawyer has a wide range of issues to confront in succession planning—in your opinion, what is the most difficult part for the practitioner?

Answer: The most difficult part of family business succession planning for the lawyer is the broad scope and diversity of issues that the lawyer must address. The purpose of the book is to help identify those issues and to suggest ways to address them.  Sometimes it is important for the lawyer to get help from colleagues or the clients’ other advisors. Business valuation, tax elections or choice of entity, nonqualified retirement plans, and disability insurance are all examples of issues that may require the lawyer to collaborate with other advisors. The book will help the lawyer spot these issues, even though they may not be in the lawyer’s areas of core competency. Family business succession planning is a collaborative, long term project, and that can become confusing or messy if the lawyer doesn’t keep it organized. The appendix materials in the book provide ways to stay organized with respect to the big picture and the details.

Robert B. Dickie is the founder of The Dickie Group, which provides training in finance and accounting to most of the country’s leading law firms and to the in-house legal departments of numerous Fortune 100 companies. Peter R. Russo, retired from the Boston University Questrom School of Business in 2017, where he served for 15 years as Executive in Residence and Senior Lecturer. During that time, he served terms as the Faculty Director of both the Entrepreneurship Program and the Executive MBA Program. Bob and Pete have just published their third edition of Financial Statement Analysis and Business Valuation for the Practical Lawyer. Bob and Pete offer their insights and expertise on financial statements and business valuation.

Question: Since you wrote the first edition of your book, how has financial statements and valuation changed?

Answer: In the two decades since Bob wrote the first edition, there have been substantive changes in both how the financial statements are generated and how they are used. A series of accounting scandals, the most famous of which was the Enron case in 2001, led to an increased skepticism about reported earnings and a call for more accountability from management. The accounting profession and the Securities & Exchange Commission have responded and today management is held to a much higher level of accountability than was previously the case.

During this same period, the U.S. Generally Accepted Accounting Principles (“GAAP”) that drive the rules management must comply with in financial reporting, have been changing to be more consistent with the International Financial Reporting Standards (“IFRS”), as part of a long-term convergence project. While this process has taken longer than initially anticipated, GAAP is undeniably moving toward the time when a single set of rules will be applied globally. For example, in recent years, we have substantially revised the way that companies record revenue and account for lease obligations.

At the same time, users of financial statements have become more sophisticated. It is not uncommon to see companies measured by a more complex set of metrics than were once used.

Question: For the lawyer approaching financial statements and valuation, how much understanding does he or she need to understand of accounting issues?   

Answer: The key to answering this question lies in how the lawyer provides value to his/her client. Sometimes the lawyer provides this value by answering the client’s questions, but often she can provide greater value by offering answers to the questions a client did not know to ask. Doing this does not necessarily require a deep knowledge of the accounting and reporting rules, nor does it require a great deal of finance expertise. What is needed is a basic understanding of how the numbers are generated, what information they do and don’t contain, and a sense of how the numbers are used.  Of equal importance is an understanding of the motivations of management—what the client is trying to achieve with a transaction or strategic decision, and management’s biases in reporting. Armed with this level of expertise, the lawyer is able to work closely with the client to help achieve its goals. 

Question: You both do an excellent job in describing valuation—when it comes to valuation and valuing a company, what are the most common mistakes made?

Answer: Perhaps the biggest misconception we see when discussing business valuation is that some people treat the question as one with a single correct answer. The value of any company is likely to vary based upon who the potential buyer is and what strategies they will be able to employ if they acquire the company. That is why we often see valuations expressed in ranges and calculations of value shown using multiple methodologies. In fact, in a business valuation, the methodologies employed often convey as much information as the numbers calculated. The process of valuing a company can help identify the drivers of value, call attention to key unknowns, and raise important questions which are worthy of attention.

Another common problem we see in business valuation is the lack of understanding of the limitations of some of the methodologies that are commonly used today. There is no “prefect formula” for calculating a business’ value and all of the methods used have their strengths and limitations. For example, if a business is being valued by comparing its performance to a group of comparable companies, it is critical to understand whether and in what ways the companies are truly comparable.   

Finally, let’s keep in mind that valuing a start-up biotech company is much more difficult, and likely to yield a much wider range of possible valuations, than, for example, an apartment building in a prosperous neighborhood with a stable rent roll.

Question: This is a very daunting area of the law. How do you keep abreast of all the changes in both?

Answer: Certainly, reading about current events and trends is an essential part of staying current. But perhaps the most important skill is to stay intellectually curious. Conversations with others who find this space interesting can yield important new insights. And especially, when we see or hear of something that seems strange or unusual, seeking the story behind that phenomenon is a great way to continue to learn. 

Question: Besides a business lawyer, what other types of lawyers would benefit from this book? Additionally, are there other professionals besides lawyers who would find this book useful?

Answer: Lawyers who work with estates certainly have a need to understand the concepts we discuss in this book, in that the assets that they are asked to advise their clients about are often investments in companies. This is particularly true if the assets include interests in privately owned companies, especially if they are minority interests. The knowledge might well also be useful for litigators handling securities cases, measurement of damages situations, or earn-out matters.

Other than lawyers, we think that this book can be extremely valuable to individuals who may not have business as their education emphasis, but who are making important decisions in companies. This is commonly the case in technology or life science companies, for example, where individuals with a background in science or medicine can rise to the ranks of upper management. We feel that this book can provide some very useful insights to someone like this, especially if an advanced degree in business is not a realistic option at this stage of the career.

Dear IRS, no penalties please! Taxpayers claim that penalties are not warranted for many reasons, but what actually works? One of the biggest, yet most misunderstood, is the defense that a tax position was based on reasonable cause.[1] Section 6664(c) of the IRC provides that “no penalty shall be imposed . . . with respect to any portion of an underpayment if it is shown that there was a reasonable cause for such portion and that the taxpayer acted in good faith with respect to such portion.” How the IRS evaluates this defense depends on which penalty has been assessed, so you must first know that to determine whether you are, well, reasonable. In addition, on top of reasonable cause, certain penalty defenses involve other concepts, such as an absence of willful neglect. Isn’t that proving a negative? You bet.

Who wins in a tax penalty stalemate? This one should not surprise you. The IRS does, of course. Put differently, taxpayers bear the burden of substantiating their reasonable cause. We all must exercise ordinary business care and prudence in reporting our proper tax liability, and remember that all tax returns are signed under penalties of perjury.

The IRS applies a facts-and-circumstances test on a case-by-case basis to determine whether a taxpayer meets the reasonable-cause exception. As you might expect, that can lead to inconsistent, subjective results. The stakes can be high. The reasonable-cause exception applies to accuracy-related penalties under section 6662, which are usually 20 percent of the amount at stake. It even applies to penalties for civil fraud under section 6663. How much is the civil fraud penalty? A whopping 75 percent. Thus, if your flaky tax deduction amounts to $10,000 in tax, you can add another $7,500 if the IRS says it was fraud. Fraud penalties are not asserted frequently, but it is not an exaggeration to say that penalties can be big. That makes your ability to sidestep them big, too, even if you end up having to pay all the tax and the interest.

But wait, there’s more. The reasonable-cause exception for penalty relief also applies to other penalties the IRS can impose, including penalties for: (1) failure to file a tax return and failure to pay, imposed by section 6651, (2) making an erroneous claim for refund or tax credit under section 6676; (3) failure to file Form 1099 or other information reporting returns under section 6721; and (4) the understatement of a taxpayer’s liability by a tax return preparer under section 6694.

In fact, the tax code is chock full of penalty provisions. A reasonable shortcut to all the detail is to argue that you always behaved reasonably. You also want to be able to say that you always claimed every single item listed on your tax return in good faith. However, where might you not want to bother arguing about your reasonable cause?

Well, there could be several situations. The reasonable-cause exception does not apply to an underpayment of tax that is due to transactions lacking economic substance as described in section 6662(b)(6). The same is true for penalties for a gross valuation overstatement from claiming charitable contributions deductions for property. All is not lost, though, at least not necessarily. There can be penalty relief in those two cases, but the rules are different and more complex. Fortunately, those two penalties are more the province of highly aggressive transactions that do not apply to most people or most situations.

Tax Return Reporting Is Key

According to the IRS, the most significant factor in determining whether you have reasonable cause and whether you have acted in good faith is your effort to report the proper tax liability. Doing your best to report the right amount sounds simple. Notably, though, unlike the taxpayer defense of “reasonable basis,” reasonable cause does not depend on the legal authority you have stacked up; rather, it depends on your actions. For example, suppose that you report the amount from an erroneous Form 1099, but you didn’t actually know that the Form 1099 was wrong. You think the Form 1099 has the total you were paid, but under audit it turns out that the Form 1099 reported less than you actually received. That could happen to anyone. After all, we all often rely on Form 1099 data, so reasonable cause may apply if you simply pick up a reported number and reasonably assume it is correct.

What if you were paid $300,000, but the Form 1099 said you received $300? It might be harder to say you picked up that number unintentionally and reported it, compared to an error where the inaccurate Form 1099 indicated $285,000. Still, your behavior may be reasonable, even with a big error.

How about an isolated computation or transposition error you might make on your return? That, too, may be consistent with reasonable cause and a good-faith effort. It is easy enough to transpose numbers or to make other errors. However, if you have a dozen of these on your return, it is not as likely that the IRS will understand and let you off the penalty hook.

Other factors the IRS considers include the taxpayer’s experience, knowledge, education, and reliance on the advice of a tax advisor. When considering the facts and circumstances, the taxpayer’s experience, education, and sophistication concerning the tax laws are relevant. Reliance on advice from a tax professional is obviously a point that many taxpayers use to try to avoid penalties.

However, the IRS says that your reliance must be objectively reasonable. That means you must provide your tax advisor with all of the necessary information to evaluate your tax matter. In other words, cherry picking what you tell your tax adviser to get the answer you want to hear is not reasonable. That kind of behavior would preclude you being viewed as reasonable if you are relying on a sugar-coated answer.

In addition, your tax advisor must be competent in the subject matter. If you have a complex corporate tax problem and you consult a low-income, individual income tax advisor, it might not be reasonable for you to rely on that advisor, no matter how faithfully you follow his or her advice.

The IRS tells its auditors that they should determine whether the taxpayer acted with reasonable cause and in good faith based on all the facts and circumstances on a case-by-case basis. The taxpayer must have exercised the care that a reasonably prudent person would have used under the circumstances. The meaning of “reasonable cause” can also depend on the particular penalty.

Some penalty sections also require evidence that the taxpayer acted in good faith, or that the taxpayer’s failure to comply was not due to willful neglect. Not every penalty provision has the same penalty relief standard. For instance, section 6676 of the code imposes a penalty for an excessive claim for refund or credit, but the penalty can be waived if you demonstrate reasonable cause.

Section 6662 imposes accuracy-related penalties, but to get out of them, your error must have been made with reasonable cause and in good faith. Finally, section 6651 imposes the failure to file or pay a penalty, and it provides a waiver based on reasonable cause and an absence of willful neglect. In short, if you are trying to get out of a penalty the IRS seeks to impose, it pays to look at the specific penalty in question. You want to show how your facts and your conduct meet all the required tests.

In Writing

Do you make your case orally? Usually not, although you can try that for starters in some cases. Like just about everything else with the IRS, you almost always should lay it out in writing. In fact, in many cases, the tax regulations actually require the taxpayer’s request for waiver of the penalty to be in writing and even signed under penalties of perjury.[2]

Whether the elements that constitute reasonable cause, willful neglect, or good faith are present is based on all the facts and circumstances. Reasonable cause is established when the taxpayer exercised ordinary business care and prudence. “Ordinary business care and prudence” is defined as taking that degree of care that a reasonably prudent person would exercise.

Key Factors

The taxpayer’s effort to report the proper tax liability is the most important factor in determining reasonable cause. In assessing the taxpayer’s effort, the IRS tells its agents to look at all the relevant factors, including the nature of the tax, the complexity of the issue, the competence of the tax advisor, and so on. Other factors include the taxpayer’s experience, knowledge, education, and reliance on the advice of a tax advisor.

In determining whether a taxpayer exercised ordinary business care and prudence, the IRS tells its agents to consider all the facts and circumstances, and to review all available information, such as the taxpayer’s reason, compliance history, length of time, and circumstances beyond the taxpayer’s control. You might assume that such a review would extend back one year, i.e., the tax year involved. However, the IRS tells its agents to look at the three previous tax years. They will look for your payment patterns and compliance history. A taxpayer who repeatedly is assessed the same penalty may not be exercising ordinary business care.

In contrast, if this is your first incidence of noncompliance, the IRS will consider that, along with the other reasons and circumstances you provide. The IRS is supposed to consider all the facts and circumstances, including the length of time between the occurrence of the tax problem and when you fixed it. The reason for your error should coincide with the timeframe of dates and events that relate to the penalty.

The IRS is even willing to say that some mistakes and circumstances are beyond your control. However, the IRS also asks whether you could have foreseen or anticipated the event that caused the problem in the first place.

How about relying on tax advice from the IRS? Isn’t that always reasonable? Not necessarily. This can be a surprisingly touchy subject, particularly in the case of oral advice. Oral advice usually isn’t worth the paper it’s (not) printed on. If you point to something the IRS told you in writing, however, the IRS evaluates the information and determines whether the advice was in response to a specific request and related to the facts contained in that request. The IRS also wants to know if you actually relied on its advice.

Taxes are complex, and that itself might provide you with plenty of excuses as to how you could mess up. However, some “oops” errors are a lot easier to explain than others. For example, the IRS says you generally do not have a basis for reasonable cause if the penalty relates to the late filing of a tax return or payment of a tax obligation. Arguing that you thought tax returns were due May 15, not April 15—even if a tax professional told you that—isn’t likely to save you from penalties.

Arguing that you or your accountant forgot to file also is not likely so demonstrate reasonable cause. The IRS says everyone is responsible for timely filing taxes, and for paying them, and those duties cannot be delegated. So even if you rely on accountants, bookkeepers, or attorneys, you cannot delegate responsibility to timely file tax returns and timely pay tax obligations. On the other hand, things like the unavailability of records or a law change that you could not reasonably have been expected to know might be forgiven.

In some cases, you can seek penalty relief due to a lack of knowledge of the law. Relevant factors include your education, whether you have been subject to the tax before, whether you have been penalized before, the complexity of the tax issue, and recent changes in the tax law or forms.

[1] Robert W. Wood practices law with Wood LLP and is the author of Taxation of Damage Awards and Settlement Payments and other books available at www.TaxInstitute.com. This discussion is not intended as legal advice.

[2] See Treas. Reg. 301.6651-1(c)(1), 301.6724-1(m).

On June 22, 2020, in a much anticipated decision, the Supreme Court held that the Securities and Exchange Commission (SEC or the Commission) can continue its longstanding practice of seeking disgorgement as an equitable remedy in judicial proceedings under section 21(d) of the Securities Exchange Act of 1934. In Liu, the court held that a disgorgement award that (1) does not exceed a wrongdoer’s net profits, and (2) is awarded for victims constitutes an equitable remedy within the scope of the SEC’s statutory authority.[1] In so holding, the Court made clear that legitimate business expenses must be accounted for in determining how much the SEC can seek in disgorgement. Although the Court indicated its skepticism toward the SEC’s longstanding practice of sending disgorged funds to the Treasury, it did not specifically address whether disgorged funds must be returned to victims of the misconduct being prosecuted, leaving that determination to the lower courts.[2] The Court also left unanswered whether the SEC is authorized to impose joint and several liability on violators.[3] Following Kokesh and other recent decisions, this is the Supreme Court’s latest effort to rein in the SEC’s enforcement authority. Although Liu stopped short of eliminating the power of the SEC to seek disgorgement for securities law violations, it provided companies facing SEC enforcement scrutiny with the necessary tools for challenging and circumscribing the amount sought by the Commission. This decision provides some clarity on the parameters of the SEC’s authority, but it leaves open many questions that will be resolved in future settlement negotiations and court battles.

The Court’s Holding

The Liu decision was eagerly anticipated by SEC defense counsel and regulated entities. The potential impact on SEC enforcement actions if disgorgement were eliminated as an equitable remedy would have been game-changing, but instead of providing absolute clarity in either direction, the Supreme Court stopped short. In doing so, it raised more questions that may give rise to potential future challenges. Writing for an 8-1 majority, Justice Sotomayor rejected an all-or-nothing approach to the question of whether disgorgement constitutes a permissible equitable remedy. The Court held that a disgorgement award that (1) does not exceed a wrongdoer’s net profits, and (2) is awarded for victims constitutes equitable relief the SEC is permitted to seek in enforcement actions.[4] To arrive at this holding, the Court examined whether the disgorgement sought in Liu—which required the defendants, a married couple, to disgorge the full amount they raised from defrauded investors, without any reduction for their claimed business expenses, and which imposed joint-and-several liability on the two spouses—falls into “those categories of relief that were typically available in equity.”[5] The Court examined cases in which courts imposed “profits-based remedies” while placing limitations on those remedies that ensured they did not constitute penalties beyond the scope of a court’s equitable powers.[6]

The Future of Disgorgement Post-Liu

In limiting disgorgement to a violator’s net profits, the Court provided guidance regarding how to differentiate valid expenses for future disgorgement calculations. The majority opinion draws a line between legitimate business expenses and those that are “wholly fraudulent” in furtherance of a scheme to defraud investors.[7] Although the Court left it to the lower court on remand to assess the legitimacy of the expenses in question, the Court seemed to indicate the potential legitimacy of certain expenses at issue in Liu because they “arguably have value independent of fueling a fraudulent scheme.”[8]

In what will likely set the stage for future battles both during settlement discussions and in the courtroom, the Court declined to answer whether the SEC’s longstanding practice of sending disgorgement funds to the Treasury rather than to victims or harmed investors would be permissible under its new disgorgement limitations.[9] The Court also declined to address whether imposing joint-and-several liability against violators was within the SEC’s statutory authority.[10] Both of these questions will lead to future questions and provide points of argument in upcoming SEC enforcement actions. Although not conclusive, Liu provides some indication of the Court’s skepticism toward both practices that will help entities and individuals facing SEC enforcement scrutiny going forward. In addressing the issue of improperly earned profits under equitable principles, the Court noted that “the SEC’s equitable, profits-based remedy must do more than simply benefit the public at large by virtue of depriving a wrongdoer of ill-gotten gains. To hold otherwise would render meaningless the latter part of § 78u(d)(5).”[11] The Court emphasized that no order in Liu required funds be directed to the Treasury, but that if such an order were to be entered on remand, the lower courts may evaluate whether that order would be “for the benefit of investors” and therefore within the SEC’s statutory grant of authority and in accordance with equitable principles.[12] Similarly, the Court concluded that disgorgement is inappropriate where it includes the ill-gotten gains that accrue to affiliates through a joint-and-several liability theory.[13] Instead, the Court opted to instruct the 9th Circuit to determine whether the petitioners could be found liable “for profits as partners” or whether individual liability is appropriate.[14] This latter point will also set the stage for future battles between co-defendants, individuals, and entities seeking to limit their own damages or disprove a joint venture or partnership in the underlying misconduct.

What It Means for Regulated Entities and Individuals

As SEC-regulated entities around the country await the outcomes of future legal battles, companies and individuals should expect the SEC to continue to seek disgorgement under familiar theories pre-Liu. Over the past five years, disgorgement has accounted for approximately 71 percent of the SEC’s monetary recoveries.[15] Absent a change in enforcement strategy or more stringent restrictions imposed by courts around the country—neither of which is expected—the Commission’s efforts will continue. Savvy regulated entities should nonetheless be prepared to push back on Commission overreach using the tools the Court has given them. To do so, companies and individuals subject to SEC scrutiny should take steps to anticipate how they might use the findings of the Supreme Court in Liu (and other decisions like Kokesh) to their advantage. While we await the reactions to this decision in the lower courts, the best practices for companies to consider today—before facing SEC scrutiny tomorrow—include:

• understanding relationships with employees, joint venture partners, agents, and other affiliated entities that could impact future joint and several liability;
• ensuring a proper understanding of the accounting issues at play in the business under review;
• understanding all expenses relevant to the conduct at issue, and those expenses’ relationship to business operations outside of the allegedly improper scheme (be prepared to justify those expenses to avoid paying them in disgorgement later); and
• keeping up to date on the lower court reactions to the Liu decision, and seeking advice from experienced counsel when questions arise.

[1] Liu v. Sec. & Exch. Comm’n, No. 18-1501, 2020 WL 3405845, at *2 (June 22, 2020).

[2] See id. at *9.

[3] See id.

[4] Id. at *2.

[5] See id. at *5 (emphasis in original).

[6] See id. at *5–*8.

[7] Id. at *11.

[8] See id. at *12 (“[S]ome expenses from petitioners’ scheme went toward lease payments and cancer-treatment equipment. Such items arguably have value independent of fueling a fraudulent scheme.”)

[9] See id. at *9.

[10] See id.

[11] Id. at *10.

[12] Id.

[13] See id. at *11.

[14] Id.

[15] See SEC Div. of Enf’t, Division of Enforcement 2019 Annual Report, at 16.

A recent decision from a California trial court held that a Delaware choice-of-law/forum provision could not be enforced against a California resident because doing so would deprive him of his right to a jury trial as embodied in the California Constitution. This decision brings into question all manner of agreements, including operating agreements for LLCs organized outside of California, and the choice-of-law/forum provisions thereof.[1]

West, resident in California, entered into a series of agreements relating to Access Control Related Enterprises, LLC (ACRE), an LLC in which he was a member and its CFO and COO. One of those agreements was a Securityholders’ Agreement that contained Delaware choice-of-law and choice-of-forum (the Court of Chancery or the Federal District Court) provisions; no other provisions of the Securityholders’ Agreement are detailed in the opinion. Some two-and-a-half years after entering into the Securityholders’ Agreement and the other agreements, West was terminated by ACRE. In response, he brought suit in California and then in Delaware. The California action was stayed on the basis of the Delaware choice-of-forum provision in the Securityholders’ Agreement. An action was then filed in the Delaware federal court, but it was dismissed for lack of subject matter jurisdiction. Another action was then filed by West in the Superior Court of Delaware. In the Superior Court, the defendants moved for summary judgment, moved to transfer the action to the Chancery Court, and moved to strike West’s demand for a jury trial on the basis of a jury trial waiver in the Securityholder’s Agreement.[2] The Securityholders’ Agreement upon which the West court focuses its attention is not even mentioned in this Delaware decision. Subsequently, the motion to transfer to the Chancery Court was granted, and in so doing the demand for a jury trial was functionally denied in that the Chancery Court (being expressly a court of equity) does not conduct jury trials.

This gave rise to the motions that led to this opinion. Recall that previously the action filed in California had been stayed based upon the choice-of-forum provision in the Securityholder Agreement. His Delaware suit now moved to the Court of Chancery, West returned to the California action and asked that the stay on its proceeding be lifted on the basis that (1) in Chancery Court there is no jury, and (2) under California law, a predispute waiver of a jury trial (other than by means of an agreement to arbitrate enforceable under either the federal or California arbitration acts) is unenforceable. Needless to say, the defendants, who otherwise finally have the dispute in a forum agreed to in the Securityholder Agreement, disagreed.

Article I, section 16 of the California Constitution provides that “any waiver of the inviolate right to a jury determination must occur by the consent of the parties to the cause as provided by statute.” Under the related statute, as interpreted in Grafton Partners v. Superior Court,[3] “a jury may be waived in civil cases only as provided in subdivision (d)” of section 631 of the California Code of Civil Procedure. That provision, since redesignated subsection (f), provides:

A party waives trial by jury in any of the following ways:

(1) By failing to appear at the trial.

(2) By written consent filed with the clerk or judge.

(3) By oral consent, in open court, entered in the minutes.

(4) By failing to announce that a jury is required, at the time the cause is first set for trial, if it is set upon notice or stipulation, or within five days after notice of setting if it is set without notice or stipulation.

(5) By failing to timely pay the fee described in subdivision (b), unless another party on the same side of the case has paid that fee.

(6) By failing to deposit with the clerk or judge, at the beginning of the second and each succeeding day’s session, the sum provided in subdivision (e).

These limitations upon the capacity to waive a jury trial are exclusive; “unless the Legislature prescribes a jury waiver method, we cannot enforce it.”[4] Further, it has been held that a written consent under subsection (2) may be given only after the action is pending; “both the agreement to waive jury trial and the filing of any such agreement must occur subsequent to the commencement of the lawsuit.”[5] West would argue that the provision of the Securityholder Agreement requiring that his dispute with ACRE and the other defendants be resolved in the Delaware Chancery Court and without a jury violated his California constitutional right to a jury trial.

Certain earlier California decisions have indicated that choice of forum and choice of law that in application waived a right to a jury would not be enforced by a California court. As cited in the West decision, Handoush v. Lease Fin. Grp., LLC[6] involved an agreement containing a New York choice-of-law/forum provision and a waiver of a jury trial. New York has no policy against predispute jury waivers, and it seems questionable that a New York court would give appropriate deference to California’s policy against predispute jury waivers:

Here, enforcing the forum selection clause in favor of New York will put the issue of enforceability of the jury trial waiver contained in the same agreement before a New York court. Because New York permits predispute jury trial waivers, and California law does not, enforcing the forum selection clause has the potential to operate as a waiver of a right the Legislature and our high court have declared unwaivable.[7]

Finding the question presented to be analogous to those in Handoush, the West court determined that “refusing to lift the stay on the grounds the Securityholders’ Agreement forum selection clause is enforceable would result in a pre-dispute waiver of West’s ‘inviolate’ right to a jury trial.”[8] Further, as the action has been transferred to the Delaware Chancery Court, and as the Chancery Court does not utilize juries (except on an advisory basis), “continued enforcement of the forum selection clause in the Securityholders’ Agreement would prevent West from having a jury trial. The pre-dispute forum selection clause is effectively and impermissibly used as a pre-dispute waiver of jury trial.”[9]

On that basis the stay on the California litigation initiated by West has been lifted. How the Delaware Chancery Court will react remains to be seen.

Implications of West v. Access Control

To a certain degree, it is too soon to fully assess the implications of the West v. Access Control decision. It is a decision of a trial court that but for commentary such as this article, could be lost in the background. However, with the continual strides being made in electronic searching of court dockets, seldom can we expect anything to remain lost and therefore uncited. At minimum, even if the decision cannot be cited as anything more than persuasive authority, it addresses a common fact pattern and will be cited under the argument of avoiding conflicts among decisions.

There is as well the possibility of reversal on appeal, which is dependent upon the defendants not only bringing an appeal, but also achieving a reversal. In light of the wealth of earlier California appellate decision relied upon in the West decision, that appeal may be swimming upstream.

What the Delaware court will do is an open question. There are examples of decisions in which the Delaware courts have applied California law notwithstanding a Delaware choice-of-law provision. For example, in Ascension Ins. Holdings, LLC v. Underwood,[10] an injunction was denied to enforce a noncompete agreement entered into in California but electing to be governed by Delaware law that would be enforceable in Delaware but nonenforceable in California. However, there the Delaware court applied California law to the parties before it. That cannot be the resolution here—namely, the suit proceeding but with California’s insistence upon jury trials respected—because the matter is before the Chancery Court, and Chancery is a court of equity that does not use juries.

Setting those points aside, this decision is a wake-up call to anyone engaged in contracts with persons[11] resident in California, but the problem is not restricted to California. Rather, many state constitutions have provisions describing the right to a trial by jury as inviolate.[12] A contracting party in any state with a similar provision may argue that if in a particular forum they would not be entitled to a jury, then the choice of law/forum is unenforceable against them. At that juncture, the party seeking enforcement likely must show that the law of that state (unlike California) permits predispute jury waivers.[13] There may be other states utilizing the same rule, and it is always possible that a state determines that reversal of its prior policy allowing waiver should be changed.

Most legal opinions either exclude or heavily qualify an opinion as to the enforcement of choice-of-law/venue provisions.[14] Are those now delivering those opinions going to either do further investigation into the state constitutions and statutes to determine whether the agreement as written is enforceable, or will those opinions go by the wayside to be replaced with exclusions from the opinion?

Another significant issue is the balkanization of the law, particularly the law of business organizations. West was a member in ACRE, a Delaware-organized LLC. In becoming a member, he agreed that the controlling operating agreement, and in the absence thereof (entirely or as to a particular matter) the Delaware LLC Act, which itself incorporates Delaware’s contract law,[15] would determine his rights and obligations. The West court made the point several times that its decision was based upon the terms of the Securityholders’ Agreement; the terms of that agreement were not discussed beyond the jury waiver and choice-of-law/forum provisions, so we are left in the dark as to whether the Securityholders’ Agreement would, under Delaware law, be treated as a limited liability company (operating) agreement. Even so, the California action that may now proceed contains a count for breach of fiduciary duty,[16] and the only credible source for a duty that could have been breached is the ACRE operating agreement. According to the West decision, the Second Amended and Restated Limited Liability Company Agreement contained the same choice-of-forum provision as the Securityholders’ Agreement. Bear in mind that West was a manager of ACRE (CFO and COO), and under the Delaware LLC Act he consented to jurisdiction in Delaware for matters connected with the LLC.[17] Under this decision, West enjoys the benefits of being a member/manager of ACRE and avoids the burdens imposed upon members and managers; he asserted, and the West court agreed, that what is good for the goose is in fact not good for the gander.

Consider a Delaware LLC in which our California resident is a member (and perhaps as well a manager). The LLC has no other connection with California, and neither it nor its constituents are subject to the specific or general jurisdiction of the California courts. Although our hypothetical actor may want to avoid the jury waiver and choice-of-law/venue provisions of the controlling operating agreement, in order to gain personal jurisdiction, he or she may be required to bring suit in a foreign jurisdiction that will enforce those contractual obligations. He or she should not be heard to then object to being deprived of a right guaranteed by California law. Assume our plaintiff does not prevail, however. Will he or she have an after-the-fact ability to challenge the judgment when it is to be enforced in California? Although not listed as an affirmative defense, perhaps chutzpah should be.

West was (or so it would appear) a California resident at the time he signed the Securityholders’ and other agreements. What would be the outcome if at that time he had been a resident of another state that would enforce the jury waiver and choice-of-law/forum provisions, but then moved to California? Can he (or should he be able to) alter his contractual obligations simply by moving across a state border? If he may, how can parties to an agreement containing a jury trial waiver ever know that the obligation will be enforceable?

This decision is another cog in the jammed-up machine that is the application of the internal affairs doctrine and basic conflicts-of-law analysis between Delaware on the one hand (it being as well a proxy for some 48 other states) and California on the other hand. Another recent decision on the point, Juul Labs, Inc. v. Grove, 2020 WL 4691916 (Del. Ch. Aug. 13, 2020), will be reviewed in a forthcoming article.

[1] William West v. Access Control Related Enterprises, LLC, Superior Court of California, County of Los Angeles, Case BC642062 (July 29, 2020).

[2] See also West v. Access Control Related Enterprises, LLC, No. N17C-11-137 MMJ CCLD, 2019 WL 2385863 (Del. Super. Ct. June 5, 2019) (granting in part and denying in part a motion to dismiss).

[3] 36 Cal. 4th 944, 116 P.3d 479 (2005).

[4] West, slip op. at 4 (quoting Grafton Partners, 36 Cal. 4th at 956, 116 P.3d at 484).

[5] Id. at 486.

[6] 41 Cal. App. 5th 729, 254 Cal. Rptr. 3d 461 (2019), review dismissed, cause remanded sub nom. Handoush v. Lease Fin. Grp., No. S259523, 2020 WL 4696603 (Cal. Aug. 12, 2020).

[7] Id. at 739, 254 Cal. Rptr. 3d at 468.

[8] West, slip op. at 5.

[9] Id.

[10] No. CV 9897-VCG, 2015 WL 356002 (Del. Ch. Jan. 28, 2015).

[11] I presume, and I have not researched the point, that the California Constitutional provision on jury trials is applicable only to natural persons and not business entities.

[12] See, e.g., Ga. Const. art. I, § 1, ¶ XI(a) (“The right to trial by jury shall remain inviolate, . . . .”); Kan. Const. Bill of Rts. § 5 (“The right of trial by jury shall be inviolate.”); Mo. Const. art. I, § 22(a) (“That the right of trial by jury as heretofore enjoyed shall remain inviolate; . . . ,”); Or. Const. art. I, § 17 (“In all civil cases the right of Trial by Jury shall remain inviolate.”). In Kentucky the right to a trial by jury is not only inviolate, it is as well “sacred.” See Ky. Const. § 7.

[13] See generally, Contractual jury trial waivers in state civil cases, 42 A.L.R.5th 53. Notably, Georgia will not enforce a predispute jury waiver. See Bank South, N.A. v. Howard, 264 Ga. 339, 444 S.E.2d 799 (Ga. 1994).

[14] See, e.g. Gail Merel et al., Common Qualifications to a Remedies Opinion in U.S. Commercial Loan Transactions, 70 Bus. Law. 121, 130 (Winter, 2014/2015).

[15] See Del. LLC Act § 18-101(9) (definition of limited liability company agreement); id. § 18-1104 (incorporating law and equity).

[16] See West, slip op. at 2.

[17] See Del. LLC Act § 18-109; see also CLP Toxicology, Inc. v. Casla Bio Holdings LLC, No. CV 2018-0783-PRW, 2020 WL 3564622 (Del. Ch. June 29, 2020).