Letter of Credit Basics

A letter of credit (LC) is an independent undertaking, typically of a bank and issued at the bank’s customer’s request, to pay another against the timely presentation of documents conforming to the LC’s terms. When a seller, lessor, or lender is uncomfortable extending credit to the other party, the buyer, lessee, or borrower may apply to a bank for an LC. With an LC, the issuer’s credit is on the line in addition to the applicant’s, and there are few defenses to payment on an LC. LCs can be divided into two categories: commercial LCs, which are payment mechanisms for the sale of goods, and standby LCs, which support financial obligations.

LC transactions consist of three relationships: (1) the underlying transaction between a buyer and seller of goods, borrower and lender, lessor and lessee, etc.; (2) the reimbursement agreement between the buyer/borrower (applicant) and the bank (issuer); and (3) the LC issued for the benefit of the seller/lessor (beneficiary).

LCs are “independent,” meaning the issuer’s undertaking is not subject to suretyship defenses, and “documentary,” meaning payment is based on documents, not performance or default on the underlying transaction.

Uniform Commercial Code (UCC) Article 5 is the source of LC law in the United States. LCs are also subject to practice rules published by the International Chamber of Commerce (ICC): UCP600 – Uniform Customs and Practice for Documentary Credits, 2007 revision, ICC Pub. No. 600, and ISP98 – International Standby Practices 1998, ICC Pub. No. 590.

LCs fit uneasily with the US Bankruptcy Code; the Bankruptcy Code does not have special rules for LCs, and UCP600 and ISP98 do not address bankruptcy. Additionally, issuing bank insolvency, governed by the National Bank Act and bank regulatory rules, can raise LC issues.

Applicant Bankruptcy

Automatic Stay

LC draw proceeds are the issuing bank’s funds and not the bankrupt applicant’s, so they are not subject to the automatic stay. However, relief from the stay may be required if the beneficiary must notify the applicant of a default, declare a default, terminate a lease, etc., before drawing. Still, such notices may be informational only or not relevant to whether the LC draw should be honored.

Ipso Facto Clause

The Bankruptcy Code prohibits enforcement of ipso facto clauses in executory contracts and unexpired leases. However, notwithstanding such a clause, even when payments are made timely on the underlying agreement, a beneficiary may still be able to draw on an LC posted by its bankrupt debtor based on the wording of the LC and the underlying agreement.

LC Proceeds as Preference

If the drawing triggers an “indirect” preference, the amount of the drawing may have to be returned to the bankrupt’s estate. A preference is not created if an LC is issued at the same time as the debt it supports is incurred, or if the LC is issued to secure an antecedent debt before the preference period commences.

Avoiding Preferences

If the debtor’s reimbursement obligation is fully secured, the beneficiary can argue that by receiving payment outside the LC, the debtor’s collateral is, in effect, released. If the reimbursement obligation is unsecured at the time of the debtor’s bankruptcy, the beneficiary received payments in the preference period directly from the debtor instead of from the LC, and no other exception to preference applies, the debtor’s estate may recover those payments as a preference.

Expiring LCs

A bankruptcy court may determine that the automatic stay prevents the beneficiary from enforcing a pre-bankruptcy covenant against the bankrupt applicant-debtor, requiring the debtor or its trustee to extend the LC.

Issuing Bank’s Reimbursement

If the reimbursement obligation is fully secured and perfected contemporaneously with the LC’s issuance, the issuing bank’s liens should not be subject to a preference action. If the LC is drawn after bankruptcy, the lender needs relief from the automatic stay to realize on its collateral or seek adequate protection of it.

Consequences of Section 363 Sale

If an asset purchase agreement and the bankruptcy court order approving it do not ensure the LC is replaced or fully collateralized, the issuer may lose its collateral.

Beneficiary Bankruptcy

Drawing on Bankrupt Beneficiary’s Nontransferable LC

The beneficiary’s rights under an LC are transferable by operation of law. A trustee in bankruptcy or court-appointed receiver is a transferee by operation of law.

Beneficiary’s Insolvency Being Used Against It

If the applicant can file an action to enjoin the draw, it must show not only material fraud but also the procedural requirements for injunctive relief.

Perfected Security Interest

A creditor’s security interest in the beneficiary’s LC rights is effective if it timely (i) perfects a security interest in the account, chattel paper, instrument, or general intangible the LC supports; or (ii) obtains an assignment of proceeds from the beneficiary that the LC issuer acknowledges.

Assignment of Proceeds as Preferential

If the assignment of proceeds is perfected before the preference period or contemporaneously with the applicant-debtor creating the debt to the assignee, the assignment should not be considered preferential.

Transferee Beneficiary

In some cases, the secured party may become the transferee beneficiary or even direct beneficiary of the LC issued for its debtor’s benefit.

Issuer Insolvency

Traditional LC Issuers

Banks and other depository institutions issue most LCs.

FDIC’s Role and Authority as to LCs Issued by Insolvent Banks

The Federal Deposit Insurance Act gives the Federal Deposit Insurance Corporation (FDIC) broad authority over failed banks, including broad authority to repudiate contracts, including LCs, that the FDIC deems burdensome, at its sole discretion. This is similar to, but broader than, the power of a debtor-in-possession or trustee appointed by the bankruptcy court to reject unwanted executory contracts. The FDIC can repudiate the contract by sending a letter to the counterparty without court approval and without prior notice.

FDIC Approach to LCs Issued by Insolvent Banks

The FDIC traditionally repudiated most LCs issued by failed banks. However, recently, the FDIC established “bridge” banks in the failures of Silicon Valley Bank and Signature Bank, indicating in a financial institution letter (FIL-10-2023) that each “bridge bank is performing under all failed bank contracts and expects all counterparties to similarly fulfill their contractual obligations.” It further indicated that “[a]ll obligations of the bridge [banks] are backed by the FDIC and the Deposit Insurance Fund.”

Going Forward

The FDIC responded to the SVB and Signature failures by putting the banks put into receivership under the Dodd-Frank Act’s systemic risk exception. These seem to be unique cases of the FDIC stepping in and establishing bridge banks to take over all the bank’s assets and liabilities to stem a more systemic risk to the financial system, which has not typically occurred. It is unclear to what extent the FDIC will retreat to its prior practice in handling LCs issued by banks that enter receivership or stand behind the contracts (or some subset of them) in future bank receiverships.

This article is related to a CLE program titled “Disaster Preparedness: Letters of Credit and Bankruptcy” that was presented during the ABA Business Law Section’s 2023 Fall Meeting. To learn more about this topic, listen to a recording of the program and read its in-depth materials, free for members.

What is a spurned seller’s recourse when a buyer walks away from a deal in breach of the purchase agreement? In private M&A, the answer is reasonably straightforward: sue the buyer to close the deal or to recover damages. In public M&A, however, the answer is murky at best.

The problem arises from the manner in which public deals are typically structured. When negotiating with a potential acquirer, the board of a public target company functions effectively as the bargaining agent for its numerous and dispersed shareholders, who cannot feasibly participate in the negotiations or sign the purchase agreement. As a consequence, the target (not its shareholders) is party to the purchase agreement and is, absent any special provisions to the contrary, the only party that can sue the buyer for a breach. Where specific performance (usually the preferred remedy) is unavailable to the target, it must seek redress against the buyer through a damages claim.

If a buyer walks away from a deal, however, the target’s damages would not be expected to include the premium that was otherwise payable to its shareholders since only the shareholders (not the target) were entitled to receive the deal proceeds. In fact, until the Ontario Superior Court’s surprising ruling in Cineplex. v Cineworld (December 12, 2021) that a target company may recover lost-synergy damages from a failed deal, in Canada, most buyers facing such a lawsuit could have credibly argued that the only damages recoverable by a target would be the target’s out-of-pocket costs for the failed transaction. As a consequence, a target may rightly be concerned that the merger agreement it inked with the buyer is nothing more than an option for the latter to walk away from the agreement, where the monetary cost for doing so is a potential damages award of a magnitude far less than that of the premium the buyer avoided paying.

To respond to this low-price “option problem,” a target may insist that the purchase agreement require the buyer to be liable for lost shareholder premium if the buyer wrongly exits the deal—a so-called Con Ed provision, named after the 2005 decision of the US Court of Appeals for the Second Circuit in Consolidated Edison, Inc. v Northeast Utilities. The enforceability of such a provision, however, is unclear. Cineplex hinted at an endorsement of a form of Con Ed provision, but the Ontario Superior Court ultimately held back from issuing firm guidance. More recently, in a first for Delaware, the Court of Chancery addressed the enforceability of a Con Ed provision head-on in Crispo, a case that may prove instructive for Canadian boards seeking to solve the option problem.

Crispo v. Musk

Background

Crispo was a side story to the Twitter–Elon Musk merger saga in which Musk’s holding companies agreed to acquire Twitter, Inc., and then refused to close the deal. In proceedings brought by Twitter shareholder Luigi Crispo seeking specific performance or damages in the alternative, the Court held that Crispo lacked standing to seek specific performance but left open the possibility that Crispo had standing to sue Musk for lost-premium damages on the basis of the lost-premium provision contained in the merger agreement (described below). The Court permitted supplemental briefings on the lost-premium point and held Crispo’s damages claim in abeyance.

Subsequently, Musk agreed to close the merger, rendering Crispo’s lost-premium claim irrelevant. Crispo then filed a “mootness fee” petition in which he argued that his stockholder litigation to recover the lost premium helped sway Musk to ultimately close the deal. On a petition for a mootness fee, the plaintiff must demonstrate that its claim was “meritorious when filed.” In Crispo, the Court of Chancery was asked to consider whether Crispo, a non-party to the merger agreement, asserted a valid claim for lost-premium damages.

Lost-premium provisions are unenforceable by a target under Delaware law

The Musk-Twitter merger agreement included a relatively common formulation of a Con Ed lost-premium provision, providing that if the agreement was terminated because of the buyer’s intentional breach, the target’s damages “would include the benefits of the transactions contemplated by this Agreement lost by the Company’s stockholders . . . (taking into consideration all relevant matters, including lost stockholder premium, other combination opportunities and the time value of money).”

Notwithstanding the clear language entitling the target to lost-premium damages, the Court held that Twitter had no right or expectation to receive the merger consideration—the merger agreement contemplated that the deal consideration would be payable at closing directly to Twitter stockholders (“no stock or cash passes to or through the target”). Where a target has no entitlement to the premium on consummation of the deal, the Court continued, it “has no entitlement to lost-premium damages in the event of a busted deal.” Accordingly, a lost-premium provision that defines a buyer’s damages to include lost premium cannot be enforced by the target. However, the Court noted, such a provision could be enforceable if the parties intended to convey third-party beneficiary status to stockholders for purposes of seeking lost-premium damages.

A lost-premium provision may (or may not) confer third-party rights on stockholders

The Twitter merger agreement expressly excluded third-party rights in favor of shareholders except in limited circumstances not relevant to the analysis. For the Court, this suggested that the parties did not intend to confer third-party beneficiary rights on shareholders for the purpose of recovering lost shareholder premium. However, the Court also noted that another “objectively reasonable interpretation[]” of the agreement was that, by expressly referring to lost-premium damages in the contract, the parties did intend to confer third-party beneficiary rights on shareholders for such damages. However, even if they did, under the merger agreement a claim for lost-premium damages would not “vest” until Twitter’s right to seek specific performance was unavailable.

Ultimately, the Court did not have to conclude which of these two interpretations was correct because it needed to determine only whether Crispo’s claim for lost premium was meritorious when filed. Either Crispo “did not have third-party beneficiary status or his third-party beneficiary rights had not yet vested”—either way his claim lacked merit.

The Law in Canada

Cineplex remains the law in Canada. When Cineworld Group plc wrongfully terminated its agreement to acquire Cineplex Inc., Cineplex argued that it was entitled to seek as compensatory damages the value of the premium that would have been paid to its shareholders had the deal closed. The Ontario Superior Court rejected this claim on the basis of the expectancy principle: “Quite simply, the losses that Cineplex seeks to recover are those of the shareholders, not Cineplex.” The parties’ arrangement agreement did not contain a clause that resembled a lost-premium provision purporting to provide for damages equivalent to lost shareholder value or any other form of Con Ed provision.

The Court also considered whether Cineplex’s shareholders were granted third-party beneficiary status under the arrangement agreement. The agreement had a third-party beneficiaries clause similar to the one at issue in Crispo, which disclaimed the Cineplex shareholders as third-party beneficiaries under the agreement except for the purpose of receiving the deal consideration on closing. On a plain reading of the third-party beneficiary provision, the Court held that the contracting parties had not intended to confer third-party rights on Cineplex’s shareholders for the purpose of enforcing payment of lost shareholder premium.

Lost-Synergy Damages as an Alternative to Lost-Premium Damages?

Although the Court in Cineplex did not award lost-premium damages, it did find that Cineplex was entitled to damages as compensation for loss of synergies that Cineworld projected to be realized in Cineplex following the acquisition. The Court found that, unlike lost premium, Cineplex was entitled to expect such synergies and could therefore use them as a basis for compensatory damages. The Court awarded Cineplex $1.2366 billion in lost-synergy damages as a present-value calculation of Cineworld’s projected annual synergies, an amount that was notably close to the quantum of Cineplex’s lost-premium claim. An appeal of the decision was expected; however, Cineworld subsequently commenced Chapter 11 proceedings, putting an end to the litigation and Cineplex’s damages award. Whether lost-synergy damages will be readily available to a spurned target remains an open question.

Takeaways for Con Ed Provisions in Canadian Public M&A Agreements

1. An Ontario court might enforce a contractual claim for lost premium (a Con Ed provision)

The Cineplex decision hints at a possible means by which a target could contract for a right to recover lost-premium damages: “There is nothing in the agreement that entitled Cineplex, as the contracting party, to recover the loss of the consideration to shareholders if the Transaction was not completed” (emphasis added). This statement suggests that an Ontario court might take a different view from Crispo and give effect to a provision entitling a target to recover damages based on lost shareholder premium. However, given that both Cineplex and Crispo are rooted in the same principle that a target cannot claim in damages an award for lost consideration that it was never entitled to receive under the transaction, it is also possible that a Canadian court could find that a lost-premium provision, without the conferral of third-party rights on shareholders, is unenforceable by a target.

2. A target might consider appointing itself shareholders’ agent or trustee to enforce rights

In Cineplex, the Court noted that the target was named as the agent of its shareholders for the purpose of enforcing their right to receive the deal consideration on closing. Cineplex, however, “was not appointed as agent for the purpose of enforcing their rights against Cineworld if it failed to close” (emphasis added). The contrast was significant for the Court: “If the parties had wanted to appoint Cineplex as the shareholders’ agent to enforce their rights on Cineworld’s failure to close, they could have done so.” In contrast, the Court in Crispo suggested that such an arrangement rests on “shaky ground” because “there is no legal basis for allowing one contracting party to unilaterally and irrevocably appoint itself as an agent for a non-party for the purpose of controlling that party’s rights.” In the Canadian context, possible workarounds to potential agency issues might be to formally appoint the target as shareholder agent by way of the court-approved interim order (if the transaction is structured as an arrangement) or to establish a trust relationship between the target (as trustee) and its shareholders (as beneficiaries).

Whichever way a target company obtains control over lost-premium litigation, certain features of the relationship between the target and its shareholders should be addressed in the agreement. Should the target retain discretion to proceed with the lost-premium litigation? Should the target retain discretion to determine whether settlement or litigation proceeds should be retained by the company or distributed to shareholders? If the proceeds are to be distributed to shareholders, should the right to receive the proceeds trade with the shares or be fixed in advance? Ironing out these details in the agreement and ensuring adequate proxy disclosure will be critical to insulate the target from potential shareholder claims based on the exercise of its discretion. Examples of these arrangements can be found in some US and Canadian public acquisition agreements.

3. Consider other means of recourse against a buyer if Con Ed damages are resisted, such as a reverse-termination fee

Con Ed provisions are often resisted by buyers in Canadian public M&A and are accordingly rarely seen in Canada (reportedly only 2 percent of all public deals in a recent American Bar Association study of Canadian transactions [available to ABA Business Law Section members] included such a provision). In the absence of a Con Ed provision and a viable means to a specific-performance remedy, a reverse-termination fee of sufficient magnitude might be a suitable, negotiable alternative. A reverse-termination fee should be appropriately estimated to align with the principles of compensatory damages to minimize the risk that it is rejected as an unenforceable punitive damages claim. Tying the fee to lost-opportunity cost or a similar measure may prove a reasonable basis to set the amount. While a reverse-termination fee may reduce the agreement to an option on the target, Cineplex suggests that a Canadian court is unlikely to grant an award for lost premium in the absence of a properly constructed Con Ed provision. Put simply, a termination fee may be better than nothing.

This information and comments herein are for the general information of the reader and are not intended as advice or opinions to be relied upon in relation to any particular circumstances. For particular applications of the law to specific situations the reader should seek professional advice.

Tornetta v. Musk, C.A. No. 2018-0408-KSJM, 2024 WL 343699 (Del. Ch. Jan. 30, 2024). ^[1]

In both 2009 and 2012, Tesla, Inc. and its founder and Chief Executive Officer Elon Musk agreed to compensation plans with significant stock option grants that would vest in tranches if Tesla achieved certain operational and financial milestones. Although the 2012 grant had a ten-year term, by 2017, Tesla already was nearing completion of those milestones. Tesla’s board of directors and its stockholders other than Musk then approved a new compensation plan with up to $55.8 billion in total value, comprised of twelve option tranches. Each tranche would vest in the event Tesla’s market capitalization grew by at least $50 billion and Tesla met either an adjusted EBITDA or revenue target in four consecutive fiscal quarters. As the Delaware Court of Chancery described, this was the largest compensation plan the parties could identify “in the history of public markets.” Indeed, it represented over thirty-three times the total value of the next closest plan, which was Musk’s and Tesla’s 2012 plan. In this post-trial decision, the Court examined Tesla’s decision to adopt the compensation plan and held that Musk and the other defendants failed to prove that decision was entirely fair to Tesla.

The stockholder-plaintiffs argued that Musk was Tesla’s controlling stockholder, and therefore that the adoption of the compensation plan should be subject to entire fairness review, rather than deferential review under the business judgment rule. The Court found that at a minimum Musk exercised control in connection with this specific transaction. The Court reasoned, inter alia, that Musk owned 21.9% of Tesla’s outstanding stock, and he was the paradigmatic “Superstar CEO” regarded as critical to a company’s management and its business operations. He also made the initial compensation plan proposal, and he dictated the timing of the process leading up to the transaction. Further, Musk was the impetus for the few changes to the plan that were made after he first proposed it.

Relatedly, the Court found that the compensation plan was not approved by a majority of independent directors, which similarly prevented deferential review under the business judgment rule. The Court pointed to Musk’s long-standing friendships and business relationships with Tesla’s outside directors, who attained great personal wealth due to their ownership of shares in Tesla or other Musk-backed ventures. The Court also found that the record supported that the outside directors in fact acted with a “controlled mindset.” They approached the process leading up to the plan’s adoption “as a form of collaboration” intended to reach a result that would seem fair to Musk—as opposed to an arm’s-length negotiation between parties with adverse interests. The Court emphasized the “absence of any evidence of adversarial negotiations” concerning the size of the plan or its other material terms. Indeed, Musk testified that a change to reduce the number of Tesla shares issuable to him was the result of “me negotiating against myself.”

The compensation plan was approved by an affirmative vote of a majority of disinterested stockholders (i.e., excluding Musk and his affiliates). The defendants argued that approval by Tesla’s stockholders supported that the transaction was fair. The Court disagreed, reasoning that the stockholder vote was not fully informed because Tesla’s proxy statement omitted material information. Tesla referred to its outside directors as “independent,” and it did not disclose the directors’ long-standing, lucrative relationships with Musk that gave rise to their potential conflicts of interest in considering his compensation. The Court further reasoned that the proxy statement should have disclosed Musk’s initial conversations with Tesla regarding the compensation plan, in which Musk proposed the material terms of the plan. The Court observed a description of that conversation was included in four drafts of the proxy statement, but it was omitted from the final version. The Court rejected the defendants’ argument that accurately disclosing the transaction’s economic terms was sufficient, particularly given that the omitted information was important to the accuracy of the proxy statement’s other disclosures concerning the transaction.

Regarding the substance of the plan, the defendants argued the plan was “all upside” for Tesla and its stockholders other than Musk. Specifically, for Musk to be able to acquire all of the shares under the twelve tranches, Tesla’s market capitalization had to increase to an amazing extent—from roughly $50 billion at the time of the plan to $650 billion—which it ultimately did. The Court reasoned, however, that in virtue of his 21.9% ownership, Musk already had “every incentive to push Tesla to levels of transformative growth.” The record evidence did not support that the plan was necessary to keep Musk as CEO. The plan did not require Musk to devote any particular amount of time to Tesla, as opposed to other projects. The Court also questioned whether the plan’s milestones were ambitious, because Tesla’s roughly contemporaneous projections supported that Tesla would probably meet most of the milestones if it successfully executed on its business plan.

The Court also rejected what it called a “hindsight defense”—that the fact Tesla had grown immensely and achieved the milestones supported that the plan worked. The Court stated the defendants “failed to prove that Musk’s less-than-full time efforts for Tesla were solely or directly responsible for Tesla’s recent growth, or that the [compensation plan] was solely or directly responsible for Musk’s efforts.” The Court reasoned this post hoc argument could not make up for the absence of contemporaneous evidence supporting the fairness of the compensation plan.

Because Musk’s compensation plan was not entirely fair to Tesla, the Court ordered that it be rescinded. The Court rejected Musk’s arguments that rescission would leave him uncompensated, because “Musk’s preexisting equity stake provided him tens of billions of dollars for his efforts.” The Court also reasoned that the defendants had not offered a viable alternative remedy short of leaving the entire compensation plan intact, and that any uncertainty as to the appropriate remedy could be resolved against them as the parties who breached fiduciary duties. The Court accordingly entered judgment in the plaintiff’s favor and directed the parties to confer on an order addressing the issue of attorneys’ fees payable to the plaintiff’s counsel.

1. Tyler O’Connell is a Partner at Morris James LLP in Wilmington, Delaware. Any views expressed herein are not necessarily those of the firm or any of its clients. ↑

On February 14, 2024, the British Columbia Civil Resolution Tribunal (the “Tribunal”) found Air Canada liable for misinformation given to a consumer through the use of artificial intelligence chatbots (“AI chatbot”).^[1]

The decision, Moffatt v. Air Canada, generated international headlines, with reports spanning from the Washington Post in the United States to the BBC in the United Kingdom.^[2] While AI comes with economical and functional benefits, companies clearly remain liable if inaccurate information is provided to consumers through use of an AI tool.

Background

AI chatbots are automated programs that use AI and other potential tools like natural language processing to simulate a conversation and provide information in response to a person’s prompts and input. Common virtual assistants such as Alexa and Siri are all examples of AI chatbots.^[3]

Increasingly, AI chatbots are used in commerce. According to a 2024 report from AI Multiple Research,^[4] AI chatbots have saved organizations around $0.70 USD per interaction. By 2025, the predicted revenue of the chatbot industry is estimated to reach around $1.3 billion USD. Today, around half of all large companies are considering investing in these tools. Air Canada’s AI chatbot is one example of their use in a commercial setting. However, as the Tribunal’s decision shows, they do not come without risks.

The Tribunal’s Decision in Moffatt

The Tribunal’s decision came after a complaint was made by Jake Moffatt. Moffatt wanted to purchase an Air Canada plane ticket to fly to Ontario, where his grandmother had recently passed away. On the airline’s website, Moffatt engaged with an AI chatbot, which responded that there is a discount if the buyer is traveling because of a death in the family and using reduced bereavement fares. Anyone seeking a reduced fare could allegedly submit their ticket within ninety days of issuance through an online form and receive the lower bereavement rate.^[5]

Unfortunately, the AI chatbot’s answer was incorrect. The reference to “bereavement fares” was hyperlinked to a separate Air Canada webpage titled “Bereavement travel” that contained additional information regarding Air Canada’s bereavement policy. The webpage indicated that the bereavement policy does not apply to requests for bereavement consideration after travel was completed. Accordingly, when Moffatt submitted his application to receive a partial refund of his fare, Air Canada refused. After a series of interactions, Air Canada admitted that the chatbot had provided “misleading words.” The representative pointed out the chatbot’s link to the bereavement travel webpage and said Air Canada had noted the issue so it could update the chatbot.

Moffatt then sued Air Canada for having relied on its chatbot, which the Tribunal determined was an allegation of negligent misrepresentation. Air Canada alleged that the correct information could have been found elsewhere on its website and argued that it could not be liable for the AI chatbot’s responses.^[6] Strangely, Air Canada endeavored to argue that the chatbot was a separate legal entity that is responsible for its own actions.

The Tribunal ultimately found in favor of Moffatt. While a chatbot has an interactive component, the Tribunal found that the program was just a part of Air Canada’s website and Air Canada still bore responsibility for all the information on its website, whether it came from a static page or a chatbot. As a service provider, Air Canada owed Moffatt a duty of care that was breached by the misrepresentation. Air Canada could not separate itself from the AI chatbot, which was integrated in its own website. Negligence existed as Air Canada did not take reasonable care to ensure that its chatbot provided accurate information. It did not matter if the correct information existed elsewhere. A consumer cannot be expected to double-check information it finds on one part of the website with another.^[7]

The Tribunal ultimately awarded Moffat approximately $650 CAD in damages, plus pre-judgement interest and filing fees with the Tribunal.

Takeaways

While admittedly this is not a court decision, the Tribunal’s decision in Moffatt serves as a helpful reminder that companies remain liable for the actions of their AI tools. Additionally, any company that intends to use AI tools should also ensure that they also put into place adequate internal policies that protect consumer privacy, warn consumers of any limitations, and train the AI system to deliver accurate results.

1. Moffatt v. Air Canada, 2024 BCCRT 149. ↑

2. Kyle Melnick, “Air Canada chatbot promised a discount. Now the airline has to pay it.,” Washington Post, February 18, 2024; Maria Yagoda, “Airline held liable for its chatbot giving passenger bad advice – what this means for travellers,” BBC, February 23, 2024. ↑

3. “What is a chatbot?,” IBM, accessed February 27, 2024. ↑

4. Cem Dilmegani, “90+ Chatbot/Conversational AI Statistics in 2024,” AIMultiple, last modified February 5, 2024. ↑

5. Moffatt, supra note 1, at paras. 13-16. ↑

6. Id. at paras. 18–25. ↑

7. Id. at paras. 26–32. ↑

The new year brings with it four new jurisdictions to watch regarding proposed true lender legislation and Depository Institutions Deregulation and Monetary Control Act (DIDMCA) opt-outs. The District of Columbia, Florida, Maryland, and Washington are the most recent jurisdictions to have introduced true lender legislation in 2024 and towards the tail end of 2023. Uniquely, the District introduced a bill that couples true lender legislation with a DIDMCA opt-out, taking a very hard stance on restricting interest rates imposed on loans made to residents of the District.

District of Columbia

On November 30, 2023, District of Columbia Councilmember Kenyan R. McDuffie introduced B 25-0609, entitled the Protecting Affordable Loans Amendment Act of 2023 (PALs Act), which proposes to opt the District out of sections 521–523 of the DIDMCA. The PALs Act is intended to strengthen consumer protection and limit the interest that out-of-state lenders can charge to the District’s 24 percent maximum usury amount. If the bill passes and the PALs Act is enacted, the District will join Iowa, Puerto Rico, and most recently, Colorado (effective July 1, 2024) in the list of jurisdictions that have opted out of DIDMCA.

Sections 521–523 of DIDMCA empower states by allowing state-chartered banks and credit unions insured by the Federal Deposit Insurance Corporation or the National Credit Union Administration to contract for the interest rate permitted by the state where the bank is located and export that interest rate into other states pursuant to its home state’s interest-rate authority. Conversely, section 525 of DIDMCA permits states to opt out of sections 521–523 via legislation. Opting out would then require application of the state law where the loan is “made.”

If the PALs Act were to be enacted, out-of-state, state-chartered banks and credit unions would ostensibly be required to follow the District’s interest rate and fee restrictions on consumer loans to the District’s residents if the loans are deemed to be made in the District. However, the effectiveness of this legislation is unclear. Federal interpretations of DIDMCA Section 521 establish where a loan is made based on the parties’ contractual choice-of-law provision and the location where certain nonministerial lending functions are performed, such as where the credit decision is made, where the decision to grant credit is communicated from, and where the funds are disbursed. This guidance creates a question as to whether an opt-out actually impacts loans made in other states.

Additionally, the District legislation contains amended definitions of “lender” and other terms, including a predominant economic interest standard that would apply the provisions of the law to entities other than the immediate lender, including certain bank agents and servicers, and a totality of the circumstances test to determine the “true lender” of a “loan.” The proposed definition of “lender” includes any person that offers, makes, arranges, or facilitates a loan or acts as an agent for a third party in making or servicing a loan. This includes “any person engaged in a transaction that is in substance a disguised loan or a subterfuge for the purpose of avoiding this chapter, regardless of whether or not the entity or person is subject to licensing,” and that

1. holds “directly or indirectly, the whole, predominant, or partial economic interest, risk or reward” in a loan,
2. markets or brokers the loan and has a right to acquire an interest in the loan, or
3. based on the “totality of the circumstances” should be considered a lender.

The proposed definition of “loan” includes “money or credit provided to a consumer in exchange for the consumer’s agreement to a certain set of terms, including, but not limited to, any finance charges, interest, or other payments, closed-end and open-end credit, retail installment sales contracts, motor vehicle retail installment sales contracts, and any deferred deposit transactions.”

We note that B 25-0609 was introduced in the District of Columbia Council on November 30, 2023, and on December 5, 2023, the legislation was referred to the Council’s Committee on Business and Economic Development. A public hearing is scheduled for March 13, 2024.

Florida

On October 9, 2023, Florida State Senator Lori Berman introduced SB 146 to add a new section to the Florida Consumer Finance Act (FL-CFA), section 516.181. The new section is aimed at “bank model” lending programs, in which a nonbank partners with a bank to originate loans through it, that focus on making, offering, assisting, or arranging a consumer finance loan with a higher rate or amount than is authorized under Florida law or receiving interest, fees, charges, or other payments in excess of those authorized under Florida law, regardless of whether the payment purports to be voluntary. This could potentially capture “tips” lenders give consumers an option to provide and Earned Wage Access (EWA) products as well, since the definition of “consumer finance loan” includes both loans and extensions of credit.

SB 146 also introduces a “true lender” test with language similar to other recent legislation, including the predominant economic interest standard, the prohibition applicable to bank agents and servicers, and a totality of the circumstances test. SB 146 also provides that if a loan exceeds the consumer usury limit, a person is deemed to be a lender if any of the tests are met.

SB 146 was filed in the Florida Senate on October 9, 2023, referred to committees on October 17, 2023, and introduced to the Florida Senate on January 9, 2024.

Maryland

On January 10, 2024, Maryland legislators introduced two credit regulation bills, HB 254 and HB 246. Through HB 254, Maryland intends to create a new subtitle to the Maryland Commercial Law, the “True Lender Act,” that will impose a true lender test on extensions of credit made to Maryland residents. The law would apply to national bank associations, state-chartered banks, state-chartered credit unions, and any person that extends loans or credit to Maryland residents. As the subtitle is named, HB 254 incorporates true lender principles, including a predominant economic interest standard, a totality of circumstances test, a provision regarding marketing or facilitating the loan or extension of credit, and anti-evasion provisions. HB 254 would also seek to void any loan or extension of credit that violates its provisions.

HB 246, entitled Earned Wage Access and Credit Modernization, proposes to amend Title 12 of the Maryland Commercial Law to govern EWA products by adding a new subtitle. A person providing direct-to-consumer earned wage access will require a license, and employer-integrated earned wage access will require a registration with the Office of Financial Regulation through the Nationwide Mortgage Licensing System (NMLS). Further, HB 246 restricts the acceptance of “tips,” as defined by certain lenders, and tips are included in the definition of “interest.” A consumer loan lender that gives consumers an option to provide the lender a tip is required to set the default tip at zero. A consumer loan lender that receives a tip that would otherwise create a rate of interest above that allowed is not in violation of the law if the lender returns the exceeding amount within thirty calendar days after receiving the tip.

Hearings were held on January 23, 2024, for both HB 254 and 246.

Washington

On December 5, 2023, HB 1874 was pre-filed for introduction to amend the Washington Consumer Loan Act (WA-CLA). The Washington bill, like the Florida bill discussed above, is aimed at “bank model” lending programs that are making, offering, assisting, or arranging loans with rates that exceed those permitted by the WA-CLA, addressing such programs by codifying both a predominant economic interest test and a totality of the circumstances test.

HB 1874 proposes a new definition of “loan” as “money or credit provided to a borrower in exchange for the borrower’s agreement to a certain set of terms including, but not limited to, any finance charges, interest, or other charges, conditions, or considerations.” Also, the proposed law governs whether the lender has legal recourse against the borrower in the event of nonpayment and whether the transaction carries required charges or payments. HB 1874 amends the applicability of the WA-CLA from a “resident” of Washington to any loan made to a person “physically located in Washington.” Additionally, on January 2, 2024, SB 5930 was also pre-filed, following the same concepts.

On December 11, 2023, HB 1918 was pre-filed to propose amendments to the laws that govern small loans under payday loan lending laws and also include true lender principles for small loans. These are loans of $700 or 30 percent of the borrower’s gross monthly income, whichever lower. The legislation also proposes an annual percentage rate cap of 36 percent on such loans. On January 2, 2024, HB 2083 was pre-filed and contains the same proposed amendments as HB 1918 except for adding an emergency declaration and providing an immediate effective date if passed.

HB 1874 and HB 2083 are both in the House Committee on Consumer Protection & Business, and a public hearing was held on January 10, 2024. On January 8, 2024, HB 1918 was referred to the House Committee on Consumer Protection & Business, and SB 5930 was referred to the Senate Committee on Business, Financial Services, Gaming & Trade.

Takeaways

These early proposed bills, like the bill proposed in the District, indicate that we will see more jurisdictions explore whether to follow Colorado’s lead on opting out of DIDMCA, even though the law is nearing forty-four years old. Jurisdictions are also continuing to explore adopting true lender legislation that mirrors legislation in Illinois, Maine, Minnesota, and New Mexico. These legislative proposals appear to be gaining steam as bank partner programs have grown and expanded across the United States.

The District’s PALs Act is interesting, however, in that it seeks to adopt both a DIDMCA opt-out and a true lender test, whereas prior legislation elected one or the other. We would expect that other jurisdictions will continue these trends and explore similar legislation and that the regulatory scrutiny and the potential for enforcement and litigation would be greater where such legislation has been enacted or is in the pipeline.

While there is still some question about the effectiveness of the DIDMCA opt-outs, financial services companies should be aware of the changing landscape as products, services, and programs are developed and maintained.

Following the English High Court’s written reasons for sanctioning the Adler Group restructuring plan on April 21, 2023 (you can read our deep dive on this decision here), the English Court of Appeal overturned the High Court’s decision and sent a strong message regarding future Part 26A restructuring plans and, in particular, the cross-class cramdown regime. The Court of Appeal’s decision, which was handed down on January 23, 2024, represents the maiden voyage of Part 26A restructuring plans in the UK through the appellate process since the introduction of the device in 2020 (Bondco PLC v. Strategic Value Capital Solutions [2024] EWCA (Civ) 24).

Summary of the Adler Group Restructuring Plan

The Adler Group, a prominent German property group owning a rental property portfolio valued at approximately €8 billion, faced a myriad of liquidity challenges following the impact of ratings downgrades, regulatory/bondholder scrutiny, and short-selling pressure. The Adler Group had six series of unsecured notes maturing in 2024, 2025, 2026, 2027, 2028, and 2029 (“Notes”). The proposal (“Plan”), initially sanctioned by the High Court, included

• introducing €937 million of new senior secured debt to repay the Notes maturing on April 27, 2023, and the 2024 Notes, in exchange for a super-senior first-ranking lien and a 22.5 percent equity interest post-restructure;
• extending the maturity date of the 2024 Notes until July 31, 2025, in exchange for priority over other noteholders in terms of repayment (maturity of all other Notes to remain the same); and
• amending the remaining Notes to allow refinancing and receive a paid-in-kind (“PIK”) interest and a subordinated security interest.

An ad hoc group of 2029 noteholders (“AHG”) opposed the Plan, but the Plan was approved by five out of six classes of creditors (37.72 percent of the AHG voting against), and the High Court sanctioned the Plan, including a cross-class cramdown against the AHG. An appeal by the AHG was allowed on the basis of the following arguments:

• Pari passu principle. The first-instance judge failed to recognize the Plan’s departure from the pari passu principle that would apply in the relevant alternative.
• Rationality test. The rationality test used was derived from schemes of arrangement that did not require further investigations regarding improvements to the Plan.
• Incorrect weighting of factors. Too much weight was given to the “no worse off” test and the simple majority of the AHG approving the Plan.

Main Takeaways of the Court of Appeal’s Decision

Further Scrutiny of and Commentary on the Pari Passu Principle

The Court of Appeal’s finding that the restructuring plan violated the pari passu principle sends a loud message about the nonnegotiable nature of equitable creditor treatment and underscores the centrality of proportionate distributions. The Court of Appeal made clear that adherence to the pari passu principle is paramount to eliminate risks associated with sequential payments to creditors from an inadequate common fund of money, and that if the pari passu principle is applied in an alternative scenario to the restructuring plan, then it must also apply to the restructuring plan itself. Departure from this principle requires a robust justification, introducing a nuanced perspective on creditor treatment.

The Court of Appeal declared the Plan to be in violation of the pari passu principle, as it did not treat the AHG in the same way as the secured creditors and other noteholders. The Court of Appeal was not convinced that the reasons argued in favor of the Plan outweighed the inequality of the Plan. In particular, the Court of Appeal was concerned by the nature of the sequential payments under the Plan, which did not align with the essence of pari passu distribution.

This position by the Court of Appeal underscores the importance of equitable creditor treatment in the cross-class cramdown scenario and the importance of providing persuasive reasoning for any deviation from equal treatment.

The Horizontal Comparator Test over the Rationality Test

The Court of Appeal deviated from the “rationality test” used in schemes of arrangement and instead introduced the “horizontal comparator test,” while emphasizing the need for a more sophisticated comparison between dissenting and assenting classes of creditors in a restructuring context.

The horizontal comparator test demands a meticulous evaluation of how different classes should be treated relative to each other in the relevant alternative scenario. This shifts the focus from a broad rationality check, which entails a broad evaluation of creditors’ commercial judgment, to a more nuanced analysis focusing on the actual positioning of creditors. The Court of Appeal, in applying this test, considered whether a proposed plan is the “best” plan, evaluating whether a different formulation could be “fairer.” For instance, if a plan offers enhanced benefits to one class over another without a justifiable reason, it might be deemed inequitable.

The Court of Appeal’s move away from the rationality test shows that courts expect a much more thorough assessment of the treatment of each class of creditor to be undertaken, with the focus being on equality. This may, however, increase the scope for challenges on these grounds in future cases. This uncertainty may result in more secured creditors proposing solutions in a legal framework outside of the UK’s Part 26A regime in order to seek certainty and liquidity.

Other Takeaways

The Court of Appeal decision in the Adler Group case emphasizes the need for a fair court process, comprehensive evidence exchange, and sufficient time for valuation considerations. Genuine urgency is going to be accommodated, but the Court of Appeal decision underscores the need for a robust and transparent process nonetheless. As part of this, the Court of Appeal stressed the importance of comprehensive valuation evidence, signaling a potential move toward longer periods between convening and sanctions hearings.

The Court of Appeal also noted that a restructuring plan can impose a “haircut” on creditors, while also permitting shareholders to retain equity. The Court of Appeal clarified that, in an insolvency scenario, shareholders not being paid until creditors are paid in full is not necessarily a departure from the pari passu principle.

Conclusion

Beyond the specifics of the Adler Group case, this decision provides guidance that may be applied to other scenarios and across jurisdictions. What some readers may view as a useful framework for the approach to other complex restructuring proceedings, others may see as a treacherous shift away from what many commentators considered to be the more “commercial” and expedient position advocated for by the High Court in April 2023.

This article is not intended to be a substitute for legal advice or a legal opinion. It deals in broad terms only and is intended to merely provide a brief overview and give general information.

On August 31, 2022, significant amendments to Part V of the Cayman Islands Companies Act (“Act”) took effect to revamp the Cayman Islands restructuring regime. These amendments introduced the new role of a court-appointed “Restructuring Officer” and a dedicated “Restructuring Petition.” The Cayman Islands restructuring officer regime (“RO Regime”) shares certain features with the Chapter 11 bankruptcy procedure in the US and Canada’s Companies’ Creditors Arrangement Act.

Now that the RO Regime is approaching its two-year anniversary, we take the opportunity to provide a brief overview of the RO Regime and an update on how it is working in practice based on the first decisions such as Re Oriente Group Limited, Re Aubit International, and Re Holt Fund SPC.^[1]

The RO Regime has been developed over a number of years with extensive consultation between the Cayman Islands government, the local judiciary, and a number of financial services industry participants (including attorneys and insolvency practitioners). The introduction of the RO Regime has been welcomed by the financial services industry as a useful tool for companies in distress (and their stakeholders) to assist with the protection of a distressed company’s value and a way to provide “breathing space” while a restructuring is carried out.

One benefit of the RO Regime is that there is now a clear distinction between winding-up processes and rescue or recovery paths. Before enactment of the RO Regime, a winding-up petition was required to be presented prior to any application to appoint officeholders (including for the purpose of promoting a restructuring). The filing of a winding-up petition was often the precise act that a distressed company (and/or its stakeholders) was trying to avoid, particularly where such a filing might trigger a corresponding public announcement on a stock exchange or an event of default on the company’s debts. Given the global reach of many Cayman Islands companies, it is understandable that stakeholders in other jurisdictions would often have an instinctive negative reaction to terms such as “winding-up petition” and “liquidator.”

It is now possible to initiate restructuring efforts using a bespoke method with the benefit of a statutory moratorium effective from the time of filing a restructuring petition that is similar to the US Chapter 11 stay (while avoiding the negative connotations associated with the winding-up petition process).

Key features

• A company may seek the appointment of restructuring officers on the grounds that (i) the company is or is likely to become unable to pay its debts; and (ii) intends to present a compromise or arrangement to its creditors.
• The petition seeking the appointment of a restructuring officer may be presented by the directors of a company: (i) without a shareholder resolution and/or an express power to present a petition in its articles of association; and (ii) without the need to present a winding-up petition. This addresses longstanding issues related to the rule in Re Emmadart Ltd [1979], which prevented directors of Cayman Islands companies from presenting a petition to wind up a company (in order to restructure or otherwise) unless expressly authorized by the articles of association.
• The moratorium will arise on presenting the petition seeking the appointment of restructuring officers, rather than from the date of the appointment of officeholders, and it will have extraterritorial effect as a matter of Cayman Islands law. This was aimed at tackling the uncertainty in the interim period where a winding-up petition had been filed with a view to restructuring, which might have triggered events of default, but a stay on claims only occurred after officeholders were appointed.
• The default position is that this will be an inter partes process with adequate notice to be given to all stakeholders.
• The powers of restructuring officers are flexible. The extent to which the directors will continue to manage the affairs of the relevant company will be defined by the order and will depend on the facts of the particular case.
• During the restructuring proceedings, the company will be able to seek sanction of a scheme of arrangement, a parallel process in a foreign jurisdiction, or a consensual compromise.
• Secured creditors with security over the whole or part of the assets of the company will still be entitled to enforce their security without the leave of the court and without reference to the restructuring officers. Unsecured creditors and other stakeholders must seek leave to initiate proceedings and circumvent the stay.

Re Oriente Group Limited, December 8, 2022 (FSD 231 of 2022) (IKJ)

Justice Kawaley handed down the first written judgment on the RO Regime. Re Oriente Group Limited provided a number of important clarifications on the law, including the following:

• Given that the RO Regime expanded the scope of the stay under the previous regime (discussed above), the Court commented that the statutory stay on proceedings under the RO Regime “might be said to turbo charge the degree of protection filing a restructuring petition affords to the petitioning company.” Accordingly, in Re Oriente, the Court found that following the presentation of a winding-up petition against a company, there is no prohibition on a company presenting a restructuring petition and such filing triggering the automatic stay under the RO Regime.
• The Court emphasized that the “jurisdiction to appoint restructuring officers is a broad discretionary jurisdiction” to be exercised where the Grand Court is satisfied that, among other things:
  • The statutory precondition of insolvency or likely insolvency of the company is met by credible evidence from the company or some other independent source;
  • the statutory precondition of an intention to present a restructuring proposal to creditors or any class thereof is met by credible evidence of a “rational proposal with reasonable prospects of success”; and
  • the proposal has or will potentially attract the support of a majority of creditors as a “more favourable commercial alternative to a winding up of the company.”
• The Court indicated that the previous body of case law on restructuring under the former rescue regime would continue to be applicable to the new RO Regime.

Re Aubit International, October 4, 2023 (FSD 240 of 2023) (DDJ)

In the second notable decision on the RO Regime, Justice Doyle reviewed the established jurisprudence and set out a nonexhaustive list of twenty-five factors to be considered in future restructuring applications under the RO Regime, such as the importance of demonstrating that the company was insolvent or likely to be insolvent, and whether a proposed restructuring will have a real prospect of being beneficial to creditors as a whole. Justice Doyle also emphasized that the Court will be wary to avoid abuse of the restructuring officer regime by companies with no intention of restructuring and permitting hopelessly insolvent companies to continue trading.

In this case, Justice Doyle found that the petitioning company did not meet the statutory requirements to appoint restructuring officers, as although it was unable to pay its debts (i.e., insolvent), it failed to meet the second requirement because there was “extremely limited information concerning the proposed ‘restructuring plan.’”

Justice Doyle indicated that although the Court did not go so far as to require that the petitioning company presently had a restructuring plan or that one would be implemented in short order, it was still incumbent on the Court to scrutinize whether there was, on the evidence before it, a genuine and realistic intention to present a credible restructuring plan.

Re Holt Fund SPC, January 26, 2024 (FSD 0309 OF 2023) (IKJ)

In a recent development, Justice Kawaley ordered the first appointment of restructuring officers over one or more portfolios of a segregated portfolio company (“SPC”). SPCs are different from typical Cayman companies in that the assets and liabilities of each segregated portfolio are segregated from each other during the life of the SPC and in liquidation, which is known as the segregation principle. Typically, where a particular portfolio has insufficient assets to meet claims of creditors, a receiver may be appointed for the purpose of an orderly closing down of the business of that portfolio.

Until this judgment, it was not clear that restructuring officers could be appointed in relation to specific portfolios given that each portfolio is not a separate legal entity.

This decision illustrates the flexibility of the SPC regime compared with both traditional companies and corresponding segregated portfolio regimes elsewhere. However, the application to appoint restructuring officers was unopposed in this case, so it will be interesting to see if such appointments are subject to challenge in future.

Takeaway

While not appropriate for all circumstances, the RO Regime will be a sensible and effective method by which large, multinational groups may seek to restructure their debt obligations and other affairs for the benefit of their stakeholders.

The Cayman Courts have provided helpful clarification on a number of aspects of the RO Regime, including the breadth of the automatic stay, the applicability of the RO Regime to SPCs, and the importance of a clear restructuring plan before asking the Court to engage its jurisdiction to appoint restructuring officers. It is clear that the Court is concerned with avoiding abuse of the new restructuring regime while also promoting consistency and certainty, albeit under a turbocharged framework.

This clarification will be especially important for foreign courts in considering whether to recognize and assist Cayman Islands restructuring officers in future. Foreign courts can take comfort in the fact that the Cayman Islands Court remains astute to guard against any abuse of the new regime by carefully analyzing whether the statutory preconditions for appointment are met in the circumstances of each case.

The key to a successful restructuring, through the Cayman RO Regime or otherwise, will always be timely action, with the right advisor team to guide the process.

This article is not intended to be a substitute for legal advice or a legal opinion. It deals in broad terms only and is intended to merely provide a brief overview and give general information.

1. Restructuring officers were also appointed subsequently by Chief Justice Ramsay-Hale on February 14, 2023, in Re Rockley Photonics Holdings Limited (FSD 16 of 2023), albeit without a written judgment. ↑

Delaware is a contractarian state, which allows parties the freedom to contract as they see fit and leaves to the parties the ordering of their affairs. Even with the freedom to include (or exclude) terms in a contract, there is one term (a covenant, really) that need not be negotiated or expressly stated in the agreement—that is the implied covenant of good faith and fair dealing. The implied covenant has been described as a “cautious endeavor” that should rarely be invoked.^[1] This is because the covenant is used to protect the parties’ benefit of the bargain and not as a quasi-equitable rebalancing of rights. It cannot be invoked if the issue is already covered by the terms of the agreement. Rather, the job of the covenant is to imply those terms that the parties did not negotiate but that they would have included in their agreement if they had thought to do so. Thus, a party asserting the covenant must identify a gap in the contract for the covenant to fill. Parties may not use the covenant to obtain benefits or protections that they did not obtain at the negotiating table. It is not a free-floating duty unattached to the written contract, and it is not the court’s role to impose terms on the parties to which they did not agree.

No matter how thoroughly parties negotiate their agreement, there may be “nooks and crannies” in the contours of the agreement that are left unnegotiated.^[2] As such, there are some terms that are too obvious to be negotiated—and thus, a gap exists. For example, the implied covenant barred a general partner from seeking the benefit of a safe harbor provision in a limited partnership (LP) agreement where he had used deceptive and misleading tactics; had the parties thought to negotiate that obvious term, they would have provided that the general partner could not use such deceptive devices.^[3]

But a gap in the written agreement is not the only circumstance where the covenant may be applied. In the ordering of their affairs, parties may grant a party the authority to exercise its discretion in making decisions under the contract. While parties are free to set parameters on the exercise of discretion or include a standard by which the exercise of discretion is to be measured, when parties do not spell out the contours of the ability to exercise the discretion granted in the agreement, the implied covenant will imply that discretion must be exercised in good faith.

The covenant requires a contract counterparty to refrain from arbitrary or unreasonable conduct that has the effect of preventing the other party to the contract from receiving the fruits of the bargain.^[4] What is arbitrary or unreasonable is not, however, judged at the time of the alleged wrongful act. Rather, the court will look to the parties’ intent at the time they entered into the contract to determine the parties’ reasonable expectations.

The covenant is implied in every contract. Sometimes the covenant can be confused with contract terms providing for “good faith.” This is often seen in the limited liability company context. Limited liability companies are an attractive vehicle for a variety of investment opportunities, including private equity and hedge fund investments. LLCs (and limited partnerships) provide structural flexibility. It is the policy of the Delaware Limited Liability Company Act (the “Act”), for example, to give maximum effect to the principle of freedom of contract and to the enforceability of LLC agreements.^[5]

Thus, LLC agreements often confer very broad authority on the managers or directors and provide for a safe harbor for their decisions. Indeed, the Act permits the elimination of fiduciary duties.^[6] However, the LLC agreement may not eliminate the covenant of good faith and fair dealing.^[7]

So, what does “good faith” in the covenant mean in these various contexts? An LLC agreement may define “good faith” as being what the manager believes to be in the best interest of the LLC (a subjective standard), or what the manager reasonably believed to be in the best interest of the LLC (an objective standard), or provide that certain actions are conclusively presumed to constitute good faith. These concepts are not to be confused with “good faith” under the covenant, which entails faithfulness to the scope, purpose, and terms of the parties’ contract.^[8]

Understanding the implied covenant and how it differs from express contractual “good faith” standards is important in drafting contracts to obtain the intended objective, usually of limiting the right to challenge a decision or a liability-limiting provision for making self-interested decisions. It is also important to understand the distinction and how each operates in developing litigation strategies. These concepts should be fully explored at the outset of drafting or litigation.

This article is related to a CLE program titled “Good Faith and Fair Dealing: Can the Covenant Really Be Breached?” that was presented during the ABA Business Law Section’s 2023 Fall Meeting. To learn more about this topic, view the program as on-demand CLE, free for members.

1. Nemec v. Shrader, 991 A.2d 1120, 1125 (Del. 2010); MHS Capital LLC v. Goggin, 2018 WL 2149718, at *11 (Del. Ch. May 10, 2018) (cleaned up). ↑

2. Gerber v. Enter. Prods. Holdings, LLC, 67 A.3d 400, 418 (Del. 2013), overruled on other grounds by Winshall v. Viacom Int’l., Inc., 76 A.3d 808 (Del. 2013). ↑

3. Baldwin v. New Wood Resources LLC, 283 A.3d 1099, 1119 (Del. Ch. 2022). ↑

4. Brinckerhoff v. Enbridge Energy Co., Inc., 2016 WL 1757283, at *18 (Del. Ch. Apr. 29, 2016). ↑

5. 6 Del. C. § 18-1101(b); In re P3 Health Group, Hldgs., LLC, 2022 WL 16548567, at 33 (Del. Ch. Oct. 31, 2022) (“parties have broad discretion to use an LLC agreement to define the character of the company and the rights and obligations of its members.”). ↑

6. 6 Del. C. § 18-1101(c). ↑

7. Id. ↑

8. Miller v. HCP & Co., 2018 WL 656378, at *8 (Del. Ch. Feb. 1, 2018) aff’d sub nom. Miller v. HCP Trumpet Invs., LLC, 194 A.3d 908 (Del. 2018). ↑

Attorneys practicing in the field of commercial finance and special assets professionals should keep up with the latest strategies to resolve borrower defaults through negotiated forbearance agreements. As discussed herein, professionals seeking to maximize lender recoveries on distressed debt should consider strategies including, without limitation: (i) preliminary loan workout analysis, (ii) pre-negotiation agreements, and (iii) forbearance agreements, which may be utilized to address deficiencies in loan documentation, collateral, or covenants.

I. Defaults

Defaults under commercial loans may be monetary in nature, i.e., a borrower may fail to pay principal at maturity, interest installments when due, or other indebtedness such as insurance premiums and taxes (collectively, “monetary defaults”). As monetary defaults generally may be cured, lenders must work with their counsel to strategize about potential business plans to resolve such defaults that limit the lender’s risk. Other defaults—such as the unauthorized sale or transfer of collateral, the death of a guarantor, and the failure to comply with applicable laws (collectively, “nonmonetary defaults”)—may not be curable, a factor that lenders should keep in mind when evaluating potential enforcement strategies.

Lenders also should be aware that their remedies must be appropriate for the specific default. For example, courts will examine the fairness and equity of a lender’s choice to accelerate a loan in the context of the nature of the default at issue.^[1] In addition, lenders should review the loan documents to determine whether the borrower’s default is automatic or requires the lender to provide notice and a time period to cure.

Most often, the nature of the collateral will compel treatment of the defaults. For example, a lender may be more willing to work out a loan default for a construction loan where the building is nearly complete and only requires minimal costs to complete it, as compared to a lender’s willingness to work out a loan secured by collateral that may not have value in a sale (e.g., computer components or auto parts). In evaluating their options, lenders also should understand that not all default interest may be recoverable, particularly where interest is assessed pre-maturity on the entire loan amount.^[2] Depending on the jurisdiction, lenders and their counsel should watch for one-action (or “single action”) rules, which require that lenders exhaust their security before suing the borrower directly on the debt^[3] or employ a modified anti-deficiency approach to recoverability.^[4] While default remedies often apply the laws of the lender’s preferred jurisdiction, lenders should be aware of recent legal developments that impact the court’s application of contractual choice of law provisions.^[5]

II. Pre-Negotiation Agreements

Lenders should strategize about a potential pre-negotiation agreement (“PNA”) prior to entering into workout agreements with their borrower. A PNA sets the ground rules for any workout discussion and expressly reserves the lender’s rights and remedies. PNAs also acknowledge the voluntary nature of workout discussions, and they should confirm that either party can terminate negotiations at any time.

Lenders and their professionals should consider utilizing PNAs to maximize lender interests by, for example: (i) stating the existing defaults with clarity and acknowledging that the lender is free to exercise all rights and remedies as a result thereof, (ii) requiring borrower’s cooperation with pre-meeting inspections of collateral, and (iii) including a detailed release of claims in any way connected with the loan documents as of the date of execution of the PNA.

III. Forbearance Agreements

Forbearance agreements can be important tools in a lender’s arsenal for the informal resolution of defaults, as such agreements provide a clear roadmap for resolution and limit a lender’s credit risk while providing a borrower with sufficient time to resolve its financial difficulties and get back on track. Forbearance agreements also are helpful in reducing lender liability concerns, as any disputes by a borrower concerning the factual aspects of a loan and the existing defaults can be addressed in the agreement. A lender also can reduce the risk of its borrower alleging that the lender made oral promises by documenting the terms and conditions for its forbearance in the forbearance agreement.

Lenders should avoid waivers of existing defaults if at all possible. Where they cannot be avoided, waivers should be specific and short term, prepared by counsel, in writing, and clearly labeled as a waiver of existing default. Oral waivers should be avoided at all costs. Lenders also often are able to collect forbearance fees as consideration for their agreement to conditionally forbear from exercising their rights and remedies upon the borrower’s default, as well as releases. In addition, lenders may utilize forbearance agreements to clarify that attorneys’ fees, appraisal fees, litigation costs, and all other costs of collection are recoverable under the parties’ loan documents. Also, any forbearance agreement should clearly state the benchmarks, conditions, or milestones that a borrower must meet—including the timeframe for such compliance—in order for the forbearance to take and stay in effect. Finally, should lenders discover any insufficiency with their collateral, perfection, or documentation, they should strive to fix the deficiency in the forbearance agreement.

IV. Conclusion

Lenders should confer with their counsel to strategize over options to address defaults under their commercial loan documents. The nature of the borrower’s default, the type of collateral, and the lender’s business goals in resolving any default all should be considered when exploring whether a PNA and forbearance agreement may be the best option for a negotiated resolution in any given situation.

This article is based on a CLE program titled “Defaults and Forbearance Agreements” that took place during the ABA Business Law Section’s 2023 Fall Meeting. To learn more about this topic, listen to a recording of the program, free for members.

1. See, e.g., Brown v. AVEMCO Inv. Corp., 603 F.2d 1367 (9th Cir. 1979); Cal. Civ. Code §§ 3275, 3369. ↑

2. See Honchariw v. FJM Private Mortgage Fund, 83 Cal. App. 5th 893 (Sep. 29, 2022); Cal Civ. Code § 1671(b). ↑

3. See, e.g., Cal. Code Civ. Proc. § 726. ↑

4. See, e.g., Tenn. Code. Ann. § 35-5-117. ↑

5. See Carmel Financing, LLC v. Schoenmann, 2022 WL 3599561 (N.D. Cal. Aug. 23, 2022) (declining to apply contractual choice of law provisions when outweighed by public policy issues of concern to the forum state). ↑

On February 1, 2023, the Centers for Medicare and Medicaid Services (“CMS”) issued its final rule on risk adjustment data validation (“RADV”) audits.^[1] The rule is already the subject of litigation. On September 1, 2023, Humana filed suit in the U.S. District Court for the Northern District of Texas,^[2] challenging the new RADV audit rule as an arbitrary and capricious reversal of the 2012 policy governing RADV audits conducted by CMS—and as retroactive rulemaking that upends the predictability of the Medicare Advantage bid process and threatens the availability of benefits to enrollees.^[3] On December 15, 2023, the Department of Justice filed a motion to transfer or dismiss the Humana suit.^[4] The Department of Justice argues that because CMS has not yet begun any audits under the new methodology, much less completed them, Humana lacks standing to challenge the new RADV audit rule and that certain aspects of the RADV audit rule are not ripe for adjudication.

Case Details

Humana argues that the new rule eliminating the fee-for-service adjuster (“FFSA”) introduces an inconsistent documentation standard that impacts the predictability of the Medicare Advantage (Part C) bid process. To manage financial risk, plans will be required to estimate potential rebates or premiums, due to increased audit recoveries arising from the retroactive application of a different audit methodology.^[5] Underlying Humana’s argument is the fundamental principle that “[t]he legal effect of conduct should ordinarily be assessed under the law existing at the time that the conduct took place.”^[6] The 2023 RADV audit rule change, asserts Humana, impermissibly creates retroactive liability affecting plan years from 2018 forward.^[7]

In its prior final rule in 2012, CMS recognized the need to use the FFSA to account “for the fact that the documentation standard used in RADV audits to determine a contract’s payment error (medical records) is different from the documentation standard used to develop the Part C risk-adjustment model (FFS claims).”^[8] The FFSA was intended to ensure that the amount due in a RADV audit considered the difference between audit review standards and the errors resulting from unsupported fee-for-service diagnostic codes, creating a permissible level of payment errors and limiting RADV audit recovery to payment errors above the set level.^[9] Humana asserts that the elimination of the FFSA removes a factor required to achieve actuarial equivalence between Part B payments and those of Medicare Advantage.

Humana argues that the retroactively applied standard for calculating extrapolated overpayments changes the legal effect of conduct under the law existing at the time that the conduct took place.^[10] Humana asserts that the change impacts all bids submitted by it since 2012. It states that since 2012, when CMS announced its adoption of the FFSA, Humana has predicated its Medicare Advantage contract bids on the existence of the FFSA.^[11] It asserts that the application of the new standard in this current plan year and earlier periods is contrary to the obligations of CMS under the annual rate notice. A retroactive application of the new standard, Humana argues, is contrary to the factors that were key to establishing the current- and prior-year bid proposals. Humana states that it based its bids on the CMS annual rate notice in place in the earlier periods, which required disclosure by CMS to identify risk and other factors to be used in adjusting payments.^[12]

Humana seeks to have the court vacate the final rule and enjoin its application against Humana in RADV audits.

Department of Justice Motion to Dismiss and Transfer Humana Suit

Humana’s suit is premised on the impact extrapolated overpayments identified in a RADV audit for payment years 2018 forward will have on current year plan bids and insurance pricing. The Department of Justice attacks Humana’s standing to challenge the 2023 CMS Final Audit Rule. It incorrectly asserts that no RADV audits under the challenged rule have occurred, and that neither Humana nor any of its subsidiaries have been audited. The Department of Justice argues that because the harm of such audits is not certainly impending, Humana cannot establish standing through “a reasonable reaction” to “that risk of harm.”^[13] CMS’s authority to conduct RADV audits is set out in 42 CFR 422.311, and it has been retroactively applied by the Office of Inspector General for the Department of Health and Human Services (OIG), in its performance of its audits of Medicare Advantage Organizations, six times since the rule became effective.

Geisinger Health Plan, in its challenge to 2023 Medicare Advantage Compliance Audit findings from the OIG, challenged the authority of the OIG to perform risk adjustment audits, arguing it lacks authority under federal regulations (42 CFR § 422.311) and the Inspector General Act of 1978 to assume program operating responsibilities. ^[14] It argued that the OIG’s reliance on 42 CFR § 422.311, which outlines the authority of CMS to conduct RADV audits, as one source of authority for its actions, is incorrect in that the regulation “does not govern or inform OIG’s actions” and that the OIG is limited to agency oversight and reporting. Under 42 CFR Section 422.311, Congress intended risk adjustment audits “to be performed by CMS, not OIG” as a corrective audit activity developed by CMS to address provisions included in federal statutes. The exercise of RADV audits delegated to the OIG, Geisinger argued, is tantamount to providing it the authority to “effectively create a new rule under the wrappings of an audit.”

Since February 1, 2023, there have been six OIG audits carried out under the 2023 Final Rule including the audit of Geisinger.^[15] A total of approximately $6.4 million in overpayments have been assessed against six Medicare Advantage payers, including a subsidiary of Humana, CarePlus Health Plan.^[16] In two of these instances, the OIG extrapolated the overpayment amount assessed because it arose from plan activity after 2018.^[17] No fee-for-service adjuster was applied in two of the audits to reduce the net overpayments recouped.^[18]

In the OIG audits conducted under the new 2023 Final Rule, payers have objected to audit findings, challenging the methodology used as involving flawed audit sampling that is inconsistent with CMS’s actuarial equivalence mandate, and its requirements for data accuracy and compliance.

CarePlus, in its 2023 contract level RADV audit, asserted an actuarial equivalence argument and objected to CMS’s failure to apply an FFSA in the overpayment calculation, asserting that during the year audited (2015), the 2012 Final Rule allowed for the offset to the recouped overpayment. The OIG responded to CarePlus’s actuarial equivalence argument in its audit report by stating:

We note that after we issued our draft report, CMS stated that it “will not apply an adjustment factor (known as a Fee-For-Service (FFS) Adjuster) in RADV audits.” To this point, we recognize that CMS—not OIG—is responsible for making operational and program payment determinations for the Medicare Advantage program.^[19]

However, by adjusting its findings to correspond to the requirements of the 2023 Final Rule for an audit with 2015 as the audit year, the OIG effectively applied a different audit standard than the one in place in 2015, the 2012 Final Rule, which did factor an FFSA into the calculated overpayment.

Conclusion

Medicare Advantage payers face a difficult road in their efforts to manage the risks associated with the 2023 RADV audit rule. However, the 2023 contract-level RADV audits have provided evidence demonstrating the risk of harm associated with the 2023 RADV Final Rule.

1. Medicare and Medicaid Programs; Policy and Technical Changes to the Medicare Advantage, Medicare Prescription Drug Benefit, Program of All-Inclusive Care for the Elderly (PACE), Medicaid Fee-for-Service, and Medicaid Managed Care Programs for Years 2020 and 2021, 88 Fed. Reg. 6643 (Feb. 1, 2023) [hereinafter 2023 Final Rule]. ↑

2. Complaint, Humana, Inc. v. Becerra, No. 4:23-cv-00909-o (N.D. Tex. Sept. 1, 2023). ↑

3. Humana further asserts that no notice and comment procedure was followed with the 2018 proposed rule, which reversed CMS’s policy and excluded the FFSA. ↑

4. Motion to Transfer or Dismiss, Humana, Inc. v. Becerra, No. 4:23-cv-00909-o (N.D. Tex. Sept. 1, 2023) (“Motion to Transfer or Dismiss”). ↑

5. 87 Fed. Reg. 65,723 (Nov. 1, 2022). RADV refers to risk adjustment data validation, which is the process of verifying diagnosis codes submitted for payment by Medicare Advantage insurers to provide clinical support for the diagnoses. The fee-for-service model reimburses providers based on procedures performed. The Medicare Advantage and Medicare fee-for-service models differ in that Medicare Advantage risk-adjusts a capitated rate to allow plans that accept patient populations with chronic conditions. Reimbursement under the Medicare Advantage model is diagnosis driven. ↑

6. Landgraf v. USI Film Prods., 511 U.S. 244, 265 (1994).  ↑

7. Contra Azar v. Allina Health Servs., 139 S. Ct. 1804, 1811 (2019) (rulemaking only applied prospectively); Regions Hosp. v. Shalala, 522 U.S. 448 (1998) (rule adjusting base-year cost for inflation was limited to affecting reimbursement for future years and for those cost-reporting periods within the three-year window for auditing cost reports—no new reimbursement principles were applied to prior periods); Bowen v. Georgetown Univ. Hosp., 488 U.S. 204 (1988) (recoupment of amounts previously paid to hospitals applying new rule retroactively is impermissible). ↑

8. Ctrs. for Medicare & Medicaid Servs., Fee for Service Adjuster and Payment Recovery for Contract Level Risk Adjustment Data Validation Audits (Oct. 26, 2018). See also Ctrs. for Medicare & Medicaid Servs., Notice of Final Payment Error Calculation Methodology for Part C Medicare Advantage Risk Adjustment Data Validation Contract-Level Audits (Feb. 24, 2012). ↑

9. Ctrs. for Medicare & Medicaid Servs., Notice of Final Payment Error Calculation Methodology for Part C Medicare Advantage Risk Adjustment Data Validation Contract-Level Audits (Feb. 24, 2012). ↑

10. CMS asserts that it meets the standard for retroactive rulemaking, that the RADV audit final rule is “based on longstanding case law and best practices from HHS [Health and Human Services] and other federal agencies,” and that it had a right to change the extrapolation methods that are “historically a normal part of auditing practice throughout the Medicare program.” 83 Fed. Reg. at 54,984, 55,048 (Nov. 1, 2018). ↑

11. Since 2012, Humana has certified its prior-year bids based on the assumption that “the final risk scores will be calculated and payments and overpayments will be determined consistent with the fact that CMS has used diagnoses contained in administrative claims to calculate risk coefficients and risk scores for [Medicare] fee for service beneficiaries,” and that CMS “will . . . apply [] a Fee for Service Adjuster . . . to account for the fact that the documentation standards used in RADV audits to determine a contract’s payment error (medical records) is different from the documentation standard used to develop the Part C risk-adjustment model ([Medicare] FFS claims).” Humana, Inc. v. Becerra, No. 4:23-cv-00909-o, ¶ 83 (N.D. Tex. Sept. 1, 2023). ↑

12. Plan bids are based on prior-year risk scores of enrollees, which are derived from specific characteristics of expected enrollees in the relevant program area and the risk-adjustment method for that relevant period. The changes implemented under the 2023 Final Rule raise pricing uncertainties affecting the Medicare Advantage bid process, and the potential negative effect of potential premium increases may affect the availability or the cost of plan benefits. ↑

13. Clapper v. Amnesty Int’l USA, 568 U.S. 398, 416 (2013). ↑

14. Off. of Inspector Gen., U.S. Dep’t of Health & Human Servs., Medicare Advantage Compliance Audit of Specific Diagnosis Codes That Geisinger Health Plan (Contract H3954) Submitted to CMS (Mar. 16, 2023), at 19–20. ↑

15. The six audits addressed in this article were commenced prior to the issuance of the 2023 Final Rule, but the draft reports were held, and the audit findings recalculated the net overpayments due, in a manner consistent with the 2023 Final Rule. ↑

16. Off. of Inspector Gen., U.S. Dep’t of Health & Human Servs., Medicare Advantage Compliance Audit of Specific Diagnosis Codes That MCS Advantage, Inc. (Contract H5577) Submitted to CMS (Mar. 24, 2023); Off. of Inspector Gen., U.S. Dep’t of Health & Human Servs., Medicare Advantage Compliance Audit of Specific Diagnosis Codes That Keystone Health Plan East, Inc. (Contract H3952) Submitted to CMS (May 31, 2023); Off. of Inspector Gen., U.S. Dep’t of Health & Human Servs., Medicare Advantage Compliance Audit of Specific Diagnosis Codes That Excellus Health Plan, Inc. (Contract H3351) Submitted to CMS (July 10, 2023); Off. of Inspector Gen., U.S. Dep’t of Health & Human Servs., Medicare Advantage Compliance Audit of Specific Diagnosis Codes That Presbyterian Health Plan, Inc. (Contract H3204) Submitted to CMS (Aug. 3, 2023); Off. of Inspector Gen., U.S. Dep’t of Health & Human Servs., Medicare Advantage Compliance Audit of Diagnosis Codes That CarePlus Health Plans, Inc. (Contract H1019) Submitted to CMS (Oct. 26, 2023). ↑

17. Off. of Inspector Gen., U.S. Dep’t of Health & Human Servs., Medicare Advantage Compliance Audit of Specific Diagnosis Codes That Excellus Health Plan, Inc. (Contract H3351) Submitted to CMS (July 10, 2023), at Report in Brief (payment year 2018 was audited, and CMS extrapolated the overpayment under the challenged rule without allowing for the use of the FFSA offset) (“On the basis of our sample results, we estimated that Excellus received approximately $5.4 million in overpayments for 2017 and 2018. Because of Federal regulations (updated after we issued our draft report) that limit the use of extrapolation in Risk Adjustment Data Validation audits for recovery purposes to payment years 2018 and forward, we are reporting the overall estimated overpayment amount but are recommending a refund of $3.1 million ($235,453 for the sampled enrollee-years from 2017 and an estimated $2.9 million for 2018).”); Off. of Inspector Gen., U.S. Dep’t of Health & Human Servs., Medicare Advantage Compliance Audit of Specific Diagnosis Codes That Presbyterian Health Plan, Inc. (Contract H3204) Submitted to CMS (Aug. 3, 2023), at Report in Brief (payment year 2018 was audited, and CMS applied extrapolation principles as per the 2023 RADV audit rule, without allowing the offset of a fee-for-service adjuster) (“On the basis of our sample results, we estimated that PHP received at least $2.2 million in net overpayments for 2017 and 2018. Because of Federal regulations (updated after we issued our draft report) that limit the use of extrapolation in Risk Adjustment Data Validation audits for recovery purposes to payment years 2018 and forward, we are reporting the overall estimated net overpayment amount but are recommending a refund of $1.3 million ($206,048 for the sampled enrollee-years from 2017 and an estimated $1.1 million for 2018).”). ↑

18. Off. of Inspector Gen., U.S. Dep’t of Health & Human Servs., Medicare Advantage Compliance Audit of Specific Diagnosis Codes That MCS Advantage, Inc. (Contract H5577) Submitted to CMS (Mar. 24, 2023), at 24 (The FFSA was not applied in this audit that covered payment years 2016 and 2017, despite those years being exempt from the 2023 Final Rule, and the OIG’s explanation referred to the 2023 Final Rule: “CMS stated (after we issued our draft report) that it ‘will not apply an adjustment factor (known as an FFS Adjuster) in RADV audits.’”); Off. of Inspector Gen., U.S. Dep’t of Health & Human Servs., Medicare Advantage Compliance Audit of Specific Diagnosis Codes That Keystone Health Plan East, Inc. (Contract H3952) Submitted to CMS (May 31, 2023), at 20 (Although the audit years sampled were 2016 and 2017, the FFSA was not applied, despite the fact that the 2023 Rule stated that the FFSA would be eliminated only after February 1, 2023, when the rule became effective. The OIG nonetheless applied the 2023 Final Rule: “[W]e note that CMS stated (after we had issued our draft report) that it ‘will not apply an adjustment factor (known as an FFS Adjuster) in RADV audits.’ Thus, we did not revise the amount in our first recommendation based on Keystone’s comments; rather, we revised the amount in response to the updated regulations that CMS published after we issued our draft report.”). ↑

19. Off. of Inspector Gen., U.S. Dep’t of Health & Human Servs., Medicare Advantage Compliance Audit of Diagnosis Codes That CarePlus Health Plan, Inc. (Contract H1019), Submitted to CMS (Oct. 26, 2023), at 22–23. ↑