Sweeping Changes on the Horizon: Fiduciary Duty of Employers & Others Managing 401K Plans

The statute governing the conduct of plan sponsors and advisors to 401(k) plans is the Employee Retirement Income Security Act of 1974 (ERISA).  Section 404 of ERISA imposes a prudent man standard of care on the employer and other plan fiduciaries, comprised of five standards:

  • Duty of Loyalty – A fiduciary must discharge his duties solely in the interest of the plan participants. This means the fiduciary must avoid conflicts of interest when managing plan assets.
  • Exclusive Purpose Rule – A fiduciary must discharge his duties for the exclusive purpose of providing benefits or defraying reasonable expenses only. The plan must not pay excessive compensation to its investment and service providers.
  • Duty of Care – A fiduciary must discharge his duties with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims. This is also known as the “prudent expert” standard.
  • Duty to Diversify – A fiduciary must diversify the plan’s investments so as to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so.
  • Duty of Obedience – A fiduciary must discharge his duties in accordance with the documents and instruments governing the plan insofar as they are consistent with ERISA.

ERISA in § 1113(1) provides that claims brought against fiduciaries under the Act must be brought within six years from the initial breach.

On February 24, 2015, the U.S. Supreme Court heard oral arguments in the case of Tibble vs. Edison International.  This was the first case involving litigation over excessive 401(k) fees heard by the Supreme Court.

The Plaintiffs sued Edison International (Edison) in the U.S. District Court for the Central District of California (district court) to recover losses from alleged breach of fiduciary duty in management of their 401(k) plan based on two theories: 1) that Edison violated certain ERISA provisions by participating in revenue sharing with the funds to offset plan costs (essentially using a portion of the revenue from the participants’ funds to pay administration costs); and 2) that Edison violated ERISA provisions by imprudent handling of plan investments.

The district court granted summary judgment for Edison noting that Edison initially chose the higher-fee retail-class mutual funds for plan investments more than six years before the claim resulting in the plaintiffs’ claim being barred by the ERISA limitations period.

On appeal to the Ninth Circuit, Tibble counsel argued a continuing violation theory proposing that Edison continually breached their duty of prudence by failing to identify on an ongoing basis alternative lower cost fund options for plan participants through 2007.  If this theory was accepted, the last breach would have been in 2007 resulting in plaintiffs’ claims falling within ERISA’s six-year statute of limitations.  The Ninth Circuit affirmed the district court’s ruling.  Tibble petitioned the Supreme Court which granted certiorari to review the case.

While the underlying claim asserts that Edison breached its fiduciary duty in the management of the employee 401(k) Savings Plan, a defined contribution plan sponsored by Edison, the Supreme Court limited review to the limitations issue.

Edison initially claimed it had no continuous duty, and those claims were barred by the six-year statute of limitations, but at oral argument both sides agreed that the duty to monitor was a continuing one. They disagreed on the scope of that duty.  Edison International contended it had no obligation to switch to the less expensive share class, because this was not the type of issue significant enough to warrant “full due diligence.”  The position of the plan participants was that Edison International, as a fiduciary for the plan, had an obligation to make changes that any prudent investor would, which included switching to the lower-fee share class, as part of its continuing duty to monitor investment options.

In response to Justice Kagan’s question as to what a trustee is supposed to do under the prudent person’s standard, Tibble counsel advanced a three-part standard: 1) look at performance on a regular basis, a periodic basis; 2) look at the expenses and determine if there is a cheaper way to get the same investment for less money that’s coming out of the beneficiaries’ assets; and 3) has there been an alteration in the fund management that one ought to look further into.

On the other hand, Edison counsel argued that ongoing, periodic monitoring for anything other than more significant changes such as change in value and risks of the investments is not required.  In response to his contention that all of the changes required to sell retail shares and buy new institutional shares creates disruptions that employees don’t like which is why the monitoring process is usually limited to looking for significant changes.  Justice Kagan was rather incredulous at this proposition by Edison when she observed that, for people who have invested in funds for 30 to 40 years, this would not be much of a disruption at all.  At another point in oral argument, Justice Roberts chimed in questioning how there could be investor confusion.  Justice Roberts proposed that one sentence saying we have been paying .3 percent, and by changing funds, now we’re paying .2 percent, will not have people running out screaming that they’re confused about it.  Justice Kagan responded again with incredulity challenging Edison counsel “They don’t like changes.  They would rather have fees?”

Edison counsel also suggested that all that should be required of the prudent trustee is a periodic review to look only for changed circumstances.  He argued against the Supreme Court endorsing Tibble counsel’s position that the prudent trustee should also look and scour the market for cheaper investment options.  Interestingly, Justice Kennedy seemed to be endorsing the Tibble position when he responded that you certainly would scour the market for cheaper investment options if that’s what a prudent trustee would do.

The Justices focused much of their questioning first as to what kind of monitoring Tibble’s counsel was proposing, what kind of standard he was suggesting.  Then they looked to whether that was what a prudent trustee would do, and what kind of burden this would create for Edison in managing the plan, and finally what effect it would have on the plan participants.

The Justices appeared to support the Tibble plaintiffs’ new “prudent” investor standard.  This Supreme Court was also urged by the government attorneys from the Labor Department to accept this new standard as well.  If the high court adopts this new standard, which appears likely, it could have sweeping effects on companies and employees.  According to the Investment Company Institute, 401(k) plans held $4.4 trillion in retirement assets as of March, 2014.  Some of the funds offered to Edison employees had fees 37% higher than comparable institutional funds.

The Supreme Court’s decision is expected to be out sometime this summer.  It could change how companies fundamentally handle the way they invest for 401(k) plans.  They could move away from mutual funds to lower-cost methods such as collective trusts or separately managed accounts.  One option would be to appoint a “3(38)” fiduciary under ERISA, typically a registered investment advisor (RIA), to transfer the responsibility for managing the plans from themselves to the RIA.  Aside from potential changes in how such plans are managed, there is a lot at stake for both employers and employees in terms of potential litigation.  The Supreme Court’s decision could open a floodgate of litigation regarding the fiduciary duties of trustees for 401(k) plans sponsored by companies across the nation.  This is definitely one decision to keep on your radar.

References

Employee Retirement Income Security Act of 1974 (ERISA), Pub. L. No. 93-406, 88 Stat. 829 (codified as amended in scattered sections of 5 U.S.C., 18 U.S.C., 26 U.S.C., 29 U.S.C., and 42 U.S.C.).

Employee Retirement Income Security Act of 1974, 29 U.S.C. § 1113(1).

Tibble v. Edison International, 711 F. 3d. 1061 (9th Cir. 2013), cert. granted in part, 2014 U.S. LEXIS 4901 (U.S. Oct 2, 2014).

New Technologies & Forbidden Debt Collection Practices

When the Fair Debt Collection Practices Act (“FDCPA”) was enacted back in 1977, it was designed to help the federal government protect consumers’ privacy rights, while monitoring and enforcing proper debt collection activities. It was also passed to protect the rights of “ethical debt collectors” whose lawful efforts were sometimes confused with those of competitors who took abusive shortcuts to recover outstanding debts.

Like most states, Texas has enacted its own similar statute entitled, The Texas Fair Debt Collection Practices Act, passed in 1997. It’s located in Title 5, Chapter 392 of the state’s Finance Code.

New Technologies Are Clearly Challenging the FDCPA’s Viability

During the past decade, various legal scholars and others have urged the federal government to update the FDCPA in light of the many new and emerging communication technologies. However, no agency could readily respond since Congress never conferred any future rule-making authority on the government entity when it first enacted the law.

Fortunately, after the Dodd-Frank Act was passed “in response to the financial crisis of 2008,” all FDCPA enforcement duties [including rule-making authority] were transferred to the new Consumer Financial Protection Bureau (CFPB).

At present, the CFPB is working hard to address the problems that are surfacing as debt collectors contact putative debtors by using automated dialers, Internet emails, text messages – and even Internet platforms such as Facebook and MySpace. At times, these new technologies appear quite appealing to debt collection agencies.

In fact, one company reported “increased payment rates by nearly 100% within five days” when text messaging was used. However, some privacy violations may have occurred and even prompted lawsuits. In another case, a debt collector used poor judgment when he posted a message on Facebook to the page of a putative debtor’s friend.

The FDCPA Is Responding & New Rules May Be Announced in the Near Future

As of November 2013, the Consumer Financial Protection Bureau (CFPB) took a “first step toward considering consumer protection rules for the debt collection market.”  In addition, the Federal Trade Commission (FTC) has remained heavily involved. In fact, at one point, the FTC sponsored a workshop so it could solicit suggestions from consumers, debt collection agencies, and others about the types of new rules required to address the many new technologies.

However, CFPB Director Richard Cordray is clearly leading the way. His bureau has been communicating with the public since late 2013 to draft new rules. (See the CFPB’s Advance Notice of Proposed Rulemaking, published in 12 CFR Part 1006).  Although an official publication date has not yet been announced, it’s very likely that new FDCPA rules will be issued during the next six to twelve months.

What Types of General Changes Are We Likely to See?

Broad FDCPA terms like “communication” will have to be expanded to include all new technologies. In addition, the FDCPA’s “disclosure requirement” will have to be “applied to new communication platforms that pose a threat to consumer privacy.”

The CFPB will also probably prevent debt collectors from forcing putative debtors to accept certain new forms of contact — without first obtaining their “express written consent” to such contact — especially when it “may cause consumers financial harm.”

Until new rules are released, debt collectors must remain cautious when contacting debtors via new technologies since the courts are quite sensitive to reasonable privacy concerns.

Will the Courts Remain Open to Debt Collectors’ Tech Dilemmas in the Future?

While new legal shifts can always occur, debt collectors appear pleased with the recent decision handed down in the New York case of Zweigenhaft v. Receivables Performance Management LLC. Stated succinctly, this case involved a young man who heard a voicemail left for his father. It made him aware that his father owed a debt.  The young man then returned the call and answered questions regarding his identity and the phone number he was using to place his call.

Claiming that the voice mail and conversation with his son “violated the FDCPA’s prohibition on third-party communications,” the father filed a lawsuit. In ruling against the father, the court held that to do otherwise “would place an undue restriction on an ethical debt collector in light of our society’s common use of communication technology.

Recent opinions like Zweigenhaft indicate that many courts remain eager to properly balance out the needs and concerns of both debt collection agencies and consumers. This type of unbiased approach remains crucial since so many people owe money in this country. In fact, during 2012, “approximately 30 million individuals, or 14% of American adults, had debt that was or had been subject to the collections process (averaging approximately $1,500).”

Conclusions

While we await the release of new rules to supplement the FDCPA, both common sense and conservative courtesies should continue to guide debt collection agencies as they use new technologies to contact putative debtors.  In addition, every effort must be made to reach the correct debtor directly. If messages are left, it’s always safest to avoid stating that any money is owed by the party you are trying to contact.

US Supreme Court Landmark Case: Burwell v. Hobby Lobby Stores, Inc.

UNITED STATES SUPREME COURT LANDMARK DECISION:

RELIGIOUS RIGHTS OF PRIVATE CLOSELY-HELD FAMILY BUSINESSES UPHELD

In one of the most hotly contested cases of the 2013-2014 term, the Supreme Court made a landmark ruling regarding a family’s religious rights in running their family-owned business on June 30, 2014. Burwell v. Hobby Lobby Stores, Inc. involved the objections of privately-owned businesses to the coverage of certain types of contraception under employer health care plans, as required by Department of Health and Human Services (HHS) regulation under the Affordable Care Act (ACA). In a decision that could have significant impact for other privately-held businesses, for-profit corporations, and their employees, the Supreme Court held that closely-held for-profit corporations are exempt from the HHS contraception regulation.

Hobby Lobby is an arts and crafts company founded by David Green and owned by the Green family with about 21,000 employees. The Green family are devout Christians. The Hobby Lobby case also involved Mardel Christian and Educational Supply, owned by Mart Green, one of David’s sons. Hobby Lobby’s case was consolidated with the case of Conestoga Wood Specialties, a small furniture company owned by the Hahns, a Mennonite family.

The decision was not founded on a private company’s right to raise religious First Amendment claims, but rather on an interpretation of the Religious Freedom Restoration Act of 1993 (RFRA). The companies relied on the RFRA’s mandate that the Government not substantially burden a person’s exercise of religion even if the burden results from a rule of general applicability, otherwise that person may be entitled to an exemption. The law presumes the exemption unless the Government can show that its action: (1) is in furtherance of a compelling governmental interest; and (2) is the least restrictive means of furthering that compelling governmental interest. The employers objected to four types of contraception required to be covered by their health plans under the HHS regulations as a burden of their exercise of religion entitling them to an exemption under RFRA.

Under the ACA passed in 2010, the HHS is charged with determining what types of contraception should be covered by employer health plans. Certain entities were exempted from the outset by the HHS: churches and related entities, non-profits that object to contraception, employers with grandfathered plans (no changes prior to March 23, 2010), and employers with fewer than 50 employees. Companies in violation of the law are faced with the alternative of being fined $100 per person per day or payment of higher wages to employees and a scaled tax.

The Court noted that allowing RFRA and First Amendment religious claims by corporate entities is not novel. But extending those rulings to for-profit corporations is new, a direction the Court has been reluctant to take until now. The Court also noted that its ruling was narrow and only applied to closely-held companies.

Interpreting the RFRA as applied to the facts of these cases, the Court found that the HHS regulations create a substantial burden on the company owners’ religious rights. To the company owners the objectionable contraceptive methods were equivalent to abortion. Thus, they were faced with the choice of assisting carrying out health plans contrary to their religious beliefs or being subject to fines, which would have amounted to about $475 million a year for Hobby Lobby alone. While the Court determined that a compelling government interest existed, it found that other, less restrictive means to further that interest existed, such as plans that allow employees to make separate payments for such coverage. The Court also noted that the simplest approach would be for the Government to assume such costs as the HHS had not demonstrated that such a plan was not a feasible alternative.

“Closely-held” corporations are defined by the Internal Revenue Service as those which a) have more than 50% of the value of their outstanding stock owned (directly or indirectly) by 5 or fewer individuals at any time during the last half of the tax year; and b) are not personal service corporations. By this definition, approximately 90% of U.S. corporations are “closely held”, and approximately 52% of the U.S. workforce is employed by “closely-held” corporations. (Blake, 2014).

Interestingly, the Court noted that determining issues regarding a publicly-traded corporation’s religious beliefs would be far more problematic than the closely-held corporations involved in Hobby Lobby. This case could have far reaching impact. It is yet to be seen what other religious exemptions will be claimed by other employers under the Hobby Lobby ruling. Stay tuned for further developments!

References

Burwell v. Hobby Lobby Stores, Inc., 573 U.S. 22 (2014).

Affordable Care Act, 42 U.S.C. § 18001 et seq. (2010).

Religious Freedom Restoration Act, 42 U.S.C. §§ 2000bb – 2000bb-4 (1993).

Blake, A. (2014, June 30). A LOT of people could be affected by the Supreme Court’s birth control decision — theoretically. The Washington Post. Retrieved from http://www.washingtonpost.com/blogs/the-fix/wp/2014/06/30/a-lot-of-people-could-be-affected-by-the-supreme-courts-birth-control-decision/.

Documents Needed When Creating or Updating Your Will

Whether you’re having a first Will drafted or updating an older one, you can help speed up the process by bringing copies of specific documents to your appointment. If possible, try to bring copies that you can leave behind for an extended period of time.

It’s also useful if you can readily explain the special circumstances involved with any beneficiaries you’ll be naming in your Will. For example, be sure to tell us if someone is still a minor, has a major disability – or may be difficult to contact due to unique job or living arrangements. Finally, keep in mind that all major life events can require future Will updates.

We hope the information we’ve shared below will help you locate the documents we’ll need when first meeting with you regarding your current estate planning needs. Many assets may be transferred either by contract or under a Will, so letting us know of any existing contractual beneficiaries aids in your overall estate planning. Our goal is to create a comprehensive estate plan that allows you to provide testamentary gifts to all of your chosen beneficiaries.

Documents/Information That Helps Attorneys Analyze Your Assets & Desired Gifts

  • A thorough list of all real property you own/co-own (or are currently purchasing). We will need copies of all property deeds that state your ownership rights – and all related mortgage documents.
  • Copies of your most recent checking and savings account statements, together with any designation of beneficiaries.
  • A list of all automobiles you own – including all other motorized vehicles titled in your name (and information stating how much you owe on each one of them).
  • Copies of all personal life insurance policies, together with any designation of beneficiaries.
  • Documents describing all structured settlements that name you as a beneficiary.
  • Your most recent certificate of deposit and brokerage firm statements, together with any designation of beneficiaries.
  • Copies of your most current 401(k), IRA, Roth, Keogh, pension, or other retirement account statements, together with any designation of beneficiaries.
  • A comprehensive list of all monthly rents and other payments owed to you personally – or to your business.
  • A complete list of all of your current stocks and bonds, together with any designation of beneficiaries.
  • A comprehensive list of all of your most valuable personal property, including: jewelry, artwork, household furniture, antiques, and other similar possessions.
  • A thorough list of all outstanding credit card debts owing – as well as any other lines of credit you’re trying to pay off.
  • Documents indicating any type of monthly support or inheritance you currently receive. This might include spousal support payments or trust account payments. You may also want to tell us about any testamentary gifts you expect to receive in the near future.
  • Any important information concerning your pets, such as veterinarian, special diet, person to care for your pets.
  • A list of any other major assets (or debts) that you haven’t already named above. Also, please be prepared to tell us about any bankruptcy filings you’ve made – either business or personal ones – during the past 10 years. Be sure to bring copies of any paperwork documenting those filings.

Information to Designate Persons to Carry Out Your Wishes

  • Full legal names, birthdates, addresses and phone numbers for:
    • Executor and two alternates;
    • Trustee and two alternates;
    • Guardian and two alternates;
    • Medical Power of Attorney and two alternates;
    • Financial Power of Attorney and two alternates;
    • Medical Provider.

Common Circumstances that Can Trigger the Immediate Need to Update Your Will

  • You get married – or divorced.
  • You adopt a child or have one born to you or your spouse/partner.
  • When one or more of your beneficiaries pass away. Depending upon the type of gifts you left to these individuals – and how they were structured – you may or may not need to update your Will. Please always call and check with us upon such deaths.
  • You gain or lose a business partner – please contact us so we can be sure your Will fully protects all of your rights regarding this type of change. Likewise, please get in touch if you change the legal structure of your business enterprise – e.g., you change it from a solo-proprietorship to a partnership – or corporation.
  • A family member’s health has significantly declined. Also, please be sure to tell us if a beneficiary has started receiving social security disability payments so we can properly structure all gifts or funds you’re providing to this individual. If you fail to do this, it can threaten this person’s ongoing eligibility to receive such government payments.
  • Whenever you purchase or inherit a new home, new land, or other real estate.
  • You significantly add to – or diminish – the number of insurance policies you’re keeping current.
  • When you personally become seriously ill. This will let us check to be sure your current medical insurance and insurance policies will fully cover all of your needs.
  • Please let us know when you’ve changed your legal home or business residence. There may be new tax consequences that should be reviewed. Likewise, let us know if you decide to change the nature of your current citizenship.
  • You inherit a very large sum of money. Likewise, please inform us if you’d like to start giving large sums of money to one or more charities.
  • One of your current beneficiaries can no longer manage his or her financial affairs. This can occur due to general physical or mental health issues – as well as due to various accidents or addictions.
  • There are major changes in your earnings or investments. This will allow us to properly adjust the size and types of gifts you may want to give to different individuals.
  • You hear about major state or federal tax changes that could affect your estate. Rest assured, we normally contact all of our clients under such circumstances. However, we’re always here to answer any questions you may have.

While the information shared above is fairly comprehensive, we believe it’s important for our clients to fully understand all aspects of the estate planning process.  In light of that goal, we’ll now also note some of the unusual events that can prevent a named beneficiary from receiving your designated gifts. If you’ll stay in close contact with us, we can usually prevent this from occurring.

Reasons a Named Beneficiary May Not Receive All Indicated Gifts

  • We cannot locate a beneficiary. Of course, your executor has a legal and fiduciary duty to hire all necessary personnel to locate all named beneficiaries. It’s always a good idea to provide our office with any new addresses for your beneficiaries, especially when they move out of the country.
  • A later divorce takes place. In an effort to protect testators who forget to update their wills after divorcing, many states have passed laws that prevent former spouses from receiving property the testators would not have wanted to give them had they updated their Wills. Of course, it’s always best to immediately contact us whenever you divorce or remarry.
  • A gift has abated. When you pass away, your estate may not be large enough to cover all of your taxes and expenses. In some cases, we may still be able to provide some gifts on a pro-rated basis, in keeping with the terms of your Will.
  • Your Will conflicts with the legal requirements of a governing community property state (like Texas) in which you live. This is one of the reasons why it’s always wise to allow our firm to carefully review any Will you already have that was drafted by another estate planning attorney. While such errors are rare, they can invalidate all or part of your Will – if it fails to honor the division of marital property required by this (or another) community property state.
  • A court later declares your Will to be void for legal reasons. This is extremely rare and would usually only occur if certain types of fraud (or mistakes) were involved.
  • A gift causa mortis has been made. While this is rare, it simply means that if a person’s death is imminent – and he/she makes a specific gift to someone (often a person right there in his/her presence), the prior named beneficiary may not receive it. Courts will naturally need to investigate this type of situation to be sure undue influence wasn’t involved or any type of fraud.

We hope this general overview of information has proved useful. However, please know that our attorneys are always available to answer any questions you may have concerning your estate planning needs.

The Texas Margin Tax – H.B. 500

In 2013 the Texas Legislature enacted H.B. 500 which provided for a temporary margin tax rate reduction, a new minimum deduction, expanded deductions, new credits for certain taxpayers, and customer-based sourcing for Internet hosting receipts. The law went into effect January 1, 2014.

A franchise tax (or margin tax) is imposed on all taxable entities. Under H.B. 500 a “taxable entity” means a partnership, limited liability partnership, corporation, banking corporation, savings and loan association, limited liability company, business trust, professional association, business association, joint venture, joint stock company, holding company, or other legal entity. The term includes a combined group. A joint venture does not include joint operating or co-ownership arrangements meeting the requirements of Treasury Regulation Section 1.761-2(a)(3) that elect out of federal partnership treatment as provided by Section 761(a), Internal Revenue Code.

For all taxable entities under this legislation, the revised tax base is the taxable entity’s margin defined as the lowest of the following:

  1. Total revenue less cost of goods sold;
  2. Total revenue less compensation; or
  3. Total revenue times 70%.

The margin tax is imposed at 0.5% on retail and wholesale trade businesses and 1% on all other taxpayers. The rate could be reduced provided the probable revenue estimates as certified by the Comptroller are calculated to offset any revenue lost by the rate reduction. In that event, H.B. 500 establishes temporary rate reductions as follows:

  1. 2014 – 0.4875% for retailers or wholesalers, and 0.975% for other taxpayers.
  2. 2015 – 0.4750% for retailers or wholesalers, and 0.950% for other taxpayers.

The rate for reports due in 2014 was actually reduced as indicated above. It is estimated by the Comptroller that probable revenue for the fiscal period applicable to 2015 will be sufficient to also allow for the rate reduction for 2015.

A taxable entity is primarily engaged in retail or wholesale trade if: (1) the total revenue from its activities in retail or wholesale trade is greater than the total revenue from its activities in trades other than the retail and wholesale trade; and (2) less than 50% of the total revenue from activities in retail or wholesale trade comes from the sale of products it produces or products produced by an entity that is part of an affiliated group to which the taxable entity also belongs, except for those businesses under Major Group 58 (eating and drinking establishments); and (3) the taxable entity does not provide retail or wholesale utilities, including telecommunication services, electricity, or gas.

Under H.B. 500, the retail or wholesale trade definition was expanded to include automotive repair shops, equipment rent-to-own transactions, and rental or leasing of tools, party and event supplies, furniture, or heavy construction equipment.

H.B. 500 adds certain deductions from margin tax apportioned to operations in Texas, including deductions for cost of solar energy devices, cost of clean coal projects, and relocation costs by certain taxable entities. H.B. 500 also provides for certain exclusions from revenue and amends the calculation of cost of goods as it applies to pipeline companies under certain circumstances, and as it applies to movie theaters. There is also a $1 million deduction from total revenue for small businesses.

The new sales sourcing rule for internet hosting companies provides that, for reports due on or after January 1, 2014, receipts are considered derived in Texas only if the consumer of the service is located in Texas.

The enactment of H.B. 500 created many changes to the margin tax and cost of goods rule, most of which are favorable to certain businesses. As a result of the more complicated margin tax and cost of goods sold calculations under this legislation, affected taxpayers should review these matters for previously filed returns, audits and future returns for potential refund claims and/or tax savings.

Too Many Working Women Still Plagued By Sexual Harassment

Although record numbers of American women have joined the workforce during the past fifty years, far too many of them are still being sexually harassed. In fact, roughly 7,200 new charges of sexual harassment are filed each year (only 17% of which are filed by males).

All of these victims are entitled to justice and most hope their cases will help curb this epidemic. During recent years, it’s been estimated that about one-fourth of all women have been sexually harassed at work. Far too many have also been assaulted on the job – and some even partially blamed for the horrific offenses committed against them.

This creates a terrible burden on women who must not only birth all children – they must also often join the full-time workforce — because so many American couples cannot afford to live on just one spouse’s paycheck, especially when children are involved.

Equal Employment Opportunity Commission (EEOC) Definition of Sexual Harassment  

Everyone seeking to file a federal lawsuit alleging sexual harassment (under Title VII of the Civil Rights Act of 1964) must first file an EEOC claim. However, the time period in which to file an EEOC claim is extremely short. If one misses the deadline, all further claims are barred.Therefore, it’s important to review how this agency defines this type of abuse. The EEOC says, “It is unlawful to harass a person (an applicant or employee) because of that person’s sex. Harassment can include ‘sexual harassment’ or unwelcome sexual advances, requests for sexual favors, and other verbal or physical harassment of a sexual nature.”

Critical Facts, Theories, and Statistics: Sexual Harassment of Women in the Workplace

  • Identity of the harasser. This can be your own supervisor, one from a different area, an employer’s agent, a co-worker – or even a non-employee;
  • Legally forbidden behaviors. This can include being asked for sexual favors, being physically touched in an unwanted (sexual) way, or other types of unsolicited sexual advances;
  • Hostile or offensive work environment. If you are forced to endure any of these types of behaviors and they “unreasonably interfere with your work performance or create an intimidating, hostile or offensive work environment, then . . . [they may constitute] sexual harassment;”
  • Lower-wage females especially vulnerable. The less a woman earns on the job, the more likely she is supervised in a way that may weaken her opportunities to report or file a successful EEOC claim for sexual harassment;
  • A number of workplace experts see declining judicial support for women who file sexual harassment claims. Some recent U. S. Supreme Court decisions imply that “big business” receives sympathetic help from the courts;
  • Too many employers fail to provide effective training that forbids sexual harassment. Not only does this greatly increase the likelihood of harassment – it also subjects these employers to more successful plaintiff lawsuits. Igonorance is not bliss. In addition to such training, employers need to create “an effective complaint or grievance process and [take] immediate and appropriate action when an employee complains;”
  • Women working in the military – as well as in the fields of high-tech and science. Sadly, these hard-working and highly intelligent women face unusually high incidences of both sexual harassment – and assault — due to their special talents and unique jobs once largely held by men;

How Our Office Helps Women Seeking to File Sexual Harassment Lawsuits

One of our attorneys will meet with you in a free, initial consultation and listen confidentially as you discuss the facts of your case. If necessary, we can help you prepare your EEOC filing, fully investigate your case, and then file your lawsuit in the appropriate federal court.

We always provide our services in as sensitive a manner as possible and understand the type of trauma most women experience regarding sexual harassment. Our firm will also explain to you how different stages of your case will most likely unfold while we prepare your case for trial. You can rest assured that we will do everything we can to succeed on your behalf.

Rule Changes Effective in 2015 Affecting Seller Financing

Overview

The Consumer Financial Protection Bureau (CFPB), an independent federal agency, is responsible for protection of consumers involved with financial products and services including mortgages, credit cards and other consumer financial products.  The CFPB was created by the Dodd-Frank Wall Street Reform and Consumer Protection Act, passed in 2010, as a response to the financial crisis of 2007-2008.

Under the Truth in Lending Act (TILA) (Regulation Z) and the Real Estate Settlement Procedures Act (RESPA) (Regulation X), the CFPB is authorized to issue rules to protect consumers when applying for and closing on a mortgage loan.  The CFPB has finalized a rule known as the TILA-RESPA Rule establishing new integrated disclosure requirements and forms along with substantial compliance guidance.  This rule will take effect on August 1, 2015.  The TILA-RESPA Rule will apply to transactions for which the creditor or mortgage broker receives an application on or after that date.  This rule will affect transactions for most closed-end consumer credit transactions secured by real property.  It will not apply to home equity lines of credit, reverse mortgages, or mortgages secured by a mobile home or by a dwelling that is not attached to real property.  The rule also does not apply to persons or entities that make five or fewer mortgages per year as they are not considered “creditors”.

The purpose of the new mortgage forms required to replace current overlapping forms including terms and costs of mortgage loans is an effort to eliminate consumer confusion and help them make the decision that is best for them with no surprises at closing.

An understanding of compliance obligations under the TILA-RESPA Rule is essential for entities originating closed-end residential mortgage loans, settlement service providers, secondary market participants, software providers, and other companies that serve as business partners to creditors.

The TILA-RESPA rule combines four disclosures into two forms, a Loan Estimate, and a Closing Disclosure.

Loan Estimate Disclosure General Requirements

Generally, the creditor must use Form H-24 prescribed by the FCPB. This disclosure is defined as a good faith estimate of the credit costs and transaction terms for the transaction.  This new form is referred to as the Loan Estimate and integrates and replaces the current RESPA GFE and the initial TIL.  This form is required to be provided within three business days of receipt of the consumer’s loan application.

The Loan Estimate:

  1. Must contain a good faith estimate of credit costs and transaction terms.
  2. Must be in writing and contain information required by §1026.37 (Form H-24).
  3. Must satisfy delivery timing and method requirements.
  4. May only be revised or corrected when specific requirements are met.
  5. May be provided by either the creditor or the mortgage broker when the mortgage broker receives a consumer’s application.

 Specific Information Required on Form H-24

  1. General information, loan terms, projected payments, and costs at closing.
  2. Closing cost details.
  3. Additional information about the loan such as contact information, comparisons table, other considerations table, and signature statement for consumer to acknowledge receipt.

Closing Disclosure General Requirements

Generally, the creditor must use Form H-25 prescribed by the FCPB.  Creditors must provide a new final disclosure referred to as the Closing Disclosure for loans requiring a Loan Estimate that proceed to closing.  This new form combines the current HUD-1 and final TIL disclosures.  This disclosure must be received by the consumer no later than three business days before consummation of the loan.

The Closing Disclosure:

  1. Must contain the actual terms and costs of the transaction.
  2. Must be in writing and contain the information prescribed in § 1026.38 (Form H-25).
  3. Must be replaced by a corrected disclosure if the actual terms or costs of the transaction change prior to consummation of the loan
  4. Requires an additional three-day waiting period if a corrected disclosure is provided.

Specific Information Required on Form H-25

  1. General information, loan terms, projected payments, and costs at closing.
  2. Loan costs and other costs.
  3. Calculating cash to close, summaries of transactions, and alternatives for transactions without a seller.
  4. Additional information about this loan (Assumption, Security Interest, Escrow, etc.).
  5. Loan calculations, other disclosures and contact information.

It is advisable that creditors dealing with transactions for closed-end consumer credit transactions secured by real property become familiar with the compliance requirements for these new disclosures well before the effective date of August 1, 2015.  The CFPB link below contains many helpful resources including a Compliance Guide, Guide to Forms, Disclosure Timeline, Forms & Samples, Videos, and additional information to help you in dealing with the new TILA-RESPA requirements.

http://www.consumerfinance.gov/regulatory-implementation/tila-respa/

Construction Insurance: Challenges Posed by the Texas Anti-Indemnity Act

Prior to the passage of the Texas Anti-Indemnity Act back in 2011, the parties most active in the state’s construction industry could still readily determine the degree of insurance coverage and indemnity they were securing regarding various projects. However, since that law went into effect on January 1, 2012, significant confusion over such issues has been introduced into the field of Texas construction law — and it’s unlikely to dissipate anytime soon.

Balancing Constitutional Rights Against Insurance Industry Concerns

Today, many in the Texas construction industry might argue that this law has had a chilling effect on their constitutional right to contract with others.  As one scholar has put it, referencing a long-standing legal principle cited in numerous U.S. Supreme Court cases, “Parties should be allowed to create contracts however they wish, as long as they do not violate the State’s police power or public policy.” Unfortunately, the Texas Anti-Indemnity Act “binds parties’ hands and prevents them from contracting as they wish.”

While many in the insurance industry pushed hard to pass this legislation, especially since the Act was designed to “protect insurance companies from exposure to liability for claims which they did not agree to underwrite” — major questions remain unanswered. One of the Act’s most glaring deficiencies is its failure to provide clear definitions of critical terms. These could have provided guidance to the courts that are now handling pending lawsuits. Many of these specific deficits are clearly pointed out in a well-researched 2014 article published in St. Mary’s Law Journal.

Types of Questions the Courts Must Now Specifically Address

  • Exactly which types of indemnity (risk-transferring) agreements are strictly forbidden under the Texas Anti-Indemnity Act? Jurists will soon be asking their sharpest law clerks to help them interpret Texas Insurance Code Section 151.101 where this vague statute is located. They will also need to spend considerable time reviewing Title 10 of the same code which addresses property and casualty insurance contracts – among many others;
  • Are most of the standard builder’s risk insurance policies common available now void? For many years, these policies have been among the first negotiated by most parties to construction projects since they help cover losses tied to the damages many new buildings incur while under construction;
  • Are policies which include a “duty to defend” now void under the Act? Strong arguments can be made that this is a very distinct provision apart from the broader duty to indemnify;
  • How can insurance companies legally offset possible losses caused by the Texas Anti-Indemnity Act, without penalizes customers with higher rates? As one scholar has pointed out, “If [insurance] companies interpret the statute broadly, they risk losing business, as they can no longer offer additional insured status or obtain indemnity agreements from other insurance companies;”
  • Which uncontroverted facts support the claim that the Texas AntiIndemnity Act was passed due to the troubling “unequal bargaining positions between owners, general contractors, and subcontractors”? Hasn’t capitalism always encouraged parties with the most money to fully insulate themselves from as much litigation as possible? As the Mary Law Journal article notes, if this was one of the true motives for passing this legislation, why did the legislature completely exclude residential construction from the Act, given the common belief that there is probably more unequal bargaining power within that specific field of construction than most others?
  • Which specific and compelling state rights are being upheld by this Act, at the apparent expense of citizens’ constitutional right to contract with one another as they choose?

Until significant case law is decided regarding the proper scope of this Act, those most active in the Texas construction industry may need to spend far more time conferring with their attorneys about the best possible ways to protect themselves against excessive litigation caused by this questionable law.

Guidance for Sale of a Business

Business owners will all, at some point, face the challenge of selling their business. Whether the change comes as a result of reaching retirement age or the fact that you have grown your business to the extent that a third party chooses to acquire it, the general process remains the same. The business owner may wish to consult with one or more of the following professionals for guidance: business broker, accountant, and/or attorney.

First, most purchasers prefer to buy assets and few, if any, liabilities of your company.  This structure gives the buyer a fresh start, decreases the buyer’s risks because contingent liabilities are excluded, and results in a stepped-up basis in those assets for tax purposes. On the other hand, asset sales typically require obtaining the consent of a number of third parties, such as lessors, lenders, and supply vendors. Almost every contract to which a business owner is a party will contain an anti-assignment clause. Even if the assignment of a contract is permitted, you must obtain the prior written consent of the other party. A due diligence review of all contracts will be necessary to ascertain their assignability. Adding these additional parties to the mix, not only lengthens the time frame to reach closing, but also may place the seller in a weaker bargaining position, if the buyer wants changes made to the contracts. Other drawbacks to the asset purchase structure from the seller’s perspective include: titled assets must each be individually re-titled (e.g., real property, vehicles, and intellectual property such as patents and trademarks); seller’s guarantees must be removed or replaced; and the parties must resolve their conflicting views on how to allocate the purchase price among the assets and the seller’s personal goodwill.

Sellers normally prefer to structure the sale of their business as a direct transfer of some or all of their ownership interests. Since the entity owning the business remains the same, the assignability issue is avoided, unless the contract contains a “change in control” provision. The assets so acquired will have a “carryover” tax basis. Moreover, an ownership interest transfer could potentially require compliance with state and federal securities laws, so the buyer will need to find an exemption to such laws or even obtain a legal opinion that the ownership interests in your business do not constitute a “security.” A “stock” buyer will need to perform a more in depth due diligence review of your business because the buyer will be assuming your liabilities too. A compromise position is for the seller to indemnify the buyer for liabilities associated with actions or inactions that occurred prior to the closing date. To make such a compromise feasible, a portion of the purchase price may have to be escrowed to secure such contingent liabilities or the seller may be forced to personally guarantee those potential liabilities.

Once the acquisition transaction structure has been determined, both buyer and seller will delve into relevant confidential information concerning the other party to evaluate the desirability of completing the transaction. Generally, the buyer will need substantially more detailed information than the seller, especially if the seller is receiving the purchase price in cash. However, if the seller will receive his or her compensation in the form of an ownership interest in the buyer, both parties will want extensive information about the other. A checklist of the categories of information that the parties should review is set forth below.

  • Organization documents for the entity, together with all amendments
  • Financial statements, audit letters and tax returns
  • Books and records of the entity
  • Major contracts
  • Real property deeds and/or leases
  • Pending or threatened litigation
  • Governmental compliance & permit requirements
  • Major customers and suppliers
  • Employment terms for employees that will be retained
  • Intellectual property rights
  • Environmental issues
  • Lien searches for counties and states where entity does business
  • Inspection of the business facilities
  • Listing and condition of machinery, equipment and inventory
  • Listing of accounts receivable
  • Insurance
  • Guarantee Agreements
  • Required approvals and consents

In addition, depending on whether or not the seller will continue to be involved in the business, satisfactory consulting or employment agreements, in the first instance, or non-compete, in the later instance, should also be executed.

Selling your business can create a “win-win” based on the parties engaging in a methodical and realistic due diligence review of your company.

Construction Project Mangement: When Being Last Can Be Least

A new construction, large or small, is a very exciting process to be a part of, but it comes with it’s share of hassles. Managing contractors, subcontractors and suppliers and all of the laws associated with it can be a headache. Are you educated before embarking on your project?

In Texas, liens for labor and materials incorporated into a construction project must strictly comply with the statutory notices and time frames to be enforceable. On the other hand, if the contractor has a direct contract with the owner, the contractor can rely on the self-enacting constitutional lien. However, the contractor should still file a notice of its constitutional lien so that third parties will have constructive notice of it. Of course, in addition to creating a lien, the contractor’s main goal is to get paid.

Subcontractors or suppliers who provide labor and/or services toward the end of a construction project face two additional challenges. First, the 10% statutory retainage may have been released to a large extent pursuant to the owner’s contract with the general contractor or because early finishing subcontractors have already received 100% of their funds. Even if the retainage funds are still available, the owner is entitled to release them 30 days after final completion of the construction project. Unless a subcontractor or supplier checks the real estate records frequently, such person may not even be aware that the retainage holding period has expired, often before such person’s statutory lien notice and filing dates have occurred.

To protect their lien rights, subcontractors and suppliers should proactively file their liens and notices promptly and not wait for the statutory deadlines, which are outside limits similar to a statute of limitations. Sending a retainage notice to both the owner and the general contractor as soon as such subcontractor or supplier starts work on the construction project provides further evidence of its rights.

Despite taking all these steps, if a contractor is not paid in full, such contractor should consider either pursuing a judicial foreclosure that allows removal of its materials (if possible) or if the contractor is relying on a constitutional lien, filing a lawsuit and a lis pendens notice against the property.