Crafting Effective Social Media Policies for Educational Entities

The reach of social media into nearly every facet of our lives, including those of our children, shows no sign of slowing. While the potential of these resources to enhance the educational experience can be considerable, it is equally important for safeguards to be put in place to protect against the pitfalls they simultaneously present. As a result, school districts, colleges and other educational entities are under increased pressure to craft social media policies and guidelines that balance the interests and rights of all stakeholders while keeping vulnerable parties out of harm’s way. With significant experience advising school administrators, employees, parents and students at all levels, the attorneys at Murray-Lobb possess the knowledge required to create and refine effective social media policies for use in the educational arena.

Widespread Need for Guidance

Considering how pervasive social media tools are in our everyday lives, many would be surprised to learn just how many school districts, colleges, universities and other educational bodies have yet to put formal policies or guidelines in place to govern their use. While official board or institution-wide policies may not be critical in every educational context, it makes good sense for school administrators to give serious consideration to putting some concrete rules into writing. Whether promulgated in a handbook or through an amendment or addition to existing policy, a clear articulation of what is acceptable and what is not in the realm of social media usage helps protect the rights, privacy and safety of all involved.

Many school districts have put in place draconian penalties for students who are caught using their cell phones at “unauthorized” times, essentially during class instruction. The administrators typically collect the cell phone and will only release it to a parent or guardian and require the payment of a $15 or more fine. The time has come for school districts and other educational bodies to recognize the usefulness of such social media tools as educational tools and to craft more flexible policies.

Key Issues in School Social Media Policy Drafting

To ensure that a school district’s social media policy achieves the desired effect, it is wise to address several key issues that are almost certain to arise in the educational setting. While it is likely impossible to design a policy able to anticipate every problem that may emerge, having specific guidelines in place will make handling misconduct an easier and more straightforward task when the time comes.

First, it is necessary to determine what, if any, types of relationships district employees will be permitted to have with students or their families via their personal social media accounts. Some districts have placed no restrictions on such relationships, whereas others have attempted to issue blanket prohibitions on such communication. The latter option, however, may give rise to challenges of a constitutional nature, with opponents citing unfair infringement on free speech rights. Therefore, a district may choose to focus its guidance on strongly discouraging excessive (or any) personal interaction between students and teachers on social media rather than banning it or attempting to police and punish it when it becomes problematic. Personal emailing or texting between school district employees and students has exacerbated the number of incidents of inappropriate relationships between such employees and students because of the ease of conducting such relationships clandestinely. Many school district employees do not realize that even if those relationships are consensual, the school district employee may still be charged with a felony and lose his or her educational career entirely.

Personal use (or misuse) of social media by school employees is just one of the ways in which a lack of clear guidelines can prove troublesome for administrators. The use of social media for legitimate, educational purposes can jeopardize districts in often unanticipated ways, including placing them at risk of intellectual property infringement lawsuits. Trademark and copyright litigation is a legitimate concern when educators make unauthorized use of protected instructional or other content via social media accounts. Therefore, it is vital that employees are thoroughly informed and trained about the risks in order to prevent costly and cumbersome legal trouble down the road.

An especially prickly area of social media policy in the educational context is the issue of when employees or students can be sanctioned for conduct on personal social media accounts undertaken outside of work or school hours. To develop an effective approach to handling such circumstances, it is necessary for administrators and board members to carefully consider the First Amendment rights of district employees and students and to provide training opportunities and concrete factual examples to help everyone engage in responsible social media use that does not jeopardize the safety or integrity of the organization and those it serves.

Maintenance of district or entity-wide social media accounts can also pose difficulties if not handled pursuant to formalized, established policies. For example, a public educational body with its own Twitter or Facebook page may be tempted to delete unflattering or disparaging comments made by a member of the public on those sites. However, its ability to unilaterally delete or disguise such remarks can be in question if no guidelines have been issued or presented to those visiting the site. As is the case in all of the scenarios described above, thorough legal review of proposed policies and the rationales behind them is essential to success.

Experienced Counsel for Texas Educators and Administrators

As the start of the new school year rapidly approaches, school districts, colleges and other governmental bodies are encouraged to undertake a comprehensive review of the manner in which they handle issues relating to social media use. The legal exposure that can result from ambiguous or nonexistent policies is significant, and securing the counsel of a seasoned education law attorney is essential. With broad experience serving the needs of Montgomery, Galveston and Harris County educators, administrators, parents and students, Murray-Lobb stands ready to provide the knowledgeable advice and practical solutions our clients deserve.

Making the Critical Distinction Between Employee and Independent Contractor

Among the thorniest concerns facing Texas business owners, large and small, is the issue of whether they are properly classifying certain types of workers as employees or independent contractors. As there are clear advantages to designating individuals as independent contractors, some businesses are deliberately making incorrect classifications, whereas others are making these errors inadvertently and subjecting themselves to onerous penalties and fines. The attorneys of Murray-Lobb regularly advise business clients on properly classifying workers in order to remain in full compliance with the U.S. Department of Labor, the IRS and the Texas Workforce Commission, and we offer the following guidance to help illustrate the potential pitfalls.

Common Reasons for Misclassification

The benefits of designating a worker as an independent contractor as opposed to an employee are many. An employee will potentially be eligible for federal and state minimum wage, overtime, unemployment insurance and worker’s compensation benefits. They will also require necessary equipment, training and supervision, all things thatcan prove costly to employers. In contrast, independent contractors will be entitled to none of those expensive benefits and will require little to no additional training. Therefore, it is easy to see why many employers frequently select this classification, even if it is arguably inaccurate when applied to the facts at hand.

There can be serious consequences when a business fails to correctly classify workers as employees or independent contractors. Those with true employees are required by the IRS to withhold income taxes, social security taxes and medicare taxes, and neglecting to make those deposits can leave companies vulnerable to additional liabilities in the form of interest, penalties and other unwanted scrutiny. Further, the Department of Labor has recently signaled its intention to enhance audit efforts with regard to companies it believes are out of compliance in this regard and to utilize its powers to impose burdensome penalties.

Determining Proper Worker Classification

Muddying the waters further for companies wishing to remain in compliance with all relevant governmental agencies is the fact that each one uses its own set of criteria for determining which workers are properly considered employees and which ones are truly independent contractors. The Department of Labor focuses on a so-called “economic realities” test that uses six factors to aid businesses as they attempt to choose the correct classification for workers, including:

  • Whether the work being performed is integral to the employer’s business;
  • Whether the worker’s managerial skills impact his or her opportunity to realize profit or loss;
  • How a worker’s relative investment stacks up against the company’s investment;
  • Whether the work being done requires specialized skills and initiative;
  • Whether the relationship between the parties is permanent or of an indefinite nature;
  • The degree and nature of the company’s control over the worker’s activities, including where, how and when work is performed.

The IRS utilizes a test involving 11 distinct factors, focused heavily on similar criteria to those used by the Department of Labor. The employers financial and behavioral control of the worker are again pivotal to determining correct classification. The Texas Workforce Commission has promulgated a 20-factor test to assess worker status, which a company can use when facing an audit to overcome the presumption present under Texas law that all workers are employees. Under the Texas law presumption test, some specific hallmarks of a genuine independent contractor relationship include:

  • Absence of company-provided training for the worker;
  • Payment upon completion of projects, not by hourly wage;
  • Worker does not use company e-mail accounts;
  • No benefits are provided to the worker;
  • No tax withholdings are made and a 1099 is issued at year’s end;
  • The worker submits invoices for work performed;
  • The worker has a roster of other clients.

Though none of these factors are determinative in and of themselves, taken together they can help create the total picture from which an accurate classification can be made.

Remaining Mindful of Common Pitfalls

Many businesses that find themselves out of compliance when it comes to their classification of workers have not intentionally sidestepped the law, but have simply fallen victim to certain common misconceptions. For instance, some believe that execution of a simple contract declaring the worker to be an independent contract will provide the necessary clarity. However, while Texas will generally defer to the right of parties to contractually define an employment arrangement in this way, the Department of Labor will still use its own test to determine proper status. Further, allowing a worker to work flexible hours in a location of their choosing does not automatically confer independent contractor status. Depending on the work being done, the Labor Department may still find that such individuals are in fact true employees. Ultimately, it is necessary to undertake a global analysis of a wide range of factors in order to make correct classifications and remain on the right side of the law.

Mitigating the Risks of Misclassifying Workers

As stated earlier, many businesses that are out of compliance when it comes to classifying workers have not knowingly made such errors, but have simply misunderstood or misapplied the traditional tests used by key governmental agencies. Fortunately, in addition to seeking guidance from a skilled Texas business lawyer, there are other steps that can be taken to mitigate the risk of improper classification of workers. Some may choose to restructure or re-document their existing independent contractor relationships with greater precision and with an eye toward explicit legal compliance. Others may simply choose to reclassify their independent contractors altogether, and certain businesses may opt to redistribute such workers to workforce management enterprises or dedicated staffing firms.

Essential Guidance for Texas Businesses

Depending on the size and type of business involved, getting worker classifications right can be a very high stakes proposition. The potential sanctions for making improper categorizations can be substantial, and remaining in full compliance with governing agencies must be a priority for all business owners. Bringing decades of business law experience to bear, the attorneys of Murray-Lobb stand ready to provide clients with a comprehensive review of their worker classification practices as well as invaluable guidance on how best to structure the relationships so vital to the success of every enterprise, big or small.

Celebrating the History and Grandeur of July 4

With summer now fully upon us, beach vacations, barbecues and family reunions fill our calendars. But, even in the midst of so much revelry and recreation, it is important for each and every American to stop and remember the reasons why we mark the Fourth of July in such a festive manner and to celebrate the glorious history of our nation’s founding. The purpose behind Independence Day is to mark America’s formal declaration of its ultimate departure from colonial rule and its birth as a fully independent land. It should be noted, however, that the Continental Congress did not make its decision to declare independence on July 4, but rather on July 2, 1776. In actuality, July 4 marks the date upon which the drafters of the Declaration of Independence finalized the language to be used in what would become one of our nation’s most sacred documents.

Early Observances of the Fourth Though in the earliest years following the drafting of the Declaration of Independence, formal celebrations were nothing like the national observances we see today, July 4 was an occasion for jubilation among many, particularly in Philadelphia, where the document was perfected. July 4, 1777 saw Congress adjourning early in order for lawmakers and residents to enjoy fireworks, bonfires and bells. Following the conclusion of the War of 1812, Independence Day observances became more commonplace and more akin to our modern celebrations. Upheaval in the political parties of the day sparked renewed interest in the Declaration of Independence, with the date July 4 taking on greater meaning for many. Some historians believe the fact that three early American presidents, John Adams, Thomas Jefferson and James Monroe, all died on the Fourth of July has lent additional significance to the date in the minds of patriotic citizens.

Congressional Recognition of Holiday Though observed by many since its founding, it was not until Congress took formal action in 1870 that the Fourth of July became a fully recognized national holiday. The piece of legislation itself, H.R. 2224 established the day as an unpaid federal observance, along with other events including Christmas and New Year’s Day. The proposed law did little more than acknowledge the significance of the date and did not establish additional benefits in relation to it. However, in 1938 Congress designated July Fourth as a recognized holiday for which all federal workers would receive a paid day off. In 1959, the federal holiday designation was supplemented by a provision stating that if the Fourth happens to fall on a Saturday, workers covered by the law will have Friday off.

Renewing Our National Commitment to Liberty Though it is easy to get swept away in the fun and excitement of a Fourth of July picnic and lose sight of the holiday’s true meaning, let us remind ourselves of why we continue to celebrate our nation’s independence well over two centuries after it was declared. July Fourth affords all of us a valuable opportunity to ponder our commitment to equality, liberty and individual rights so eloquently expressed by the founders. In essence, a treatise based in the finest traditions of common law, the Declaration of Independence embodies ideas central to our society, including the notions that all of us are endowed with unalienable rights and that government rightly derives its specific powers only from the consent of those it governs. We at Murray-Lobb encourage all Americans to join in this most important national day of remembrance and reflection while also taking part in the joyous, colorful and jubilant gatherings it inspires each and every year. Whether you choose to take in the sights and sounds of a local fireworks display or host friends and family at a backyard picnic, July Fourth is the perfect time to bask in the grandeur and glory of the freedoms we all hold so dear. In the succinct, yet utterly apt words of John Adams when toasting the 50th anniversary of the Declaration, “Independence Forever!”

Navigating the SBA Loan Process

When it comes to entrepreneurial activity and small business opportunity, Houston is truly booming. Data from the U.S. Small Business Administration (SBA) and its Houston District Office indicate that 2014 was a record breaking year in terms of the dollar amount of small business loans extended. With a total of $688 million in new loans made, those figures represented a growth of 21% in the sheer number of loans as well as an uptick of 5.9% in dollar value over FY 2013.

2015 is also on its way to being an impressive year for SBA lending, as more and more entrepreneurs seek to take full advantage of 7(a) as well as 504 loans to launch, acquire, expand or grow their enterprises. Two of the most popular types of SBA-guaranteed loans, the 7(a) loan is granted for the purpose of starting or purchasing a new business, while a 504 loan is referred to as a “certified development company” loan meant to facilitate the ability of an existing small business to finance key fixed assets including equipment or real estate. These are just two of the programs through which the SBA assists dynamic businessmen and women across the country as they fuel economic recovery and growth, and represent a large portion of the loans currently being made not just in Houston, but across the entire state of Texas. The lending market is competitive, but with the recent growth, Texas SBA lenders can rely on Murray | Lobb to assist them in providing high quality, low cost, efficient services to their SBA clients.

SBA Loan Approval Criteria

For many interested in starting or expanding a small business, an SBA-backed loan is the piece of the puzzle that turns vision into reality. Lenders who participate in these programs understand the critical role they are playing in spurring economic development and continued growth, and employ several categories to help them judge each applicant’s likelihood of success and, of course, repayment. Key factors influencing decisions in the SBA loan application process include:

  • Ratio of entrepreneur’s investment in the business to the requested loan amount
  • Predicted future cash flow
  • Management experience, training and education of the borrower
  • Personal credit history of the primary borrower
  • Collateral, if available

Document-Intensive Application and Loan Closing Process

The data-intensive process involved with securing SBA-guaranteed financing is evidenced by the lengthy list of documents that will often be required for the completion of most loan transactions. Those seeking financing through an SBA participant lender may be asked to execute most, if not all, of the following types of documents:

  • Construction Loan Agreements
  • Construction Deeds of Trust
  • Assignments of Rents
  • Security Agreements (non-real estate business assets)
  • SBA form Loan Agreements
  • SBA form 147 Notes
  • SBA Form 148 Unconditional Guaranties
  • Lender Specific Guaranty Agreements
  • Environmental Indemnity Agreements
  • Mineral Rights Acknowledgments
  • Contractor’s Affidavits
  • Agreements of General Contactors
  • Assignments of Soil Reports, Engineering Reports & Survey
  • Consents to Communicate and Provide Information (for jobbers/franchisors)
  • Waivers of Jury Trial
  • Same Name Affidavits
  • Collateral Protection Insurance Notices
  • Borrower & Guarantor Authorizing Resolutions
  • Borrower’s Affidavits Document Correction Agreements
  • Loan Agreement Notices
  • Patriot Act Disclosures
  • SBA form 601 Agreements of Compliance
  • Borrower’s Certifications (SBA)
  • Settlement Sheets (SBA)
  • Certifications of Compliance with Child Support Obligations for principals of Borrower
  • Acknowledgments of Receipt of SBA EEOC Posters
  • W-9 Statements for Borrower
  • Informational Statements of Legal Counsel

Particularly for those wishing to launch entirely new enterprises, the idea of aggregating such a massive amount of documentation may seem daunting. The detailed, cumbersome nature of the information needed before an SBA-backed loan may be granted can discourage even the most ambitious prospective borrowers. However, with the right help, current and burgeoning small business owners can effectively make their case to lenders and secure the funding they need to thrive.

U.S. Supreme Court Defines Standard for Defalcation

IN LANDMARK CASE, U. S. SUPREME COURT RESOLVES AGE OLD DISPUTE OVER MEANING OF TERM IN BANKRUPTCY CODE; SETS NEW STANDARD FOR EXCEPTION OF DEBTS FROM DISCHARGE BY REASON OF DEFALCATION

Introduction

In the landmark decision of Bullock v. BankChampaign, NA, 133 S. Ct. 1754 (May 13, 2013), the United States Supreme Court settled a question confounding courts and litigants since 1867. The Court accepted this case after noting that there were numerous lower court interpretations of the term defalcation resulting in at least three different applications of the term in bankruptcy cases.  In oral arguments, it was noted that this case presented one of the most confounding questions of bankruptcy law, the meaning of defalcation, which is found in Section 523(a)(4) of the United States Code, 11 U.S.C. § 101 et seq. (the “Bankruptcy Code”).

It is an undefined term in the Bankruptcy Code with more than 100 defined terms and has been so in every version since 1867. There is no plain contemporary, ordinary meaning that can settle the dispute regarding interpretation of the word because it is not in common use. Legal authorities have long disagreed about its meaning. Broad definitions of the term in modern and older dictionaries are unhelpful, and courts of appeals have disagreed about what mental state must accompany the definition of defalcation.

This case presented both the question of the action required to establish defalcation and the mental state that must accompany it.

There are two main purposes for bankruptcy: 1) to give debtors a fresh financial start by eliminating most if not all of their debts; and 2) to fairly distribute debtors’ assets amongst creditors.

According to statistics released by the Administrative Office of the U.S. Courts, 936,795 bankruptcies were filed in the year ended December 31, 2014 (909,812 personal and 26,983 business). Kmart Corp. is the biggest U.S. retailer to declare bankruptcy, according to data going back to 1980, with total pre-bankruptcy assets of more than $17 billion, Reuters reported.

The statistics for personal bankruptcies are as follows: average age: 38; 44% of filers are couples; 30% are women filing alone; 26% are men filing alone; slightly better educated than the general population; two out of three have lost a job; half have experienced a serious health problem; fewer than 9% have not suffered a job loss, medical event or divorce; highest bankruptcy rates: Tennessee, Utah, Georgia, Alabama.

The primary expected outcome of filing for bankruptcy is a discharge of most if not all of one’s debt.  Creditors may object to the discharge of the debt owing to them, and under certain circumstances, the debt may be deemed to be non-dischargeable under the Bankruptcy Code.  Section 523 of Title 11 of the Bankruptcy Code, provides that certain debts may not be discharged, including debts incurred by “fraud or defalcation while acting in a fiduciary capacity, embezzlement or larceny.” 11 U.S.C. § 523(a)(4).

Background of the Case

Bullock was the trustee of a Life Insurance Trust (the “Trust”), created by his father for the benefit of Bullock and his four siblings. On several occasions, Bullock borrowed funds from the Trust for various investments which resulted in profit for himself.  Bullock repaid the Trust in full, but his brothers sued him in Illinois state court, alleging that he breached his fiduciary duty to the Trust, as these loans were not authorized by the terms and conditions of the Trust. The state court held that even though he had repaid the Trust in full, Bullock had breached his fiduciary duty as trustee by engaging in self-dealing. Interestingly, the state court issued this opinion while noting the absence of a malicious intent on Bullock’s part. The state court awarded Bullock’s brothers the sum of $250,000 (representing the “benefit received” by Bullock from his breach) plus $35,000 in attorneys’ fees. Additionally, it imposed constructive trusts on some of Bullock’s property and on the original trust.

Bullock then filed for bankruptcy relief and his brothers opposed discharge of Bullock’s debts to the Trust on the grounds of defalcation.  The issue before the Supreme Court was the scope of the term defalcation, including the conduct and state of mind required to constitute and exception to discharge of debts under the Bankruptcy Code.

Oral Argument

The transcript of the oral argument before the Supreme Court makes it clear that the Justices and counsel had significant difficulty in analyzing this case. The Justices attempted to have counsel define the mental state required and the kind of loss, if any, required for defalcation.  The Court looked to the requirements for fraud in the general sense, as well as embezzlement and larceny as those terms are nearest to defalcation in the Bankruptcy Code.  The Court questioned the parties regarding what mental state should be required: whether it mattered if Bullock knew taking out the loans constituted self-dealing and constituted a breach of fiduciary duty; whether some higher standard was required. The specifics of the conduct involved and the nature of the terms of the Trust were also examined.

The Decision

In the final analysis, the Supreme Court held that where the conduct at issue does not involve bad faith, moral turpitude, or other immoral conduct, the term defalcation requires an intentional wrong. The Court went further to state that its definition of intentional conduct included not only conduct that the fiduciary knows is improper, but also reckless conduct of the kind that the criminal law often treats as the equivalent. Therefore, in situations where actual knowledge of wrongdoing is lacking by the fiduciary, the conduct satisfies the requirement if the fiduciary consciously disregards or is willfully blind to a substantial and unjustifiable risk that such conduct will result in a violation of a fiduciary duty.

To summarize, the term defalcation in the Bankruptcy Code includes a culpable state of mind requirement involving knowledge of, or gross recklessness in respect to, the improper nature of the fiduciary behavior.  In adopting this standard, the Court

Conclusion

Before Bullock, the standard for defalcation ranged from no specific state of mind to some degree of fault to extreme recklessness.  Bullock resolved the circuit split and set forth the minimum culpability required by a fiduciary to make a debt non-dischargeable as one closer to the extreme recklessness end of the spectrum. This higher standard is likely to result in more debts arising from a debtor’s breach of fiduciary duty to be dischargeable, and furthers the bankruptcy policy of providing debtors with a fresh start.  The result is one clearly articulated standard, but there still remains ample room for courts to be inconsistent in their application of this defalcation exception to discharges in bankruptcy.

Negotiation and Drafting of Construction Contracts

Significant risks to the construction contractor can arise from the contracts entered into for various projects.  However, these risks can be managed by a thorough understanding of key contract provisions and assistance of counsel in negotiating and drafting contract provisions to clarify rights and obligations of the parties, fair allocation of risks, and other protections that may be available.  A well-drafted construction contract clearly defines key terms such as scope of work, price, terms and conditions of payment, and allocation of foreseeable risks.

The contract process in the construction industry often starts with the bidding process.  Bidding for construction jobs can make or break the construction contractor.  It is essential for the contractor to know how to effectively bid for work to make a profit and have a successful business.  There are a number of ways to bid construction contracts.  But whichever method is used, success depends upon developing the most accurate cost estimate and formulating the lowest reasonable bid.

A project can be either private or public.  Usually a private project is one let by a private individual or entity, while a public project is let by a governmental entity.  The private project process usually involves solicitation of quotes or formal bid proposals from contractors, bids or offers by the contractors, and acceptance of the bid, resulting in a legally enforceable contract.  On the other hand, the public construction contract bidding process must follow set requirements under federal, state, and local laws.

Construction contracts are usually priced according to one of several methods involving two basic types, fixed price and cost reimbursable.

Two more common fixed price methods are Lump Sum and Unit Price.

Lump Sum is an agreement to a fixed price prior to the contract award which is not subject to adjustment except for changes in the scope of work. An example would be an agreement that the contractor will build a garage for a fixed price of $15,000.  Under this scenario, the contractor bears any overage in labor and/or material costs.

Unit Price is an agreement to a fixed price for a given unit of work and the total price is the unit price times the quantity of items delivered, installed or erected.  An example would be an agreement that a contractor build a garage for a set price per square foot.

One of the more common cost reimbursable methods is Cost Plus Fee.  Under this method, the agreement is for payment of all contractor labor and material costs plus a fee which can be expressed as a percentage or a lump sum, such as an agreement that a contractor will build a garage for the cost of labor and materials plus 25%.

Ten significant contract provisions that should be considered are as follows:

  1. Scope of Work – Statement of the scope of work including quality, completeness of design, and nature of the parties’ duties is critical to avoiding costly disputes later.
  1. Price and Payment Methods – Typically the contract will contain a schedule for specific items of work and, as they are completed, the contractor certifies that a percentage of the work is completed and will request payment for it.
  1. Insurance – At a minimum, construction contracts require insurance coverage for comprehensive general liability (CGL), automobile, and worker’s compensation coverage. Additionally, some type of proof of insurance may be required from subcontractors. The owner may also provide for other insurance coverage to protect against risks such as catastrophic events.
  1. Indemnification – One party agrees to cover certain losses which might be incurred by the other party as a result of claims which might arise under the contract, holding the other party harmless.
  1. Warranties and Bonds – Certain warranties are customary such as a warranty that goods furnished will be of good quality. Contract bonds such as performance and payment bonds may be required guaranteeing completion of the project and payment under the contract.
  1. Project Changes and Change Orders – Provision for submission and approval of necessary changes in plans and specifications during the course of the project.
  1. Delays – Contracts often provide an allowance of certain delays, and penalties for other delays by the contractor.
  1. Suspension and Termination – If the contractor fails to comply with the certain provisions of the contract, the owner may suspend or terminate the contract.
  1. Disputes – Many contracts contain an arbitration clause which requires disputes to be resolved in arbitration rather than in court.
  1. Transaction Rules for Particular Industries – Construction contracts should set out required industry procedures for the transaction where necessary.

A properly negotiated and drafted construction contract will be fairly complex if it is to be clear as to all material terms and provide for a fair allocation of risks.  Any contractor or owner preparing to take on a construction project would be well advised to have a solid understanding of all of the primary contract provisions and to seek legal counsel to assist in negotiation and drafting of the construction contract.  Failure to understand the contract one signs or the failure to seek assistance of counsel are not legal defenses to problems that might arise later after the project is underway.

Pay-if-Paid – What It Means for Subcontractors

Subcontractors Unite!  Do not sign a subcontract that shifts the risk of non-payment by the owner on you.  My advice is to strike out such provisions in any proposed subcontract and negotiate a reasonable time in which the Contractor has to pay regardless of whether the Owner pays.

Contractors are always trying new ways to “shift the risk” of non-payment by the Owner.  What this means is that General Contractors do not want to pay a subcontractor or supplier unless the Contractor has received payment from the Owner.

This is true even when there is no objection to the work performed or material supplied.

Contractors first tried inserting “pay-if-paid” and “pay-when-paid” provisions in their subcontracts.   The provision can be as simple as stating: “Contractor will pay Subcontractor within 7 days of Contractor’s receipt of payment by the Owner”, or as specific as, “It shall be a condition precedent to Contractor’s obligation to make each payment to Subcontractor (including but not limited to progress payment, final payment, payment for extra work or changed work), if the funds for such payment have first been paid by the Owner to Contractor.”

The Legislature took care of the “pay-if-paid” provision with the contingent payment clause statute that allows an unpaid Subcontractor to reject the enforcement of the provision when the reason for non-payment by the owner has nothing to do with the work of the Subcontractor.  Knowledge of Chapter 56 of the Texas Business and Commerce Code is essential.

Chapter 56 does not apply to a “pay-when-paid” clause if the payment is to be made within a reasonable time.  The problem is that “reasonable time” is not defined in the statute.

To get around the “pay-when-paid” reasonable time standard, Contractors are now defining “reasonable time” in the subcontract.  A typical definition might be as follows:

In the event of non-payment by the Owner, the parties agree that Contractor shall pay Subcontractor within a reasonable time.  For the purposes of determining the timing of payment under these circumstances, the parties acknowledge and agree that a reasonable time for payment to Subcontractor is within 30 days after Contractor has exhausted all available rights and remedies in connection with recovery of payment from the Owner.

When considering how long the litigation process can take including appeals, Subcontractors could be waiting up to 10 years for payment under this definition.  When negotiating the timing of payment, I would suggest the following:

In the event of non-payment by Owner, Contractor acknowledges it will be obligated to pay Subcontractor with a reasonable time for work completed in accordance with the Contract Documents, and for which Owner has no complaint.  A reasonable time period for non-payment to Subcontractor shall be 120 days from the date Subcontractor submitted its application for payment, or 90 days from the date the project reaches substantial completion, whichever occurs first.

However, Contractors have devised an even more sinister way to avoid payment.  They are now getting the Subcontractor to assume the risk of non-payment by the Owner and accepting the risk that the Owner may not pay for the work performed.  This language could be devastating in a suit to collect the amount owed for canopies installed at a project.  A typical provision might say:

It is agreed by the parties that, if payment from the Owner for all or a portion of the Subcontract work is never received by Contractor, then Contractor will never have any obligation to pay the Subcontractor for such portion of the work not paid by Owner.  Subcontractor expressly assumes the risk of Owner nonpayment.

Never agree to such a provision.  The Contractor is always in the best position to determine the financial strength of the Owner, or the Owner’s creditworthiness.  It is the Contractor who has met with and worked with the Owner concerning the plans and construction budget.  The risk of non-payment by the Owner should always fall on the Contractor because it is the Contractor who can elect not to contract with the Owner if the Owner lacks funds or credit.

In many instances a Subcontractor elects whether or not to subcontract on a job because of the Contractor’s reputation.  Most Subcontractors do not elect whether or not to subcontract on a job because of the reputation of the Owner.  Most often the Subcontractor has no intimate knowledge about the Owner.

Murray | Lobb, PLLC. represents subcontractors in their negotiations with contractors and helps in collecting payment for work performed and materials supplied to a construction project.

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/.