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/.

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.