Talladega College Featured in Client Spotlight

VOL 2016, ISSUE 1 sirote.com 1 Talladega College featured in “Client Spotlight” 2 The Counselor . Vol 2016, Issue 1 sirote.com 3 Letter from the Editors Welcome to the latest issue of The Counselor. First and foremost, introductions are in order. This letter is written to you by the new CoEditors in Chief – Arthur S. Richey and Danielle N. Starks. We are both embarking on our second year of practice at Sirote & Permutt, P.C., and we could not be more excited to have the opportunity to share with you the most important and prevalent legal trends and issues that we and our colleagues are seeing in our everyday practice. We are taking over for The Counselor’s previous Editor in Chief, Charles R. Driggars. On behalf of everyone at Sirote & Permutt, P.C. we want to express our appreciation for all of the hard work, commitment and dedication that Charles gave to The Counselor for the last 10 years. This publication would not be where it is today without Charles, and we hope to build on that legacy as Co-Editors in Chief. We wish him well in his retirement after 34 fulfilling years at Sirote & Permutt, P.C. In this issue of The Counselor, we bring to you a number of articles written by our esteemed colleagues on significant legal issues that may affect your life or business, as well as information about our attorneys and clients. We hope that you enjoy this issue of The Counselor. Editorial Arthur S. Richey and Danielle N. Starks Co-Editors in Chief Alabama’s new Non-Compete Act: Will your non-competition and non-solicitation contracts still be enforceable after January 1, 2016? What Do Businesses Need To Know? Effective January 1, 2016, Alabama’s new statute, the Restrictive Covenants Acti , will govern non-competition and non-solicitation agreements, and other restrictive covenants. The former statute, Alabama Code § 8-1-1, was repealed effective January 1, 2016.ii This article highlights changes in the law and describes implications for businesses in drafting and enforcing non-competition and non-solicitation agreements. The new statute attempts to rectify sometimes inconsistent case law that has developed over many decades. Some things change, others stay the same. The general structure is the same – a general rule prohibiting agreements to restrain trade (i.e. contracts that restrain people from exercising a lawful profession, trade, or business), with exceptions to the general prohibition, followed by related rules. The General Rule. “Every contract by which anyone is restrained from exercising a lawful profession, trade, or business of any kind otherwise than is provided by this section is to that extent void.”iii Understanding the general rule is important - a prohibition on restrictive covenants with specific exceptions. Such a structure emphasizes a public policy that disfavors restraints of trade and indicates that such restraints will be narrowly interpreted by a court. What is a Restrictive Covenant? Under a restrictive covenant, one person agrees with another person to refrain from doing something he or she would otherwise be able to do. For example, a company hiring an employee may not want the employee to work for a competitor if the employee leaves (non-competition restrictions), or may want to prevent a former employee from soliciting clients of the company or hiring away their former co-workers (non-solicitation restrictions). Another common example relates to the sale of a business - where the buyer requires that the seller agrees not to compete with the business the buyer just bought. ARTHUR S. RICHEY arichey@sirote.com | 205.930.5025 Practice areas: Corporate & Securities Real Estate Tax DANIELLE N. STARKS dstarks@sirote.com | 205.930.5020 Practice area: Litigation 4 The Counselor . Vol 2016, Issue 1 sirote.com 5 News Restrictive covenants make good business sense. It would be difficult to find a buyer of a business if the seller (who knows all of the customers) could turn around and open a competing business. Similarly, employers’ investment in specialized employee training, sharing proprietary information, and development of customer good-will can be protected by restrictive covenants preventing direct competition should an employee depart for a competitor. On the other hand, there is a strong public policy in Alabama favoring a competitive marketplace and disfavoring restrictions that cause otherwise productive workers to sit idly by, unable to work due to a restrictive covenant. Required Components. To be enforceable, there must be a signed, written agreement, supported by adequate consideration, which includes both of two threshold items. First, there must exist a protectable interest which is preserved by the restrictive covenant. Second, the agreed-upon restriction must be one of the six types of restraints outlined in Section 1(b) of the statute. 1) Protectable Interest. A “protectable interest” is defined by the new statute as including trade secrets, confidential information, commercial relationships, good will, and specialized training involving substantial business expenditure. Recall that restrictive covenants are disfavored by the law. Therefore, the restrictions contemplated by a restrictive covenant must serve to protect a “protectable interest.” Importantly, merely designating an interest as “protectable” in a form contract is not sufficient. A business must have some interest that is actually preserved by the restrictive covenant. For instance, a restrictive covenant in a form contract may be enforceable in a situation where an employee has access to trade secrets of his or her employer, but unenforceable with respect to another employee without such access because the restriction does not actually preserve a protectable interest. 2) Permissible Types of Restrictive Covenants. The six types of permissible restrictive covenants in the new statute are (1) agreements between companies to not hire the other company’s agent, servant, or employee who holds a “uniquely essential” position; (2) agreements to limit commercial dealings to the contracting parties; (3) non-competition and non-solicitation agreements associated with the sale of a business; (4) agreements by an agent, servant, or employee to not compete with a commercial entity; (5) agreements by an agent, servant, or employee to not solicit a commercial entity’s current customers; and (6) agreements upon dissolution of a commercial entity to refrain from carrying on a similar business. Drafting a Restrictive Covenant Components. In drafting a restrictive covenant, four important components deserve attention - who, what, where, and how long? 1) Who is prevented from engaging in an otherwise permissible activity? An employee? A newly hired employee with specialized skills? Were specialized skills acquired during employment? An employee who agreed to work for a 3-year transition period after selling the business to a new owner? 2) What is the activity or behavior limited by the restrictive covenant which would not be limited in the absence of a restrictive covenant? This might be competing, working, soliciting customers, hiring, soliciting co-workers to leave their employment, or something else. 3) Where is the restriction enforced? Also known as the “geographic scope” - which might be, depending on the circumstances, 1 mile, 5 miles, the southeastern US, east of the Mississippi, or another area. 4) How long is the restriction enforceable? Also known as the “duration” of the restriction, which might be 6 months, 1 year, 2 years, or perhaps longer, or possibly until some particular event takes place. Why Is Careful, Tailored Drafting So Important? Three reasons. First, restrictive covenants are disfavored and require observance of certain formalities. Second, timing is key. Third, watch out for the blue pencil! 1) Writing and Signatures. Certain formalities are required to create an enforceable restrictive covenant. The contract or agreement must be in writing, signed by all parties, and supported by adequate consideration. The new statute suggests that more than token consideration must be given. Presumably, a judge could invalidate a restrictive covenant if the employee did not receive enough consideration for an agreed-upon restriction. How much is enough in a particular set of circumstances? 2) Time of Signing – Case Law. Importantly, restrictive covenants binding employees normally should be entered immediately after employment has begun. If a non-competition agreement is signed before employment begins, a court may declare it unenforceable.iv The practical problem is obvious. If a job is sufficiently important to the business to require restrictive covenants, the terms of employment probably were negotiated in advance of the employee’s start date. Should the employee re-sign the agreement after employment begins? Is there sufficient consideration to support the restrictions signed after the employee’s start date? Practically, can you “spring” a non-compete on employees after they start? These are important issues to consider. News 3) Blue Pencil. The component of the new statute likely to have the greatest impact on drafting restrictive covenants is the “blue pencil” rule. The term “blue pencil” references an editing tool used to mark-up a draft copy. In the context of restrictive covenants, it refers to a court’s ability to modify or remove terms of a contract that are illegal or unenforceable while leaving the remainder of the contract intact. Under Alabama’s new Restrictive Covenants Act, a court may void a restrictive covenant in part and reform it to preserve the protectable interest if such restraint is (i) overly broad or (ii) unreasonable in its duration. Further, and even more concerning for employers, if a restraint does not fall within the limited exceptions set out in Section 1(b) of the statute, a court may void the restraint in its entirety. Many contracts include a provision inviting a court to reform (or re-draft) parts of the contract that are not consistent with the law – essentially the parties agree to permit a court to “blue pencil” any unreasonable restrictions but continue to otherwise enforce the contract. Many states enforce such contracts in accordance with the parties’ intent. This arrangement encourages broad drafting of restrictive covenants. After all, if the court ultimately will reduce any overbroad provisions, employers and buyers (normally the parties drafting documents with restrictive covenants) should draft the broadest possible restrictions. When a court eventually examines a contract, it will just dial back the restrictive covenant to a reasonable level. Meanwhile, all of the employer’s other contracts (which have not been examined by a court) will continue to contain broad restrictions. In contrast, several states have “all or nothing” blue pencil provisions. Rather than permit courts to re-write or reform an overbroad restrictive covenant, if a court finds that a restrictive covenant is unreasonable, the court will eliminate the provision entirely. The policy at work is to encourage reasonable drafting by employers and buyers. If, the thinking goes, employers know that a court will completely invalidate an overbroad restrictive covenant, then employers will have an incentive to draft only such restrictive covenants that would be defensible if challenged and examined by a court. Alabama’s Restrictive Covenants Act describes a middle approach. Courts appear to be able to exercise the blue pencil to re-write a restrictive covenant, but only in limited circumstances – modifying either (i) the geographic scope, or (ii) the duration of a restriction. In other words, the court can change the answer to two questions – where and how long. The new statute does not appear to permit a court to change other components of the restrictive covenant. For instance, if a non-solicitation provision in a contract applies to “all customers” of a business, a court may not be able to reduce the restriction to only the top 5 customers of the business. The language of the new statute provides that Alabama courts may void a restraint entirely (the “all or nothing” response) if the restraint does not fit within one of the limited exceptions outlined in the statute. Precisely what “may” means in this context is unclear – we will have to wait and see how courts interpret this apparently permissive authority. What is clear, however, is that the drafters of the statute intended to discourage overreaching boilerplate restrictive covenants that are not narrowly tailored to a specific situation. Employers and buyers using overbroad restrictions risk losing all protection of the restrictive covenant. Features of the New Law 1) Inconsistent Law Repealed. The previous restrictive covenant statute, Alabama Code § 8-1-1, is repealed along with all laws that conflict with the new Restrictive Covenants Act. All indications are that beginning January 1, 2016, all restrictive covenants, whenever drafted, will be judged under this new statute. 2) Application to Independent Contractors. The new statute states that “[a]n agent, servant, or employee of a commercial entity…” may agree to a non-compete restriction or a non-solicitation restriction. In contrast, the current law states that “one who is employed as an agent, servant or employee may agree with his employer…” to such restrictions. This change in the Restrictive Covenants Act may be interpreted as permitting restrictive covenants to apply in the context of independent contractors. If courts ultimately agree, this will be an important practical change. 3) Professional Exemption Unchanged. The “professional exemption” for restrictive covenants, which has been developed through significant litigation over many years, is not eliminated. 4) Presumptive Periods of Reasonableness. An often-disputed component of a restrictive covenant is its duration. A feature of the new statute is the introduction of presumptively reasonable time periods for three restrictions. a. Sale of a Business. A seller of a business may agree with the buyer to refrain from engaging in a similar business and soliciting customers of the business. Restraints of one year or less are presumed reasonable. b. Non-Compete. Second, non-compete agreements that prevent an agent, servant, or employee of a commercial entity from engaging in a similar business, which are two years or less, are presumed reasonable. 6 The Counselor . Vol 2016, Issue 1 sirote.com 7 News c. Non-Solicit. Third, non-solicitation agreements that prevent an agent, servant, or employee of a commercial entity from soliciting current customers are presumed reasonable for the greater of (i) 18 months, or (ii) “for as long as post-separation consideration is paid for such agreement.” These presumptive periods of reasonableness are an important new feature of the statute. Presumptive periods are not maximums, but enforcing longer restrictions may be an uphill battle. Employers and buyers will need to justify why a particular restriction should extend beyond the presumptively reasonable period. 5) Undue Hardship – Affirmative Defense. Under current Alabama law, restrictive covenants not barred by a statutory prohibition are subjected to a 4-part “reasonableness” test to determine if, and to what extent, such restrictions are enforceable. One component of such test is that a restriction may not impose an “undue hardship” on the person against whom it is enforced. The party seeking enforcement of the restriction, normally an employer or buyer of a business, has to to show that the restriction imposes no undue hardship on the party against whom enforcement is sought. Under the new Restrictive Covenants Act this burden shifts. “Undue hardship” is an affirmative defense – meaning that the party resisting enforcement (normally an employee or seller of a business) must affirmatively demonstrate that enforcing the restriction will cause an undue hardship. 6) Remedies – Injunctive Relief + Monetary Damages. The Restrictive Covenants Act clarifies that injunctive relief and monetary damages are available remedies for breaches of valid restrictive covenants. “Lawful liquidated damages” are permitted if provided in the contract. Note, however, that liquidated damage provisions carry unique risks. 7) Unanswered Questions. Many questions remain unanswered. Does the repeal of prior conflicting law impact cases that are merely inconsistent, but not directly in conflict with the new statute? How much consideration is “adequate”? How long can consideration support a non-solicitation restriction? Will courts seek to avoid utilizing the blue pencil? How broadly will courts apply their power to void restraints entirely? What constitutes a “commercial entity”? What will be the impact of the foreign law provision that appears to prevent selecting a different state’s law to circumvent Alabama’s public policy regarding restrictive covenants? What constitutes a “current” customer? Will a non-solicitation agreement be enforceable with respect to prospective customers? What type of training is “specialized” enough to be a protectable interest? Next steps. Restrictive covenants need to be examined and possibly re-drafted in light of the new statute. Otherwise, employers and buyers risk losing protection after January 1, 2016. n _________________________________________________________________________________________________________________________________________________________________________________________________________ i Alabama Laws Act 2015-465, signed by Governor Bentley on June 11, 2015, and referred to as the “Restrictive Covenants Act”. The Restrictive Covenants Act is codified at Ala. Code § 8-1-190, et seq. ii Restrictive Covenants Act, Sections 9 and 10. iii Id. at Section 1(a), codified at Ala. Code § 8-1-190(a). iv Pitney Bowes, Inc. v. Berney Office Solutions, 823 So. 2d 659 (Ala. 2001). Dawson v. Ameritox, Ltd., 2014 WL 31809 (S.D.Ala., Jan. 6, 2014). If you have any questions regarding the matters discussed in this memorandum, please contact the following attorneys or call your regular Sirote contact. BIRMINGHAM Andy Andrews 205.930.5757 bandrews@sirote.com Gaile P. Gratton 205.930.5320 ggratton@sirote.com J. Rushton McClees 205.930.5106 rmcclees@sirote.com Kyle T. Smith 205.930.5190 ksmith@sirote.com HUNTSVILLE John P. Burbach 256-518-3677 jburbach@sirote.com Rod G. Steakley 256-518-3670 rsteakley@sirote.com MOBILE T. Julian Motes 251-434-0130 jmotes@sirote.com John C.S. Pierce 251-434-0102 jpierce@sirote.com Talladega College Talladega College is a four year, liberal arts, private college located in a historic district of the City of Talladega. If you aren’t familiar with it, you are almost certainly familiar with some of the names that it has produced: • Judge Houston Brown, Circuit Court Judge in Jefferson County for 15 years. • Wynona Lipman, Democratic Party Politician and the first African-American Woman Elected to the New Jersey Senate. • Hank Sanders, Democratic Member of the Alabama Senate since 1983. • Arthur Shores, American Civil Rights Attorney, considered Alabama’s “Drum Major for Justice.” • Eunice Johnson, Creator of the Ebony Fashion Fair. These names are just a few of those belonging on a long list of movers and shakers who graduated from Talladega College. Not to mention, one of the firm’s senior partners, J. Mason Davis, Jr. is a Talladega College alumnus, as well as a former chairman of its Board of Trustees. Talladega College is a school of important historical significance. This year, the institution is 148 years old, quickly approaching a celebration of 150 years of history and academic excellence. The institution is the oldest private, historically black institution in the State of Alabama and has had a strong impact on the state over the years. In fact, in speaking with Dr. Billy Hawkins, the current President of Talladega College, his pride in the College is visceral. And it doesn’t take long to figure out why. Client Spotlight: ANDY ANDREWS bandrews@sirote.com | 205.930.5757 Practice areas: Corporate & Securities Health Care Tax J. RUSHTON McCLEES rmcclees@sirote.com | 205.930.5106 Practice areas: Litigation Mortgage Banking 8 The Counselor . Vol 2016, Issue 1 sirote.com 9 The history of Talladega College began on November 20, 1865 when two former slaves, William Savery and Thomas Tarrant, both of Talladega, met with a group of new freedmen in Mobile, Alabama. From this meeting came the commitment: “...We regard the education of our children and youths as vital to the preservation of our liberties, and true religion as the foundation of all real virtue, and shall use our utmost endeavors to promote these blessings in our common country.”i With this as their pledge, Savery and Tarrant, aided by General Wager Swayne of the Freedmen’s Bureau, began in earnest to provide a school for the children of former slaves of the community. Originally, they operated in a one-room schoolhouse, constructed from lumber salvaged from an abandoned carpenter’s shop, but the school quickly overflowed with pupils, spurring a need for larger quarters. Meanwhile, the nearby Baptist Academy was about to be sold due to a mortgage default. This building had been built in 1852- 53 with the help of slaves including Savery and Tarrant. A speedy plea for its purchase was sent to General Swayne. General Swayne then persuaded the American Missionary Association to buy the building and the surrounding 20 acres of land for $23,000. The grateful parents of the school children renamed the building Swayne School, and it opened in November of 1867 with about 140 pupils. Thus, a building constructed with slave labor for white students became the home of the state’s first private, liberal arts college dedicated to servicing the educational needs of blacks.ii In 1869 Swayne School was issued a charter as Talladega College by the Judge of Probate of Talladega County. Twenty years later, in 1889, the Alabama State Legislature exempted properties of the college from taxation. The founders intended for the College to be an elite academic institution – a mindset that has been passed from one generation to the next. In speaking with any graduate of Talladega College, a common theme is that each of them will tell you that their school is academically elite. Time and time again, the College has produced the types of individuals who have gone out and made major impacts in the country. For example, Arthur Shores, a Talladega alumnus and civil rights attorney, successfully argued the case of Lucy v. Adams before the U.S. Supreme Court to prevent the University of Alabama from denying admission solely based on race or color. Ms. Lucy then became the first African-American to attend the University of Alabama when she was admitted in 1956. Indeed, the history of Talladega College is an important part of the character and the fiber of the campus. For this reason, when the College underwent efforts to renovate Foster Hall, the first dormitory built on the campus in 1869, it was momentous. Foster Hall was a women’s dormitory which was also used for training and receptions, but it experienced significant fire damage, causing the need for complete renovations. Talladega College was recently renovating Foster Hall with the help of a series of federal grants, but work stopped abruptly when a missed deadline resulted in the withholding of government funds. The fact that the construction stopped was a serious setback for the College, but the situation became disastrous when the general contractor tried to take advantage of the situation by claiming unearned overhead and profits from Talladega College. Although the general contractor was paid in full for its completed work, the general contractor and its attorney realized that if they could convince Talladega College to terminate the contract, the contract would potentially entitle the contractor to a great deal of additional money in the form of unearned overhead and profit. Through what can only be described as legal maneuvering, the contractor made its play. After misleading the College into terminating the contract, the general contractor immediately sued for its unearned overhead and profit. The dispute went to arbitration and one of our top litigators, Jim Williams, took the lead in representing Talladega College. Even though Williams expected the general contractor to offer an alternative explanation for its actions, the contractor instead admitted precisely what it had done. Perhaps not surprisingly, the arbitrator was lead to the same conclusion Williams had reached – the contractor was simply exploiting a bad situation and making Talladega College the victim. The arbitrator ruled in favor of Talladega College and ordered that the contractor was entitled to nothing. Talladega College is on a mission not only to produce some of the best and brightest minds in Alabama, but also to set young people on a track to go out and make waves. Sirote is proud that it was able to be there for the College in a time of need so that it may continue on this path. n ________________________________________________________________________________________________ i Talladega College History (November 6, 2015), http://www.talladega. edu/history.asp. ii Id. Client Spotlight On June 30, 2015, I watched with pleasure as Governor Robert Bentley signed the bill to turn Alabama’s Achieving a Better Life Experience (ABLE) Act into law. The ABLE Act allows a savings account to be established for an individual who became disabled prior to age 26. For individuals with disabilities who receive Supplemental Security Income (“SSI”) or Medicaid, both of which have a resource limit of $2,000 to qualify, an ABLE Act account will not count as a resource. This account offers a straightforward avenue to handle funds of a person on SSI or Medicaid while preventing disqualification due to excess resources. Financial institutions in Alabama should be ready by the end of 2016 to offer ABLE Act accounts. While some advocates hoped that the ABLE Act would eliminate the need for a Special Needs Trust, it does not. Due to the contribution limits, distribution restrictions listed below, as well as the Medicaid payback required, there still may be a need for a Special Needs Trust. Despite this, however, the ABLE Act should provide practical and inexpensive options for persons with disabilities seeking more autonomy over resources while retaining eligibility for important government benefits. Below are some helpful facts regarding ABLE Act accounts: • Only individuals with a disability that occurred before age 26 can have an account. • Only one ABLE Act account per individual is allowed. • The ABLE Act account must be located in the State of the individual’s residence. • Proof of disability must be shown to open the account --- for example, a doctor’s letter or a disability determination by Social Security. • Total contributions to the account for one year cannot exceed $14,000 (or the amount of the gift tax annual exclusion in effect). This requirement, unfortunately, eliminates the option for an insurance policy over $14,000 or a distribution from an inheritance above that amount to name an ABLE Act account as beneficiary. • If the account exceeds $100,000.00, then the individual will lose eligibility for SSI, as well as Medicaid, which is automatically provided to SSI recipients in Alabama. If an individual is not on SSI but is receiving Medicaid benefits, then the total ABLE Act account limit is $350,000.00 in Alabama (this amount corresponds to Alabama’s 529 plan maximum amount). • The funds in an ABLE Act account can grow inside the account tax-deferred and will come out income tax free ALABAMA’S NEW ABLE ACT ACCOUNTS AVAILABLE AT THE END OF THIS YEAR 10 The Counselor . Vol 2016, Issue 1 sirote.com 11 News when used to pay for “qualified disability expenses” for the account beneficiary. Any payments for a non-qualified expense may mean the account will no longer qualify as an exempt resource and will cause a pro rata portion of the earnings attributable to the non-qualified payment to be subject to tax plus a 10% penalty. The proposed regulations by the Federal Government require each state to monitor distributions from ABLE Act accounts on an annual basis. • Although the term “qualified disability expenses” is not yet fully defined, examples of qualified expenditures are likely to include transportation, assisted technology, health and wellness needs, housing and employment support. Examples of non-qualified expenses may include entertainment or vacation expenses. • While it appears that the proposed regulations regarding ABLE Act accounts will allow for housing, Social Security has stated that distributions for housing from these accounts will have an impact on SSI distributions in the same manner that presently exists when distributions for housing are made from any source other than SSI. • Most importantly, the amount remaining in an ABLE Act account at an individual’s death --- regardless of the source of the funds contributed --- must be paid to the Medicaid agency that paid benefits for the individual’s care. If funds remain after repayment to Medicaid, then they may pass to the family. Because a Special Needs Trust created by a family to bequeath inheritances, life insurance or gifts to the individual does not need Medicaid payback, it remains a better avenue through which to leave funds for a person on SSI or Medicaid rather than relying on an ABLE Act account alone. While this list of limitations may seem daunting, the ABLE Act does offer plenty of useful opportunities for individuals with special needs who qualify for an account. Here are a few examples: • If an individual on SSI or Medicaid (recipient) directly receives a small inheritance, gift or personal injury award, then up to $14,000 of the amount can be contributed to an ABLE Act account, with any excess amount being “spentdown” on items or services for the recipient. This avoids having to spend the entire amount down to $2,000. • If the recipient is able to save money from his or her monthly SSI or Social Security Disability check, he can contribute some to an ABLE Act account, up to $14,000 per year. This avoids having to spend the excess in order to maintain the $2,000 resource limit. The ABLE Act account, however, should not receive funds from an SSI check that the individual should be spending on room or board. • If an individual on SSI or Medicaid is working and wants to save some of his earnings, the ABLE Act account is perfect for these savings. This is particularly helpful for individuals learning skills to live independently. • Similarly, if the parent of an SSI or Medicaid recipient wants to supplement the recipient’s monthly income from SSI or working, and allow the recipient to have direct access to the funds the parent contributes, the parent can make a direct deposit to the ABLE Act account each month, up to the annual limit of $14,000. We do not know yet whether interest earned by the account will count towards the $14,000 limit. Nevertheless, where the recipient is able to manage monthly finances, and the family encourages these skills, the ABLE Act account can provide more autonomy over finances while living independently, without reducing or eliminating SSI or Medicaid. • Another possible use of an ABLE Act account is to allow an individual to receive child support payments for a child (regardless of age) on SSI or Medicaid. This is a better way to approach child support payments because they otherwise reduce monthly SSI dollar-for-dollar (except for the first $20), even to the point of eliminating SSI and Medicaid (which is provided automatically in Alabama to SSI recipients). Please be aware, however, that for this approach to be successful, a parent should consult legal counsel experienced in this area. I am proud that Alabama quickly took the steps to provide our citizens with the legislation needed to open ABLE Act accounts. Much advocacy took place over the past 8 years to bring the federal law into place. I hope individuals with disabilities and their families will take advantage of this new legislation. Please feel free to give me a call to discuss estate and government benefits planning for individuals with special needs and how an ABLE Act account can be part of your plan. n The Affordable Care Act... a cat with nine lives? Possibly. Currently, it’s on number four and going strong. This article discusses King v. Burwell, the latest Supreme Court test, and looks at what may be next for this law. At the end of June, the Affordable Care Act (“ACA”) survived US Supreme Court scrutiny again. Concluding, by 6-3 vote, that tax credits are available for health insurance purchased on a Federal Health Insurance Exchange as well as an Exchange created by individual states for any applicable taxpayer, the decision essentially leaves the ACA “as is” – for now. The issue in King was whether tax credits authorized under the ACA are available in states, like Alabama, that decided not to establish their own Health Insurance Exchange and therefore have an Exchange run by the Federal government. An individual may receive an ACA tax credit only if the individual enrolls in an insurance plan through “an Exchange established by the State under [42 U. S. C. §18031].” In other words, to receive an ACA tax credit, three things must be true: First, the individual must enroll in an insurance plan through “an Exchange.” Second, that Exchange must be “established by the State.” And third, that Exchange must be established “under [42 U. S. C. §18031].” (emphasis added) An opposite outcome would have caused tremendous confusion, invalidating ACA tax credits in 34 states (including Alabama) for insurance purchased through an ACA Exchange. Would millions of individuals who have received tax credits be required to pay them back? If tax credits are no longer available in 34 states, would the Employer Mandate be a toothless tiger in twothirds of the country (recalling that an employee’s ACA tax credit is the trigger mechanism for the employer mandate penalties)? What about multi-state employers? Would the change trigger legislative action? Many considered King v. Burwell the strongest challenge to the ACA. The key disagreement was whether “established by the State” permits credits for persons in one of the 34 states that did not establish their own Exchange, and therefore have an Exchange established by the Federal government under a different provision, 42 U. S. C. §18041. On the ultimate question, the Supreme Court affirmed the decision of the United States Court of Appeals from the Fourth Circuit – that ACA tax credits were available on State Exchanges as well as Federal Exchanges. The Supreme Court, however, took a different route to the same destination. In a nutshell, the Fourth Circuit’s decision was about the authority of the IRS. It asked whether the IRS overstepped its authority in 2012 when it issued a rule permitting tax credits on Federal Exchanges like the credits available through State Exchanges. The general method of analyzing an agency’s interpretation of a statute is to apply the Chevron test, asking whether the statute is ambiguous and, if so, whether the agency’s interpretation is reasonable. The Supreme Court said that was the wrong question. Describing King as an extraordinary case, the Supreme Court said that Exchange tax credits are a key provision of “deep economic and political significance”, and reasoned that had Congress wished to assign this issue to an agency, it surely would have done so expressly. Therefore, since Congress did not do so, it does not matter what the IRS thinks about the issue - the Supreme Court was not answering the question of whether the IRS overstepped its authority. Rather, the Supreme Court determined what the statute means – which involves an entirely different analysis. As the dissenters framed the issue, it is difficult to overcome the argument that “an Exchange established by the State” really means “Exchange established by the State or the Federal Government.” Nodding to the apparent disconnect, the Court noted that “while the meaning of the phrase “an Exchange established by the State” may seem plain “when viewed in isolation,” such a reading turns out to be “untenable in light of [the statute] as a whole” reasoning that, because the Court “cannot conclude” that the phrase “an Exchange established by the State under [relevant section of ACA]” is unambiguous, “the context and structure of the Act compel [the Court] to depart from what would otherwise be the most natural reading of the pertinent statutory phrase.” Quoting heavily from other Supreme Court decisions, Justice Roberts went further to explain his decision in terms of the role of the judiciary. He describes a court’s job as “to say what the law is” noting the Court should be wary in relying on context and structure in statutory interpretation, “lest what professes to be mere rendering becomes creation and attempted interpretation of legislation becomes legislation itself.” His reasoning could be seen as an exercise in conservative jurisprudence, though not conservative politics. Most instructive is the distinction of the Legislative role from the judicial task, “in every case we must respect the role of the Legislature, and take care not to undo what it has done.” In addition to the context and structure of the law, the Court looks to the apparent purpose of the law. “A fair reading of legislation demands a fair understanding of the legislative plan.” According to the Court, since the ACA credits are “necessary for the Federal Exchanges to function like their State Exchange counterparts, and…Congress passed the Affordable Care Act to improve health insurance markets, not to destroy them, [then] [i]f at all possible, we must interpret the Act in a way that is consistent with the former, and avoids the latter.” Hence, according to the Court, the statute authorizing the ACA tax credits “can fairly be read consistent with what we see as Congress’s plan, and that is the reading we adopt.” KATHERINE BARR kbarr@sirote.com | 205.930.5147 Practice area: Estates, Wills & Trusts 12 The Counselor . Vol 2016, Issue 1 sirote.com 13 The Supreme Court’s posture in King seems to be fairly similar to other ACA cases. The first major challenge to the ACA, National Federation of Independent Businesses v. Sebelius, was decided by the Supreme Court in 2012 and addressed the individual mandate – that individuals must have insurance or make a “shared responsibility” payment. Only a minority of the Court agreed with the government’s argument that the individual mandate was a valid exercise of Congress’s authority over interstate commerce. The individual mandate was upheld, however, with Justice Roberts providing the deciding vote - reasoning that the individual mandate could be a valid exercise of Congress’s taxing authority. Some view this case as Justice Roberts creating an argument to “save” the ACA. It can be seen as an example of Justice Roberts following the principle to take care not to undo what has been done by the Legislature. Later, in Burwell v. Hobby Lobby Stores, Inc., the US Department of Health and Human Services (“HHS”) issued regulations under the ACA statute, referred to as the “contraceptive mandate”, requiring many employer-based group health plans to provide to women, at no charge, 20 types of contraception approved by the U.S. Food and Drug Administration (“FDA”). The plaintiffs in the Hobby Lobby case, both for-profit closely-held companies, objected to 4 of the 20 types of contraception required. The Court ruled, 5-4, in favor of the Hobby Lobby plaintiffs based on the Religious Freedom Restoration Act (“RFRA”), a 1993 law that prevents the federal government from taking actions which substantially burden the exercise of religion, unless the action constitutes the least restrictive means of serving a compelling government interest. A regulatory action under one statute (the ACA) was trumped by a prior statute. What can we glean from these three Supreme Court cases interpreting the ACA? First, the ACA is here to stay. Efforts to repeal the ACA through the Courts probably will not be successful. Several major components of the law have been challenged and withstood Supreme Court scrutiny. Justice Roberts, as the swing voter, has staked out his position in upholding legislative action if possible. Any major changes to the ACA will require legislative action. Second, regulatory agencies beware. In Hobby Lobby, the Court showed its willingness to overturn action by regulatory agencies, despite several hurdles presented in that case. In King, the Court indicated its willingness to sidestep the regulatory agency entirely for a major provision of the law where the ACA statute did not expressly grant authority to a regulatory body for rulemaking. Recent Change! The ACA’s automatic enrollment rule required employers with more than 200 full-time employees to automatically enroll new full-time employees in one of its plans. Automatic enrollment changed the “default” position to “enrolled” – which, under the affordability guidelines of the Employer Mandate, would necessitate an employer contribution to insurance premiums on behalf of each full-time employee unless the employee declined coverage. On November 2, 2015, President Obama signed the Bipartisan Budget Act of 2015, which repealed the automatic enrollment requirement – allowing employers to avoid potentially substantial cost increases. What’s Next? Several major components of the ACA still have not been implemented, including nondiscrimination requirements and the “Cadillac Tax”. For many employers, especially those that offered health insurance prior to the ACA, these nondiscrimination requirements represent the largest potential financial impact of the ACA. The ACA adds nondiscrimination requirements to group health plans which are “similar to” nondiscrimination requirements already in place for other purposes, such as for self-insured plans. Failure to comply can trigger an excise tax of $100 per person, per day, as well as civil monetary penalties among other sanctions. The IRS, DOL and HHS determined that compliance is not required (and sanctions will not apply) until after regulations or other guidance is issued. The general thrust of the current nondiscrimination rules (compared to which the forthcoming rules will be similar), is that an employer’s health insurance plan may not favor highly compensated individuals, such as officers, shareholders, and top employees, and is applied with regard to participation in the health plan and the benefits provided under the plan. When the nondiscrimination rules are effective, employers most likely will need to increase the benefits of the non-highly compensated individuals, which increases costs, or reduce the benefits of the highly-compensated individuals, and risk losing top employees. The nondiscrimination requirements may potentially trigger penalties for employers or will entail significant costs for compliance, often much more than the threat of an Employer Mandate penalty. Such regulatory action also may serve as a source of future challenges to the ACA, which has withstood quite a lot of scrutiny so far. It looks like we will have to wait and see how many lives the ACA ultimately has. n Opinion JULIAN MASON DAVIS, JR. Attorney Spotlight: The life and career of Julian Mason Davis, Jr. exemplifies the characteristics that all attorneys should aspire to attain: a commitment to justice, selfless service to clients and community, and hard work. Davis continues to exemplify these characteristics as a senior shareholder at Sirote & Permutt, P.C. “I enjoy practicing law. I get up every morning about 5, fix my breakfast, read the news and get to work at 7. I’ve done that every day for 55 years, except when I had to take my kids to elementary school, then I would get to the office at 8.” The City of Birmingham has been home to Davis and his family for over 120 years. Davis’s grandfather, William Calhoun Davis, and father, Julian Mason Davis, Sr., served as principals at Thomas Elementary School, the first brick and mortar school JAY MAPLES jmaples@sirote.com | 205.930.5383 Practice areas: Corporate & Securities Health Care Tax ANDY ANDREWS bandrews@sirote.com | 205.930.5757 Practice areas: Corporate & Securities Health Care Tax 14 The Counselor . Vol 2016, Issue 1 sirote.com 15 Attorney Spotlight News built for African Americans in the City of Birmingham. The Harrises, his mother’s family, owned and operated several businesses, including Protective Industrial Insurance Company of Alabama, a life insurance company, and Davenport and Harris Funeral Home, Inc. founded in 1899, which is the oldest African American family owned and operated business in the State of Alabama and is still owned and operated today by the Harris family. Davis attended Talladega College in Talladega, Alabama, where he meet his wife of 58 years, June Fox Davis. Upon graduating from Talladega College in 1956 with highest honors, Davis enrolled as a first year law student at the State University of New York at Buffalo Law School. Ms. Davis moved up to Buffalo, NY to be with Davis after their marriage in August of 1957, but the Davises would eventually move back to Birmingham, partially due to the cold Buffalo weather. “When June was pregnant with our first child, Karen, I took her to the airport to go back home to Birmingham. Before she left, she said ‘Don’t think I don’t love you, but I’m going back home because it’s too cold up here.’” After graduating from the State University of New York at Buffalo Law School as a member of the Buffalo Law Review, Davis moved back to Birmingham and received his law license in April 1960, becoming the ninth African American to hold a license to practice law in the City of Birmingham at the time. During his first year of practicing law, Davis, along with his law partners Peter Hall and Orzell Billingsley, Jr., represented 125 African American students charged with “trespass after warning” for participating in lunch counter sit-in demonstrations in Huntsville, AL. After losing each case at the City Court and Circuit Court, Davis and his partners appealed one case, Leon Felder v. City of Huntsville, to the Alabama Court of Appeals. Davis and his partners won the appeal, overturning the convictions for all students represented by Davis, Hall and Billingsley. After practicing with Hall and Billingsley for a few more years, Davis started his own practice, where he represented his family businesses in various matters. In 1983, Davis was elected as the President of the Birmingham Bar Association. Shortly thereafter, he received a phone call from General Edward M. Friend, Jr. Davis recalls “General Friend told me ‘You can’t practice law over there by yourself and be President of the Birmingham Bar, so I am going to bring you over to this firm.’ I merged my practice into the Sirote practice, became a senior partner, and I’ve been here for 31-32 years.” As a senior shareholder at Sirote & Permutt, P.C., Davis represents clients in business, as well as life, health and surety company defense. Davis has extensive experience before insurance regulatory bodies and has argued matters before the Supreme Court of Alabama, and the 5th and 11th Circuit Courts of Appeals. Davis has received numerous awards and recognitions for his distinguished legal career, including an induction into the Alabama Lawyers Association Hall of Fame, being named to the Best Lawyers in America, and receiving the AV-Preeminent rating from the Martindale-Hubbell Peer Review Ratings. He has sat on the Board of Directors of Rust International, Enstar Corporation, Bruno’s and Energen. Davis has been involved in numerous civic organizations, including the United Way of Central Alabama, the Birmingham Regional Chamber of Commerce, and the Kiwanis Club of Birmingham. Davis has received several awards for his civic involvement, including the “Lifetime Achievement in Civil Rights” honor from the NAACP, Positive Maturity’s “Top 50 Over 50” honor, and honors from the Alabama Poverty Project and the Birmingham Bar Foundation. He is a member of the Executive Committee of the Alabama Academy of Honor. Outside of the office, Davis enjoys spending time with June and their adult two children, Karen Madeline Davis and J. Mason Davis, III, playing golf almost every Saturday at Pine Tree Country Club, teaching Sunday School at First Congregational Church UCC on Center Street North, and cooking breakfast for June “I get up every Sunday morning and get in the kitchen about 6:30 and I fix breakfast for my wife and me. We like to eat salmon croquettes, grits and biscuits.” n In 1974, Mason and his family were featured on the cover of Time magazine as part of the cover story entitled “Middle-Class Blacks Making it in America”. The National Practitioner Data Bank: What Every Healthcare Practitioner Needs to Know 16 The Counselor . Vol 2016, Issue 1 sirote.com 17 Most healthcare practitioners have heard of the National Practitioner Data Bank (NPDB), but many are unfamiliar with exactly what it is, how it operates, and what implications it might have on a healthcare practitioner’s career. The NPDB acts as a national clearinghouse for information relating to the professional competence of healthcare practitioners, and it is administered by the Health Resources and Services Administration (HRSA), a division of the United States Department of Health and Human Services (HHS). The information reported to the NPDB is intended to be used in combination with information from other sources in making determinations on employment, affiliation, clinical privileges, certification, licensure, or other decisions. Hence, if the name of a physician or dentist, or other healthcare practitioner, is found in the NPDB, it could affect the ability of that healthcare practitioner to obtain privileges with a hospital or a state license. On April 6, 2015, the HRSA released a revised NPDB Guidebook - the first update in more than ten years. The new NPDB Guidebook incorporates legislative and regulatory changes adopted since the 2001 edition, provides updated explanations and examples of NPDB policies, and attempts to clarify when an action must be reported to the NPDB. An electronic copy of the 2015 NPDB Guidebook can be found on the NPDB web site (www.npdb.hrsa.gov). This article aims to demystify the operations of the NPDB; to emphasize the significant impact on healthcare practitioners when reports are made to the NPDB; to encourage every healthcare practitioner to ensure the accuracy of information in the NPDB; and to take steps to dispute reports, when necessary. Federal Laws Governing NPDB Operations Three significant federal laws currently govern NPDB operations: 1. Title IV of the Health Care Quality Improvement Act of 1986 (HCQIA) Established the NPDB as a clearinghouse of information on medical malpractice payments and adverse actions related to licensure, clinical privileges, and professional society memberships of physicians, dentists, and, in some cases, other healthcare practitioners. Drug Enforcement Administration (DEA) registration actions and Medicare/ Medicaid exclusions are also reportable. 2. Section 5 of the Medicare and Medicaid Patient and Program Protection Act of 1987, codified as Section 21 of the Social Security Act (SSA) Added certain adverse actions taken by state licensing and certification authorities, state law enforcement agencies, Medicaid fraud control units, state agencies administering state healthcare programs, peer review organizations, and private accreditation organizations. Subjects of reports can include healthcare practitioners, entities, providers, and suppliers. 3. Health Insurance Portability and Accountability Act of 1996, codified as Section 1128E of the SSA Originally established the Healthcare Integrity and Protection Data Bank (HIPDB) which has since been merged with the NPDB. Added certain final adverse actions taken by federal agencies and health plans against healthcare practitioners, providers, and suppliers. Eligible Entities Each of the three federal laws governing NPDB operations has different provisions regarding the entities that are eligible and/ or required to query or report to the NPDB. While the NPDB operates as a single data bank, the information that entities are required to report and are authorized to receive when they query is based on their eligibility under each statute. In general, to be eligible to query the NPDB, an entity must be one of the following: • Hospitals; • Healthcare entities that provide healthcare services and follow a formal peer review process; • Professional societies that follow a formal peer review process; • State licensing and certification authorities; • Health plans; • Quality improvement organizations; • State law enforcement agencies, including state prosecutors; • State Medicaid fraud control units; • State agencies administering or supervising the administration of state healthcare programs; • Agencies administering federal healthcare programs, including private entities administering such programs under contract; • Federal licensing and certification agencies; or • Federal law enforcement officials and agencies, including federal prosecutors. Queries The 2015 NPDB Guidebook outlines the query process for entities and individuals who are required or permitted to query News News the NPDB, identifying the type of information available to the specific entities and individuals and how the specific entities and individuals are permitted to use the information obtained from the NPDB. When an entity queries the NPDB, the NPDB determines how the entity is registered with the NPDB before releasing information, and it releases only lawfully permitted information based on the entity’s registration. Two examples of federally-mandated queries of the NPDB: • Hospitals are required to query the NPDB when a physician, dentist, or other healthcare practitioner applies for medical staff appointment (courtesy or otherwise) or for clinical privileges at the hospital, including temporary privileges. • Every two years (biennially), hospitals are required to query the NPDB on all physicians, dentists, and other healthcare practitioners who are on its medical staff (courtesy or otherwise) or who hold clinical privileges at the hospital. Hospitals receive the following types of information in response to their queries: • Medical malpractice payment information; • Licensure actions by state medical and dental boards; • Licensing and certification actions taken by states and federal agencies; • Adverse actions taken by healthcare entities against clinical privileges, including professional review actions taken by professional societies; • Negative actions or findings by peer review organizations or private accreditation entities; • Healthcare-related criminal convictions and civil judgments; • Exclusions from participating in federal or state healthcare programs; and • Other healthcare-related adjudicated actions or decisions. Other healthcare entities may query the NPDB when they have or may be entering into employment or affiliation relationships with healthcare practitioners; when healthcare practitioners apply for clinical privileges or medical staff appointments; and/ or when they are engaging in professional review activity. Entities like health plans and state licensing and certification agencies also may query the NPDB when they are determining the fitness of individuals to provide healthcare services; when they are protecting the health and safety of individuals receiving healthcare through programs they administer; and/or when they are protecting the fiscal integrity of programs they administer. Practice Pointer: A healthcare practitioner may self-query the NPDB at any time by submitting a request through the NPDB web site (www.npdb.hrsa.gov) and paying a small fee (currently $5.00). Healthcare practitioners should regularly request a NPDB self-query to ensure all information in the NPDB is correct. If any inaccurate information is discovered, promptly follow the steps below to correct or dispute the NPDB report. Reports NPDB reporting requirements by entity are set forth in detail in the 2015 NPDB Guidebook. Information reported to the NPDB is maintained permanently unless it is corrected or voided from the system. Below is a summary of the information required to be reported to the NPDB: • Medical malpractice payments resulting from a written claim or judgment; • Certain adverse licensure, clinical privileges, and professional society membership actions related to professional competence or conduct; • DEA controlled substances registration actions; • Exclusions from participation in Medicare, Medicaid, and other federal healthcare programs; • Negative actions or findings by peer review organizations or private accreditation organizations; • Exclusions from participation in state healthcare programs; • Healthcare-related civil judgments in federal or state court; • Healthcare-related federal or state criminal convictions; • Federal licensure and certification actions; and • Other adjudicated actions or decisions. Practice Pointer: Healthcare practitioners at risk of being reported to the NPDB should immediately consult with experienced legal counsel to assess whether there are opportunities to avoid a report to the NPDB. Even when a NPDB report must be made by a reporting entity, legal counsel can help mitigate the adverse consequences of a report by negotiating the wording of the report as well as classification codes and basis of action codes. Subject Statements and the Dispute Process When the NPDB receives a report, the NPDB processes the report as submitted by the reporting entity. The contents of the report are determined by the reporting entity, not by the NPDB. Reporting entities are responsible for the accuracy of the information they report and are required to certify that the report 18 The Counselor . Vol 2016, Issue 1 sirote.com 19 News News Residential Leases and the Automatic Stay: What’s a Lessor to Do Lessors of residential real property often encounter the bankruptcy automatic stay when attempting to evict delinquent tenants. Speaking very generally, the automatic stay is an injunction, which precludes certain actions from being taken against a bankruptcy debtor after the debtor files a bankruptcy petition. In the lessor/tenant context, the bar created by the automatic stay can create confusion as to what actions a lessor can take to recover leased property and recoup unpaid rent and other charges. The purpose of this article is to discuss generally some options a lessor may consider when faced with a bankrupt tenant. A Warning Though the purpose of this article is to discuss what a lessor can do, it is important to first stress what a lessor cannot do. When a debtor files a bankruptcy petition, all legal actions against the debtor or the debtor’s property must cease. At the time the debtor’s bankruptcy petition is filed, notice of the filing will be provided to most or all of the debtor’s creditors. Once on notice, a creditor can be sued for actions taken against a debtor. In the present context, the filing of an unlawful detainer or evictions action against a delinquent tenant can result in a lessor being sued for violation of the automatic stay—which can result in a significant monetary damages award against the lessor. As a bottom line, a bankruptcy filing and the automatic stay should be taken seriously by creditors. The wisest choice for a lessor is to go through the bankruptcy court (likely with an attorney) to seek relief. is accurate. When the NPDB processes a report, the NPDB notifies the subject of the report. The notification provides instructions for obtaining an official copy of the report from the NPDB web site. The subject of a report submitted to the NPDB should review the report for accuracy, including the description of the reported event. If any information in the report is inaccurate, the subject of a report can request that the reporting entity file a correction. The NPDB is prohibited by law from modifying any submitted information, even if the healthcare practitioner who is the subject of the information can prove its inaccuracy. If a reporting entity refuses to change the report it submitted to the NPDB, the affected healthcare practitioner may initiate a dispute to the NPDB and/or add a statement to the NPDB report, which any subsequent requestor would receive. The dispute process allows a healthcare practitioner to protest the factual accuracy of the report or whether the report was submitted in compliance with the NPDB reporting requirements. A healthcare practitioner, however, is prohibited from disputing the underlying reasons for the reports, such as the merits of a medical malpractice claim or the appropriateness of, or basis of, other types of reports. Practice Pointer: A healthcare practitioner should seek the assistance of experienced legal counsel before determining the best way to respond to an inaccurate NPDB report, including contacting the reporting entity directly, drafting a subject statement for inclusion with the NPDB report, and/or navigating the NPDB dispute resolution process. Conclusion Reports to the NPDB can have a significant impact on a healthcare practitioner’s future. Therefore, it is important for healthcare practitioners to understand how the NPDB operates, as well as the healthcare practitioner’s rights with respect to the information reported, how information is reported, who is allowed access, and what can be done to ensure the accuracy of the information in the NPDB. Finally, healthcare practitioners must be aware of which types of adverse actions will be reported to the NPDB and should take care to mitigate any potential future impact. n KELLI ROBINSON krobinson@sirote.com | 205.930.5158 Practice area: Health Care 20 The Counselor . Vol 2016, Issue 1 sirote.com 21 Trends Considerations When deciding what action to take in the face of a tenant’s bankruptcy, a lessor’s first step should be to analyze the characteristics of the particular tenant. Like most things, the characteristics of tenants exist on a spectrum. On one end of the spectrum are tenants who were current at the time of their bankruptcy filing. Those tenants typically assume their residential lease and continue making payments. In that circumstance, a lessor should ordinarily take no action because the lease is performing. The remainder of the spectrum includes tenants with varying degrees of default. Most often, the nature and magnitude of a tenant’s default will drive a lessor’s motivation with regard to the tenant. Naturally, a lessor will be more willing to work with a bankrupt tenant in curing a pre-petition default if the tenant’s default is minor; conversely, if a tenant’s default is the result of a major lease infraction, or derives from many months of unpaid rent, the lessor will lean more toward eviction. As lessor’s motivations vary, so do those of their tenants. Some tenants attempt to assume their pre-petition residential leases in order to remain in the leased property. In order to do so, those tenants attempt to propose plans or take action to cure pre-bankruptcy defaults. Other tenants reject their leases, freeing the property up for lessors to retake possession without fear of reprisal from the automatic stay. Regardless of the circumstances and motivations present in a particular case, lessors have options. Options The nature of a lessor’s options when faced with a bankrupt tenant depends on (1) whether the tenant was in default before the filing of the tenant’s bankruptcy, and (2) if any actions were taken by the lessor against the delinquent tenant prior to the filing. If a tenant was in default prior to the filing of its bankruptcy, unpaid rent and other charges are likely outstanding. In order to attempt to recoup those amounts, a lessor’s best option is to file a proof of claim with the bankruptcy court detailing the unpaid amounts. If the proof of claim is allowed (survives an objection by the tenant/debtor), the lessor will potentially receive distributions on account of the claim. The extent of those distributions depends upon (i) whether the debtor has any assets for liquidation in a chapter 7 case, and (ii) the debtor’s income level and magnitude of other debts in a chapter 13 case. The other big issue for lessors is repossession of leased property. If a lessor determines that eviction is its desired course, the lessor’s prebankruptcy actions with regard to the leased property become relevant. Subject to certain very limited exceptionsi , which are rarely invoked, lessors fortunate enough to obtain valid judgments for possession of leased residential property prior to a tenant’s bankruptcy filing may take action to repossess the leased property without regard to the automatic stay. See 11 U.S.C. § 362(b)(22). It clearly behooves a lessor to move quickly through the eviction process in order to obtain a judgment of possession prior to a tenant’s potential bankruptcy filing. Lessors not in possession of such a judgment are forced to participate in a tenant’s bankruptcy case in order to recoup any outstanding amounts and to potentially regain possession of leased property. Moreover, forced participation in the bankruptcy case of a bankrupt tenant can be a negative experience for lessors, often resulting in legal expenses, delay, lost profits, and uncertain recoupment of unpaid pre-petition amounts. However, a lessor should use caution when pursuing a judgment because the threat of the automatic stay always looms, and state court rules and procedures must be followed in order to obtain a valid judgment. In addition, a lessor can run afoul of state and federal consumer protection statutes. Simply stated, the desire to repossess property from a defaulting tenant must be weighed against the potential costs for a legal misstep made in haste. An experienced attorney can evaluate your options and guide you through the process. n _________________________________________________________________________________________________________________________________________________________________________________________________________ i If a bankrupt tenant satisfies the requirements of 11 U.S.C. § 362(l), which includes curing the prepetition default which led to the judgment of possession, the automatic stay will apply to the leased residential real property despite the judgment of possession. A Friend to the Ronald McDonald House Members of the litigation department in the Sirote & Permutt, P.C. Birmingham office recently provided and served a meal to families staying at the Ronald McDonald House in Birmingham. The Ronald McDonald House is a home away from home for families of ill children who are receiving inpatient care at hospitals in the Birmingham metropolitan area. The attorneys and staff provided and served a delicious meal of Jim ‘N Nick’s barbecue, sides, and homemade brownies to the families staying at the Ronald McDonald House. The children and families seemed to enjoy the meal, especially the macaroni and cheese. In addition to serving the meal, attorneys and staff had the opportunity to visit with the children and their families staying at the Ronald McDonald House. It was a wonderful evening for all involved. Many thanks to Susan Conger, an employee in the litigation department, for organizing the meal. If you would like to provide and serve a meal to the families staying at the Ronald McDonald House, please visit the website (www.rmhca.org), search for the volunteer page, find the calendar, and sign up! n THOMAS HUMPHRIES thumphries@sirote.com | 205.930.5331 Practice areas: Banking & Finance Litigation Mortgage Banking 22 The Counselor . Vol 2016, Issue 1 sirote.com 23 ® RECENT SUCCESSES WITH CLIENTS Air-Rite Contractors, Inc. – Mobile, Alabama John C.S. Pierce, business and commercial trial counsel in Sirote & Permutt’s Mobile, Alabama office, recently tried a case on behalf of our client, Air-Rite Contractors, Inc. The case involved allegations of negligence, wantonness and trespass arising from a dam failure. Plaintiffs demanded that the defendants pay hundredsof-thousands of dollars to settle the case, which our client countered with a more reasonable offer. The CoDefendant counter-sued our client, then settled on the eve of trial, but we refused to increase the offer. The case was tried, the counter-claim was denied and all counts of the Plaintiffs’ claim were dismissed, except negligence . The resulting verdict was very close to our last settlement offer, a fraction of the demand and less than the co-defendant’s settlement. Congratulations to Air-Rite Contractors, Inc. for having the perseverance to demonstrate that some cases must be tried in order to achieve a just and reasonable result. Bruno Event Team – Birmingham, Alabama Bruno Event Team, headquartered in Birmingham, is a nationwide leader in sports event management and marketing, serving a wide range of collegiate and amateur sports, professional golf and motorsports. Some of their events include the Regions Tradition Champions Tour Golf Tournament, the Magic City Classic, the Southeastern Conference Baseball Tournament, the U.S. Women’s Open Golf Championship, the U.S. Senior Open Golf Championship, and the Honda Grand Prix of Alabama. As an example of the impact of Bruno Event Team on the local community, the Regions Tradition Champions Tour event, and its predecessor, the Bruno’s Memorial Classic, have raised more than $14 million for local charities since inception in 1992. Potomac Land Company – Orlando, Florida Orlando developer Potomac Land Company acquired 22.21 acres of Central Florida real estate. After successfully planning and obtaining entitlements to transform the consolidated property into two residential subdivisions, Potomac Land Company sold the property to Meritage Homes of Florida, Inc. Sirote & Permutt’s Response for Clients Under the Watchful Eye of the Consumer Financial Protection Bureau The Financial Services Group at S&P prepares compliance management programs for its consumer financial services clients. Such programs are based upon the CFPB’s own Supervision and Examination Manual, and are collaborative products completed for each’s client’s specific business model. The compliance management program is designed to be the road map to prove to the satisfaction of the CFPB that the client is following federal consumer law. Last year, the Financial Services Group also conducted five simulcast programs for consumer financial services clients addressing various areas of CFPB supervision and enforcement of the federal consumer finance laws. Each two-hour program was offered live and simulcast via the World Wide Web. For 2016, the Group will continue its treatment of the specific areas of CFPB concerns, beginning with the first program of the new year on January 14th. SIROTE.COM FIRM ANNOUNCEMENTS Sirote & Permutt Announces 47 Attorneys Selected as Best Lawyers in America© for 2016 Sirote & Permutt is pleased to announce that 47 of its attorneys were selected for inclusion in Best Lawyers in America© for 2016. The annual directory recognizes those who most excel in the legal profession based upon evaluations by colleagues and other legal professionals. Attorneys Bradley J. Sklar and Lenora W. Pate were chosen by Best Lawyers in America as “Lawyers of the Year” for their respective fields. Only a single lawyer in each practice area in each community receives this honor. Sirote & Permutt ranked in 2016 “Best Law Firms” Sirote & Permutt has been ranked in the 2016 “Best Law Firms” list by U.S. News & World Report and Best Lawyers® in 31 practice areas. Firms included in the 2016 “Best Law Firms” list are recognized for professional excellence with consistently impressive ratings from clients and peers. Achieving a ranking signals a unique combination of quality law practice and breadth of legal expertise. Sirote & Permutt Announces 28 Attorneys Selected As Alabama Super Lawyers 2015 Sirote & Permutt announces that 28 of its attorneys were selected for inclusion in Alabama Super Lawyers 2015. Alabama Super Lawyers recognizes attorneys who have distinguished themselves in their legal practice. TVA and Sirote’s Joe Ritch Helped Secure $600M Google Data Center in Alabama With Google’s plans to build a $600 million data center in Stevenson, Alabama, Governor Robert Bentley credited Tennessee Valley Authority and Huntsville attorney Joe Ritch in those who helped secure the project. This will be Google’s seventh in the U.S. and 14th data center campus worldwide. Construction will begin in 2016. Sirote & Permutt Opens Off ice in Orlando, Florida Sirote & Permutt opened an office in Orlando, Florida, its third office in the Sunshine State. Anthony Smith, shareholder and former Homewood City Councilman, has been named the Managing Partner of the firm’s Orlando office. 24 The Counselor . Vol 2016, Issue 1 ® This magazine is a publication of Sirote & Permutt, P.C., and should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general information purposes only, and you are urged to consult your attorney concerning your own situation on any specific legal questions you may have. This publication is sent to friends and clients of Sirote & Permutt, P.C. The sending of this publication is not a priviledged communication, and does not create a lawyer/client relationship. The Alabama State Bar requires the following disclosure: “No representation is made that the quality of legal services to be performed is greater than the quality of legal services performed by other lawyers. © 2016 Sirote & Permutt, P.C. All Rights Reserved Sirote & Permutt, P.C. 2311 Highland Avenue South Birmingham, AL 35205 205.930.5100 ®