LeClairRyan Accountant and
Attorney Liability Newsbrief
TABLE OF CONTENTS
No Harm, No Foul? Not When it Comes to Misuse of Client
Mass. Superior Court Rules LLC Can Sue for
Alleged Legal Malpractice Conduct before the
LLC Was Formed
2018 Accountant Liability Seminar - June 21st
Massachusetts Superior Court Rules
Attorney Malpractice Statute of Limitations
Not Triggered by Client Billing Questions or
Denial of Summary Judgment
Personal Representative of an Estate Was
found to Act In a Quasi Judicial Capacity
Entitling Her to Judicial Immunity in Handling
Whether an Insurance Broker Owes Its Client
A Fiduciary Duty Is A Question of Fact
New Tax Law Affects Executive Compensation
The Tip Income Protection Act
by David A. Slocum, Esq.
Attorneys in Massachusetts should take note of the recent decision in the Matter of
Ariel J. Strauss, which provides an important reminder that nothing short of scrupulous
adherence to all requirements of the Rules of Professional Conduct will do where an
attorney’s handling of client funds is involved.
In Matter of Strauss, 479 Mass. 294, decided on April 12, 2018, the Supreme Judicial
Court (SJC) ordered the indefinite suspension from the practice of law of an attorney
who failed to maintain client funds in an IOLTA account and temporarily deprived the
client of the use of those funds. Although the amount at issue was less than $3,000;
although the client ultimately received the full amount of her funds within only a few
months; and although the attorney’s mishandling of client funds was isolated to a
single incident involving a single client, the SJC held the attorney must be suspended
from the practice of law indefinitely, and for no less than five years.
The Facts of the Case.
The attorney represented a client on a contingency fee basis in connection with a
personal injury claim. That claim resulted in a settlement in which the defendant of the
personal injury claim agreed to pay the attorney’s client $5,000. Before the defendant
issued the settlement check, the client told the attorney she would be traveling
internationally for a few weeks and was concerned that cashing the settlement check
while abroad might be difficult. The client told her attorney that she wanted to receive
the settlement funds in cash.
In late December 2012, after the client had left for her trip, the attorney received the
settlement funds from the defendant. The attorney promptly deposited those funds
into his client trust account, which had a zero balance immediately before he made
the deposit. The next day, the attorney withdrew his fee of $1,666.67 pursuant to the
contingency fee agreement. The attorney failed, however, to notify the client that he
Absolute Litigation Privilege Bars Claims
Arising Out of Settlement Negotiations
had withdrawn his fee, and failed also to provide the client with any statement of the
amount of the withdrawal, the balance in the account, or the amount due to the client.
A few weeks later, in mid-January 2013, the attorney wrote a check for substantially
the full balance of the trust account payable to the attorney’s father who was also
one of his clients. The attorney’s bank records show that as a result, the balance of
the trust account dropped to $175 at a time when the attorney was required to hold
approximately $3,000 in trust for his client. Having by this point returned from her trip
abroad, the client told the attorney that she wanted to receive the settlement funds
without delay and that she no longer needed for the payment to be made in cash.
Less than two months later, in early March 2013, the attorney paid the client the entire
amount due to her in cash, and she signed a receipt.
Following an investigation, the Office of Bar Counsel filed a petition for discipline
against the attorney. That petition alleged the attorney failed to properly maintain a
check register for his client trust account and failed to perform a periodic reconciliation
of the account in violation of Mass. R. Prof. C. 1.15(f)(1)(B) and (E). The petition
further alleged the attorney:  failed to safeguard the client’s funds in a trust account,
in violation of Mass. R. Prof. C. 1.15(b)(1);  failed to pay the client the proceeds of
her settlement promptly, in violation of Mass. R. Prof. C. 1.15(c);  failed to provide the client with notice of withdrawal of his fee, the amount of
the fee, an itemized bill for services rendered, and a balance of the client’s funds left in the account, in violation of Mass. R. Prof. C. 1.15(d); and
 authorized distributions that caused a negative balance in his client trust account, in violation of Mass. R. Prof. C. 1.15(f)(1)(C).
The BBO Hearing.
At the hearing before a committee of the Board of Bar Overseers (the BBO), the attorney testified that in December 2012, when he deposited the
settlement check into his client trust account, he was holding cash in excess of that amount for the benefit of another client, his father. He further
testified that after depositing the settlement check into the client trust account, he maintained the amount due to the client from the personal injury
matter in cash in an envelope on his desk. The attorney explained that he did so based on the client’s pre-trip request that she be paid in cash.
He further explained that having so “earmarked” that cash for the client, he then held the funds in the trust account for his father’s benefit.
The BBO hearing committee did not credit the attorney’s explanation, and further found the attorney had submitted “reconstructed records” in an
after-the-fact attempt to conceal his misuse of the client’s funds. Finding that the attorney’s misconduct included a “[k]nowing misuse of one client’s
funds for the benefit of another,” the hearing committee recommended the attorney be indefinitely suspended from the practice of law. The BBO
adopted the committee’s findings and recommendation, but following a hearing, a single justice of the SJC issued an order imposing only a sixmonth
to the SJC.
appeal of that order,
the SJC found there was substantial evidence to support the hearing committee’s
determination that the attorney
misused funds belonging to the client by writing a
check on those funds for the benefit of his father,
and that the client was temporarily
of the use of her funds. As
the Court explained:
[BBO hearing committee’s]
findings establish that the respondent intentionally - - not negligently
- - misused client funds. … Although
consisted of misuse of a single client’s
funds, and those funds were delivered to the client within weeks or months of the settlement,
are obliged to safeguard client funds regardless of the amount. They
may not treat client funds as fungible commodities, using funds
to one client for the benefit of another,
or even for their own purposes.
SJC commented that it considered the attorney’s
violation of the Rules of Professional Conduct to be “egregious” and more troubling than
situation presented in the Matter
459 Mass. 558 (2011)
where an attorney received a three-year suspension for intentional misuse
funds advanced for fees. Additionally,
the SJC noted the presence of aggravating factors - - namely evidence from which the BBO hearing
rationally concluded that the attorney engaged in post-hoc “reconstruction” of records in an attempt to conceal his misuse
the SJC reversed the decision of the single justice imposing a six-month suspension, and ordered that the attorney be suspended
from the practice of law.
Recognizing that the attorney had already served seven months
of suspension, the Court ordered he shall
be eligible to petition for reinstatement earlier than three
months prior to four years and five months from the date of the
order of indefinite
in Massachusetts should take note of this decision and the important reminder it offers
that scrupulous adherence to the Rules of
Conduct must be observed where preservation of client property is involved. Attorneys
often hold client funds in a variety of
including for example, possession of settlement checks, advances for attorney’s
fees and costs, and deposits for real estate
When an attorney holds such funds - - or any property
- - for the benefit of the client, the attorney’s
role is that of fiduciary and virtual
BBO and Massachusetts Courts regard the misuse of client funds as among the gravest forms of professional misconduct, as they
where only a relatively small amount of money is involved; where a client’s
deprivation of funds is only temporary and relatively short-lived;
where the attorney has not obtained a personal benefit, an attorney
nonetheless risks indefinite suspension from the practice
of law by
even a single misuse of client funds.
it may seem obvious that property held in trust for a client belongs to that client and no one else, the SJC’s
decision in Matter
an important reminder that strict adherence to all rules regulating the safekeeping of client funds is of vital importance.
with those rules not only protects the client’s
but also protects the attorney from the perception of impropriety.
worth bearing in mind that when it comes to the handling of client funds, attorneys are stewards not only of those funds, but
also of their own
reputation as well as the public’s confidence in the legal profession as a whole. As such, nothing short of scrupulous adherence to the rules, done
with the utmost vigilance and integrity, will suffice.
Contact the author at firstname.lastname@example.org.
Mass. Superior Court Rules LLC Can Sue for Alleged Legal Malpractice Conduct before the LLC Was
Formed by Thomas K. McCraw Jr., Esq.
Does a limited liability company have standing to sue a law firm for
alleged legal malpractice for conduct that occurred before the company
was formed? Yes, says the Massachusetts Superior Court.
Contractor Trusted. Shortly thereafter, the three partners did form an
LLC, but under the name Accutrax LLC, not Contractor Trusted. (In
fact, no company named Contractor Trusted ever actually existed.)
Finnegan was aware of the establishment of the company, and the
name. Finnegan sent bills to Contractor Trusted for its services,
referencing “Accutrax,” and Billado paid the bills.
In March 2013, three partners – Billado, Kildevaeld, and Cumings –
sought to obtain a patent for their product, a razor utility knife. One
of the joint venturers agreed to assign his ownership and interest
in the patent to a yet-to-be-formed LLC, with the other two partners
contributing marketing and other services to promote sales of the knife
in exchange. The partners sought legal assistance from the defendant,
Finnegan, Henderson, Farabow, Garrett & Dunner, LLP (“Finnegan”),
in obtaining the patent. At the time, the LLC did not yet exist, but the
partners advised Finnegan of their plan to form a company and market
the product under a trade name, Accutrax. The intended name of the
Finnegan, however, applied for the patent only in the name of one
of the partners individually – Kildevaeld – and not Accutrax or even
Contractor Trusted. Accordingly, the patent ultimately issued in the
name of Kildevaeld only. Finnegan also did not prepare and obtain an
assignment by which Kildevaeld would transfer his ownership interest
in the patent to the LLC, as the partners had originally agreed he would
do. Finnegan claimed that it represented only Kildevaeld, and that it
company was Contractor Trusted, LLC (“Contractor Trusted”).
had an attorney-client relationship only with him – not the LLC.
Finnegan interacted with one partner in particular, Billado, in
establishing the engagement for its services. Billado signed the
engagement letter with Finnegan on behalf of Contractor Trusted, and
paid a retainer fee. Per the engagement letter, Finnegan’s client was
Accutrax, meanwhile, sought marketing opportunities for its product.
Kildevaeld asserted that the patent belonged to him alone, and
attempted to strike a deal for himself. That created internal conflict at
Accutrax, and prevented the company from entering into any marketing
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contracts, causing damage to the company.
Accutrax sued Finnegan for breach of fiduciary duty to the company in securing the patent for Kildevaeld individually, rather than for the company
as its client. Finnegan asserted that it only represented Kildevaeld, and moved to dismiss on grounds that Accutrax failed to state a claim upon
which relief could be granted. Finnegan argued as Accutrax did not exist at the time Finnegan was engaged as counsel, it did not owe any
Citing precedent over a hundred years old,
the court ruled that Accutrax’s complaint pleaded sufficient facts to support a viable claim, despite
the fact that no company existed at the time of the engagement of Finnegan. The court cited the fact that Finnegan was well aware that the three
partners intended to form a company to hold the patent, and that such a company was formed – consistent with the expectations of all three
partners, and of Finnegan. The fact that the company was incorporated as “Accutrax LLC” rather than as “Contractor Trusted, LLC” was of no
consequence, as Finnegan had both constructive and actual knowledge of the name of the company. The company itself, the court found, was
“perfectly in line with Finnegan’s expectations.” The name change was “immaterial to the parties’ expectations and intent at the time of contract.”
Accepting the facts as alleged by Accutrax to be true for purposes of deciding Finnegan’s motion to dismiss, the court held that Accutrax alleged
sufficient facts to support “cognizable claims arising from its status as a client of Finnegan.”
The court’s ruling did not address whether any agreement between Accutrax and Finnegan was breached – or even made – noting that the
substantive claims remained issues of fact to be determined later. The decision does, however, permit the case to move forward to the next stages
of litigation, allowing Accutrax to pursue its claims.
Holyoke Envelope Co. v. U.S. Envelope Co., 182 Mass. 181 (1902).
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Massachusetts Superior Court Rules Attorney Malpractice Statute of Limitations Not Triggered by
Client Billing Questions or Denial of Summary Judgment by Ben N. Dunlap, Esq.
In Donarumo v. Phillips, 2018 WL 1614043 (2018), the plaintiffs alleged their attorneys in an underlying suit had committed malpractice by
overbilling them for services rendered and by incorrectly advising them as to the strength of their defenses. The clients alleged their attorneys’
characterization of claims against them as “frivolous” caused them to forego pre-trial settlement opportunities, ultimately leading to an adverse
judgment and post-trial settlement on less favorable terms.
In the malpractice action, the defendant attorneys argued the clients’ claims were time barred because they accrued more than three years
before the filing of the complaint, when the clients raised questions about amounts billed, as well as particular billing entries. They also argued
the malpractice claims accrued no later than the date the court in the underlying suit denied the clients’ summary judgment motion, indicating that
claims the attorneys had evaluated as “frivolous” would proceed to trial.
The judge in the malpractice action disagreed and denied the defendant attorneys’ summary judgment motion, ruling the clients’ claims were
not time-barred. In particular, the court noted “[r]outine concerns and even complaints about legal fees are coin of the realm in the land of civil
litigation” and ruled the clients’ questions about billing did not “rise to the level of demonstrating actual knowledge on the Plaintiffs’ part that they
were being harmed by the Defendants’ billing practices or that the Defendants were committing legal malpractice by overcharging them” (emphasis
As to the clients’ claim that their attorneys had over-estimated the strength of their defenses and discouraged pre-trial settlement, the judge ruled
that claim was not triggered by the denial of the clients’ summary judgment motion in the underlying case. Denial of summary judgment indicated
merely that the case would proceed to trial; it did not “belie, or even significantly undermine, the Defendants’ assurances that the [underlying
plaintiffs’] claims were weak and would not likely succeed at trial.”
The court concluded a claim based on the alleged advice not to settle could not have accrued until the adverse outcome at trial.
The court’s ruling serves as a reminder that under the continuing representation doctrine, the limitations clock does not begin running until the
client has actual knowledge that he has suffered an appreciable harm. A client’s questions about billing or the denial of a summary judgment
motion, do not, under these circumstances, demonstrate “appreciable harm” sufficient to trigger the statute of limitations.
Contact the author at firstname.lastname@example.org.
Personal Representative of an Estate Was found to Act In a Quasi Judicial Capacity Entitling Her to
Judicial Immunity in Handling An Estate by Eric A. Martignetti, Esq.
In Farber v. Sherman, No. 17-ADCV-44SO, 2018 WL 1567781, (Mass.
App. Div. 2018), the Appellate Division reversed the Probate Court’s
denial of a motion to dismiss, holding the doctrine of quasi-judicial
immunity shielded an attorney acting as personal representative of an
estate from a breach of contract claim.
the Property to Farber. Thereafter, Farber filed suit in Orleans District
Court against Sherman for, among other things, breach of contract in
failing to comply with the terms of the Petition.
Sherman moved to dismiss on the grounds of judicial immunity. She
argued that, as the Probate Court’s designee under its Temporary
Orders, she was a quasi-judicial officer entitled to the protection of
judicial immunity. The District Court denied Sherman’s motion to
dismiss because it was not clear from the pleadings whether the
partition action was still pending at the time of the alleged breach of
contract, and thus whether Sherman’s quasi-judicial role had ended.
The attorney, Lisa Sherman, was appointed as personal representative
in June 2014. In her will, the decedent left her Property to her two
adult children, Farber and Ling, in equal shares. Farber brought a
partition action in Probate Court seeking the sale of the Property. After
the partition action was filed, but before Sherman’s appointment as
personal representative, Ling brought his own equity action and moved
for a temporary order granting him sole occupancy of the Property
during the pendency of the action, as he had lived there since 1998. In
Temporary Orders, the Court granted Ling’s motion for sole occupancy.
The Appellate Division easily concluded that Sherman acted in a judicial
capacity because Farber and Ling were required to submit any disputes
as to the Temporary Orders to Sherman for binding “resolution,” in order
to “minimize the possibility of the parties returning to Court for further
orders” relating to the ongoing disputes about access to the Property.
The Court’s Temporary Orders also included the following paragraph 8:
Should there be any dispute between the parties as to the orders
set forth above, particularly but not limited to paragraph 3, which
allows access to Farber upon ‘reasonable notice’ and for ‘legitimate
reasons,’ and requires that Ling not ‘unreasonably’ withhold
access, the parties shall submit these issues first to the Personal
Representative (‘PR’) of the Estate of Star T. Waage, Attorney Lisa
F. Sherman, for resolution.
After trial in December, 2014, the Probate Court dismissed Ling’s equity
action against Farber, but it explicitly continued the Temporary Orders.
The more challenging question for the Appellate Division was whether
the scope of Sherman’s quasi-judicial role ended when the equity and
partition actions ended, or whether it extended through the transfer
of the Property. The Court concluded it was the latter: “[W]e read the
Probate Court’s orders, in totality, to extend Sherman’s quasi-judicial
role through the completed transfer of the Property, and the end of the
parties’ disputes over it, not merely through the disposition date of the
action.” Therefore, the Court held that Sherman was entitled to quasijudicial
immunity at all times relevant to the breach of contract claim
On April 17, 2015, the parties filed a signed Agreement on Petition
for License to Sell, setting forth the terms for a private auction of
the Property to be conducted by Sherman, with the bidders limited
to Farber and Ling. The Petition provided that the deed was to be
delivered to the successful bidder on May 20, 2015. Farber was the
successful bidder. On May 26, 2015, Sherman delivered the deed to
For attorneys taking court appointments, the lesson from Farber is to
make sure the judge’s instructions are clear, and to make sure they are
complying with those instructions.
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Whether an Insurance Broker Owes Its Client A Fiduciary Duty Is A Question of Fact by Michael T. Grant, Esq.
In BioChemics, Inc. v. AXIS Reinsurance Co., 277 F. Supp. 3d 251 (D. Mass. 2017), the United States District Court for the District of
Massachusetts granted the defendant insurance brokers’ motion for summary judgment on the plaintiffs’ claims of negligence, breach of fiduciary
duty, and violations of Massachusetts General Laws chapter 93A (“Chapter 93A”) stemming from AXIS’s denial of claims for defense costs under
the plaintiffs’ directors and officers (“D&O”) liability insurance policy. Citing Massachusetts precedent, J. Zobel found no special circumstances
exist giving rise to a fiduciary duty on the part of the defendant insurance brokers where the plaintiffs failed to cite to any representations made by
the defendants on which the plaintiffs relied or which could be construed as expert advice.
On May 5, 2011, BioChemics, Inc. (“BioChemics”), a specialty pharmaceutical company, and its officers (collectively, the “plaintiffs”) became
the subject of a Security and Exchange Commission (“SEC”) investigation alleging BioChemics had misled investors regarding the company’s
value. BioChemics failed to report the investigation to its then D&O policy provider, XL Insurance (“XL”). In November 2011, BioChemics switched
carriers to AXIS Reinsurance Company (“AXIS”) after its broker Brown & Brown of New York, Inc. (“Brown & Brown”) informed the plaintiffs XL
would be restricting coverage and increasing premiums the following year. BioChemics’s contract with AXIS contained a provision requiring notice
of all known claims prior to binding. As it had not been informed of the SEC investigation, XL reported to AXIS it had no notice of any claims from
BioChemics did not notify AXIS of the SEC investigation until March 29, 2012, when it made a claim under the AXIS D&O policy for defense costs
arising out of the investigation. After AXIS denied the claim, the plaintiffs brought this action claiming Brown & Brown and insurance producer
John P. Raucci (collectively, the “defendants”) handling of their account resulted in denial of D&O coverage. On January 6, 2015, J. Zobel granted
AXIS’s motion for summary judgment, finding the SEC investigation and subsequent enforcement action were not covered under AXIS’s policy
because the investigation began prior to AXIS’s policy period and no notice of the investigation was given to AXIS by either XL or BioChemics.
In an Order dated September 28, 2017, J. Zobel addressed the remaining defendants’ motions for summary judgment on the plaintiffs’ claims of
negligence, breach of fiduciary duty and violation of Chapter 93A. The plaintiffs’ pleadings alleged they would have preserved coverage under the
XL policy had the defendants “properly advised [them] prior to the expiration of the XL policy in November 2011” and asked the plaintiffs about
any potential claims. Additionally, the plaintiffs argued Brown & Brown owed them a fiduciary duty by virtue of inheriting a long-standing consulting
relationship between the plaintiffs and a prior broker’s agent. The court found the plaintiffs’ arguments unconvincing. It noted Brown & Brown was
under no obligation to inquire about potential claims or to ensure insurance policies were adequate for the needs of the insured. Rather, Brown &
Brown and its agents owed duties to deal in good faith and to carry out instructions, duties normally found in agency relationships.
The court further opined it is well established insurance brokers owe no fiduciary duty to insureds absent “special circumstances,” which may
include “a longstanding relationship between the broker and the insured, or reliance by the insured on the broker for advice.” The court here found
insufficient evidence of “special circumstances” giving rise to a fiduciary duty on the part of the defendants. Although the plaintiffs demonstrated
a prior relationship with a consultant working for Brown & Brown’s corporate predecessor going back more than ten years, they “presented no
evidence of representations made by [the prior agent] on which they relied.” Furthermore, even if Brown & Brown had owed the plaintiffs a fiduciary
duty, the court could not find sufficient evidence of breach where Brown & Brown merely worked with the plaintiffs to procure insurance coverage
and did not provide specific advice “with respect to insurance or coverage issues.”
Under the terms of their contracts with XL and AXIS, the plaintiffs were required to report all known claims and failed to do so. Absent special
circumstances conferring a heightened duty of care, the court found the defendants “were entitled to accept this representation and were under
no duty to ferret out potential claims left unreported.” Citing Sullivan v. Manhattan Life Ins. Co. of New York, 626 F.2d 1080, 1082 (1st Cir. 1980),
J. Zobel stated the law simply does not allow sophisticated insurance applicants “to leave entirely to the soliciting insurance agents the burden of
affirmatively inquiring whether an express representation of the absence of [a potential claim] to which the applicant has appended his signature, is
false or in need of explanation or modification.” Accordingly, the court found no duty was owed by the defendants and granted summary judgement
in their favor on the plaintiffs’ tort claims (the Chapter 93A claims also failing for lack of causation).
The court’s decision in BioChemics reaffirmed the duties owed by brokers to insureds arise from an agency rather than fiduciary relationship.
More importantly, however, the case established an important limit on the “special relationship” exception to this well-established rule. Where a
longstanding relationship exists between broker and insured, the insured must still show an affirmative assertion or representation made by the
broker on which the insured relied to their detriment. Additionally, the assistance a broker provides insureds must go beyond “typical” services
designed “to obtain competitively priced insurance coverage,” and into the arena of expert advice. Moving forward, insureds must do their own
due diligence prior to signing liability policies and cannot expect brokers to advise them on basic policy requirements, as such advice is generally
beyond the scope of the relationship and should be unnecessary where the insured is sophisticated and given ample opportunity to educate itself
as to the requirements of its liability policy.
Contact the author at firstname.lastname@example.org.
New Tax Law Affects Executive Compensation by Robert N. Saffelle, Esq.
The final tax reform bill signed by President Trump on December 21, 2017 makes substantial changes to executive compensation paid by private and
public companies and non-profit organizations. But it could have been worse. Significant restrictions on nonqualified deferred compensation plans
were removed from the final bill. This article briefly summarizes the major changes:
Private Companies: Employee Deferral of Stock Option Gains
The law adds a new Section 83(i) to the Tax Code that, subject to a number of conditions, allows employees to elect to defer the inclusion of
income arising from the exercise of stock options and the payment of restricted stock units (RSUs) in stock for up to five years. Key conditions and
requirements include the following:
Eligible Company Requirements. The company must be privately held and at least 80% of the company’s employees must receive stock options or
RSUs. The 80% requirement is intended to incentivize companies to broaden the employee group that receives stock.
Eligible Employee Requirements. To be eligible to defer tax recognition, the employee must not be the CEO or CFO or a family member of the
CEO or CFO, a 1% owner of the company within the past 10 years, or one of the four most highly compensated officers in any of the past 10
Deferral Requirements. Eligible employees may elect to defer the recognition of stock option or RSU income until the earliest of (a) five years after
the date the stock is first vested; (b) the date the stock becomes transferable or publicly traded; or (c) the date on which the employee is no longer
eligible for the deferral or revokes the deferral election.
Notice Requirement. Effective January 1, 2018, the company must provide a written to notice to employees of their rights to defer. Failure to
provide this notice results in IRS penalties on the employer of $100 for each missed notice, up to an annual cap of $50,000.
Effect of Election to Defer. When income is included at the end of the deferral period, the amount included is based on the value of the stock at
the time of exercise or settlement, rather than at the time of income inclusion. This rule applies even if the value of the stock has declined during
the deferral period.
Bottom Line: These rules apply to stock options exercised, and RSUs settled, after 2017. As a result, privately held corporations will need
to determine if they can and want to apply the new rules to outstanding option and RSU awards and, if so, be ready to satisfy the notice
requirements. This legislation is intended to allow employees of private companies which do not have access to public markets to readily sell
their shares to cover taxes arising on the exercise of stock options and RSUs to delay the tax event for up to five years. The restrictive conditions
imposed in order for the income deferral election to apply may hinder its use by private companies.
Public Companies: Expansion of $1 Million Compensation Limit
Performance-Based Compensation Exception Repealed. Under Section 162(m) of the Tax Code, compensation over $1 million to certain public
company executive officers is not deductible by the company. Historically, performance-based compensation paid only on the attainment of
performance goals, has not been subject to the $1 million deduction limitation. This exception is repealed by the new law.
CFOs Subject to Section 162(m). The legislation amends Section 162(m) to specifically include a public company’s principal financial officer as
a “covered employee” subject to the $1 million compensation limit. This corrects an unintended gap that left CFOs generally not being subject to
Section 162(m) due to changes in the SEC’s executive compensation disclosure rules.
Once Covered, Always Covered. If an executive is a “covered employee” for 162(m) purposes in 2017 or any later year, the new law provides
that he or she remains a covered employee for all future periods, including after termination of employment for any reason (including death). This
eliminates the ability to deduct severance payments made after termination of an executive’s employment to the extent that the severance results
in compensation in excess of the limit.
Expansion of Covered Companies. The definition of a public company subject to Section 162(m) is expanded by the new law to include any
corporation that is required to file reports under Section 15(d) of the Securities Exchange Act of 1934. This change would subject private
companies with public debt that triggers Section 15(d) reporting to the $1 million deduction limitation.
Limited Grandfathering Rule. The new law grandfathers compensation provided pursuant to a written binding contract in effect on November 2,
2017, so long as it is not materially modified after November 2, 2017.
Bottom Line: The changes could result in a significant loss of deductions to companies, but the corporate tax rate reductions would mitigate some
of the impact. In addition, given the expansion of employees covered, it could result in many more companies subject to the $1 million pay limit.
Non-Profits: Excise Taxes on “Excess” Compensation
Excise Tax on Compensation Over a $1 Million. In general, annual compensation in excess of $1 million paid to any of the top five most highly
paid persons at a non-profit employer results in 21% excise tax on the employer for compensation paid that exceeds $1 million.
Excise Taxes on Large Termination Payments. A 21% excise tax is also imposed on separation payments that exceed a specified level. This
excise tax, payable by the non-profit, is imposed if severance payments to any of its top five most highly compensated persons equal or exceed
three times the person’s average compensation over the preceding five years.
Bottom Line: This legislation, along with the proposed changes to the intermediate sanctions rules, may materially impact executive pay at taxexempt
organizations. Many large tax-exempt organizations compete
with for-profit organizations for senior executive talent, and
likely put tax-exempt organizations at a substantial cost
disadvantage relative to similar for-profit companies. In addition,
pressure on tax-exempt executive compensation levels, the changes could jeopardize the ability of some tax-exempt organizations
their missions due to the inability to pay competitive compensation
packages to qualified executives.
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The Tip Income Protection Act — Changes to Tip Pooling by Setareh Ebrahimian, Esq.
The Tip Income Protection Act of 2018 (“the Act”) was signed into law on March 23, 2018 as part of the omnibus spending bill. The Act, buried in the
2,323 pages of the bill, amends the Fair Labor Standards Act (FLSA) and rolls back the Department of Labor’s 2011 regulation on tip pools.
The Act allows for employees who do not customarily receive tips to participate in tip pools, where the employer does not take a tip credit. The
“employees” referred to in this act also include the back of the house employees like busboys, chefs, line cooks, and janitors. The Act makes it very clear
that tips belong to the employees, and not employers, stating:
An employer “may not keep tips received by its employees for any purpose including allowing managers or supervisors to keep any portion of
employees’ tips, regardless of whether or not the employer takes a tip credit.”
This strict prohibition against managers, supervisors and employers collecting or retaining tips made by employees is critical in light of the increased
penalties under the Act.
While the Act does not affect tip-credit provisions spelled out in Section 203(m) of the Fair Labor Standards Act, it does affect tip pools when an employer
is not taking a tip-credit allowing all types of employees to participate in a tip pool. This provision of the Act is contrary to the limitations on tip pool
participants in Section 203(m).
Old Tip Pooling Rules
The tip pool provisions in Section 203(m) restrict tip pools to employees who “customarily and regularly” receive tips, leaving out back of the house
employees like bussers, cooks, chefs.
Penalties for tip pool violations include unpaid wages and liquidated damages in the same amount.
New Tip Pooling Rules
Employees who customarily do not receive tips can participate in a tip pool, when the employer is paying the full minimum wage and is not taking a tip
credit. However, managers, supervisors, and employers cannot collect or retain tips made by employees.
Penalties for tip pool violations increased to include the amount of tip credit taken, amount of wages withheld, and liquidated damages in the same
amount. Additionally, the Secretary of Labor may impose civil penalties of $1,100 per violation.
We will be closely monitoring developments on this topic, especially, in cases where managers and supervisors participate in a tip pool. The Act’s
language is broad, prohibiting “managers and supervisors.” However, the question left for employers is: ”Will courts draw a distinction between upper
level management and lower level supervisors?”
Restaurants commonly use tip-credit and tip pooling arrangements, and must be careful not to violate the FLSA. Also, state law can provide stricter
restrictions on these arrangements than the FLSA. We encourage employers considering these arrangements to contact legal counsel.
Contact the author at firstname.lastname@example.org.
Absolute Litigation Privilege Bars Claims Arising Out of Settlement Negotiations by William E. Gildea, Esq.
A Massachusetts Superior Court Justice recently allowed an attorney’s Motion to Dismiss claims against him for abuse of process, tortious
interference with a contractual relationship, and civil conspiracy arising out of third-party complaint.
In Wise v. Big Tuna, LLC et al., 2018 WL 2049357 (Mass. Super. Ct. Feb. 26, 2018), Betsy Wise originally brought claims for misappropriation of
corporate funds, breach of contract, breach of fiduciary duty, civil conspiracy, and violation of G. L. c. 93A against other company owners and LLC
members in which Wise is a member and shareholder. Also named as a defendant was attorney Elliot M. Loew, for his role in acting as an attorney
on behalf of the company and LLC during alleged unauthorized transactions unrelated to the company and LLC’s operations, and assisting the
defendants in delaying distributions Wise was entitled to. Wise also claimed Loew breached his fiduciary duty by obstructing her from discovering
Loew subsequently asserted claims for abuse of process, tortious interference with a contractual relationship, and civil conspiracy against Jeffrey
Fink, Wise’s “settlement counsel” during negotiations between Wise and the company’s president. Loew further alleged in his Third-Party Complaint
that he was named as a defendant only to pressure or advise his client to offer a larger settlement amount, and “disrupt their attorney-client
relationship.” Loew alleged Fink threatened to publicly question the reputation of the company and another shareholder and refer the case to litigation
counsel if no agreement was reached.
Fink filed a Mass. R. Civ. P. 12(b)(6) motion in an attempt to dispose Loew’s claims. The Court held Loew’s allegation that Fink threatened the
reputation of the company and shareholder “cannot serve as a basis for any claim against Fink because the statements were made while this
litigation was being contemplated. They are therefore protected by the absolute litigation privilege. See Sriberg v. Raymond, 370 Mass. 105, 109
(1976) (litigation privilege bars civil liability for statements made ‘in conferences and other communications preliminary to litigation’ related to the
contemplated proceeding); Fisher v. Lint, 69 Mass. App. Ct. 360, 365-366 (2007).” The Court further dismissed the other claims because they failed
to state a claim and were “far too conclusory.”
This Decision is influential because it bolsters the absolute litigation privilege. Attorneys can still zealously advocate for their client(s) without
fear of retaliatory litigation. Surely, attorneys will continue to remain civil and professional when negotiating their clients interests. But looking
forward, attorneys can feel confident when negotiating on behalf of a client and still maintaining their ethical duties. The Court’s Order will dissuade
prospective Plaintiffs from filing claims related to prior litigation.
Contact the author at email@example.com.
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