November 08, 2006
Vol. 19 No. 5 Sep/Oct 2006
Vol. 19 No. 5 Sep/Oct 2006
PDF Version: http://www.utahbar.org/barjournal/pdf/2006_sept_oct.pdf
Cover Art Information: COVER: Wheeler Canyon in September, by first time contributor Nathan Lyon, Weber County Attorney's Office.
* Mr. Gray Goes to Washington
* Why Lawyers Matter
* Tax Matters: Statute of Limitations
* Bankruptcy Alternatives in the Face of Recent Bankruptcy Abuse Prevention and Consumer Protection Act
* Utah Enacts the Uniform Environmental Covenants Act ("UECA")
* Crimes, Truth and Videotape: Mandatory Recording of Interrogations at the Police Station
* Utah Law Developments: Recent Developments in Criminal Investigation and Discovery: Access, Disclosure and Use of Information in the Criminal Defense Realm
* Utah Law Developments: Antitrust Immunity for Utah's Political Subdivisions: The Utah Supreme Court's Opinion in Summit Water v. Summit County
* Standards of Professionalism & Civility: Standard 20 - Just Doing the Right Thing
* Paralegal Division: Message From the Chair
Posted by BarStaff at 02:40 PM
Mr. Gray Goes to Washington
Mr. Gray Goes to Washington
by Brett J. DelPorto and Jeffrey S. Gray
MR. GRAY: ...[T]he defendants in this case were the adults inside the home.
JUSTICE STEVENS: Oh, they charge that the adults were intoxicated.
MR. GRAY: Yes.
JUSTICE STEVENS: Well, thatÕs a serious crime in Utah I guess. (Laughter.)
MR. GRAY: We anticipated that comment actually. (Laughter.)
JUSTICE STEVENS: And what's your response?
When Jeff Gray first announced he was appealing Brigham City v. Stuart to the United States Supreme Court, the response from colleagues in the Criminal Appeals Division of the Utah Attorney General's Office was immediate. Congratulations. The obligatory "high five." Some even named Jeff as a personal hero.1
Privately, however, the mood was a bit more subdued. The United States Supreme Court? The big guys? Virtually every case handled by the office goes no further than the Utah Supreme Court. By one estimate, the State's last cert petition to the U.S. Supreme Court on an issue of criminal law was 17 years ago. And that one was denied. What chance do we have now? Shouldn't Jeff just let this one go?
"I never thought he'd get cert, but it couldn't hurt to try," said Assistant AG Joanne Slotnik. But "[w]hen Jeff aggressively garnered so many states as amici, I felt much more encouraged."
Ultimately, the U.S. Supreme Court not only granted cert, but also agreed with Jeff about as thoroughly as the court agrees on anything. By a 9-0 vote, the court adopted the State's position and, in doing so, clarified the scope of warrantless searches under the emergency aid and exigent circumstances doctrines.
Now, five months later, it's time to ask a pertinent question: What was he thinking?
In a sense, the saga began on February 18, 2005, the day the Utah Supreme Court weighed in on Brigham City v. Stuart. It is fair to say this was not a good day for anyone in the office, Jeff in particular. Jeff had received the customary phone call the day before informing him that the opinion was to be released the next day. Accordingly, Jeff arrived at work bleary-eyed from a fitful night of worrying about the case and a little apprehensive about the strong possibility that he was about to get skunked.
"I'm usually a sound sleeper, even when I have something important the next day. But it had taken more than eight months after oral argument for the Court to issue an opinion, and oral argument had not gone well. This was an important case we could not afford to lose. Officers deal with domestic violence on a daily basis. I felt a loss would severely hamper their ability to effectively deal with violence. I was already thinking cert."
In taking the case to the Utah Supreme Court, Jeff had hoped to undo at least some of the concerns raised by earlier rulings from the trial court and then from the Court of Appeals. In the State's view, the legal issues presented in Brigham City were very straightforward. Should police officers be required to wait until violence becomes life-threatening before entering a home in order to break up a fight? Brigham City police had responded to a loud party complaint at 3 a.m.2 When they arrived, they quickly determined that some kind of physical altercation was occurring inside. Their investigation led them into the back yard. After entering the back yard, the officers watched through windows and a screen door as four adults attempted to pin a juvenile against a refrigerator. When the juvenile freed his hand and socked one adult in the nose, the officers opened the screen door and yelled "Police!" When no one inside heard, the officers entered the home and stopped the fight. In addition to arresting the juvenile, the officers arrested the adults, who were charged with contributing to the delinquency of a minor, disorderly conduct and intoxication.
Defense counsel filed a motion to suppress all the evidence seized inside the home, claiming the search was illegal under the Fourth Amendment to the U.S. Constitution. Brigham City countered that the search was legal because the officers entered the home based on probable cause - an ongoing assault - and exigent circumstances. The trial court disagreed, holding that the officers should have knocked, even though the "loud, tumultuous thing going on" inside would probably have made it impossible for anyone to hear a knock.3 The trial court granted the motion to suppress and the Utah Court of Appeals affirmed.
It was at this point that Jeff became involved. Because the case concerned misdemeanors, the matter was not handled initially by the AGÕs Criminal Appeals Division, which generally handles appeals of felonies only. But in the wake of the Court of Appeals' Brigham City opinion, it became clear that the case was, from the Office's perspective, a precedent that needed to be overturned.
After receiving authorization from the Brigham City Attorney, Jeff petitioned for certiorari to the Utah Supreme Court, which was granted. This was taken as a positive sign. However, any initial optimism about the court's decision to accept cert was largely dissipated after oral argument.
The court's Brigham City opinion was disappointing, but not entirely surprising. By a 3-2 margin, the Utah court affirmed the Court of Appeals' decision, but with a new component. The court agreed that there were no exigent circumstances warranting the officers' entry into the home.4 The court also concluded that the entry was not justified under the so-called "emergency aid doctrine" Ð a theory the State had not briefed. According to the Court, "the circumstances known to the officers at the time of entry did not create a reasonable belief that emergency aid was required."5
As explained by Fred Voros, Criminal Appeals Division Chief, the court's discussion of the emergency aid doctrine was "a little unexpected. Although the dissenting opinion in the court of appeals had suggested that the officers' entry was justified by Utah's emergency aid doctrine, we had made a strategic decision not to argue it. In fact, the words 'emergency aid' did not appear in our brief."
It's fair to say that Jeff was miserable. Brigham City was a fairly constant topic of conversation and Jeff immediately wanted to take the case to the ultimate tribunal. But petitioning for certiorari to the U.S. Supreme Court is a daunting task. By some estimates, the Court receives more than 6,000 petitions a year. Yet, it grants only about 100. The cert petition is perhaps the single most important document to be filed with the Court. Telling the Court why the opinion was wrong is important, but insufficient. The petitioner must convince the Court that the case is of widespread importance. A former Chief Justice explained it this way: "What the Court is interested in is the actual, practical effect of the disputed decision - its consequences for other litigants and in other situations. A petition for certiorari should explain why it is vital that the question involved be decided finally by the Supreme Court. If it only succeeds in demonstrating that the decision below may be erroneous, it has not fulfilled its purpose."6
Given this task, the decision to file a cert petition was not immediate.
"At this point, Jeff proposed filing a cert petition in the United States Supreme Court," Voros recalled. "I told him I didn't see how we could interest the Court in such a fact-bound case. I didn't see a broad issue of national importance in it. I was convinced that our court had ruled incorrectly, but that's not enough to interest the Supreme Court in a cert petition. Jeff retreated to his office to think about it."
About a week later, Jeff suggested that the Supreme Court might be interested in addressing the emergency aid doctrine. Researching the issue for the first time, Jeff discovered a split in both the states and the federal circuits on the question of how the emergency aid doctrine works. "Nothing catches the Supreme Court's attention faster than a circuit split," Voros noted. "We had an issue. We were on our way."
After filing the cert petition, the next order of business was finding a state willing to file an amicus, or "friend of the court," brief on our behalf. The importance of amicus support at the certiorari stage cannot be overstated. One study has shown that the participation of an amicus at the certiorari stage increased the acceptance rate from 8.5 percent to 26.7 percent.7 The National Association of Attorneys General (NAAG) has found that the acceptance rate is even greater when a petitioning state receives amici support. Some states expressed passing interest, but there were no willing participants until Voros called his friend, Tim Baughman, an attorney with substantial Supreme Court experience from the Wayne County Attorney's Office in Michigan. Baughman agreed and, in about four hours, hammered out a proposed brief. In the ensuing week, two additional counties and attorney generals from sixteen states agreed to sign onto the brief. A couple of key states agreed to sign on after Mark Shurtleff made some personal telephone calls to his fellow attorneys general.
On Friday morning, January 6, 2006, the court responded. The petition was granted.8
"I think we all knew when the Supreme Court would conference on the case, and so I think we knew the day, or at least approximate day, when Jeff would hear if cert was granted," recalled Chris Ballard, an assistant attorney general in Criminal Appeals. "Both Joanne [Slotnik] and I were in our offices, adjacent to Jeff's, when the call came. I remember both of us listening very carefully when the call came. Jeff was calm and collected on the phone. I remember him saying something like, 'Yes. Okay. Thank you.' Then he hung up and I heard Jeff say, in an almost disbelieving tone, 'They granted. They granted it.'"
Jeff's take was a little different: "When our secretary, Lee Nakamura, informed me that a clerk from the U.S. Supreme Court was on the line, I could hardly contain myself. However calm I may have seemed on the telephone, I was bursting with excitement inside. This was so important for law enforcement and, for me, it was a personal dream come true."
Even though Jeff had argued the case in the Utah Supreme Court as well as preparing and filing the petition for certiorari, it was not a given that he would be the one to argue the case in the U.S. Supreme Court. In many states, the attorney general him - or herself argues cases in the high court as a matter of course. Utah Attorney General Mark Shurtleff considered making the argument, but ultimately deferred to Jeff.
"To be honest, my elation at the cert grant was tempered when Attorney General Mark Shurtleff told me in an email that I would have to 'arm wrestle' him for the opportunity to argue the case. I had vigorously pursued the case since learning of the Court of Appeals opinion, I was passionate about the law, and arguing before the Supreme Court was a dream I never imagined would be within my grasp. Yet, I knew who had the 'might' to win an arm-wrestle. Mark was, after all, my boss and the official publicly elected to represent the State. He would be well within his rights to argue the case."
The following Tuesday, Shurtleff met with Jeff and Fred Voros to announce his decision: Jeff would argue the case.
"I am not typically an emotional person," Jeff recalled, "but I was overwhelmed. I will ever be grateful that Mark allowed me to pursue the case to its end. I know it was a difficult decision for him. He, too, coveted the opportunity to argue before the High Court and, he had the power to do so. Yet, he deferred to me."
With cert granted, the work began. Save for a case or two, Voros cleared Jeff's calendar for the next four months. Others within the division absorbed Jeff's normal caseload. The case was set on a tight briefing schedule. Brigham City was among the six cases granted that day which would complete the oral argument calendar for the 2005-2006 term. There would be no room for continuances. Jeff's brief was due February 21, the respondents' brief March 28, and Jeff's reply April 17 - one week before oral argument.
Jeff's petition for cert had merely identified the circuit split without analyzing the issue; it had not discussed the merits of emergency entries by police officers. Jeff was eager to do so in his brief. "I had never believed that the emergency aid doctrine comported with Fourth Amendment jurisprudence. It was too narrow and overly rigid. I always believed that emergency aid entries should be judged against the standard used for other safety exigencies. I did not argue emergency aid in the Utah Supreme Court because I knew that the circumstances in Brigham City would not satisfy Utah's narrow exception. The cert grant provided me the opportunity to challenge the doctrine."
At Fred's suggestion, Jeff created a rough timetable to follow, setting target dates for filing the joint appendix, completing brief drafts, editing, and moot courts. After Jeff finished drafting the brief, he submitted it for editing to Voros and Dan Schweitzer, head of the Supreme Court Project for the National Association of Attorneys General (NAAG). The completed brief was sent off to a Midwest publisher that specializes in Supreme Court briefs and the brief was filed with the Court.
The State received additional amicus support at this stage of the proceedings. In all, five amicus briefs were filed at the merits stage supporting Brigham City's position. Tim Baughman filed a second amicus brief on behalf of numerous states and counties. Briefs were also filed by the U.S. Solicitor General, the National League of Cities, the Fraternal Order of Police, and Americans for Effective Law Enforcement.
After filing his brief, Jeff immediately began preparing for oral argument. Very few get the opportunity to argue before the Supreme Court. Those who do had better be prepared. Of oral argument, Justice William Brennan said, "[O]ral argument is the absolutely indispensable ingredient of appellate advocacy. ...[O]ften my whole notion of what a case is about crystallizes at oral argument. This happens even though I read the briefs before oral argument; indeed, that is the practice now of all the members of the Supreme Court. ...Often my idea of how a case shapes up is changed by oral argument. ...Oral argument with us is a Socratic dialogue between Justices and counsel."9
In preparing for oral argument, Jeff participated in nine moot courts. The first few were brainstorm sessions with colleagues from the Division. Thereafter, the moot court sessions attempted to simulate a formal appellate argument, but without the time limits - Jeff wanted to field as many questions as possible. Judges for these sessions were drawn primarily from the Attorney General's Office. Before leaving for Washington, D.C., however, two moot courts were held that included judges from outside of the office. The first included retired Chief Justice Michael Zimmerman and Michael Lee, then serving as general counsel to Governor Jon Huntsman, Jr. (Lee is now serving as a law clerk to Supreme Court Justice Samuel Alito). The second was set up by the Division's law clerk, John Nielsen, who is attending law school at BYU. It included Dean Kevin Worthen and Professors Margueritte Driessen and John Fee. By this time, the respondents had filed their brief and Jeff had submitted his reply to the publisher for printing and filing.
Jeff and Fred flew to Washington, D.C. the following week Ð six days before the day of oral argument. On Wednesday, they visited the Supreme Court and listened to two oral arguments. This gave them a feel for the justices and the general tenor of the proceedings. On Thursday, Jeff participated in a moot court sponsored by NAAG, comprised primarily of former law clerks to U.S Supreme Court justices. The next day, he participated in a moot court session at Georgetown Law Center. Patricia Millet, who wrote the amicus brief on behalf of the Solicitor General's Office, participated as a judge in both moot courts. She was among the State's staunchest allies, but proved to be the most aggressive moot judge. Her contributions were invaluable.
After the moot courts, Fred and Jeff hunkered down trying to fine tune the argument. But by Sunday, Jeff's will to continue his preparation was gone. Jeff spent the day with friends and family enjoying some of the sights in Washington, D.C.
"Emotionally, I was exhausted from preparation. I had prepared for oral argument for four months. If I didn't have a handle on it by now, I never would. One of my "must stops" before oral argument was the National Archives. I wanted the opportunity to see the hallowed documents that form the cornerstone of our nation. I read the Fourth Amendment, word for word, from the original Bill of Rights. At about 5 p.m., we met up with some friends at the Arlington Cemetery. It then hit me: 'What am I doing gallivanting about in Washington, D.C. when I have perhaps the most important argument of my life the following morning?' I promptly left my family and friends and returned to my hotel room, where I hunkered down for some final preparation."
When the day finally arrived, Jeff was joined at the courthouse by several colleagues who had decided to foot the bill for travel and accommodations just to see the court - and Jeff - in action. Even the division's lead secretary, Lee Nakamura, felt compelled to attend and, by arriving at 6 a.m., managed to be the first person in the pre-dawn line for members of the public to observe the argument. (Attorneys who are members of the Supreme Court bar have their own section and, mercifully, need not show up quite so early.)
Not surprisingly, there are deep-rooted formalities at the Supreme Court. Jeff and all of his supporting colleagues were advised to wear dark suits and avoid button-down shirts, which, for unknown reasons, are regarded as too flamboyant. No talking. No squirming. And sit up straight. When Jeff and Fred attended an argument the week earlier, a bailiff had actually admonished a spectator, quietly but in open court, not to sit with her elbows on her knees.
"I truly did not anticipate the awe I felt sitting in that courtroom," said Slotnik. "It surprised me completely. To have a colleague argue a case I knew so well gave the whole experience an added dimension. I would have hated missing that argument."
At precisely 10 a.m., the nine justices quickly appeared from amid the rustle of dark curtains and took seats designated to indicate seniority - the newest justices on each end. At 10:03 a.m., Chief Justice John Roberts called the case and Jeff rose to give the formal opening: "Mr. Chief Justice, and may it please the Court..."
Despite these formalities, the actual argument was surprisingly informal. "It was the argument you might have expected from a group of brilliant laypersons armed with the facts of the case and one rule: the police must act reasonably," said Voros. "They were friendly, showed some humor, and asked a lot of difficult questions. Except for the number of justices, it was not unlike an argument before the Utah Supreme Court."
Jeff spoke for about one minute before the questions began to fly. Justice Ruth Bader Ginsburg wanted to know why the police had not attempted to obtain a telephonic warrant.
"The reason is where there's a violent situation, things can change in seconds," Jeff replied. "I mean, it can turn deadly in seconds. They don't have time. Even though a telephonic warrant would certainly be a more speedy process of getting a warrant, it's not speedy enough where punches are being thrown."
Justice Antonin Scalia wondered whether actual violence was always necessary. "[Y]ou don't really mean that if they saw somebody inside with a gun and they heard him saying, I'm going to shoot you in 2 minutes, since they could have gotten a telephone warrant, they would have to had to get a telephone warrant?"
Jeff replied that actual violence or the threat of imminent violence was probably necessary for a warrantless entry. Interestingly, as the argument continued, it became clear that some members of the court seemed to favor an even more lenient standard that would allow police to enter simply because of the noise.
Chief Justice Roberts pursued this theme: "If the noise is the cause of their being there and if the noise is so loud at 3:00 in the morning that it's still continuing and nobody can hear the knock on the door - they knock on the door several times and shout - would they not have the right to go in then to quell the noise?"
"Absolutely," Jeff responded. "All that I am maintaining is that they would not be justified under a safety exigency to go in. Certainly to Ð as far as disturbing the peace, then yes, but not where the proffered justification is safety."
Justice John Paul Stevens wondered just how serious injuries or the threat of injuries needed to be before police could enter under such a safety rationale. "What if a father was spanking his child, for example?"
"No," Jeff responded. "Spanking of a child would not. There's no indication under most circumstances of an intent to injure or abuse. Now, of course, if there are circumstances that would suggest abuse, then officers could go in."
Amazingly, virtually all of the questions Jeff fielded from the court had been anticipated in one form or another during the extensive moot court process. Stevens' "spanking" question, for example, had been addressed. Voros had even anticipated Justice Scalia's obscure hypothetical in which officers witness an ongoing crime of counterfeiting: "[Y]ou see a guy turning out counterfeit dollar bills, $100 bills, and can you go in right away if you see him doing that?"
"Well, it's a crime ongoing, in progress," Jeff responded. "So there certainly could be made an argument. Now, whether or not there's an exigency, I think that's doubtful because police could secure the scene and secure a warrant and then execute that warrant."
Some of the justices drew peels of laughter with their comments. Stevens' comment about intoxication being a serious offense in Utah drew thunderous laughter from onlookers, even though the basis for the charge against the Brigham City defendants had nothing to do with liquor laws peculiar to Utah.
"Normally... we think of it a - as public intoxication, and - and that's where it's usually prosecuted and where we find it,' Jeff said in reply to Stevens' quip. "But intoxication [in the home] can become an offense where it disturbs others outside of the home, and that's what happened here."
Scalia consistently drew chuckles with his dry and pointed wit. For example, he marveled at what he viewed as the trial court's "obsession" with the requirement that the officers knock, even though the ruckus from inside the house would have made it impossible to hear. The Brigham City police officer, Scalia noted, "stood at the door. He opened the screen door and said, police...,which he thought would be more effective than knocking on - on the - you know, the - the edge of a screen door, which doesn't make a very good knock."
Paul J. McNulty, Deputy Attorney General of the United States, who filed an amicus curia brief supporting Utah, addressed the court next. Then came the attorney for the respondents, Michael P. Studebaker.
Finally, Jeff gave his rebuttal remarks.
"The Utah court created two different tests. And under the one test, it examined whether or not the officers were primarily motivated by a desire to arrest or search for evidence. Now, the court, the Utah Supreme Court, concluded that they did - that... their motives were primarily law enforcement motives because they did not render aid. And this Court has repeatedly held that an officer's subjective motives play no part in the objective reasonableness test, and it should not do so here.
"Justice Ginsburg, you indicated that there was no suggestion of domestic violence. The Utah Supreme Court actually acknowledged that where violence is seen in a home between adults and, for example, a younger person, that there would be reason to believe that domestic violence is possibly present. ...[N]ow, the court refused to look at that because there was no finding that the inhabitants or those involved were actually cohabitants. Of course, this Court has never required that officers have a certainty of the situation, only a reasonable belief, and they clearly have that.
"And in any event, whether or not it's domestic violence or some other type of violence, it's something that I believe this Court in Mincey [v. Arizona]10 recognized, that officers can, and probably should...intervene in the face of violence, and that's what the officers did here."
Although it is difficult to predict the result from oral argument, those from the AG's office who attended were optimistic.
"It was clear from the argument that we had won," said Assistant AG Ken Bronston. "In that respect, the USSC is not much different than our appellate courts. That is, generally the court reveals its basic view from the bench, especially when the questioning is intensive. Here, the Court was all over respondent on the basic untenability [of the view] that the police could not react in these circumstances."
The opinion, released less than a month after argument, was gratifying for the entire Division, but especially, of course, for Jeff.
"Arguing before the Supreme Court is clearly the pinnacle of my career thus far. I was awestruck as I entered the courtroom, watched the justices file in, and fielded their questions. These nine justices were very intelligent and sober men and women. They asked practical questions and expected practical answers in return. It was obvious that they took their job seriously, cognizant of the effect their decision would have on many. I felt, in a very small sense, that I was now part of the history of this great country. I had been given the opportunity to make a difference. The effort, however, was clearly not mine alone. I owe a debt of gratitude to my colleagues at the Attorney General's Office. They suffered through my rantings, challenged my ideas, and sharpened my thinking on the case. This was a victory we all earned. But most important, it is a victory for officers who put their lives on the line each day for us and, it is a victory for all victims of violence."
1. This is an attempt to provide a somewhat intimate account of the case, which means certain biases will be evident. This is not an excuse for unfairness, however, and the authors have attempted to present a fair and balanced account.
2. Brigham City v. Stuart, 2005 UT 13, ¦¦ 2-4, 122 P.3d 506.
3. Id. at ¦ 4.
4. Brigham City, 2005 UT 13 at ¦ 37.
5. Id. at ¦ 27.
6. Robert L. Stern, Eugene Gressman, Stephen M. Shapiro, & Kenneth S. Geller, Supreme Court Practice, at 433 (8th ed.) (quoting Chief Justice Vinson in a speech before the American Bar Association at St. Louis, September 7, 1949, 69 S.Ct. v. (1949)).
7. Supreme Court Practice, at 465.
8. Brigham City, Utah v. Stuart, 126 S.Ct. 979 (2006).
9. Supreme Court Practice, at 671 (quoting from Harvard Law School Occasional Pamphlet No. 9, 22-23 (1967)).
10. 437 U.S. 385 (1978).
Posted by BarStaff at 01:06 PM
November 06, 2006
Why Lawyers Matter
Why Lawyers Matter
by R. Clayton Huntsman
A few weeks ago I had the honor of attending my daughter Sonia's graduation services at Willamette Law School in Salem, Oregon. The dean, and then Willamette's president, spoke to us, with a refreshing absence of cliche or braggadocio, focusing on honoring the new law school graduates and praising the profession of law. As each spoke, I couldn't help but silently assess my own legal career, soon to begin its fourth decade. As I reflected I renewed my own gratitude for the opportunity of practicing law, and reaffirmed an appreciation of our legal system and for those who labor hard in so many ways to improve and maintain it. I was pleased that another generation of accomplished and motivated lawyers was joining us, with all of their hopes for, and good faith toward, their futures.
After almost thirty years in this profession, I am still not cynical. Call me naive if you wish, but I realize that I, my lawyer-daughter, and all of us who labor in our chosen professions matter, even if only to one client at a time, whether it be a small child of divorce, a single criminal defendant or a troubled business.
I would like to share with you three of the many reasons why I believe we do matter and why we should not take our privileged positions lightly, grudgingly, or for granted. Like most of you, I'm one of the Bar's "rank and file." I'm not running for judge or vying for a promotion, so I hope what I have to say resonates with at least some of you.
Permit me a definition first, which I hope you find neither excessively Orwellian or cheesy. When I say "good lawyers," as I frequently do in this article, I mean all of us in the Bar, who I assume strive for excellence as a matter of routine. No one tries to be a bad lawyer. I assume we all try our best, and at least try to do the right thing.
So here are three areas that matter:
A. PREVENTION
Good lawyers prevent problems. They counsel clients so that they won't end up in court, or if they already are in court, so that they will not compound their legal messes. Best of all, prevention-oriented lawyers help clear the way so that clients can build their businesses, estates, lives, and other interests more smoothly and effectively. The longer I'm in this profession, the more I value this proactive aspect of our representation.
My first exposure to the role of a good legal counselor was as a child in my own home, listening to my superintendent father as he discussed complicated problems of the multi-cultural, fast-growing Silicon Valley school district he headed. As he spoke with board members, administrators, concerned citizens and others, on the telephone or in our living room, invariably I would hear "County Counsel advises...." Or "let me check with County Counsel on that." To me, my father was the best example of knowledge, power, and decision-making that I knew. He had rocketed through Stanford University in eight quarters, earning an M.A. and an Ed.D. in record time. He then became assistant superintendent for five years and then superintendent of schools for twelve years in a high school district which ranged from the wealth of Los Altos Hills to the barrios of Mountain View. This was all during the fast-growth fifties and the turbulent sixties, thriving in a job where the average survival rate of school superintendents was just over two years. So who was this all-powerful "County Counsel" whose counsel and every blessing were constantly invoked, this disembodied voice who influenced the building of new schools, acquisition of land for future growth, teacher contracts and employment problems, bus fleets, cultural conflict, and student discipline? Of course, it was the staff lawyer for Santa Clara County, whose assignment was to provide wise legal guidance to busy school superintendents.
Now Dad could have taken the approach that we see so often - arrogance, disdain, disregard. But he did not do so; rather he sought out and listened to good counsel; prevented little problems from becoming big ones, and as a result led his district to national prominence. I learned much from my father - starting with respect for the law and legal counselors.
I have worked with "County Counsel" myself. Of course, they were not called that here in Utah, but their role and effect are the same. Sensible lawyers and decent persons like John Palmer, who represented the Washington County School District for years, come to mind. John and I quietly resolved many potentially inflammatory cases involving students" rights, employment, school prayer, property, and other issues. Good lawyers like John don't provoke unnecessary litigation or contention, but rather act to prevent problems. I learned a lot from John as I matured as a lawyer.
Of course, sometimes prevention, planning and all the best intentions cannot prevent litigation. Sometimes the corruption and crime of the Enrons and Watergates must be met head-on, multimillion dollar defenses notwithstanding. However, I believe that almost any case can be settled amicably if good and ethical advisors are retained and listened to.
B. LIFTING THE BOAT
Every time a courageous lawyer does the hard thing and battles government, corporate tyranny and others with power, money, and influence - we all benefit. Martin Luther King put it well in his classic "Letter from Birmingham Jail":
...Injustice anywhere is a threat to justice everywhere. We are caught in an inescapable network of mutuality, tied in a single garment of destiny. Whatever affects one directly, affects all indirectly.... Anyone who lives inside the United States can never be considered an outsider anywhere within its bounds.
For decades lynching black people in many of our states was acceptable and went unpunished. Voting and other civil rights denials were often the cultural and legal norm. Jim Crow legislation ruled. Only through the actions of dozens of courageous and effective lawyers, such as Thurgood Marshall, were these institutionally-sanctioned practices halted. As a result, all of us became freer and less intimidated by parochial bullying in opposition to our fundamental rights and liberties as citizens.
We have a long way to go to fully integrate all of our law-abiding citizens who are "different," but as lawyers and decent persons we can try. Every time courageous lawyers like our own Brian Barnard or Dani Eyer and the ACLU of Utah confront the Goliath of institutional injustice, our civilization becomes just a little more friendly - or at least less hostile - to the disenfranchised, the marginalized, the "least of us." They do their good works despite opposition, criticism, and often hostility that comfortable lawyers representing the more popular "status quo" never or seldom know. But by advocating for the "least of us," good lawyers protect and advocate for all of us, because injustice anywhere affects justice everywhere.
It is not just in the controversial world of civil rights law that these efforts matter. Whenever a workplace act of bullying or harassment occurs; whenever a presumptuous government official abuses power, or lends a corrupt ear to special interests; whenever a child is shunned because her parents are "different" - or because she is "different" - and you do something positive about it - you then help to lift the common boat from the shoals of a smug and sometimes unjust world.
"Raising the boat" begins with honest questioning of what we see, hear, read, and presume. There is often a dark side to those cheerful exploitations we buy into and enlightenment may conceal itself in the humble shadows we bypass or ignore.
Mainstream America is now "on board" with racial equality. But are we "on board" with all forms of discrimination, including the often subtle discrimination based on gender preference or personal creed? I think not. Henry David Thoreau said it well when he was hosted by his government in the local jail for refusal to pay a poll tax to protest slavery and American aggression against Mexico. In "On the Duty of Civil Disobedience," Thoreau writes:
...Why does (government) not cherish its wise minority? ...Why does it not encourage its citizens to be on the alert to point out its faults...? Why does it always crucify Christ, and excommunicate Copernicus and Luther and pronounce Washington and Franklin rebels?
C. BUILDING
Closely related to our role as "counselors" and "prevention" guides is our role as legal architects, planners, and engineers. We ("good lawyers") help our clients build.
There are two equally important ways, in general, in which we do this. One is the "affirmative" act of helping a client structure something she has an interest in - a business, an estate, even a criminal defense or alcohol and drug treatment program. The second is the "negative" act of saying "no" - don't stalk your ex-wife; don't misrepresent your product or your resume; don't talk to the alleged victim; don't blow deadly toxins into the environment.
Often clients don't want to be told "no", even for their own economic or legal well-being. Their reasons and rationalizations are many and commonplace - we've all seen them: hubris, greed, control, insecurity, errant moral compass. They may resent you for being obstructionist or negative. They may even fire you and seek out counsel with more flexible ethics or less client control, someone who will say, "Yes! Yes! Yes!" I say, let them go. There's plenty of work for good lawyers, and you don't need to sell your soul to get it. If the Ken Lays and Jeff Skillings want "yes-lawyers" to approve their "creative accounting" schemes, I hope you are not among the "chosen." You can still help those who are teachable to reach their worthy goals - including an ethical criminal defense - and not enter Faustian bargains in the process.
In 1940, before I was born, and according to the abstract of deed and written narrative I still retain, my father built a comfortable home in Pocatello, Idaho where he taught school and was later dean of boys of Pocatello High School. His two sons were turning four and three. Dad did most of the heavy labor himself, as he did with our California home a decade later. But in both enterprises he relied on architects, contractors, electricians and plumbers. As self-reliant as he was, and taught his sons to be, Dad had the good sense to take counsel from the pros and to defer to their expertise.
Our favored clients are much like that. They do the labor, the "heavy lifting" in their lives, but they rely on us for the legal guidance and expertise needed for them to build. This is true in both a "micro" and "macro" sense. Good lawyers help build lives, reputations, estates, businesses, subdivisions, communities, complex physical and economic infrastructures, interstate commerce, and nations. We help our clients build "for the good," to "pursue happiness" in ethical and socially responsible ways. Good lawyers would no more help a client steal, cheat, maim, or kill than those my father relied on would have sanctioned building his house on a blue clay deposit, with no plan, no respect for boundaries or the rights of neighbors, or in violation of building codes.
So if you get a little client flack about being "negative" or "obstructionist," put it in context. Don't take it personally or feel you must assert your moral flexibility to accommodate such a client on his or her malignant terms. Without your good and responsible counsel, our clients may as well build on quicksand and it will be at least partly your fault if you fail them.
I hope to never retire from this profession. It can be stressful, but if it doesn't kill you it can make you stronger. I hope all of you can find, and preserve, the good in your respective law practices. Remember that our chosen profession provides us our independence, financial security, and above all the opportunity to counsel, build, and help "lift the boat." Each of us can do so in our different ways, and according to our respective interests, means, and abilities, because we do matter.
Posted by BarStaff at 02:58 PM
Tax Matters: Statutes of Limitation
Tax Matters: Statutes of Limitation
by Paul K. Savage
Some taxpayers still haven't recovered from their disappointment that the computers at the IRS didn't explode when the calendar rolled over to 2000, but we should all be thankful they did not. Government snafus seldom result in good news for citizens, despite the hopes and prayers of many that somehow the IRS wouldn't be able to collect taxes in the new millennium. Instead, each year taxpayers still have to count all the chickens that finally hatched in order to calculate how much Uncle Sam can lay claim to. We start our calculations by determining our gross income. Congress has defined gross income in broad terms as "all income from whatever source derived" and then provided a non-exclusive laundry list of examples, such as compensation for services, business income, interest, rents, royalties, dividends, alimony, etc. (See Section 61 of the Internal Revenue Code, hereafter "IRC"). It seems pretty simple on its face, until one realizes that hundreds of additional sections of code also come into play, not to mention the thousands of pages of regulations and rulings and innumerable interpretive court decisions.
Little wonder that Justice Learned Hand once wrote:
In my own case the words of ... the Income Tax [code]... merely dance before my eyes in a meaningless procession: cross-reference to cross-reference, exception upon exception Ð couched in abstract terms that offer no handle to seize hold of Ð leave in my mind only a confused sense of some vitally important, but successfully concealed, purport, which it is my duty to extract.... (Learned Hand, the Spirit of Liberty (1952), p. 213.)
The good news is that it is no crime to misunderstand the tax code. Sure, if a person fills out a tax return incorrectly it may be audited and result in a subsequent tax bill, together with interest and maybe even underpayment penalties. But to go to jail a person has to "cheat," which means that the IRS can prove that a person willfully broke the law. That is a lot different from getting confused or misunderstanding something.
Neither must a taxpayer look over her shoulder for very long. Typically, the IRS can only audit taxes for three years from the date of filing (IRC ¤6501(a)), but in instances where a taxpayer understates gross income by more than 25%, that statute of limitations stays open for an additional three years (IRC ¤6501(e)(1)(A)). One might wonder why this six-year rule only applies to omissions from gross income, but not to omissions from taxable income. For instance, why wouldn't it apply in an instance where a taxpayer overstated deductions rather than understating income? The answer revolves around the concept of why we have a statute of limitations. Life has to go on, so if the players are on notice as to what the issues are, they have to act within a reasonable time frame in order to preserve their rights. Deductions are presumed to be examined in any ordinary audit based on documentation preserved by the taxpayer, but omissions from gross income are much harder to detect in an audit. As a matter of policy, the statute of limitations bar is a little higher for taxpayers underreporting gross income. Of course, the six year rule for 25% percent omissions of income also presumes that the taxpayer hasn't committed tax fraud by filing a false return with the intent to evade tax, not filing a return, or making any other willful attempt to evade tax, in which case the statute of limitation never runs (IRC ¤6501(c)).
By some strange coincidence, not paying taxes illegally is governed by ¤6501(c), whereas not paying taxes legally, as a tax exempt organization, is governed by ¤501(c). In other words, not paying taxes under ¤6501(c) is bad, unlike not paying taxes under ¤501(c), which is good. If your client isn't paying taxes, pay attention to the six. As stated above, if a person or entity doesn't pay taxes under ¤6501(c), the statute of limitations doesn't ever run. Or, as one dissenting and disgruntled judge put it,
[The IRS] would leave the statute open for that portion of eternity concurrent with the taxpayerÕs life, whether he lives 3 score and 10 or as long as Methuselah. In most religions, one can repent and be saved, but in the peculiar tax theology of [the IRS], no act of contrition will suffice to prevent the statute from running in perpetuity (Klemp v. Commissioner, 77 T.C. 201 (T.C. 1981)).
It is important to distinguish in this context between the aforementioned statute of limitations for the assessment of civil consequences, as opposed to the criminal consequences, which still carry a six-year statute of limitations. If a taxpayer fails to file a return or files a false one, a criminal prosecution can only be brought within six years of the offense, but in year seven or beyond a civil tax assessment is still possible if the case for civil fraud can be proven. From a practical standpoint, however, making a case for tax fraud after more than six years has passed can be difficult for government authorities, unless the evidence was collected within the six year window.
What of the truly repentant tax evader? Fortunately, though the laws of justice permit a heavy hand, government policy permits a little mercy from time to time, particularly if a taxpayer confesses before getting caught. Under the IRS' "voluntary disclosure" policy, taxpayers who do the mea culpa before "the man" is on to them can usually avoid a criminal prosecution. That is not necessarily an easy out for a tax cheat. To be a true voluntary disclosure, the confession has to be timely and complete, and the taxpayer has to be willing to be fully cooperative in the subsequent assessment and payment of the taxes, penalties and interest. To be timely, the disclosure has to occur before a triggering event, such as the beginning of an audit, the beginning of a criminal investigation, or (controversially) even before the receipt by the IRS of an anonymous tip of which the taxpayer may not even be aware. Thus, the decision to make a voluntary disclosure, rather than simply filing amended tax returns, needs to be carefully considered based on the facts and circumstances at the time.
It should also be remembered that the statute of limitations for tax matters is tolled when a taxpayer is living outside the United States for a continuous period of six months or more at a time (IRC ¤6503(c)). What's more, if a taxpayer has bank accounts outside the United States, it is not just tax returns that come into play. Taxpayers with a financial interest in or signatory authority over foreign bank accounts with collective balances over $10,000 have an obligation to file a disclosure form with Department of the Treasury, under Title 31 of the United States Code. This used to be only a requirement under Title 31 (The Bank Secrecy Act), but in 2004 Congress added a civil penalty for failing to file the form under the Internal Revenue Code (Title 26). Although the penalty may be waived if the taxpayer can show "reasonable cause" for failing to file the form, the penalties under Title 31 and Title 26 can be steep. The statute of limitations for assessing penalties due to willful failure to file the form under Title 31 is six years.
In addition to the limitations imposed on the Internal Revenue Service in assessing taxes, the IRS is also subject to time limits in connection with collecting them. Once a tax is assessed against a taxpayer, the IRS can actively attempt to collect for a period of ten years. This ten year rule may seem easy on its face; however, the ten year clock doesn't even start until taxes are actually assessed. It would be too convenient to say that these taxes relate to 1996, so the drama is over by the end of 2006. A tax assessment can happen immediately after a return has been timely filed, but it can also happen later; after an audit, for example, or at any time within the statute of limitations periods for assessing taxes described above. The ten year collection period can also be tolled during a period when bankruptcy proceedings are under way, when an offer to compromise the liability for a lesser sum has been submitted and is under consideration by the IRS - forestalling collection action - or, once again, when the taxpayer is residing abroad.
It was Benjamin Franklin who proclaimed that in this world nothing can be said to be certain, except death and taxes. But as somebody once quipped, at least death doesn't get worse every time Congress meets. The good news: whether we get things wrong by accident or on purpose, there are mechanisms for setting things straight, even if it is just through the passage of time. Everyone understands that the tax code is complex, but despite its faults, the tax code seems to work for most people, most of the time (regardless of how they may feel about the rates), and somehow we all muddle through.
Posted by BarStaff at 02:44 PM
Bankruptcy Alternatives in the Face of Recent Bankruptcy Abuse Prevention and Consumer Protection Act
Bankruptcy Alternatives in the Face of Recent Bankruptcy Abuse Prevention and Consumer Protection Act
by J. Robert Nelson
I. Introduction
More than a year has passed since enactment of the well publicized Bankruptcy Abuse Prevention and Consumer Protection Act (the "Amendments") and six months since key provisions actually took effect. The Amendments appeared to make personal bankruptcies more complicated and less accessible. As to business bankruptcies, the Amendments seemed to reduce the leverage of debtors in chapter 11 reorganizations. The last six months would suggest that, as to personal bankruptcies, the Amendments have had the anticipated effect. Compared with the pre-Amendments period, personal bankruptcies are down dramatically.1 As to business reorganizations, it is still too early to assess whether the Amendments will, as has been speculated, materially change some dynamics.
A. Burdens of Bankruptcy
Even before the Amendments, bankruptcy tended to be a course pursued only as a last resort. As to individuals, the concerns centered on the stigma of bankruptcy and the long term impact on credit worthiness. For businesses, experience showed that bankruptcy was an expensive, cumbersome and usually unsuccessful way to deal with financial pressures. Companies shied away from bankruptcy realizing, among other things, that uncertainties attendant to a bankruptcy filing would make it even more difficult to compete with companies whose continued existence was not in question.
Competitive disadvantage was not the only problem. With bankruptcy came a whole new set of players. Not only was there oversight by a bankruptcy judge but, in many jurisdictions, bankruptcy filings triggered administrative supervision by the Office of the United States Trustee. It also involved the appointment of a committee or even multiple committees to represent the interests of both creditor constituencies and equity holders responsible for monitoring the debtorÕs reorganization activities and, on occasion, opposing those activities and directions. Bankruptcy also implicated a new set of professionals Ð attorneys, accountants, financial advisors and even public relations specialists - to advise and represent both the debtor and the appointed committees. The cost of this cadre of new professionals imposed huge burdens on already financially strapped companies.
Bankruptcy also imposed its own frequently restrictive operating requirements and limitations. The "open book" philosophy of bankruptcy required debtors to file detailed operating reports, and, as a matter of course, to provide information to committees. These committees, the United States trustee and the bankruptcy court carefully scrutinized asset purchases, sales and termination of contracts; actions that might have been taken without substantial oversight before bankruptcy. This was a high price for the protection that bankruptcy offered.
If cost and added scrutiny were not enough, many debtors quickly realized that bankruptcy came with its own time pressures. Even before the Amendments, the Bankruptcy Code, 11 U.S.C. ¤ 101 et seq., imposed numerous statutory deadlines. These included deadlines to perform under certain leases (11 U.S.C. ¤ 365(c)(5)), to assume or reject contracts and leases (11 U.S.C. ¤ 365(c)(4)), to resume payments to real estate secured creditors (11 U.S.C. ¤ 362(d)) and to file and confirm plans of reorganization (11 U.S.C. ¤ 1121).
Given these burdens and demands, it was small wonder that so few businesses that sought chapter 11 relief successfully reorganized and emerged from bankruptcy. Indeed, less than one in five chapter 11 cases resulted in court -approved plans of reorganization. The vast majority of reorganizations ended in liquidation.
B. Potential Benefits of Bankruptcy
While the foregoing factors operated as clear disincentives, there were still situations in which bankruptcy was a prudent, and sometimes the only, strategy for individuals and businesses to cope with financial pressures. Bankruptcy probably offered the only effective way for large manufacturers to deal with thousands of suits stemming from asbestos contamination, defective medical products and other product liability issues. Bankruptcy frequently was the only way to deal with a contentious secured creditor positioned, because of its lien, to shut down operations. In a turn on that theme, secured creditors themselves, on occasion, would actually condition cooperation on a bankruptcy filing believing it to be the best way to control a debtor and to prevent loss of collateral value as a result of enforcement actions by other creditors. In other cases, bankruptcy, with the accompanying opportunity to prepare a reorganization plan that bound dissenting creditors under 11 U.S.C. ¤ 1126(c), was the only practical way to deal with a disgruntled, but minority, block of unsecured creditors. Finally, bankruptcy could be an effective tool in maximizing the return on assets through a bankruptcy court-approved sale to a third party, free and clear of liens, claims and encumbrances pursuant to 11 U.S.C. ¤ 363(f).
Because of the significant burdens and low success rates, bankruptcy practitioners and their clients historically have been drawn to other ways to address financial problems. This sensitivity and openness to non-bankruptcy solutions has also applied to creditors who likewise have recognized the potential negative impact of bankruptcy. Even secured creditors recognize that delay is a fact of life in bankruptcy. The automatic stay under 11 U.S.C. ¤ 362 prevents lien enforcement, sometimes for a lengthy period. That delay would be less painful for secured creditors if interest continued to accrue and attorneys fees and costs could be collected in accordance with loan agreements. That frequently was not the case, however. Even if a contract provided for recovery of interest and applicable fees and costs, 11 U.S.C. ¤ 502 limited such ÒadditionsÓ if the collateral was not of sufficient value to cover the entire debt. Thus, bankruptcy was particularly difficult for under-secured creditors.
For unsecured creditors, the problem with the "bankruptcy alternative" was even more acute. With less than 20% of companies successfully reorganizing, bankruptcy did not offer the best odds of being repaid and maintaining a customer.
Because bankruptcy was not a panacea, even before the Amendments, businesses and their creditors considered other options in determining how best to resolve financial problems. Some of those alternatives2 included (1) forbearance agreements and debt restructurings, (2) composition/extension agreements, (3) deeds in lieu of foreclosure, (4) assignments for benefit of creditors, and (5) liquidations, with or without bankruptcy court supervision.
The remainder of this article will touch upon advantages, disadvantages and issues associated with each of these alternatives and conclude with a brief discussion of pre-negotiated and pre-packaged bankruptcy plans in situations in which bankruptcy presents itself as the most viable debt relief strategy.
II. Some Bankruptcy Alternatives
A. Forbearance Agreements and Loan Restructurings with Secured Creditors
If a company has lender financing, financial difficulties almost inevitably lead to payment or other defaults under loan agreements, usually both. Although contractually such defaults permit creditor action, enforcement usually is not instantaneous. The "dance" which follows a default usually involves explanations and excuses, then threats (both of enforcement by the lender and bankruptcy by the borrower), and then requests either for short or long term forebearance and finally negotiation of an agreement. This "dance" reflects a recognition that the alternatives (lien enforcement and bankruptcy) are time consuming and expensive and that a negotiated solution is usually best for both sides. Because the "solution," whether temporary or permanent, rarely is immediately apparent, time is needed, without enforcement pressure, to identify the problem and the "fix," and to document appropriate changes.
Although creditor forbearance can be informal, more typically it is governed by an actual forbearance agreement which reflects the terms under which the secured creditor will defer enforcement action. Such an agreement usually includes the duration of the standstill and may dictate required interim payments, special reporting requirements and other conditions. For example, in cases involving lines of credit, a forbearance agreement may modify advance rates and other provisions. The practical effect of some modifications is either (1) to pressure a borrower to locate alternative financing, or (2) to reduce the outstanding loan by tightening credit and forcing at least a partial liquidation of collateral through a borrower's operations.
From a borrower's standpoint, a forbearance agreement is beneficial because it provides needed time to attempt to fix a problem in a way that is more flexible and less expensive than filing a bankruptcy. From a lender's standpoint, a forbearance agreement is beneficial for several reasons. It eliminates the possibility that, by failing to act promptly, the lender has waived otherwise actionable defaults. It clearly sets the "rules" that govern any forbearance. It also can, and frequently does, include a release of claims that a borrower otherwise might assert against a lender. Finally, as noted, it can be used to pressure a borrower to rationalize its operations and/or to locate alternative financing.
The goal of any short term forbearance is a long term solution to a financial problem. For companies experiencing a "minor blip," it can provide sufficient time for a company to return to profitability and to cure loan defaults. In other cases, it provides time, among other things, to locate alternative financing. When neither a cure nor a refinancing materializes, the parties must decide whether permanently to restructure the secured debt. Such a restructuring may include, among other things, a waiver of defaults, restructure of covenants, new loan advances, sometimes supported by the grant of additional collateral.
There are several legal issues associated both with temporary forbearance and permanent debt restructuring agreements. Perhaps the most significant relates to lender control of its borrower. Standard contractual covenants and restrictions necessarily impose some controls on a borrower's operations. Enforcement of those standard provisions normally does not create a legal problem. An issue may arise, however, if a secured creditor "shifts hats" and involves itself directly in operating decisions of its borrower. An example might involve a lender that dictates the specific trade creditors to be paid while a borrower is experiencing financial difficulty. Such involvement in day-to-day operating decisions may create a basis for allegations that the lender, in effect, has become a venture partner with its borrower and, as such, potentially liable for its borrower's debts.
Another problem may arise if a bankruptcy follows hard on the heels of a restructuring under which a lender has received additional collateral. In such case, unless the lender provides new consideration, the grant of additional collateral may be subject to a preference attack in the bankruptcy under 11 U.S.C. ¤ 547.
Finally, any material changes to loan agreements could affect lien priority. Each of these factors should be considered in connection with forebearance agreements and loan restructurings.
B. Agreements with Unsecured Creditors
Out-of-court restructurings of secured debt typically are conditioned on the "stabilization" of trade debt. In a bankruptcy, trade debt is "handled" through the reorganization plan. Creditors are entitled to vote on proposed plan treatment. Acceptance of a bankruptcy plan requires the affirmative vote of a majority in number and two thirds in amount of unsecured creditors voting. 11 U.S.C. ¤ 1126(c). Such an affirmative vote binds dissenters if the reorganization plan satisfies several other statutory requirements, including the "best interest" standard. That standard requires that a plan provide to creditors at least what they would receive in a liquidation of the debtor's assets (11 U.S.C. ¤ 1129(a)(9)).
The non-bankruptcy equivalent of a reorganization plan is a contractual agreement with creditors in the form of a composition, an extension, or a combination of both. A composition involves a payment of less than the full outstanding balance. An extension involves deferred payments either of the outstanding balance or some lesser amount. Composition/extension agreements are contractual understandings with each individual creditor. Unlike bankruptcy, there is no device to bind creditors who refuse a proposed treatment. Consequently, debtors normally condition any composition/extension proposal on acceptance by a large percentage of creditors so that dissenters represent such a small minority that they will not disrupt the out-of-court restructuring.
C. Liquidation of Assets
There are situations in which rehabilitation is not feasible, and liquidation is the only viable option. In such instances, a debtor's fiduciary duty to creditors requires that it act to protect and maximize the value of its assets. Although it may in some cases be the preferred means (see below), bankruptcy is not the only liquidation vehicle. In addition to liquidation through a bankruptcy, other possible liquidation approaches include the deeding of collateral to a secured creditor in lieu of a foreclosure, an assignment for benefit of creditors and self liquidation.
If there is a secured creditor, it usually will attempt to dictate the manner of liquidation. A secured creditor has rights in collateral which are implicated, particularly upon a default. Interference with those rights could expose management to an action for conversion. In recognition of that leverage, some debtors simply deed the collateral to the secured creditor in lieu of a foreclosure. Although this may be the easiest way to "wash hands" of a problem, it ultimately may not be the wisest course of action. For one thing, management's decision could be questioned by junior creditors if there is even a remote possibility that the value of the collateral exceeds the secured debt. There also are circumstances in which secured creditors actually prefer that management supervise a liquidation of the business and of their collateral. An orderly liquidation by current management, presumably operating under a restrictive liquidation budget, usually maximizes the return for all creditors.
There are instances in which management's participation either is not desirable (lack of creditor confidence) or not possible. In those cases, another non-bankruptcy liquidation option is an assignment for benefit of creditors. In this state, Utah Code Ann. 6-1-1 permits a debtor to assign all of its assets to a designated agent responsible for liquidating the assets, determining claims and distributing cash proceeds to creditors. From that standpoint, an assignment looks much like a liquidation by a trustee in bankruptcy under chapter 7 of the Bankruptcy Code. With fewer statutory and administrative restrictions, however, assignments tend to proceed more quickly than bankruptcy liquidations and at a lower overall cost. An assignment usually is not feasible if there is substantial secured debt. There are several other potential drawbacks. In bankruptcy, a trustee may exercise statutory avoiding powers to recover pre-bankruptcy preferences and fraudulent transfers and thereby increase the "pot" for distribution to creditor. An assignee does not have that power, although individual creditors do have standing to pursue fraudulent conveyance suits but for their own and not general creditor benefit. Also, Utah statutes do not provide the detailed framework for resolution of disputed claims that is available in a chapter 7 bankruptcy.
In some situations, management itself can supervise a liquidation and distribute proceeds ratably to creditors without the additional cost overlay of a bankruptcy or an assignment for the benefit of creditors. This assumes, of course, that creditors refrain from individual enforcement actions (to "get a leg up") long enough for assets to be liquidated. If enforcement actions do ensue, and assuming that management is opposed to permitting one creditor to seize a disproportionate share, either an assignment or a bankruptcy will be necessary.
If liquidation is inevitable, bankruptcy has to be considered. It can be an effective tool in maximizing liquidation proceeds. In most cases, if a seller is in financial distress, prospective purchasers will know it. Sales under distress usually depress the number and amount of offers. Prospective purchasers "look for a deal" either because the seller has limited "staying power" or out of concern for the potential "baggage" (loss of employees and customers, successor liability, among others) associated with a distressed sale. Bankruptcy can provide a solution to these problems. In bankruptcy, a sale can be effected pursuant to a court order which transfers assets to a buyer free of liens, claims and encumbrances. 11 U.S.C. ¤ 363(f). That "protection" tends to increase offers. In addition, bankruptcy is structured to encourage competitive bidding, and that increases the likelihood of a fair market price. Not only sellers, but also prospective purchasers recognize these potential benefits. Indeed, it is not uncommon for a prospective purchaser of a distressed business to make an offer contingent on there being a bankruptcy filing followed by a court supervised and approved asset sale so that the deal is as clean as possible.
III. Pre-Negotiating and Pre-Packaging Bankruptcy Plans
If informal restructuring proves unsuccessful, bankruptcy is probably the one way to deal with creditors and reorganize a business. Because of its disadvantages (e.g., expense and lack of flexibility), however, if bankruptcy is advised, there are pre-bankruptcy steps that should be considered to expedite the process, shorten the time in bankruptcy and minimize the related cost. Negotiation, and even approval, of a reorganization plan, does not have to await the filing of a bankruptcy petition. Claim treatment can be negotiated, and even voted on, before a filing in what, in bankruptcy rubric, is known either as a pre-negotiated or pre-packaged plan. Pre-filing negotiation of the treatment of a financing bank is not unusual. Such pre-bankruptcy negotiation is more difficult with regard to bondholders and trade creditors where, instead of negotiating with only one, a debtor must deal with multiple claimants. However, even in those cases, there are numerous examples of agreements being reached pre-bankruptcy with representatives (a trustee for bondholders or a committee of trade creditor representatives) of the creditors. Although pre-negotiated plans may not be binding in a subsequent bankruptcy, they can expedite the process once a bankruptcy has been filed.
In some cases, there is sufficient time not only to negotiate the framework of a plan but to solicit actual creditor acceptance in what is known as a pre-packaged bankruptcy. The process requires an informed vote based upon adequate disclosure to creditors. Provided that the manner of pre-bankruptcy solicitation was in compliance with applicable nonbankruptcy rule, law or regulation or, after disclosure to creditors of "adequate information" as contemplated by 11 U.S.C. ¤ 1125(a), a bankruptcy court may proceed directly to consideration of confirmation of a plan whose approval has been solicited before bankruptcy. This approach, if successful, can streamline the process to the point that a plan can be confirmed and the debtor emerge from bankruptcy in only a few months.
IV. Conclusion
Bankruptcy is not always the option of choice in dealing with and resolving financial difficulties. The recent Amendments to the Bankruptcy Code clearly do nothing to change that reality. Whether the goal is liquidation or rehabilitation, debtors and creditors alike recognize that there are available non-bankruptcy options. As noted, those options can avoid or minimize some of the disadvantages of a bankruptcy. However, there still are situations in which bankruptcy, even with its disadvantages, remains the best vehicle to address and resolve financial problems.
1. Lawyers who regularly handle personal bankruptcy work advise me that, as practice becomes more routine, the impact of the Amendments may not be as dire as first thought. Indeed, Òmeans testingÓ a major change under the Amendments, may only be significant as to a small percentage (10-15%) of those filing personal bankruptcy.
2. Although the referenced alternatives are discussed with respect to businesses, some may be equally applicable to individual insolvencies.
Posted by BarStaff at 02:27 PM
November 03, 2006
Utah Enacts the Uniform Environmental Covenants Act ("UECA")
Utah Enacts the Uniform Environmental Covenants Act ("UECA")
by Steven J. Christiansen
Earlier this year, Utah State Senator Lyle W. Hillyard introduced Senate Bill No. 153 entitled, "Uniform Environmental Covenants Act" ("UECA"Ó). S.B. 153 was enacted during the 2006 General Session of the Utah Legislature and should be of interest to anyone involved with real property or environmental issues in the State of Utah.
UECA represents one of the most recent efforts of the National Conference of Commissions on Uniform State Laws ("NCCUSL"). NCCUSL finalized and adopted UECA in August 2003. Since its adoption, UECA has been enacted by a number of state legislatures, including Delaware, Iowa, Kentucky, Maine, Maryland, Nebraska, Nevada, North Dakota, Ohio, South Dakota, Utah, West Virginia, and Wyoming.1
The need for a uniform law like UECA arises out of the burgeoning Brownfields movement focused on bringing contaminated and underused properties back into full productive use in the community. UECA is complementary of federal statutes like the Small Business Liability Relief and Brownfields Revitalization Act ("Brownfields Amendments")2 and state statutes like the Utah Voluntary Cleanup Program ("VCP").3 Among other things, these statutes seek to encourage the purchase of and investment in contaminated sites by offering defenses and alternatives to the notorious strict, joint and several liability scheme of the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA").4 The VCP also seeks to encourage cleanup of contaminated sites by providing procedures for voluntary cleanup of Brownfields sites using flexible risk-based cleanup levels that are selected depending on the anticipated future use of the property.5
The effective, long-term use of risk-based cleanup levels is dependent on the ability of site owners, the Utah Department of Environmental Quality ("DEQ"), and other parties interested in the site to create, implement, and enforce "institutional controls" at Brownfields sites. Generally speaking, institutional controls fall into five different categories: (1) proprietary controls (e.g., deed restrictions, easements, and restrictive covenants); (2) local government controls (e.g., zoning, variances, and building permits); (3) statutory enforcement controls (e.g., administrative orders and consent decrees); (4) information devices (e.g., deed notices, record notice, and notice to government agencies); and (5) engineering and access controls (e.g., pavement or caps over contamination, slurry walls, and fencing).6
As of May 1, 2006, institutional controls at Brownfield sites must be implemented under UECA in lieu of the Utah Environmental Institutional Controls Act which was enacted in 2003 by the Utah Legislature.7
Hypothetical Example of UECA in Action: For example, ABC Corporation owns an 8-acre parcel in an urban location historically used for commercial and industrial purposes. Over the years, there have been some releases of hazardous constituents at certain locations at the site where raw materials and waste materials were handled. These activities and releases resulted in some contamination of the soil and groundwater. ABC Corporation closed and cleaned up these facilities with the approval of DEQ utilizing risk-based standards that contemplate only commercial or industrial uses on certain contaminated portions of the site. DEQ is satisfied with the closure and issues ABC a "no further action" letter. ABC does not contemplate or desire residential uses on the contaminated portions of its site. A large cap is placed over a significant portion of the waste materials which have been consolidated into a corner of the site. ABC now wishes to sell the property, but is concerned that the cap and other cleanup remedies never be disturbed. ABC sells the property to XYZ Corporation with deed restrictions (i.e. an "environmental covenant") requiring no disturbance of the cap and no future use of designated portions of the property for residential purposes. An environmental covenant is prepared and signed by ABC, XYZ and DEQ. Furthermore, the environmental covenant is recorded in the county where the site is located.
In the foregoing hypothetical, ABC Corporation was motivated to clean up the site only to commercial standards because it is less expensive than cleaning the property to residential standards. Moreover, ABC reasons that so long as its deed restrictions on the site are complied with and enforced the chosen cleanup standards are fully protective of public health and the environment. ABC Corporation is also concerned the designated portions of the property continue to be used only for commercial purposes to avoid possible liability down the road from a subsequent buyer who uses the site for residential purposes and claims injury.
UECA allows a seller to impose restrictions on parcels of real estate in the form of "institutional controls" or "environmental covenants" that are enforceable by the initial seller and his buyer, the state environmental agency (DEQ), the municipality where the parcel is situated, and any other person expressly granted the right of enforcement in the covenant.8 Moreover, the environmental covenant runs with the land9 and has a duration that is "perpetual."10
To be valid and enforceable, the environmental covenant must be signed by the state environmental agency (DEQ) and each "holder" or grantee of the environmental covenant.11 The environmental covenant must also be recorded in the appropriate county - in every county in which any portion of the real estate subject to the environmental covenant is located.12
Since enactment of UECA by the Utah Legislature earlier this year, DEQ officials have been developing a form environmental covenant that could be used at any particular site to ensure the long-term enforceability of agreed upon environmental restrictions.
UECA is complementary of the growing strategy for dealing with environmental issues in commercial and industrial real estate situations: (1) perform environmental due diligence ("all appropriate inquiry") prior to taking title in any potentially contaminated real property to establish the foundation for qualifying for the "bona fide prospective purchaser," "adjoining property owner" or "innocent purchaser" defenses to CERCLA liability provided by CERCLA and the 2002 Brownfields Amendments; (2) as the new owner of a potentially contaminated site, obtain "written assurances" from federal and state environmental officials acknowledging qualification for the defenses to CERCLA liability on conditions of appropriate care of known contaminants and cooperation, assistance and access to environmental officials; (3) as circumstances dictate, perform a risk-based, voluntary or state directed cleanup of the site to comply with commercial cleanup standards where only non-residential future uses of the site are contemplated; and (4) utilizing UECA, impose appropriate environmental covenants or servitudes on the parcel in order to protect the seller and all subsequent buyers from future liability.
Conclusion:
The field of environmental law continues to evolve and mature through the enactment of more practical federal and state legislation. UECA is the latest example of this trend towards the creation of incentives for investing in and remediating contaminated Brownfields sites. Used properly in the hands of knowledgeable environmental practitioners, UECA can provide protections in the form of environmental covenants for owners, sellers and other parties with an interest in contaminated properties. UECA allows for intelligent, risk-based remedies at contaminated sites with the assurance of minimization of environmental liability through the imposition and enforcement of institutional controls.
1. See 19 Probate & Property 31 (May/June 2005), 19 Probate & Property 16 (July/August 2005), 19 Probate & Property 25 (September/October 2005); and 19 Probate & Property 32 (November/December 2005).
2. Pub. L. No. 107-118, 115 Stat. 2356 (2002) (amending 42 U.S.C. ¤¤ 9601 et seq.).
3. U.C.A. ¤¤ 19-8-101 to 120.
4. 42 U.S.C. ¤¤ 9601 et seq.
5. U.C.A. ¤ 19-8-110(5). See also U.A.C. R315-101 (Cleanup Action and Risk-Based Closure Standards).
6. A. Edwards, "Institutional Controls: The Converging Worlds of Real Estate and Environmental Law and the Role of the Uniform Environmental Covenant Act," 35 Conn. L. Rev. 1255, 1260-1262 (2003).
7. U.C.A. ¤ 19-10-101 to 108.
8. U.C.A. ¤ 57-25-111.
9. U.C.A. ¤ 57-25-105(1).
10. U.C.A. ¤ 57-25-109(1).
11. U.C.A. ¤ 57-25-104(1)(e).
12. U.C.A. ¤ 57-25-108(1).
Posted by BarStaff at 10:40 AM
