By Wade Iverstine and Eric Lockridge

A 2013 change to Louisiana’s revocatory action now exposes a secured lender’s collateral and guarantees to the risk of avoidance litigation for ten years, up from three years, after the closing date.

Start here if you just asked, “What is a revocatory action?” This post explains how the revocatory action effects multi-party secured loans, and how the 2013 legislative change has only become relevant since August 2016.

The Context

Below is a diagram of a common secured loan structure, where an existing family of organizations borrows money for a newly formed subsidiary to purchase assets:

Blog Article Diagram

The loan is supported by upstream and cross-stream security. The signatures and collateral granted by the subsidiaries are “upstream” security grants as they support the parent’s obligations. Each is a “cross-stream” security grant as it supports the other subsidiaries’ obligations. The parent’s obligations and collateral grants are “downstream” as they support the subsidiaries’ loan obligations. Downstream security grants are typically not at risk, because a benefit to one of the subsidiaries increases the value of the parent’s ownership interest in the subsidiary.

Upstream and cross-stream security grants can be annulled where, as in many transactions, the loan does not benefit all loan parties in perfectly equal proportions. Louisiana’s “revocatory action” allows a subordinate creditor to avoid, or “claw back,” an obligation or grant of collateral if it causes or increases the grantor’s insolvency.[1] In the example shown above, the economic value of the loan flows disproportionately to the parent and newly formed subsidiary. Under these circumstances, the upstream and cross-stream security grants increase the liability side of the existing subsidiaries’ balance sheet without a proportionate increase in the value of the assets of those entities. This disproportionate flow of value and liability subjects the upstream and cross-stream grants to annulment in a revocatory action if the grants caused or increased the existing subsidiaries’ insolvency.

Why is a Three-Year-Old Change Relevant Only Since August 2016?

Before August 1, 2016, Louisiana law limited a lender’s avoidance risk to, at most, three years after the closing date. After three years the Louisiana “revocatory action” expired without exception.

On August 1, 2013, the Louisiana Legislature created an exception to the three-year limitations period.  Under the new law, the three-year limitations period does not apply in “cases of fraud.”[2]  The phrase “cases of fraud” is not defined, and courts have thus far skirted the question by interpreting the 2013 legislative change as a substantive change, not procedural.[3] According to that interpretation, the fraud exception only applies to transfers closing after August 1, 2013. Since the three-year limitations periods on those loans began to expire on August 1, 2016, the meaning of “fraud” has become very relevant to bankruptcy trustees and unsecured creditors looking to expand the limitations period to attack loans that closed over three years ago.

As we get further from August 1, 2016, more loans will become subject to litigation over what is a case of fraud.

The Change Adds (at Least) Seven Years and Uncertainty to Avoidance Risk

In effect, the “cases of fraud” exception expands a three-year risk to a ten-year risk for secured lenders. If the three-year peremptive period does not apply in cases of fraud, the general prescriptive period rule in Louisiana provides that “[u]nless otherwise provided by legislation, a personal action is subject to a liberative prescription of ten years.”[4] Moreover, unlike the three-year limitations period which is a peremptive period (which for our non-Louisiana readers is similar to a “statute of repose”), the ten-year prescriptive period is subject to interruption. It takes no imagination to think of the changes that can occur in a borrower’s business over a ten-year period compared to a three-year period. And if that change is negative, a bankruptcy trustee or unsecured creditor will want to attack the upstream and cross-stream grants to the secured lender.

In addition to enjoying an expanded limitations period, bankruptcy trustees and unsecured creditors now enjoy a blank slate in litigating what the Louisiana Legislature meant by “cases of fraud.” Is this a constructive fraud concept or does the plaintiff need to show actual fraudulent intent? As the case law develops on this question, the uncertainty advantages the unsecured creditors and bankruptcy trustees in negotiations with secured lenders.

Extra Diligence to Consider

In light of the heightened avoidance risk in Louisiana, some diligence practices which may have been reserved for larger loan transactions now look more reasonable for smaller loans that involve multiple obligors.

For example, the lender may require a solvency opinion by a financial expert to establish that as of the closing date the upstream or cross stream guarantees did not create or increase the grantor’s insolvency. In addition, a fairness opinion is often used in other jurisdictions to establish evidence that the borrower obtained sufficient value from the loan to support its guarantee or collateral grant. Whether a debtor received equivalent value to its security grant is relevant in jurisdictions that follow the Uniform Fraudulent Transfer Act, but is not particularly relevant to the balance sheet test in a revocatory action. However, because we do not know how courts will interpret “cases of fraud,” a fairness opinion in addition to a solvency opinion may be warranted for transactions subject to Louisiana’s revocatory action for evidence that a particular grant was supported by the particular value of the loan flowing to the subsidiary.

The new exposure also warrants a re-examination of the secured lender’s standard loan documents to ensure that the credit departments understand and are actively conducting the solvency and debt-coverage tests provided in their forms.

More generally, the expanded reach of the Louisiana revocatory action warrants closer scrutiny and diligence expense that was not as critical to preventing transfer avoidance before the legislative change.

**********************

[1] La. Civ. Code art. 2036.

[2] La. Civ. Code art. 2041.

[3] In re Robinson, 541 B.R. 396, 400 (Bankr. E.D. La. 2015); Cotter v. Gwyn, No. CV 15-4823, 2016 WL 4479510, at *12 n.102 (E.D. La. Aug. 25, 2016).

[4] La. Civ. Code art. 3499.

GOM

By Tod J. Everage

With less than one week on the job, newly-confirmed Secretary of the Interior, Ryan Zinke announced that BOEM will offer 73,000,000 acres of lease space located in the Gulf of Mexico for oil and gas exploration. Proposed Lease Sale 249 is currently scheduled for August 16, 2017, and will include all unleased areas of federal waters in the GOM. The sale will be livestreamed from New Orleans.

This sale is the first under the new Outer Continental Shelf Oil and Gas Leasing Program for 2017-2022 (Five Year Program). The plan includes two GOM lease sales each year, including all available blocks in the combined Western, Central, and Eastern GOM. It is estimated that there are approximately 211 million to 1.118 billion barrels of oil and 0.547-4.424 trillion cubic feet of gas available for production in those available leases. The available land for lease includes approximately 13,725 unleased blocks located between 3-230 miles offshore, and ranging in depth between 9-11,115 feet of water.

Excluded from the lease sale are blocks subject to the Congressional moratorium established by the Gulf of Mexico Energy Security Act of 2006; blocks that are adjacent to or beyond the U.S. Exclusive Economic Zone in the area known as the northern portion of the Eastern Gap; and whole blocks and partial blocks within the current boundary of the Flower Garden Banks National Marine Sanctuary. The full text of BOEM’s press release can be found here.

The current Five Year Program [2012-2017] will have its final lease sale today, March 22, 2017, which includes approximately 48 million acres off the coast of Louisiana, Mississippi, and Alabama comprised of 9,118 blocks. The sale will be livestreamed started at 9 am via BOEM’s website.

SEC

By David P. Hamm, Jr.

On October 26, 2016, the SEC adopted final rules that (1) modernize Rule 147, (2) create a new Rule 147A, (3) amend Rule 504, and (4) repeal Rule 505 (collectively, the “Amendments”). The adopting release can be found here. Several of the significant changes brought about by the Amendments are broadly summarized below.

Modernization of Rule 147 and Creation of New Rule 147A

Rule 147 was adopted in 1974 for the purpose of providing guidance to issuers conducting unregistered offerings under Section 3(a)(11). This section provides an exemption from registration for “[a]ny security which is part of an issue offered and sold only to persons resident within a single State or Territory, where the issuer of such security is a person resident and doing business within, or, of a corporation, incorporated by and doing business within, such State or Territory.”

Rule 147 has not been substantively amended since its enactment. In light of this reality, the SEC noted: “[D]ue to developments in modern business practices and communications technology in the years since Rule 147 was adopted, we have determined that it is necessary to update the requirements of Rule 147 to ensure its continued utility.”[1]

In addition to modernizing the existing Rule 147, the SEC also created a new Rule 147A. The amended Rule 147 and the new Rule 147A “are substantially identical, except that . . . new Rule 147A allows an issuer to make offers accessible to out-of-state residents and to be incorporated or organized out-of-state.”[2]

Given the similarity of the Amendments (except as specifically set forth above) as they relate to existing Rule 147 and new Rule 147A (collectively, the “Rule 147 Amendments”), they will be treated together in this portion of the article. The Rule 147 Amendments can be divided under six headings:

1. Modification of “Doing Business” Requirements

Two significant changes were made to the “doing business” requirements of Rule 147.  First, the Rule 147 Amendments add an alternative “doing business” test based upon the location of a majority of the issuer’s employees.  Under the new “employee test,” an issuer can satisfy the “doing business” requirement by showing that a majority of its employees are based in the state where the offering is being made. This is a relatively straight forward test that, in many cases, will not require a significant amount of analysis.[3]

Second, the Rule 147 Amendments change the relationship of the “doing business” requirements from conjunctive to disjunctive. That is, an issuer no longer has to meet all of the “doing business” requirements. Rather, the issuer now only needs to satisfy one of the “doing business” requirements. This is a significant change that greatly reduces the difficulty of satisfying the existing “doing business” requirements.[4]

2. Addition of “Reasonable Belief” Standard

The Rule 147 Amendments include a “reasonable belief” standard in connection with the issuer’s determination as to the purchaser’s residence. The necessity of the inclusion of this standard is highlighted in the adopting release as follows:

“Under current Rule 147(d), regardless of the efforts an issuer takes to determine that potential investors are residents of the same state in which the issuer is resident, the exemption is lost for the entire offering if securities are offered or sold to just one investor that was not in fact a resident of such state.”[5]

In connection with the inclusion of a “reasonable belief” standard, the Rule 147 Amendments require the issuer to obtain a written representation from each purchaser as to its residence. The receipt of the written representation, however, is not the end of the story. The determination as to whether the issuer has a “reasonable belief” as to the residency of a purchaser is determined on the basis of all the facts and circumstances.[6]

3. Revision of Entity Residence Tests

For both issuing and purchasing entities, the Rule 147 Amendments replace the “principal office” test with the “principal place of business” test for the purpose of determining residency. The “principal place of business” is the “location from which the officers, partners, or managers of the [entity] primarily direct, control and coordinate the activities of the issuer.”[7]

4. Six-Month Resale Limitation

The Rule 147 Amendments make two significant changes to the existing resale limitation in the context of Rule 147 offerings. The current resale limitation is triggered by the termination of the Rule 147 offering and lasts for a period of nine months. The resale limitation adopted by the Rule 147 Amendments is shorted to a six-month period and is now triggered by date of purchase by each purchaser.[8]

It is significant to note that securities issued in reliance upon Rule 147 and Rule 147A are not “restricted securities” under Rule 144(a)(3). Accordingly, the resale of such securities must, as a general matter, only comply with state securities laws.[9]

5. Addition of Bright-Line Integration Safe Harbor

The Rule 147 Amendments adopt a “bright-line integration safe harbor” which precludes the integration of offers or sales of securities made prior to the commencement of a Rule 147 or Rule 147A offering and certain specified offers and sales made after the completion of a Rule 147 or Rule 147A offering.[10]  Of particular note, the Rule 147 Amendments provide that an offer or sale of securities made more than six months after the completion of a Rule 147 or Rule 147A will not be integrated.

6. Disclosure and Legend Requirements 

The Rule 147 Amendments change the mode of the disclosure requirements by allowing the disclosures to be made in the same form that the offer is made.  Thus, if the offer is made orally, the disclosures can be made orally to the offeree at the time of the initial offer. However, every purchaser must be given a written disclosure a reasonable period of time before the actual sale in reliance on Rule 147 or Rule 147A.

The Rule 147 Amendments also provide specific language to be used in connection with the required legend (the existing version of Rule 147 does not provide specific language).

Finally, it should be noted that securities sold under Rule 147 and Rule 147A are not “covered securities” for purposes of the National Securities Markets Improvement Act of 1996 (“NSMIA”) and compliance with applicable state securities law is still required.

The Rule 147 Amendments will be effective on April 20, 2017.

Amendment of Rule 504

The Amendments increase the aggregate amount of securities that can be offered and sold in reliance on Rule 504 during any twelve-month period from $1,000,000 to $5,000,000. The last increase to the maximum aggregate amount under Rule 504 was in 1988 when the cap was raised from $500,000 to $1,000,000.  Further, the adopting release appears to express an openness to raise the cap higher (perhaps $10,000,000 as was suggested by a commenter) after having the opportunity to observe market activity with the new cap.[11]

Prior to the Amendments, Rule 504 did not include a bad actor disqualification provision. The Amendments incorporate by reference the bad actor disqualification provision of Rule 506(d).  The utilization of the same bad actor provision in the context of Rule 504 and Rule 506 is part of the SEC’s overall effort to create a “consistent regulatory regime across Regulation D” and simplify due diligence efforts on the part of issuers.[12]

Like securities sold under Rule 147 and Rule 147A, securities sold under Rule 504 are not “covered securities” for purposes of NSMIA and compliance with applicable state securities laws is still required.

The amendments to Rule 504 became effective on January 20, 2017.

Repeal of Rule 505

Given the increase of the Rule 504 threshold from $1,000,000 to $5,000,000, the SEC repealed Rule 505 because of its belief that it was no longer needed. Even before the amendment to Rule 504, only 3% of Regulation D offerings were made in reliance upon Rule 505.[13]

The repeal of Rule 505 will be effective on May 22, 2017.

Conclusion

As the adopting release noted: “The final rules will primarily impact the financing market for startups and small businesses.”[14]  The Amendments could potentially revitalize and expand the use of Rule 147 and Rule 504 in the context of intrastate and regional offerings, thereby giving smaller issuers more viable options as they seek to raise capital through securities offerings.

Additionally, the revisions to Rule 147 and the enactment of new Rule 147A will likely expand the utilization of intrastate crowdfunding offerings as “most states that have enacted crowdfunding provisions require issuers that intend to conduct intrastate crowdfunding offerings to use Rule 147.”[15]

__________________________

[1]  Exemptions to Facilitate Intrastate and Regional Securities Offerings, SEC Release No. 33-10238, 18 (Oct. 26, 2016). Of note, the release goes so far as to discuss particular disclosure requirements in the context of Twitter or like social media platforms with similar space limitations. Id. at 18-19.

[2]  Id. at 26. It should also be noted that new Rule 147A does not have a limit on the permitted size of the offering.

[3] The adopting release does anticipate potential complications that could arise given the ever-changing and mobile workplace: “[I]f an employee provides services in the Maryland, Virginia and Washington, DC metro area out of the offices of a company in Maryland, the employee would be based in Maryland for purposes of this test.” Id. at 33.

[4]  The SEC noted the onerous nature of the existing “doing business” requirements: “Given the increasing “interstate” nature of small business activities, we believe it has become increasingly difficult for companies, even smaller companies that are physically located within a single state or territory, to satisfy the issuer “doing business” requirements of current Rule 147(c)(2).” Id. at 30.

[5]  Id. at 36.

[6] Id. at 37. The adopting release mentioned several data points that may be of particular importance: (1) an existing relationship between the issuer and purchaser, (2) recent utility bill, (3) pay-stub, (4) state or federal tax returns, (5) identification documentation such as a driver’s license, and (6) information obtained by the utilization of credible databases. Id. at 37-38.

[7]  One nuance of interest (particularly in Louisiana) for purchasing trusts is that a trust in a jurisdiction where trusts are not deemed to be a separate entity will be “deemed to be a resident of each estate or territory in which its trustee is, or trustees are, resident.” Id. at 40.

[8]  Id. at 43-47.

[9]  The adopting release did note the risk of being deemed an “underwriter” or as one participating in a “distribution” if securities are acquired with a view to distribution. Id.at 47.

[10]  Id. at 49-54. The post-sale safe harbors include offers or sales (1) registered under the Securities Act, except as provided in Rule 147(h) or Rule 147A(h), (2) exempt from registration under Regulation A, (3) exempt from registration under Rule 701, (4) made pursuant to an employee benefit plan, (5) exempt from registration under Regulation S, (6) exempt from registration under Section 4(a), and (7) made more than six months after the completion of an offering conducted pursuant to Rule 147 or 147A.

[11]  Id. at 77-78.

[12] Id. at 78.

[13] The empirical data behind this percentage was taken from Form D filings with the SEC from 2009 to 2015. Exemptions to Facilitate Intrastate and Regional Securities Offerings, SEC Release No. 33-10238, 11 & n.22 (Oct. 26, 2016).

[14]  Id. at 88.

[15]  Id. at 91. According to the North American Securities Administrators Association (“NASAA”), as of July 18, 2016, 35 states had enacted crowdfunding statutes. A link to NASAA’s intrastate crowdfunding update can be found here. A link to the NASAA’s Intrastate Crowdfunding Directory can be found here.

BELCHATOW POLAND - MAY 02 2013: Modern white keyboard with colored social network buttons.

By A. Edward Hardin, Jr.

Social media use by employees, and employers’ social media policies, continue to appear in the legal headlines.  Much of the recent news coverage has touched on action by the National Labor Relations Board (NLRB) and its assessment of employer social media policies.  However, recent legal action in Pennsylvania does not address the NLRB and its actions, but returns to somewhat traditional litigation.  The Charlotte Observer recently reported on a lawsuit filed by two American Airlines flight attendants who claimed they were subjected to sexual and gender harassment through social media.  The plaintiffs alleged that they reported the conduct to human resources, but that American Airlines failed to take action, and failed to enforce its own social media policy.  Although the allegations include the use of technology as tools of alleged abusive behavior, the underlying employee conduct appears to be typical of the kind of conduct that leads to litigation.  For more on the suit, click here.

stock

By David P. Hamm, Jr.

In In re Books-A-Million, Inc. Stockholders Litigation, the Delaware Court of Chancery dismissed a suit by minority stockholders (the “Plaintiffs”) alleging that several fiduciaries breached their duties in connection with a squeeze-out merger (the “Merger”) through which the controlling stockholders of Books-A-Million, Inc. (the “Company”) took the Company private.[1]  The decision, authored by Vice Chancellor J. Travis Laster, provides additional guidance regarding the utilization of the business judgment rule in the context of controller buyout.

The MFW Requirements

The default standard of review in the context of a controller buyout is the entire fairness test.[2]  However, the business judgment rule serves as the operative standard of review if the six requirements set forth by the Delaware Supreme Court in Kahn v. M&F Worldwide Corp. (the “MFW Requirements”) are satisfied, namely:

“(i) the controller conditions the procession of the transaction on the approval of both a Special Committee and a majority of the minority stockholders; (ii) the Special Committee is independent [and disinterested]; (iii) the Special Committee is empowered to freely select its own advisors and to say no definitely; (iv) the Special Committee meets its duty of care in negotiating a fair price; (v) the vote of the minority is informed; and (vi) there is no coercion of the minority.”[3]

Bad Faith and the Second MFW Requirement

In Books-A-Million, the court concluded that all of the MFW Requirements were satisfied. In so doing, the court shed significant light on the second MFW Requirement; namely, that the Special Committee be independent and disinterested.[4]  The most significant contribution of the case was the court’s treatment of the plaintiffs’ allegation of bad faith as a basis for their claim that the second MFW Requirement had not been satisfied. The court acknowledged the novelty of the plaintiffs’ claim by stating the following:

“It is not immediately clear how an argument regarding bad faith fits within the M&F Worldwide framework. The Delaware Supreme Court did not discuss whether a plaintiff could seek to call into question the independence of a director by contending that although appearing independent, the director did not in fact act independently for the benefit of the stockholders but rather in pursuit of some other interest, such as to benefit the controlling stockholder.”[5]

The heart of the plaintiffs’ bad faith claim was the fact that a third-party offer existed that was greater than the controller offer. The third party offer was $0.96 more per share. The court summarized the plaintiffs’ argument as follows: “The Complaint contends that it is not rational for a director to take a lower priced offer when a comparable, higher priced offer is available. Because no one rationally would do that, the plaintiffs contend that the independent directors must have had some ulterior motive for not pursuing [the third party offer].”[6]

In rejecting the plaintiffs’ argument, the court quoted extensively from Chancellor Allen’s analysis in Mendel v. Carroll.[7]  In Carroll, Chancellor Allen distinguished a third-party offer and a controller offer on the grounds of a control premium:

“The fundamental difference between these two possible transactions arises from the fact that the Carroll Family [the controller] already in fact had a committed block of controlling stock. Financial markets in widely traded corporate stock accord a premium to a block of stock that can assure corporate control.”[8]

The court in Books-A-Million applied the control premium concept as follows in relation to the relative levels of the third-party and controller offers:

“On the facts alleged, one can reasonably infer that Party Y’s [the third party] offer was higher because Party Y was seeking to acquire control and that the Anderson Family’s [the controller] offer was lower because it took into account the family’s existing control over the Company.”[9]

In a footnote, the court cited several sources establishing recognized control premiums and signaled that control premiums falling outside of an acceptable range could potentially give rise to an inference that a company’s fiduciary duties acted in bad faith. [10]

Application of the Business Judgment Rule

Given the satisfaction of each of the MFW Requirements, the court utilized the business judgment rule as the operative standard of review. The utilization of the business judgment rule, as is typically the case, was the death knell for the plaintiffs. The court went so far as to say that: “It is not possible to infer that no rational person acting in good faith could have thought the Merger was fair to the minority. The only possible inference is that many rational people, including the members of the Committee and the numerous minority stockholders, thought the Merger was fair to the minority.”[11]

Conclusion

While Books-A-Million is helpful on several points, the case breaks new ground on the treatment of a bad faith claim within the MFW Framework.  Controllers and their counsel should take note of the importance of any control premium falling within the acceptable range cited by the court; namely, from 30% to 50%. Any premium in excess of the range cited could potentially expose a corporation’s fiduciaries to an allegation of bad faith, thereby triggering the entire fairness test as the operative standard of review.

____________________________

[1] C.A. No. 11343-VCL, slip. op. (Del. Ch. Oct. 10, 2016, available here.

[2]  Id. at 16 (citing Kahn v. Tremont Corp., 694 A.2d 422, 428 (Del. 1997)).

[3]  88 A.3d 635, 645 (Del. 2014).

[4]  The plaintiffs did not contest the satisfaction of the third, fifth, and six MFW Requirements. The court’s analysis in the context of the first and fourth MFW Requirements do not advance any new ground and, therefore, are not discussed in this brief article.

[5]  Books-A-Million, C.A. No. 11343-VCL, slip op. at 23.

[6]  Id. at 25-26.

[7]  651 A.3d 297 (Del. Ch. 1994).

[8]  Id. at 304.

[9]  Books-A-Million, C.A. No. 11343-VCL, slip op. at 34.

[10]  Id. at 35 & n.16.

[11]  Id. at 42.

 

 

chem

By R. Lee Vail, P.E., Ph.D.

On February 28, 2017, the EPA received a petition from the “RMP Coalition” for reconsideration and a request for a stay from the amendments to the RMP rule. The RMP Coalition consists of several affected industry trade groups, manufacturing groups, and the Chamber of Commerce of the United States of America. The petition asserts that:

  • the Local Emergency Planning Committee (“LEPC”) disclosure requirements are open ended, will result in a significant security risk, and that EPA failed to give notice that it may alter the final rule being open-ended;
  • the EPA changed the third-party audit criteria to include an arbitrary trigger that is subject to the whims and imagination of an agency, and EPA did not properly notice or address this change;
  • the EPA did not include information on its cost-benefit findings as required by Michigan v. EPA, 135 S.Ct. 2699 (2015);
  • the scope of the three year audit was expanded to include all covered process without providing notice of the change or the rational;
  • the EPA failed to explain claimed statutory authority to expand the rule;
  • numerous supporting documents were not available during the comment period; and
  • the EPA should reconsider the amendment “in light of the revelations that the West, Texas, incident was an intentional act.”

On March 13, 2017, Scott Pruitt, Administrator of the EPA, convened a proceeding for reconsideration of the RMP rule amendments and signed a letter that administratively delayed the effective date of the rule for 90 days.

bath

By Erin Kilgore and Scott Huffstetler

As with any change in administration, this is a time of uncertainty.  One example is the rights of transgender individuals to access certain restrooms in the workplace, which, based on recent events, will likely continue to be a source of uncertainty for many employers.

Federal law does not expressly prohibit discrimination based on transgender status.  Title VII is the federal employment law that prohibits discrimination based upon “sex” (among other protected characteristics).  The EEOC and some courts have interpreted “sex” under Title VII to include “gender identity.”  Under that interpretation, transgender individuals could be protected under Title VII.  Other courts have refused to adopt an expansive interpretation of “sex” and have left it to Congress to create transgender employee protections legislatively.

A case filed by a transgender male student against the Gloucester, Virginia school board over his use of the boys’ restroom, G.G. ex rel. Grimm v. Gloucester Cty. Sch. Bd., was on the trajectory to provide guidance on the issue of restroom access.  Grimm filed suit seeking to use school restrooms that aligned with his gender identity, rather than the restroom that corresponded with his birth sex.  Additional background information regarding the Grimm case can be found here.  Grimm is not a Title VII case, but concerns a different federal law, Title IX, which governs protections for students and employees in educational settings.  Although different laws, courts often look to Title VII to interpret Title IX, and, at times, vice versa.  Therefore, many predicted a decision in the Grimm case would have ripple effects into the employment arena and implications beyond restroom access issues.

However, on Monday, the Supreme Court announced it would not hear the case, and the case was sent back to the lower court.  That announcement came in the wake of a February 22, 2017 joint memorandum issued by the Department of Justice and the Department of Education, which revoked the Obama administration’s federal guidelines on transgender students’ use of restrooms.  As a result, the case law remains unsettled.  Employers should be aware of how the courts in their jurisdiction(s) interpret Title VII, as well as any state laws, regarding transgender rights and structure their policies and practices accordingly.

plant

By Lee Vail, P.E., Ph.D.

On March 14, 2016, Environmental Protection Agency (“EPA”) proposed changes to the Risk Management Plan Program (“RMP”) Rule . On January 13, 2017, the EPA published a new final rule.  This is the final article in a series that addresses five major changes: root cause analysis for near misses, third-party audits, inherently safer technology, emergency response, and availability of information. The subject of this discussion is the changes to the emergency response preparedness requirements.

In proposing extensive additions to §68.210, the EPA concluded that Local Emergency Response Committees (“LEPC”) and the public needed additional information about covered facilities and that rule should mandate automatic submission and posting of such information. Instead, the revised rule facilitates the transmission of information to those that request it.

During the comment period, LEPC’s insisted that they neither had the capacity to accept the mandated submission of information nor ever had difficulty acquiring the information they needed. As a result, as part of the emergency response coordination  revisions, LEPCs may request any relevant information. The discussion of relevant information in this section of the preamble pretty well follows the list given in the discussion of the emergency response section:

The LPEC or local emergency response officials may request such as accident histories, portions of incident investigation reports relevant to emergency response planning, incident investigation reports, records of notification exercises, field and tabletop exercise evaluation reports, or other information relevant to community emergency planning.

The EPA then adds:

For example, this may include requesting information on changes made to the facility that affect risk such as incorporating safer alternatives.

82 Fed. Reg. at 4667.

Similarly, rather than requiring that a faculty distribute specific chemical hazard information to the public, owners and operators must notify the public of the availability of such information. See 40 C.F.R. 68.210(c). Among the advantages touted for this approach was that the facilities would be informed about who requested the information (at least the initial recipient). The information available through such requests is limited to “only information that could improve community awareness of risk.” 82 Fed. Reg. at 4669. EPA explicitly rejected comments that Safer Technology and Alteration Analysis (“STAA”), incident investigations, and third party audit reports should also be available to the public.

The revised rule requires that facilities must hold a public meeting follow an incident that meets the accident reporting criteria found in §68.42 (five year update criteria). Information communicated during the public meeting includes the same information included in the five year accident history (e.g., on and offsite impacts, root cause, etc.), as well as the information listed in §68.210(b) that is already available upon request. This public meeting must occur within 90 days of such an incident.

Finally, the EPA also added a requirement that RMPs shall be available to the public consistent with 40 CFR Part 1400. This appears to be little more than a cross reference to notify the public that RMPs are available in federal reading rooms.

On January 26, 2017, the EPA delayed the effective date of several regulations, including these changes to the RMP rule. Whereas this rule is now expected to go in effect on March 21, 2017, this rule is subject to Congressional Review Act and could be undone by that process.

To sign up for Lee Vail’s Process Safety Management e-Alert, send an email to client_services@keanmiller.com

wet

By Trey S. McCowan, Claire E. Juneau, and Tyler Moore Kostal

On March 3, 2017, the United States Fifth Circuit Court of Appeals issued its long-awaited opinion in the matter of Board of Commissioners of the Southeast Louisiana Flood Protection Authority-East, et al. vs. Tennessee Gas Pipeline Company, LLC, et al., No 15-30162, Slip Op. (5th Cir. 3/3/17). The Fifth Circuit’s decision affirmed the U.S. Eastern District Court of Louisiana’s decision to dismiss an action brought by the Flood Protection Authority against ninety-seven oil and gas and pipeline companies claiming that historic oil and gas exploration, production and transportation activities contributed to wetland loss in St. Bernard and Plaquemines Parishes.

The Flood Protection Authority’s lawsuit asserted claims for recovery based on theories of negligence, strict liability, violations of the natural servitude of drain, public and private nuisance and breach of contract. The Flood Protection Authority also asserted that it was a third-party beneficiary of various wetland permits issued to members of the oil and gas industry. The Flood Protection Authority sought damages and injunctive relief claiming that each canal dredged by defendants would have to be backfilled and revegetated. The Flood Protection Authority also claimed that the industry members were responsible for the costs of “wetlands creation, reef creations, land bridge construction, hydrologic restoration, shoreline protection, structural protection, bank stabilization and ridge restoration” throughout wetlands located in an area in St. Bernard and Plaquemines Parishes described as the “buffer zone.”

The complaint described “a longstanding and extensive regulatory frame work under both federal and state law” that protects against the effects of dredging activities. According to the Flood Protection Authority, these regulations imposed legal duties on defendants to remedy wetland loss caused both directly and indirectly by dredging activities. The complaint specifically enumerated four main components of this framework including the Rivers and Harbors Act of 1899;[1] the Clean Water Act of 1972;[2] “regulations related to rights-of-way granted across state-owned lands and water bottoms administered by the Louisiana Office of State Lands” and the Coastal Zone Management Act of 1972.[3] However, the Flood Protection Authority claimed that it was relying solely on state law for recovery.

The Flood Protection Authority’s lawsuit was removed to the U. S. District Court for the Eastern District of Louisiana on multiple jurisdictional grounds including federal question jurisdiction under a narrow exception to the well-pleaded complaint rule as set forth in Grable & Sons Metal Products, Inc. vs. Darue Engineering and Manufacturing, 545 U.S. 308, 125 S. Ct. 2363, 162 L. Ed. 2d 257 (2005) and Gunn v. Minton, ___U.S.____, 133 S. Ct. 1059, 185 L. Ed. 2d 72 (2013).

After the Flood Protection Authority’s motion to remand was denied, defendants filed a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) on the ground that the Flood Protection Authority’s complaint failed to state viable causes of action against defendants. The district court agreed with the defendants and dismissed all claims. The Flood Protection Authority appealed. After taking the matter under advisement for over a year, the Fifth Circuit issued its opinion affirming the district court’s decision finding federal jurisdiction and dismissing the case.

The Fifth Circuit first affirmed the district court’s decision finding federal jurisdiction. The Fifth Circuit held that the claims in the Flood Protection Authority’s suit, although couched in terms of state law, fell within the exception set forth in Grable and Gunn finding that three of the Flood Protection Authority’s claims necessarily raised federal issues: “the negligence claim, which purportedly draws its requisite standard of care from three federal statutes; the nuisance claims which rely on the same standard of care; and the third-party breach of contract claim, which purportedly is based on permits issued pursuant to federal law.”

Under the limited Grable/Gunn exception to the well-pleaded complaint rule, federal jurisdiction exists where “(1) resolving a federal issue is necessary to the resolution of the state-law claim; (2) the federal issue is actually disputed; (3) the federal issue is substantial; and (4) federal jurisdiction will not disturb the balance of federal and state judicial responsibilities.”

In finding that the Flood Protection Authority’s claims relied solely on interpretations of federal law, the Fifth Circuit rejected the Authority’s claim that Louisiana’s coastal use regulation requiring restoration of mineral exploration and production sites “to the maximum extent practicable” imposed an obligation on the defendants. The Fifth Circuit held that “the ‘maximum extent practicable’ language is “a regulatory determination that entails ‘a systematic consideration of all pertinent information regarding the use, the site and the impacts of use… and a balancing of their relative significance.’” No Louisiana court has used this or any related provision as the basis for imposing state tort liability. The Fifth Circuit further stated that “the Louisiana Supreme Court has explicitly rejected the prospect that a statutory obligation of ‘reasonably prudent conduct’ could require oil and gas lessees to restore the surface of dredged land.”[4]

With respect to the second prong of the Grable test, the Fifth Circuit held that there were in fact, federal issues in dispute, i.e. the interpretation of the scope of obligations under the River and Harbors Act and the Clean Water Act. Consequently, this element of the Grable test was satisfied.

The Fifth Circuit next found that the federal issues were substantial noting the “importance of the issue to the federal system as a whole.”[5] Since the Levee Authority’s claims implicated “an entire industry” and conduct subject to an extensive federal permitting scheme that were issues of “national concern,” the Fifth Circuit affirmed the district court’s finding that the federal issues were substantial and that the third Grable factor was satisfied.

With respect to the final Grable factor, the Fifth Circuit affirmed the district court’s finding that the ruling would not cause and enormous shift of traditionally state cases into federal courts reasoning that the Flood Protection Authority was relying on federal law to establish liability and that resolution of its claims could affect coastal land management in multiple states as well as the national oil and gas market.

Finding that the district court had properly retained jurisdiction, the Fifth Circuit next addressed the substantive defenses raised by the defendants and affirmed the district court’s ruling dismissing the Flood Protection Authority’s claims.

First, the court found that the Flood Protection Authority failed to state claims based on negligence and strict liability because the defendants owed no duty to the Authority under federal or state law. Quite simply, the enunciated rules and principles of law cited by the Flood Protection Authority did not extend to and were not intended to “protect this plaintiff from this type of harm arising in this manner.” The Fifth Circuit affirmed the district court’s decision that the River and Harbors Act, the Clean Water Act, the Federal Coastal Zone Management Act and state law did not create a duty that bound defendants to protect the Flood Protection Authority from increased flood protection costs that arise out of coastal erosion allegedly caused by defendants’ dredging activities.

With respect to the Flood Protection Authority’s claims based on servitude of natural drain, the Fifth Circuit held that there is no basis in law for “finding that a natural servitude of drain may exist between non-adjacent estates with respect to coastal storm surge.” The court also noted that storm surge did not constitute “surface waters that flow naturally from an estate situated above” as specified in the Civil Code articles pertaining to the servitude of natural drain.

Finally, the Fifth Circuit affirmed the district court’s holding that the Flood Protection Authority failed to state a valid “nuisance” claim under Louisiana Civil Code article 667 because the Authority did not sufficiently allege in its complaint that it was a “neighbor” of any of defendant’s property. Although, the Flood Protection Authority was correct in its argument that there is no rule of law compelling “neighbor” to be interpreted as requiring certain “physical adjacency or proximity,” the Fifth Circuit has previously found that there must be “some degree of propinquity, so as to substantiate the allegation that activity on one property has caused damage on another.” Consequently, a nuisance claim under article 667 requires more than simply a “causal nexus,” and the Flood Protection Authority failed to set forth sufficient factual allegations mandating dismissal of the nuisance claims.

It remains to be seen if the Flood Protection Authority will pursue further review in its lawsuit against the oil and gas industry in either the Fifth Circuit or United States Supreme Court.

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[1] 33 U.S.C. §§ 401-467.

[2] 33 U.S.C. §§ 1251-1388.

[3] 16 U.S.C. §§ 1451-1466.

[4] Terrebonne Parish School Board vs. Castex Energy, Inc., 893 So. 2d 789, 801 (La. 2005)(“We hold that, in the absence of an express lease provision, Mineral Code article 122 does not impose an implied duty to restore the surface to its original, pre-lease condition absent proof that the lessee has exercised its rights under the lease unreasonably or excessively.”).

[5] Citing, Gunn v. Minton, 133 S. Ct. 1059, 1066 (2013) and Smith v. Kansas City Title and Trust Co., 255 U.S. 180, 198-202 (1921).

EPA

By Brittany Buckley Salup

On March 2, 2017, the EPA withdrew its information collection request (ICR) regarding methane emissions from existing oil and gas facilities.  EPA finalized and issued the underlying ICR on November 10, 2016.  Since that time, EPA sent letters to thousands of owners and operators in the oil and gas industry, requiring them to complete surveys regarding their existing facilities.  EPA’s withdrawal of the ICR is effective immediately.  According to the EPA’s website,  industry members who previously received a letter requiring a survey response associated with this particular ICR are “no longer required to respond.”

Additional information is available here.