Louisiana protects corporate directors and officers from liability to shareholders or others when they make decisions in good faith and reasonably believe that their decisions are in the best interest of the organization. This principal, called the “business judgment rule,” gives officers and directors the freedom to take risks and to make decisions without wondering if shareholders or others will attempt to sue them, personally, if a particular decision ultimately results in a loss to the company. The business judgment rule itself is not news; it has been discussed in American case law since at least the 1940s, and is now codified in the statutory law of some states, including Louisiana. The blog-worthy news about the business judgment rule is a December 13, 2011 court decision from a federal court in California in FDIC v. Perry noting that the statutory version of the rule enacted by California’s legislature protects only corporate directors, not officers. You can see the opinion here, and an interesting commentary on the opinion by Kevin LaCroix here.

Unlike California’s law, the Louisiana statute that codifies the business judgment rule, La. R.S. 12:91, provides business-judgment-rule protections to directors and officers of corporations, partnerships, and limited liability companies formed in Louisiana. Louisiana provides strong protection to directors and officers who act in good faith and exercise reasonable diligence in making decisions. Louisiana is already attracting digital-media and other high-tech and entertainment-related business from California with the possibility of attractive tax credits, free workforce training, and other incentives. The fact that Louisiana’s corporate law is more management-friendly than California’s is one more factor for businesses to consider when thinking about expanding or relocating to Louisiana.
 

The Gulf Opportunity Zone Act of 2005 (the “Act”) added several new sections to the Internal Revenue Code that provide certain tax benefits for affected hurricane disaster areas. Section 1400N(a) authorized the issuance of Qualified Private Activity Bonds (“Qualified Bonds”) to finance the construction and rehabilitation of residential and nonresidential property located in the Gulf Opportunity Zone (“GO Zone”). The Act gave private business owners and corporations the opportunity to borrow capital at favorable tax-exempt rates to acquire, construct, reconstruct or renovate qualified property in the GO Zone. The deadline for the issuance of GO Zone Bonds was extended through the end of 2011. However, the Act did not address the current refunding of Qualified Bonds after the applicable issuance deadline had passed.  

In a refunding, an issuer sells bonds and uses the proceeds to redeem outstanding debt that typically has higher interest rates. In a current refunding, the issuer uses the refunding bond proceeds to redeem the outstanding debt within 90 days. On December 23, 2011, the Internal Revenue Service released an advance copy of Notice 2012-3, which provides guidance on current refunding of outstanding prior issues of Qualified Bonds, including GO Zone Bonds and Hurricane Ike Bonds.

A current refunding of Qualified Bonds that meets the conditions of Notice 2012-3 may be issued after the applicable deadline and still be treated as Qualified Bonds. The conditions include that the original Qualified Bonds must have been issued before the deadline for the issuance of such bonds. The issue price of the current refunding issue must be no greater than the outstanding stated principal amount of the refunded bonds. And, the current refunding issue must meet all applicable requirements for the issuance of tax-exempt private activity bonds, including that the average bond maturity must be no longer than 120 percent of the average reasonably expected economic life of the facilities financed or refinanced.

Additionally, as long as the original Qualified Bonds satisfied the designation requirement, no further designation or official state or local governmental action is required for a current refunding of such bonds.

Notice 2012-3 will appear in Internal Revenue Bulletin 2012-3, dated January 17, 2012.

The Internal Revenue Code restricts the amount of private business use that can occur in facilities financed with tax-exempt bond proceeds, but there are a number of exceptions to this general rule. Certain facilities (“exempt facilities”) that are privately used are eligible for tax-exempt bond financing if they benefit the general public or implement specific Congressional policies. In August, the IRS issued final regulations for determining whether a facility is a “solid waste disposal facility” that qualifies for tax-exempt bond financing.

A facility that performs a “preliminary function” also qualifies as a solid waste disposal facility. Such preliminary functions include collecting, sorting, separating, storing, treating, disassembling, or handling solid waste. The final regulations do away with the 50% threshold limit on preliminary functions, but the function still must be preliminary to and directly related to a qualified solid waste disposal process.

There are 3 types of solid waste disposal processes provided for in the final regulations. Absent any express restriction, a solid waste disposal process can include any biological, engineering, industrial, or technical method. The disposal processes provided in the final regulations include: (1) a final disposal process; (2) an energy conversion process; and (3) a recycling process. A final disposal process is just that; it’s the last stop for the material, which is either landfilled, incinerated (without capturing useful energy), or otherwise indefinitely contained. An energy conversion process involves a thermal, chemical, or other process applied to solid waste to create and capture energy. A recycling process involves reconstituting or transforming the solid material, but does not include refurbishing, repairing, or similar activities.

Both energy conversion and recycling processes result in the production of a product that is useful for consumption in agricultural, consumer, commercial, governmental, or industrial operations or activity and which could be sold for such use. The final regulations continue to provide that solid waste disposal process ends at the production of the first marketable product. Whether a “useful product” has been produced involves determining whether a product could be sold, not whether the product actually is sold. Operational constraints that affect the point in production when a useful product can reasonably be extracted or isolated and sold independently may be considered in the analysis. The final regulations provide that the costs of extracting, isolating, storing and transporting the product to a market may be taken into account only if the product is to be used at a different location from where it is produced.

What if the facility in question is a mixed-use facility that provides both a qualified solid waste disposal function and another non-qualified function? The final regulations continue the current rule that permits partial financing of a facility in which only a portion qualifies as a solid waste disposal facility. The costs allocable to the qualified solid waste disposal function are determined using any reasonable method and based on all facts and circumstances. The final regulations also permit an entire facility to be financed with tax-exempt bonds even where the facility processes solid waste and material that does not qualify as solid waste (a “mixed-input facility”) if at least 65% of the materials processed (as determined by weight or volume) are solid waste. This 65% test must be satisfied each year after the facility is actually operating substantially at design levels, with some exceptions for extraordinary events outside the facility’s control. The final regulations provide a 3 year curative period to address the impact from such events.

The final regulations also provide several examples of various facilities that would qualify for tax-exempt financing as solid waste disposal facilities. Such examples include: A facility that converts used tires into roadbed material is engaged in a recycling process so that facility qualifies as a solid waste disposal facility. A facility that burns solid waste and captures steam as useful energy is engaged in an energy conversion process, and so qualifies as a solid waste disposal facility. But, any facilities used to further process the steam to generate electricity are not engaged in an energy conversion process and would not qualify as solid waste disposal facilities. A transfer station that collects, sorts, and processes solid waste before it is landfilled and the trucks used to haul the waste to the transfer station provide preliminary functions directly related to disposal and so qualify as solid waste disposal facilities if at least 65% of the material brought to the transfer station is solid waste. Refurbishment is not a qualified disposal process, so a facility that restores and repairs old cars does not qualify as a solid waste disposal facility.

The final regulations are applicable to bonds issued after October 18, 2011, but may be applied retroactively. The final regs only need to be applied to refunding bonds where the refunding involves an extension of the remaining weighted average maturity of the refunded bonds.
 

Today, the ICM Registry launched the new sponsored top-level domain – .XXX. The .XXX domain is being launched specifically for the adult entertainment industry; however, the .XXX launch is also important for individuals, businesses, and organizations owning trademark rights. Trademark owners will have a short, fifty-two (52) day period (“Sunrise B period”) to protect their trademarks from .XXX registry ahead of wider availability on the .XXX domain. The Sunrise B period will run from September 7, 2011 to October 28, 2011.

The .XXX Registry is allowing trademark owners to block their marks in the .XXX domain (e.g., yourmark.xxx). The owner of a registered mark desiring to opt-out of the .XXX domain may submit an application to the .XXX Registry, with a one-time fee of $225 per domain name. This application, if granted, will remove that domain name from the pool of domain names available for future registration. Essentially, a successful application will prevent any potential person or entity from registering a trademark as an .XXX domain name for at least ten (10) years. Any blocked domain will resolve to a standard informational page stating that the domain name is not available for registration.

If a trademark owner does not block its trademark from .XXX registry during the Sunrise B period, all members of the adult entertainment industry will have the ability to register that mark as an .XXX domain name. Although post-registration protection measures, such as the ICM Registry’s Uniform Dispute Resolution Policy (“UDRP”) and the Anticybersquatting Consumer Protection Act, 15 U.S.C. § 1125(d) (“ACPA”), are available to trademark owners who fail to block their mark from .XXX registry during the Sunrise B period, participation in the .XXX Registry’s Sunrise B opt-out process may be a more cost-effective and pro-active approach for trademark owners.

Trademark owners desiring to protect their marks from .XXX registry should act fast as the Sunrise B period only lasts from September 7, 2011 to October 28, 2011.
 

Last week, the United States Department of the Treasury announced the approval of applications from Louisiana and a handful of other states for State Small Business Credit Initiative (“SSBCI”) funding. The SSBCI is an important component of the Small Business Jobs Act (“the Act”) that was signed into law last fall. This funding is intended to provide support to state-level programs, and is designed to generate billions in additional small-business lending and help create new private sector jobs.

Under the Act, these states’ programs may receive a total of $360 million in SSBCI funds. Under the SSBCI, states must demonstrate a reasonable expectation that each $1 in federal funding will generate a minimum of $10 in new private lending. Accordingly, this $360 million allocation is expected to support more than $3.6 billion in new private lending.

The states approved for SSBCI funding are: Alabama ($31.3 million), Florida ($97.7 million), Idaho ($13.2 million), Iowa ($13.2 million), Louisiana ($13.2 million), Mississippi ($13.2 million), Ohio ($55.1 million), Oregon ($16.5 million), Tennessee ($29.7 million), Texas ($46.6 million), Virginia ($18.0 million), and Washington, D.C. ($13.2 million).

The Louisiana Department of Economic Development will use its funds to support two existing programs: the Louisiana Small Business Loan Guarantee Program and the Louisiana Seed Capital Program, a venture capital program.
 

In Transocean Offshore Deepwater Drilling, Inc. v. Maersk Contractors USA, Inc, 617 F.3d 1296 (Fed. Cir. 2010), the Federal Circuit reversed a district court’s summary judgment decision that no patent infringement occurred when a US company made an offer to sell to another US company when the sale negotiations occurred outside of the US.

Transocean filed suit for infringement of patents related to an improved apparatus for conducting offshore drilling. In order to drill for oil and other offshore resources, drilling rigs must lower several components to the seabed including the drill bit, casings, BOB’s, and the drill string. A conventional offshore drilling rig utilizes a derrick with a single top drive and drawworks that can only lower one element at a time in a time consuming process. Transocean patented a specialized derrick to improve the efficiency of lowering the above components. The specialized derrick included “two stations – a main advancing station and an auxiliary advancing station that can each assemble drill strings and lower components to the seabed.” Id. at 1301. This duel-activity rig could significantly decrease the time required to complete a borehole. Id at 1302. Transocean sued Maersk rig for infringement of the specialized derrick patent.
 

Thus, one of the questions before the Federal Circuit was whether an offer to sell, made in Norway by a U.S. Company to another U.S. company, to sell a product within the U.S. for delivery and use within the U.S. constituted an offer to sell “within the U.S.” under the definition of Section 271(a). Ultimately, the Federal Circuit determined that the focus should not be the location of the offer; rather, the focus must be on the location of the future sale that would occur pursuant to the offer. There was no question that the patent infringing rig was to be delivered to the US and utilized in the Gulf of Mexico. As such, the Federal Circuit vacated the district courts summary judgment of non-infringment noting the real harm that would be created by such a decision because U.S. companies could simply travel and contract abroad to avoid patent infringement. Id at 1309-10.

On remand, a jury found on April 21, 2011 that Maersk infringed Transocean’s valid patent and awarded Transocean $15 million. 2011 WL 2604769 (S.D. Tex 2011). Transocean’s victory was short-lived as on June 30, 2011, Judge Hoyt found pursuant to Fed. R. Civ. P. 50(b) that Maersk did not infringe the patents because the evidence did not support the jury’s findings.

Also of interest is a potential conflict between the prior decisions of the Federal Circuit and Judge Hoyt. The Maersk contract contained a provision allowing for the design to change if needed to avoid patent infringement. The Federal Circuit stated that schematics attached to the contract could support a finding of an infringed sale and that subsequent alterations were irrelevant. 617 F.3d at 1311. Judge Hoyt found that the contract anticipated alteration and therefore “no rig was offered for sale, or sold in violation of 35 U.S.C § 271(a).” 2011 WL 2604769 at 5. Further, Judge Hoyt found that under such circumstance, awarding a reasonable royalty would be unconscionable if the delivered drilling rig was altered to avoid infringement as Transocean would suffer no harm.
 

In today’s political and economic environment, in which public resources available for infrastructure development and maintenance are increasingly scarce, Public-Private Partnerships (PPPs) offer a welcome alternative to traditional financing and operation models. A PPP is a contractual agreement between a public agency (federal, state or local) entity and a private sector entity to deliver a service or facility for public use. The Louisiana Supreme Court has recognized the public benefits of PPPs, finding that “public-private partnerships that take advantage of the special expertise of the private sector are among the most effective programs to encourage and maintain economic development, and that it is in the best interest of the State and its local governments to encourage, create, and support public-private partnerships.” See Board of Directors of Indus. Devel. Bd. of City of Gonzales, Louisiana, Inc. v. All Taxpayers, Property Owners, Citizens of City of Gonzales, 938 So.2d 11, 17 (La. 2006).

PPPs differ from joint service agreements in several key respects. Because private partners share in the potential benefit of a project and in the risk of a project’s failure or deficiency, they have a strong incentive to limit costs, avoid delays in construction, and efficiently maintain the facility. Studies suggest that traditional contract-driven projects may be more subject to delays and overruns, whereas PPPs result in greater on-time and on-budget completion. PPPs reward efficiency, innovation, and creativity in the development new facilities. In return, private partners are able to rely upon the broad perspectives, personnel, knowledge of public needs, legal authority, financing resources, and procurement policies that are unique public partners.

Public and private partners must be mindful of several issues when crafting a successful PPP: statutory authority, public commitment to the project, community perception, revenue stream, corporate and public organization structures, and partner compatibility. They must develop a business plan that clearly delineates the responsibilities of each partner and addresses the competing expectations of each partner’s constituents. Clear objectives, consistent benchmarks, and effective management and communication are essential.

PPPs offer many practical advantages to public and private entities: maximizing each sector’s strength, reducing risk, reducing capital investment, sharing resources, improving efficiency, facilitating environmental compliance, and improving cost-effectiveness. When properly structured, PPPs provide clear win-win situations for both private and public actors.
 

Louisiana legislators passed two new laws during the most recent Legislative Session placing additional requirements on employers to check the citizenship status of employees.

Act 376 provides for the verification of employees engaged only in public contract work by enacting La. R.S. 38:2212.10.  The new law provides that a private employer shall not bid on or contract with a public entity unless the employer attests via sworn affidavit to the use of an immigration verification system to verify that all employees in the state of Louisiana are legal citizens of the U.S. or are legal aliens.  All subcontractors are required to do the same.  Violations of the new law may result in cancellation of the public contract and ineligibility for any public contract for a period of three years or less.  If the employer complies with the verification provisions and relies on the information obtained in accordance with the verification system, the employer is protected from state law civil and criminal liabilities for: (i) hiring someone that is later found to be an unauthorized alien and (ii) refusing to hire an individual whose legal status within the verification system was that of an unauthorized alien.  The provisions of the new law apply only to contracts entered into or bids offered on or after January 1, 2012.  If the status verification system expires and is not extended by the federal government, the provisions of this new law will no longer be applicable.  Link to Act 376

Act 402 has a much broader application than Act 376, requiring verification of citizenship and authorization for employment. La. R.S. 23:995 already prohibits a person from hiring an illegal alien.  Act 402 adds new provisions to this statute that become effective August 15, 2011.  The new law provides that a person shall not be subject to certain sanctions if: (i) the E-Verify system has been used to verify the citizenship or work authorization status of every employee or (ii) the employee has provided to the employer a picture identification and at least one of the following documents: a U.S. birth certificate or certified birth card, Naturalization certificate, certificate of citizenship, alien registration card, or U.S. immigration form I-94 with employment authorized stamp.  The employer must retain copies of all documents provided by the employee.  An employer who has used the E-Verify system is presumed to have been in good faith and is not subject to any penalty for relying on the accuracy of the information contained therein.  The penalty provisions within the statute have been increased to $500 for a first violation, $1,000 for a second violation, and $2,500 for a third violation.  The penalty provisions are applicable to each alien employed in violation of the law.  There is an exemption for health care facilities/entities licensed by DHH under the statutory provisions relating to second and third violations.  Link to Act 402

Does an insurer waive its policy defenses when it breaches its duty to defend?  In Arceneaux v. Amstar Corp., 211 WL 2591701 (La. July, 2011), the insurer breached its duty to defend by issuing a denial of coverage and withdrawing from the insured’s defense.  The insurer’s action was based on the mistaken belief that its policies contained an exclusionary provision when, in fact, the exclusion was no longer effective.  According to the trial court, breaching the duty to defend resulted in a waiver of the coverage defenses.  The Louisiana Supreme Court concluded to the contrary, differentiating between a breach and a waiver.  Waiver is an intentional relinquishment of a known right or power, and occurs when an insurer with knowledge of the facts indicating non-coverage assumes or continues the defense without obtaining a non-waiver agreement to reserve its coverage defenses.  Under those circumstances, the insured is led to believe that the insurer has given up that right and the insured has the right to believe that the insured’s counsel is acting in the insured’s best interest without regard to coverage defenses.  An insurer cannot avoid liability based on a coverage defense if it has defended the insured without a reservation of rights.  To the contrary, a breach of the duty to defend is not a waiver and does not mislead the insured into believing there could be coverage because there is no expressed intent to release its right to deny coverage.  Under such circumstances, waiver principles do not apply.  Consequently, a breach of the duty to defend is not a waiver of policy defenses.

Recently, Louisiana businesses have received solicitation by mail from a private company regarding services related to the maintenance of corporate meeting minutes.  An “Annual Meeting Disclosure Statement,” provided as part of the solicitation, cites certain provisions of La. R.S. 12:223 which requires every corporation to keep certain records, including records of the meetings of its members and directors, at its registered office.  The solicitation goes on to declare that “Not satisfying the minimum annual filing requirements in a timely manner causes your company to be in ‘bad standing’ with the state.”  Finally, services are offered with the statement, “We assist corporations to avoid potential non-compliance with the above provision of maintaining Annual Meeting Minutes.”

Although it is unclear what services are actually being offered in the solicitation described above, Louisiana business owners should be aware of the following:

1. Louisiana law does not require corporate minutes of director or shareholder meetings to be filed with the state; and
2. The corporate records described in La. R.S. 12:223 are required to be kept at the corporation’s registered office.

You should consult your attorney for assistance in determining any and all legal requirements regarding a corporation, limited liability company, partnership, or any other legal entity.
 

In the United States, patent owners or licensees are required to inform alleged infringers of their possibly infringing behavior prior to being able to recover damages for the infringement of a valid U.S. patent. (1)  Marking a product with the applicable patent number provides the requisite notice. (2)  However, failure to monitor products marked with a patent number can have dire consequences.

35 U.S.C § 292 prohibits the marking of an unpatented article as being “patented.” § 292 states that “[w]hoever marks upon, or affixes to, or uses in advertising in connection with any unpatented article, the word “patent” or any word or number importing that the same is patented for the purpose of deceiving the public… [s]hall be fined not more than $500 for every such offense.” (3)

Currently, any person may bring a lawsuit for a violation of 35 U.S.C. § 292 and get half of any fines levied against the entity responsible for the false marking. (4)  The other half of the fine goes to the United States government. (5)

While § 292 only provides for a civil monetary fine, the fine is up to $500 per offense. The Court of Appeals for the Federal Circuit, the court which hears appeals in all patent cases, held that an “offense” under the statute is each separate item that bears the false patent label. (6)  Accordingly, the damages could easily climb into the millions of dollars.

However, to be fined under § 292, there must be a showing that there was an “intent to deceive the public.” (7)  The Court of Appeals for the Federal Circuit held that there is no intent to deceive the public when there was a “reasonable belief that the articles were properly marked.” (8) 

Recently, the United States District Court for the Northern District of Ohio found that 35 U.S.C. §292 was unconstitutional. (9)  However, the Court of Appeals for the Federal Circuit has yet to determine the constitutionality issue. Additionally, the America Invents Act passed by the Senate would limit a cause of action under 35 U.S.C. §292 to the United States government or to an entity suffering a competitive injury as a result of the alleged false marking. (10)  The America Invents Act merely narrows the potential pool of plaintiffs and does not alter the amount of damages available.

Therefore, under the Court of Appeals for the Federal Circuit’s interpretation of the statute, it is important to have a plan in place to monitor patent marking and to ensure that the plan is actually implemented.  Additionally, the Court of Appeals for the Federal Circuit has held that obtaining the opinion of outside counsel with regards to the formation of a monitoring plan and to ensure that the items marked are covered by the applicable patents are facts which may tend to show that a business did not intend to deceive the public. (11)

To reduce the risk of violating the false marking patent law, businesses which own or license patents should consider obtaining the opinion of a competent patent attorney to assist in developing a plan to monitor patent marking and to determine if products and processes which are currently being marked with patent numbers are indeed covered under the listed patents.

(1)  35 U.S.C. § 287(a).
(2)  Id.
(3)  35 U.S.C. § 292(a).
(4)  35 U.S.C. § 292(b).
(5)  35 U.S.C. § 292(b).
(6)  Forest Group v. Bon Tool, 590 F.3d 1295, 1304 (Fed.Cir.2009).
(7)  Clontech Labs. Inc. v. Invitrogen Corp., 406 F.3d 1347, 1352 (Fed.Cir.2005).
(8)  Id., at 1353.
(9)  See Unique Product Solutions, Ltd. v. Hy-Grade Valve, Inc., 2011 WL 924341 (N.D.Ohio 2011).
(10)  S. 23, 112th Cong. (as passed by Senate, March 8, 2011).
(11) Pequignot v. Solo Cup, 608 F.3d 1356, 1364 (Fed.Cir. 2010)

A recent opinion from the United States Bankruptcy Court in Baton Rouge, Louisiana shows that even experienced lenders and developers may not always understand how Louisiana’s Private Works Act applies to their project, and how much leverage a properly filed notice of contract can provide to a general contractor.  Tuscany Reserve, LLC (“LLC”) was formed by sophisticated developers for the purpose of developing a new apartment complex in Baton Rouge. LLC obtained acquisition and construction financing from a bank (1st Bank), which properly recorded its mortgage on the project before work commenced. LLC hired “Contractor” to build the complex; Contractor recorded its notice of contract in the parish mortgage records.  As often happens, a dispute developed between LLC and Contractor regarding the work performed and lack of payment.  Contractor stopped work and filed a lien on the property under the Louisiana Private Works Act for $1.17 million.  Contractor eventually agreed to cancel its lien in exchange for a promissory note and guarantees from LLC’s principals and collateral provided by an LLC affiliate.  Once the lien was cancelled, 1st Bank funded two draw requests on the construction loan.  LLC needed more money for the project and turned to a new lender (2nd Bank) for additional financing.   2nd Bank secured its loan with a collateral mortgage on the immovable property for the project; there were no liens in the property records when 2nd Bank recorded its mortgage.  The relationship between LLC and Contractor soon soured, again, and Contractor filed two liens on the project, one for the original claim amount, plus interest, and another for $250,000.00.  Contractor sued LLC and its principals on the matured promissory note, and also sued LLC based on its rights under the recorded construction contract and the Louisiana Private Works Act. LLC eventually filed for chapter 11 bankruptcy in the Middle District of Louisiana.

2nd Bank made several arguments for why Contractor’s liens should not relate back to the date the notice of contract was filed. 2nd Bank argued that Contractor’s agreement to take a promissory note in lieu of payment after the first lien was filed, and Contractor’s subsequent cancellation of its lien, was a novation of Contractor’s claims and transformed those claims “from a construction contract claim secured by Private Works Act liens into an unsecured claim” based on the promissory note.  The Bankruptcy Court disagreed.  The Court found that the parties’ agreement did not expressly state that a novation was intended, so no novation occurred. The original debt and related rights remained in place.

The Court also rejected 2nd Bank’s argument that Contractor abandoned its privilege by cancelling its initial lien and accepting LLC’s promissory note and other consideration in payment of that debt. The Court noted that there is no authority for 2nd Bank’s proposition that a contractor is barred from filing a second lien for the same work referenced in an earlier lien that the Contractor cancelled.  So long as a notice of contract is on file, the contractor has the right to file a lien on the project, and that lien will outrank any mortgage put on the project after the notice of contract was filed.  See Shreve Land Constructors, LLC v. Tuscany Reserve, LLC, et al. (In re Tuscany Reserve, LLC), Adv. No. 10-1042 (Bankr. M.D. La., March 3, 2011).

How can a lender considering a new loan on an existing project avoid the same fate that befell 2nd Bank?  First and foremost, thoroughly review the mortgage records before advancing funds.  The absence of liens on the project does not necessarily mean that all is clear. If there is a notice of contract for the project in the mortgage records, the new lender should require the contractor to terminate that contract or subordinate its rights to the new lender as a condition of advancing funds.
 

A recent federal district court case (Watson v. U.S., 107AFTR 2d 2011-311) has held that the IRS could recharacterize purported dividend payments to an S corporation shareholder-employee as wages. In this case, a CPA was a sole shareholder, employee, director and officer of a professional corporation that was taxed as an S Corporation. The corporation was a member of a firm that rendered accounting services. In the years at issue, the shareholder-employee paid himself a salary of $24,000.00 while he received dividend distributions totaling over $175,000.00 annually.

In this case, the taxpayer’s wholly-owned S corporation was actually a 25% shareholder in an accounting firm with other members. All of the cash income to the taxpayer’s professional corporation came exclusively from the accounting firm.

After reviewing all of the facts of the case, the court concluded that all of the distributions from the S corporation were in fact remuneration for services paid and recharacterized them as wages with all applicable employment taxes and penalties upon the failure to withhold those taxes being due.

This case illustrates the risk associated with structuring a business entity as an S corporation in an effort to minimize these employment taxes. If the taxpayer had structured this differently, he might have had a greater chance of success.
 

The Louisiana Supreme Court has refused to review the decision of the First Circuit Court of Appeal in ConAgra Foods, Inc. vs. Bridges, 2010-0907 (La. App. 1st Cir. 10/29/10), 48 So.3d 1249. In ConAgra Foods, the First Circuit determined that ConAgra Foods, Inc. would receive the benefits of Louisiana net operating loss carryovers held by subsidiaries, which had been sold in Internal Revenue Code (“IRC”) §338(h)(10) transactions . Under federal tax law, the parties to a stock sale can elect IRC §338(h)(10) treatment such that the stock sale is treated as an asset sale for income tax purposes and the tax attributes of the subsidiaries that are sold are acquired by the selling parent corporation. The steps that occur under an IRC §338(h)(10) transaction are as follows:

In 1986, the Louisiana Legislature amended the Louisiana corporation income tax law so as to rely on the federal corporation income tax law, except for modification from federal tax law clearly provided for in Louisiana law. See La. R.S. 47:287.2 et seq.

In the ConAgra Foods case, the Department of Revenue did not dispute the federal tax treatment but contended that for Louisiana corporation income tax purposes, the net operating loss carryovers did not transfer to ConAgra Foods, the parent entity.

The court rejected the Department of Revenue’s argument that the provisions of La. R.S. 47:287.86(I) precluded ConAgra Foods from being the corporation that acquired the net operating losses. The court held:

A close scrutiny of the two statutes [La. R.S. 47:287.86(I)(1) and IRC §381] reveals that the language utilized in La. R.S. 47:287.86(I)(1) is nearly identical to that employed under federal law. And the express provisions of La. R.S. 47:287.86(I)(1) indicate that the determination of “the acquiring corporation [that] shall succeed to and take into account, as of the close of the day of distribution or transfer, the aggregate net operating loss carryovers of the distributors or transferor corporation,” is “subject to federal law and the limitations provided thereunder.”

Because the Department has conceded that under federal law ConAgra as the parent selling corporation of the subsidiaries is entitled to succeed to and take into account the remaining tax attributes [including the net operating loss carryovers] after the deemed sale of the assets to Pilgrim’s Pride and UAP [the purchasing entity] in the deemed liquidation of the subsidiaries back into the parent, and mindful of the nearly identical provisions of both Louisiana and the federal statutes, clearly ConAgra is the “acquiring corporation” of the NOLs for Louisiana state income tax purposes as well.
ConAgra Foods, 483 So.3d at 1252.

The ConAgra Foods case will provide good authority for taxpayers who have relied on the incorporation of federal income tax law into the Louisiana corporation income tax system. Absent clear Louisiana statutes modifying the federal corporation income tax treatment for Louisiana corporation income tax purposes, taxpayers should be able to rely on the federal corporation income tax treatment.
 

As companies expand their operation into foreign states, it is essential to determine the potential tax liability for conducting business in those jurisdictions.  Although states differ as to their treatment of out-of-state taxpayers, all states are bound by the U.S. Constitution and federal law and jurisprudence, which require a nexus between a taxpayer and a foreign state before a tax may be imposed. 

Read the entire article. 

The application of corporate veil piercing theories to limited liability companies is still in its early stages in Louisiana jurisprudence. In Hollowell v. Orleans Regional Hosp. LLC, the U.S. Court of Appeals for the Fifth Circuit became the first court applying Louisiana law to pierce the veil of a Louisiana limited liability company on an “alter ego basis,” adopting from corporate veil piercing jurisprudence a non-exhaustive list of factors, namely: 1) commingling of corporate and shareholder funds; 2) failure to follow statutory formalities for incorporating and transacting corporate affairs; 3) undercapitalization; 4) failure to provide separate bank accounts and bookkeeping records; and 5) failure to hold regular shareholder and director meetings. 217 F.3d 379, 385-386 (5th Cir. 7/18/00); citing Riggins v. Dixie Shoring Co., 590 So.2d 1164, 1168 (La. 1991). The court emphasized that the inquiry is in fact a “totality of the circumstances” test, and “courts are not limited to these five factors when invoking the alter ego doctrine.” Id., at 387, citing Riggins, at 1168.

(1) MBW’s funds were commingled with the funds of Mr. Washauer and a separate company of his, as MBW did not have a separate bank account to transact its own affairs, and the only payments made to ORX under the agreement were made on MBW’s behalf by Mr. Washauer and his separate company. Id., at 937-938.

(2) Mr. Washauer failed to follow statutory formalities for incorporating by signing the agreements with ORX on MBW’s behalf before MBW was recognized as an LLC by the Louisiana Secretary of State. Id., at 938. The court apparently rejected Mr. Washauer’s argument that he complied with the statutory requirements as a result of his acquisition of a working interest in the land (including oil, gas and mineral leases) on behalf of MBW and the subsequent issuance by the Secretary of State of a certificate of organization to MBW. Mr. Washauer cited La. R.S. 12:1310.1, which provides that when immovable property is acquired by an individual-who is acting in any capacity for and in the name of any LLC-and the LLC is later issued a certificate of organization, the LLC's existence is retroactive to the date of acquisition of the interest in the immovable property. Id., at 936-937.

(3) MBW was undercapitalized, as it never owned any assets apart from its working interest in the oil and gas wells related to the agreement with ORX. Furthermore, MBW never used its own capital to pay its expenses for the venture with ORX. Id., at 938.

(4) MBW did not have a separate bank account to transact its own affairs. After issuing a check to ORX on MBW’s behalf, Mr. Washauer “did not see the point in creating a checking account and getting a tax ID for a one time investment. He anticipated that the above-referenced check was going to be the last payment made relative to the [agreement].” Id.

(5) Although Louisiana LLC law does not require members or managers to hold meetings, keep minutes, or act through formal resolutions, the court found the fact that MBW had not had a meeting in over a year further evidenced that “Mr. Washauer was operating MBW at his leisure and discretion,” and that the corporate veil should be pierced. Id.
 

It is a fairly common practice for individuals purchasing pleasure yachts to take calculated steps to minimize sales taxes on their purchases. In fact, a simple “Google” search on the subject reveals many websites offering free advice on this issue. One of the tactics suggested by several websites seems fairly simple: instead of the individual purchasing the yacht, the individual forms a corporation, and the corporation purchases the yacht.

In Kelly v. Porter, Inc., 687 F. Supp. 2d 632 (E.D. La. 2010), the Eastern District of Louisiana made it clear that individuals who purchase recreational vessels through corporate entities cannot recover for any emotional distress or loss of enjoyment that the individual LLC member sustains when the vessel is damaged. The Kelly plaintiff wished to purchase a yacht for his own personal use. In an attempt to minimize the sales tax on that purchase, the Kelly plaintiff formed a new limited liability company (LLC) and named himself the sole member. Although the yacht was titled in the name of the LLC, the Kelly plaintiff considered himself to be the “true” owner of the yacht.

Shortly after it was purchased, the yacht was extensively damaged when it took on water while docked in its slip. The Kelly plaintiff and the LLC filed suit against the defendants alleging that they sustained “emotional damages” and “loss of enjoyment” due to the yacht being damaged. In response, the defendants filed a motion for summary judgment seeking to have all of the claims of the individual plaintiff dismissed for lack of standing. The defendants cited La. R.S. 12:1329, which states that the members of a LLC do not have an ownership interest in property owned by the LLC. Although the Kelly plaintiff attempted to claim that he was the “equitable” owner of the yacht, the Court disagreed and dismissed all of his claims.

Additionally, the defendants sought to have the LLC’s claims for “emotional damages” and “loss of enjoyment” (i.e., “non-pecuniary damages”) dismissed as well. The Court dismissed those claims, citing a litany of cases holding that corporations “cannot recover non-pecuniary damages such as loss of enjoyment or emotional damages.”

This decision makes it clear the Courts will not allow would-be yacht purchasers to “have it both ways.” Therefore, the author suggests that individuals considering purchasing a yacht should carefully consider all of the consequences of purchasing a yacht through an LLC and make a well-informed decision.
 

The United States Supreme Court recently resolved conflicts among the Circuit Courts about the citizenship of a corporation for determining diversity of citizenship jurisdiction (1). This will allow corporations to analyze with more predictable results whether to remove a case to federal court. In Hertz Corp. v. Friend, et al, No. 08-1107 (February 23, 2010) (a unanimous decision, which is unusual in and of itself), the Court decided that when determining a corporation’s citizenship for diversity of citizenship jurisdiction, the “principal place of business” of the corporation is “the place where the corporation’s high level officers direct, control, and coordinate the corporation’s activities”—something that courts have referred to as the “nerve center” of the corporation.

The District Court and Ninth Circuit determined diversity did not exist because they determined that although Hertz did business in 44 states its business activity was “significantly larger” and “substantially predominated” over activity in other states. Therefore, Hertz’s “principal place of business” and thus, its citizenship, was in California. The Supreme Court agreed to review the Ninth Circuit’s decision.

The Court’s decision focused on the meaning of “principal place of business” in Section 1332(c)(1). It started its analysis with a discussion of the history and rationale for diversity jurisdiction starting with the first diversity jurisdiction statue enacted in 1789 and ending with the current version of 28 U.S.C. §1332(c)(1) which was enacted in 1958. The court then reviewed the various tests used by federal appellate courts to determine the location of a corporation’s “principal place of business.” For example, the First Circuit used a “nerve center” test (the location from which the corporations activities are directed and controlled); the Second Circuit used a “business activities” test (where a corporation’s actual business activities are located); the Sixth and Tenth circuits used a “total activities” test (a combination of the “nerve center” and “business activities” tests); the Fifth and Eleventh circuits used a two-part test (are corporate activities “centralize or de-centralized” and then either a “place of operations” or a “nerve center” test.

The old “nerve center” test won out. The Court found that the best way to identify the principal place of business of a corporation as “the place where a corporation’s officers direct, control, and coordinate the corporation’s activities.” This conclusion was reached for three reasons: (1) the statutory language supported the approach of identifying a single state as the principal place of business; (2) it leads to “administrative simplicity” and predictability that will allow courts to focus on the underlying merits of a case rather than jousting over jurisdiction; and (3) the legislative history supported the conclusion.
 

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 (1) The diversity jurisdiction statute, 28 U.S.C. §1332(c)(1) says that “a corporation shall be deemed to be a citizen of any State by which it has been incorporated and of the State where it has its principal place of business.”

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Following the passage of H.R. 3950, the House of Representatives passed H.R. 4872, the Health Care and Education Affordability Reconciliation Act of 2010, by a vote of 220 to 211. This second bill by the House modifies the Senate bill (H.R. 3590), and H.R. 4872 will serve as the foundation for any changes made by Congress to the current healthcare delivery, payment and insurance system. Some of the insurance-related changes that may have immediate impact include: lifetime caps on coverage end; children can stay on parents’ policies until age 26, and insurance companies can’t cancel coverage except in the case of fraud. A significant issue of addressing the Medicare physician payment formula still remains unresolved, as well as medical liability reform.

The changes addressed in H.R. 4872, sought by House Democrats and President Obama, will be considered by the Senate under budget reconciliation rules requiring a simple majority to pass and send it to President Obama for his signature. Senate Republicans have stated their intention to offer numerous amendments and raise multiple points of order to the legislation. If the H.R. 4872 is changed in any way prior to Senate approval, it must return to the House for an additional vote before President Obama can sign it.