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.

 

 

other-agreements

By Dean P. Cazenave

When lenders and borrowers want to modify the terms of an existing loan agreement, and the modifications are extensive and will affect many provisions of the agreement, the lender’s lawyer will often choose to draft an “amended and restated agreement” in order to document those modifications. A single amended and restated agreement will often be easier to read than would be the original agreement and a separate amendment (or a series of separate amendments). When they do so for a secured financing, the parties almost always intend that the collateral that secured the original loan agreement continue to secure the obligations under the amended and restated credit agreement;, as a result of a recent decision by the U.S. Court of Appeals for the Sixth Circuit, it is important that the document clearly states that it is not intended as a novation of the obligations under the original loan agreement.

Recently, in Bash v. Textron Financial Corporation (In re Fair Finance Company), 834 F.3d 651 (6th Cir. 2016), the U.S. Court of Appeals for the Sixth Circuit reversed a determination of the District Court for the Northern District of Ohio that an amended and restated loan agreement did not constitute a novation of the original loan agreement. In so doing, the court held, in largely reversing the dismissal of an adversary proceeding arising out of a Chapter 7 bankruptcy case, that the amended and restated loan agreement may actually have constituted (or at least it is ambiguous as to whether it constituted) a novation of the original loan agreement. If the amended and restated loan agreement did in fact constitute a novation, the security interests granted pursuant to the original loan agreement would have terminated at the time that the parties entered into the amended and restated loan agreement. The circuit court, after reversing the district court’s determination, remanded the question to the lower court for further proceedings.

The district court had rejected the novation argument, but the Sixth Circuit reversed, finding that the following provisions of the amended and restated loan agreement created a question of fact as to whether it was the parties’ intent to wholly replace and extinguish (i.e. novate) the original loan agreement and the security interest granted thereunder:

  • The statement that the restated loan agreement was for “valuable consideration, the receipt and sufficiency of which are hereby acknowledged”;
  • The language that the restated loan agreement “constitutes the entire agreement of Borrowers and Lender relative to the subject matter” thereof and would “supersede any and all prior oral or written agreements relating to the subject matter”; and
  • The re-grant of the security interest under the restated loan agreement.

It is cause for concern that all of the provisions the Sixth Circuit found were evidence of a novation in In re Fair Finance Company are regularly found in amended and restated loan documents throughout the broader loan market.

Significantly, the Sixth Circuit distinguished this case from In re TOUSA, Inc., where a district court ruled that the execution of an amended and restated agreement did not constitute a novation. The amended and restated agreement in TOUSA contained an explicit statement that the parties intended that the security interest and liens granted in the original security agreement would continue in full force and effect. The district court in TOUSA explained that notwithstanding the general language in the amended and restated agreement that all prior agreements were being restated in their entirety, the specific terms the parties agreed to must be given effect.

While one may question the sufficiency of the evidence that the Court relied on in finding that the parties may have intended to effect a novation, the lesson that a lawyer drafting an amended and restated financing agreement should draw from this decision is the importance of clearly and expressly stating the parties’ intent that the amended and restated agreement not constitute a novation. When drafting an amended and restated financing agreement, a lawyer should include an express statement that the agreement is not intended to constitute a novation or a termination of the obligations under the original agreement, and in the context of a secured financing, that the security interests created pursuant to the original agreement are intended to continue and to secure the obligations under the amended and restated agreement.

Accessibility computer icon

By Price Barker, Brian Carnie, and Michael Lowe

Disability access lawsuits have become a cottage industry and they have found their way into Louisiana, Texas and Arkansas.  Most are brought by the serial litigants working with same law firm.  These plaintiffs visit a business for the primary purpose of discovering an Americans with Disabilities Act (ADA) accessibility violation and then file a federal court lawsuit without giving the property owner, tenant or business advance notice of their complaint or an opportunity to fix the problems.

Now we are seeing a growing trend of “drive by” or “Google” disability access lawsuits.  The tag “drive-by” lawsuit came about due to accusations in many of these cases that either the plaintiff, or their lawyer, simply drove by the business, observed an alleged violation, and then filed suit.  The tag “Google lawsuit” arose from the belief of several business owners who have been sued that the ADA violations (such as the failure to have a lift seat at a hotel swimming pool) were discovered using Google earth.  In “drive-by” or “Google” lawsuits, the plaintiff almost always seeks attorneys’ fees, expert witness fees, and other litigation costs, as well as other concessions from the business they have sued.  Under federal law, business owners often have to pay both sets of attorneys’ fees, and if they do not settle, or make the corrections to their property demanded in the suit, it may end up costing them many thousands of dollars more, leading to accusations that these suits are simply money-making ventures for the plaintiff bar.

The ADA was passed by Congress in 1990.  Every private business in the United States open to the public must comply with the ADA.  This includes restaurants, bars, convenience stores, hospitals, hotels, shopping centers, and other retail locations.  The accessibility requirements of the ADA are very specific, and extensive.  There are thousands of requirements to be found in the 275-page ADA manual, which has specific requirements for things such as the slope and length of wheelchair ramps, the location and signage for handicap parking spots, and the height and location of door handles, sinks, toilets, and grab rails.

ADA access litigation is not limited to parking lots, sidewalks, restrooms and other alleged physical barriers in a “brick and mortar” establishment.  A growing number of lawsuits are being filed claiming that the business’ Web site does not provide adequate accessibility to the visually or hearing impaired.  Since 2010, the United States Department of Justice (DOJ) has delayed issuing specific regulatory guidance directly addressing the accessibility standards for commercial Web sites.  That does not mean that businesses do not have to try to comply with the general requirements of the ADA, nor does it prevent DOJ enforcement or suits by private plaintiffs.

Numerous ADA access lawsuits have been filed in federal court in Shreveport.  One of the recently filed claims is a class-action filed by a registered sex offender against a local municipality, claiming that the office where he is required to register as a sex offender is now violating the ADA by not providing him with a sign language interpreter.

So what should a business owner do to avoid this expensive headache?  A good starting point is to make your business an unattractive target.  Visit your location to see if there are any obvious ADA violations that would catch the attention of a “drive-by” plaintiff.  For example, look for un-ramped entrance steps, poorly maintained routes from handicap parking spaces to the entrance, handicap parking spaces with no access aisle, and observe the slope of your handicap parking spaces.  If you can see a slope, it is probably non-compliant.  And if you can see the slope, you can bet the plaintiff driving by will too.

 

Merger Dictionary Definition Word Combine Companies Businesses

By Linda Perez Clark

Recent cases have highlighted the importance of seller contractually protecting and retaining ownership over communications that, pre-closing, are subject to the attorney-client privilege.  The absence of such language in a merger or asset/stock purchase agreement can lead a court to conclude that such communications are owned by the buyer/surviving corporation.

Such was the result in Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, 80 A.3d 155 (Del. Ch. 2013), where more than a year post-closing, after the buyer sued the seller for allegedly fraudulently inducing buyer to enter into the merger, the seller asserted ownership over pre-merger privileged communications maintained on the surviving corporation’s computer system.

The court ruled in the buyer’s favor, and held that the surviving corporation owns and controls such communications, noting that the seller had not been proactive in either protecting the communications from seller’s access, or contractually preserving ownership.   The court specifically noted that under Delaware law, all property, rights, privileges, etc. become property of the surviving corporation (the same is true under Louisiana law, LSA-R.S. 12:1-1107);  a contrary result can only be achieved by contractual agreement.

Accordingly, a clause addressing ownership and control over such communications, and proactively protecting them from disclosure, is critical.

 

LouisianaPaddleboatStamp

By G. Trippe Hawthorne and Mallory McKnight Fuller

Click here to review a Practice Note explaining how to enforce arbitral awards in the state and federal courts in Louisiana.  This Note explains the procedure for confirming an arbitration award in Louisiana, and the grounds on which a party may challenge enforcement under Louisiana and federal law, including the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, the Federal Arbitration Act (FAA), and the Louisiana Binding Arbitration Law (BAL). This Note also briefly explains the procedure for vacating, modifying, or correcting an arbitral award in Louisiana.

 

louisiana

By Linda Akchin and Chris Dicharry

INTRODUCTION

Louisiana law imposes a sales tax on “sales at retail.”  “Sale at retail” is defined in the sales tax law, and the definition provides that the term does not include “sales of materials for further processing into tangible personal property for sale at retail.”    This provision is commonly referred to as the “further processing exclusion.”[1]  The most recent Louisiana Supreme Court’s decision interpreting this “further processing exclusion,” Bridges v. Nelson Indus. Steam Co., 2015-1439 (La. 5/3/16), 190 So.3d 276 (the “NISCO decision”), recently became final.  The decision is significant for all taxpayer-manufacturers.  It provides an excellent explanation of applicable legal principles relating generally to interpretation of the further processing exclusion and a comprehensive explanation of the three-prong jurisprudential test for application of the exclusion.  In response to the NISCO decision, and before it became final, the Legislature passed an Act amending the further processing exclusion.[2]  The purpose of this writing is to (i) provide some general information regarding applicable rules of law to be gleaned from the NISCO decision; and (ii) identify questions arising from the recent legislative amendment to the law.

THE SUPREME COURT DECISION

The further processing provision applies to byproducts.

The NISCO decision is the first in which the Supreme Court directly addresses the question of whether the further processing exclusion from tax applies to purchases of materials that are further processed into a byproduct of a manufacturing process.  The Supreme Court held that it does.  Noting that the exclusion applies to “tangible personal property,” and the sales tax regulation interpreting the exclusion provides that whether materials are further processed or simply used in the processing activity will depend entirely upon an analysis of the “end product,” the court reasoned that it found nothing in the law that requires the “end product” be the enterprise’s primary product, explaining:

“The plain language of the statute makes the exclusion applicable to articles of tangible personal property.  There simply is no distinction between primary products and secondary products. . . . At the end of the day, the ash [NISCO’s byproduct] is produced and sold . . . making it an ‘article of tangible personal property for sale at retail.’”[3]

The NISCO decision applies and interprets the long-established three-pronged test for application of the exclusion.

The Court applied the jurisprudentially-established three-pronged test for application of the further processing exclusion as it related to NISCO’s ash byproduct:  The test is:

(1) the raw materials become recognizable and identifiable components of the end products;

(2) the raw materials are beneficial to the end products; and

(3) the raw materials are materials for further processing, and as such, are purchased with the purpose of inclusion in the end products.[4]

In applying the test the Court clarifies and reinforces aspects of the application of the test that all taxpayers would be well-served to keep in mind.   Those clarifications include:

(1)       The further processing provision constitutes an “exclusion” not an “exemption” from tax, and as such, must be liberally construed in favor of the taxpayer;[5]

(2)       When the material purchased is processed into less than all of the end products produced, the analysis involves only consideration of the end product(s) into which the material is further processed, without regard to other end products.[6]

(3)       In order to satisfy the “benefit” prong of the test it is not necessary to conduct tests to determine the qualities of the material purchased or its beneficial impact on the end product.  It is sufficient that elemental components of the material purchased become integral components of the molecular makeup of the end product.  That “integration” is in and of itself of some benefit to the end product.[7]

(4)       The “purpose” prong of the test does not involve a primary purpose test; and the “purpose” test involves a “manufacturing purpose” inquiry, not a “business purpose” or “economic purpose” inquiry.  Only the manufacturing process and the physical and chemical components and the materials involved in the process are germane to the “purpose” test.[8]

(5)       There is no legal basis for an “apportionment” approach to the further processing exclusion, whether based upon the percentage of the material or some assigned value of the components that actually end up in the end product, and any such approach is impractical in application.[9]

The New Law

The 2016 Legislative amendment, effective June 23, 2016, amends the law to provide that “[t]he term ‘sale at retail’ does  not include sale of materials for further processing into articles of tangible personal property for sale at retail when all of the criteria in Subsubitem (I) of this Section are met.[10]  Those criteria consist of a re-statement of the three-pronged test:  (1) the raw materials become a recognizable and identifiable component of the end product; (2) the raw materials are beneficial to the end product; and (3) the raw materials are material for further process, and as such are purchased for the purpose of inclusion into the end product.

The amendment goes further, however, and adds a “Subitem II” to the definition of “sale at retail.”  This addition represents new law and provides, in short, that “[i]f the materials are further processed into a byproduct for sale, such purchases of materials shall not be deemed to be sales for further processing and shall be taxable.”  The term “byproduct” is defined to mean “any incidental product that is sold for a sales price less than the cost of the materials.”

QUESTIONS CREATED BY THE NEW LAW

Did the Legislature intend to overrule the NISCO decision?

The first question that arises is whether the clarifications to the three-prong jurisprudential test that are set forth in the NISCO decision may be applied under the amended law’s verbatim codification of the three-prong jurisprudential test.  It is a well-accepted rule of statutory construction that those who enact statutory provisions are presumed to act deliberately and with full knowledge of existing laws on the same subject, with awareness of court cases and well-established principles of statutory construction, with knowledge of the effect of their acts and a purpose in view; and that when the Legislature changes the wording of a statute, it is presumed to have intended a change in the law. [11]  Thus, legislative language will be interpreted based upon assumption that the Legislature was aware of judicial decisions interpreting those statutes, including among others, the NISCO decision.[12]  Because the amended law adopts the three-prong judicial test verbatim, we believe a strong argument may be made that there is no legislative intent to vary from the Supreme Court’s interpretations of that test, except to the extent the language of the amended law expressly varies from the Supreme Court’s prior interpretations.  The Legislature has never hesitated to expressly state its intent to legislatively overrule a Louisiana Supreme Court decision, when that is indeed its intent.  Here, no express statement of such intent was made, and we do not believe that the Louisiana Supreme Court will infer intent to overrule any aspect of the NISCO decision, except to the extent the language of the amendment is inconsistent with the court’s interpretation in NISCO.

What constitutes a “byproduct” for purposes of the new law?

In cases where a product is sold for a sales price less than the cost of its materials, questions will likely arise as to whether the product is an “incidental product.”  Because the term “incidental product” is not statutorily defined by the legislature, we must give the words their commonly-accepted meaning.  The word “incidental” means “being likely to ensue as a chance or minor consequence,” or “occurring merely by chance or without intention or calculation.”[13]  Many products sold for a sales price less than the cost of their materials are intentionally manufactured and sold.  They are not manufactured by accident; and they are not the result of chance.  Instead, a conscious decision is made to choose a process design that will in fact create certain byproducts, with the intention to sell all the products of the process – both “primary products” and “byproducts,” with an overall profit motive.  While any particular byproduct may be of minor consequence economically speaking, when viewed in a vacuum, it may not be of economic “minor consequence” to the overall finances of the taxpayer; or it may not be of minor consequence in terms of volumes manufactured and sold, or investment made to develop, manufacture, market and sell the byproduct.  In our opinion, the Legislature’s amendment – a clear intent to vary from the NISCO decision’s holding that the further processing exclusion applies to all end products – merely creates more uncertainty, resulting in many more sales and use tax disputes and consequent litigation.  The taxing authorities will undoubtedly argue that the intent of the amendment was to create a rule to be applied when a byproduct, viewed in a vacuum, is not profitable; but that is not what the Legislature said.  The Legislature adopted a rule to be applied to “incidental products,” without defining that term.  Thus, we believe a proper interpretation requires that a determination must first be made regarding whether the byproduct is an “incidental product;” and only if it is an incidental product, does the second part of the “test” – whether it is sold for a sales price less than the cost of its material – apply.

May the new law be applied retroactively?

Taxpayers may expect the taxing authorities to impose the new law going forward.  Serious questions arise, however, regarding the applicability of the new law to taxes already reported and paid, or incurred, before the new law became effective.

The new law expressly provides that it “shall not be applicable to any existing claim for refund filed or assessment of additional taxes due issued prior to the effective date of this Act for any tax period prior to July 1, 2016, which is not barred by prescription.”  If a taxpayer’s claim or dispute with the taxing authority falls within the language of this provision, the new law should not be applied by the taxing authorities.  It is not clear what is meant by the terminology “claim for refund filed.”  Does it mean the submission of a refund request or claim with the taxing authority, or a suit for refund, or both?  Likewise, it is not clear what is meant by “assessment of additional taxes due issued” – does it include notices of intent to assess (“proposed assessments”), notices of assessment (“final assessments”), petitions for redetermination of assessments, or suits to collect tax, or all four.  We recommend that taxpayers apply the most liberal interpretation of the language unless and until guidance is provided by regulation or judicial decision.

There will undoubtedly be cases in which no claim for refund has been filed or assessment issued before the effective date of the act, but involving tax periods prior to July 1, 2016.  In such cases, we believe a strong argument may be made that retroactive application of the new law to pre-amendment tax periods is unconstitutional.  The Legislature stated in the Act that it “is intended to clarify and be interpretive of the original intent and application of” the further processing exclusion, and that “[t]herefore, the provisions of this Act shall be retroactive and applicable to all refund claims submitted or assessments of additional tax due which are filed on or after the effective date of this Act.”  Despite this statement by the legislature, we believe that the amendment to the law is not merely clarifying and interpretive.  We believe the changes are substantive in nature.  Generally, substantive laws may be applied prospectively only.  And despite express legislative intent to the contrary, it is uniquely the province of the courts to determine if an Act is substantive, or merely clarifying and interpretive.  And, if the law is substantive, it will not be applied retroactively by the courts because to do so impinges upon the authority of the judiciary in violation of the constitutional doctrine of separation of powers and divests taxpayers of substantive rights and causes of action that accrued and vested in the taxpayer before the effective date of the Act, such that imposition of the new law would constitute a denial of due process.[14]

Was the amendment to the law constitutionally enacted?

In the case of an attempt by a taxing authority to apply the new law retroactively to pre-amendment tax periods, or in the case of a purely prospective application of the new law to post-amendment tax periods, a question still exists regarding the constitutionality of the law’s enactment.  The Louisiana Constitution provides that enactments levying a new tax or increasing an existing tax require a two-thirds vote of both houses of the Legislature to become law.[15]  Here, the Act at issue did not have a two-thirds vote of the House of Representatives.  A viable legal argument exists that because the law amends definitions in a manner that makes previously non-taxable transactions taxable, it constitutes either a “new tax” or an “increase in an existing tax,” thus requiring a two-thirds vote of both houses of the Legislature. [16]  Unless and until this issue is resolved in the courts, a taxpayer would be wise to seek legal counsel and consider its options before voluntarily paying tax on materials purchased for further processing into a byproduct.

__________________________________________________________

[1] La. R.S. 47:301(10)(c)(i)(aa), before amendment effective June 23, 2016; see La. Act No. 3 (2nd Extra. Sess. 2016) (“Act 3 of 2016”).

[2] Act 3 of 2016, supra.

[3] NISCO, pp. 8-9, 190 So.3d at 282.

[4] Id. at pp. 7-8, 190 So.3d at 281, quoting International Paper, Inc. v. Bridges, 2007-1151, p. 19 (La. 1/16/08), 972 So.2d 1121, 1134.

[5] Id. at pp. 5-6, 190 So.3d at 280-281.

[6] Id. at pp. 7-9, 190 So.3d at 281-282.

[7] Id. at pp. 9-10, 190 So.3d at 282-283.

[8] Id. at pp. 4, 10-13, 190 So.3d at 279, 283-285/

[9] Id. at pp. 13-15, 190 So.3d at 285-286.

[10] Act 3 of 2016, supra (emphasis added)

[11] Borel v. Young, 2007-0419, pp. 8-9 (La. 11/2/07), 989 So.2d 42, 48 (emphasis added).

[12] State v. Campbell, 2003-3035, pp. 8-9 (La. 7/6/04), 877 So.2d 112, 118.

[13] Merriam-Webster’s Collegiate Dictionary (11th ed. 2012) (emphasis added).

[14] See e.g. Mallard Bay Drilling, Inc. v. Kennedy, 2004-1089 (La. 6/29/05), 914 So.2d 533); Unwired Telecom Corp. v. Parish of Calcasieu, 2003-0732 (La. 1/19/05), 903 So.2d 392; and Bourgeois v. A.P. Green Indus., Inc., 2000-1528 (La. 4/3/01), 783 So.2d 1251; La. Const. Art. II, §§1-2; La. Const. art. I, §2; U.S. Const. Amend. XIV, §1.

[15] La. Const. Art. VII, §2.

[16] See e.g. Dow Hydrocarbons & Resources v. Kennedy, 1996-2471 (La. 5/20/97), 694 So.2d 215.

 

 

middle

By Brittany Buckley Salup

Chief Judge Brian Jackson issued an “Omnibus Order Suspending All Deadlines” for cases pending or to be filed in the U.S. District Court for the Middle District of Louisiana.  The Order explains that the court has been inaccessible—a key term in the Federal Rules of Civil and Appellate Procedure—since August 12, 2016 due to historic flooding in the region.  Until further notice from the Middle District, all deadlines and delays in cases pending or to be filed in the Middle District are suspended.  This suspension expressly applies to prescriptive and peremptive periods.  In addition, all pending criminal cases in the Middle District are temporarily excluded from the time requirements of the Speedy Trial Act.

The Middle District’s Order follows similar Executive Orders from Governor Edwards, which suspended deadlines in Louisiana state courts due to flooding.  More information about the Governor’s Orders is available here.

A copy of the Middle District’s Order (M.D. La. General Order 2016-10) is available here.

 

 

seal

By Claire Juneau

On August 17, 2016, Governor Edwards amended Executive Order JBE 2016-57 which had suspended the running of prescription, peremption, and all legal delays from August 12, 2016 until September 9, 2016. The amendment to Executive Order JBE 2016-57 modifies the suspension of deadlines as follows:

  • Liberative prescription and peremptive periods continue to be suspended throughout Louisiana until Friday, September 9, 2016.
  • Deadlines in legal proceedings currently pending in state courts, administrative agencies, and boards in Acadia, Ascension, Assumption, Avoyelles, Cameron, East Baton Rouge, East Feliciana, Evangeline, Iberia, Iberville, Jefferson Davis, Lafayette, Livingston, Pointe Coupee, St. Charles, St. Helena, St. James, St. John the Baptist, St. Martin, St. Tammany, Tangipahoa, Vermilion, Washington, West Baton Rouge, and West Feliciana, Parishes, continue to be suspended until Friday September 9, 2016. This suspension includes all deadlines set forth in the Louisiana Civil Code, the Louisiana Code of Civil Procedure, Title 9 (Civil Code Ancillaries) Title 13 (Courts and Judicial Procedure), Chapter 11 of Title 18 (Election Campaign Financing); Chapter 10 of Title 23 (Worker’s Compensation); Chapter 5, Part XXI-A of Title 40 (Malpractice Liability for State Services); Chapter 5, Part XXIII, of Title 40 (Medical Malpractice), and Title 49, Chapter 13 (Administrative Procedure) of the Louisiana Revised Statutes. This is a modification from the original Exeuctive Order JBE 2016-57 which suspended deadlines statewide.
  • Except for the suspension of prescriptive and peremptive periods and the suspension of deadlines in the parishes listed above, the suspension provided for in original Executive Order JBE 2016-53 shall end Friday, August 19, 2016. If a party can show an inability to meet the deadlines caused the flooding, the court, administrative agency, or board shall suspend deadlines specific to that matter until September 9, 2016.

A copy of the amendment can be found here: JBE-16-57-Amended-Emergency-Suspension-of-Deadlines-in-Legal-Proceedings

A copy of the original executive order can be found here.

c

By Edward H. Warner and Linda Perez Clark

On Thursday, May 5, 2016, the Consumer Financial Protection Bureau (CFPB) issued a notice of proposed rules that would fundamentally change the way certain businesses contract with consumers.  Among other actions, the proposed rule would eliminate class action waivers from pre-dispute arbitration clauses and agreements for certain businesses.  The announcement of the proposed rule was somewhat expected, considering Congress directed the CFPB to study the use of mandatory arbitration clauses in consumer financial markets beginning in 2012.  The CFPB released the results of its three year study in March 2015 and found that class actions were the favored method for consumers to hold certain financial services businesses accountable.  The May CFPB press release states that “the CFPB’s proposal is designed to protect consumers’ right to pursue justice and relief, and deter companies from violating the law.”

What does this proposal intend to change?

Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, the CFPB is proposing to establish 12 CFR part 1040, which would impose two sets of limitations on the use of pre-dispute arbitration agreements by providers of consumer financial products and services (“Covered Providers”).

First, the proposed rule would prohibit Covered Providers from using an agreement with a consumer that provides for arbitration of any future dispute if such an agreement bars the consumer from filing or participating in a class action with respect to the covered consumer financial product or service.  Second, the proposal would require a Covered Provider that is involved in an arbitration pursuant to a pre-dispute arbitration agreement to submit specified arbitral records to the CFPB.

What does this change mean for your company?

While only a proposal at this point, this development warrants attention if your company uses pre-dispute arbitration agreements containing class action waivers.  If the proposal is approved, Covered Providers would need to eliminate class action waivers from pre-dispute arbitration agreements and clauses.  The proposal would apply to Covered Providers who are typically in the core consumer financial markets of lending money, storing money, and moving or exchanging money.  Additionally, if the rule is passed, any pre-dispute arbitration agreement will need to include a mandatory statement that the consumer cannot be stopped from filing his/her claim as a class action in court, or from participating in a class action filed by someone else.

What are the legal implications and timelines moving forward?

The new regulations would apply to pre-dispute arbitration agreements entered into on the date that is 211 days from the date the final rule is published, and thus would not apply to any agreement in effect prior to that date.  The 90-day period for the public to comment on the proposed regulations expires August 22, 2016.  Businesses should monitor the outcome and enlist counsel to prepare to address these new requirements if adopted.

If you wish to view the proposed rule, or file a public comment, you may do so at the link here.

 

26

By Sam Lumpkin

On December 1, 2015, amendments to the Federal Rules of Civil Procedure took effect in an effort to rein in the scope of federal discovery. Several changes were made to Federal Rule 26 with the goal of reducing the substantial expense and unfairness of overbroad discovery.

Former Rule 26(b)(1) provided that:

Parties may obtain discovery regarding any nonprivileged matter that is relevant to any party’s claim or defense— including the existence, description, nature, custody, condition, and location of any documents or other tangible things and the identity and location of persons who know of any discoverable matter. For good cause, the court may order discovery of any matter relevant to the subject matter involved in the action. Relevant information need not be admissible at the trial if the discovery appears reasonably calculated to lead to the discovery of admissible evidence. All discovery is subject to the limitations imposed by Rule 26(b)(2)(C).

 The new Rule 26(b)(1) provides as follows:

 Parties may obtain discovery regarding any nonprivileged matter that is relevant to any party’s claim or defense and proportional to the needs of the case, considering the importance of the issues at stake in the action, the amount in controversy, the parties’ relative access to relevant information, the parties’ resources, the importance of the discovery in resolving the issues, and whether the burden or expense of the proposed discovery outweighs its likely benefit. Information within this scope of discovery need not be admissible in evidence to be discoverable.

Under the former Rule 26(b)(1), parties were allowed to obtain discovery “regarding any nonprivileged matter that is relevant to any party’s claim or defense.” The new rule adds a new statement that discovery must also be “proportional to the needs of the case,” a change that the Advisory Committee on Rules of Civil Procedure described as a “significant improvement” designed to achieve the goal of the Rule 1 – the “just, speedy, and inexpensive determination of every action.” However, the Committee noted that this change is not intended to shift the burden of proving proportionality to the party seeking discovery or to provide a basis for refusing to provide discovery.

In addition to the new requirement of proportionality, the new Rule 26(b)(1) includes several factors that govern a court’s consideration of whether discovery is indeed proportional to the needs of the case. Those factors are: (1) the importance of the issues at stake; (2) the amount in controversy; (3) the parties’ relative access to relevant information; (4) the parties’ resources; (5) the importance of the discovery in resolving the issues; and (6) whether the burden or expense of the proposed discovery outweighs its likely benefit. Most of these factors were previously contained in Rule 26(b)(2)(C), but have been moved into 26(b)(1) because they have always been a constraint on the scope of discovery. The Advisory Committee stated that this change was intended as an additional prominent emphasis on the requirement of proportionality and to encourage parties to take the factors into account in pursuing discovery. The third factor – the parties’ relative access to relevant information – is a new addition, and was added in order to recognize that in some cases the discovery burden will necessarily be greater on one party than on another. The Committee rearranged the order of the factors in the new rule, moving the “importance of the issues at stake” ahead of “the amount in controversy” in order to avoid any possible implication that the amount in controversy is the primary concern in determining proportionality.

In a change related to the new emphasis on proportionality, the new rule eliminates the broad statement that relevant information “need not be admissible at the trial if the discovery appears reasonably calculated to lead to the discovery of admissible evidence,” and substitutes the more straightforward language that “Information within this scope of discovery need not be admissible in evidence to be discoverable.” The Committee noted that the central principle of this portion of the rule is simply that information within the allowed scope of discovery is discoverable, even if it is not in a form admissible in evidence – it is “merely a ban on admissibility-based refusals to provide relevant discovery.” However, although the “reasonably calculated” section in the previous rule “has never been intended to define the scope of discovery,” it was interpreted by many parties to mean that the scope of discovery must merely be “reasonably calculated to lead to the discovery of admissible evidence.” As a result, the “reasonably calculated” term has in many cases “swallowed” any other limitations on the scope of discovery. The new rule therefore eliminates the “reasonably calculated” language, and further removes any doubt that discovery must be limited and proportional to the needs of the case.

Finally, the new rule further removes the reference that discoverable matters include “the existence, description, nature, custody, condition, and location of any documents or other tangible things and the identity and location of persons who know of any discoverable matter.” The Committee determined that this was simply “excess language,” but included it in the official Committee Notes and emphasized that these subjects would remain discoverable if they satisfied the considerations in the revised rule.

The new version of Rule 26, while not creating a new basis for refusing to respond to discovery, does allow parties to defend against discovery requests that would have been overbroad under the previous rule but may have been allowed by the courts. If the changes are successful, recipients of discovery will be better able to obtain protection from the substantial expense of responding to overbroad discovery requests.