By Wade Iverstine and Eric Lockridge

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

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

The Context

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

Blog Article Diagram

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

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

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

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

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

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

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

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

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

Extra Diligence to Consider

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

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

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

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

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

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

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

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

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

GOM

By Tod J. Everage

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

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

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

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

wet

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

[1] 33 U.S.C. §§ 401-467.

[2] 33 U.S.C. §§ 1251-1388.

[3] 16 U.S.C. §§ 1451-1466.

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

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

phish

By Jessica C. Engler

The IRS has sent an urgent alert to employers this month that a W-2 phishing scam that many companies fell victim to in 2016 is back in full force for 2017. The IRS warns that this scam is emerging earlier this year and is targeting school districts, tribal organizations, and nonprofits in addition to businesses.

The “W-2 Scam” is carried out by persons who disguise (“spoof”) an email to make it look like it came from a top executive or the receiver’s business colleague. The dummy email is sent to (typically) the organization’s accounting and human resources department, and will ask for a list—or the copies themselves—of the company’s W-2 tax forms, employee’s dates of birth, and Social Security Numbers. If the unsuspecting victim responds with this information, the sender can use this data to file false tax returns, generate revenue on the black market, and perpetuate identity theft.

While this email can take many forms, some example phrasing for the email includes:

  • “Please send me the individual 2016 W-2 (PDF) and earnings summary of all W-2s of our company staff for a quick review”
  • “Hope you had a nice weekend. Do you have PDF copies of the employee’s W-2s? Could you please send to me for a quick review?”
  • “I need you to email me the list of individual W-2 copies of all employees’ wages and income tax statements for 2016 tax year in PDF file format for quick review. Prepare the list and send to me ASAP. I will brief you more about this later.”

The IRS warning indicates that these phishing emails are also including requests for wire transfers this year.

The Security Summit (which comprises the IRS, state tax agencies, and members of the tax industry) recommend that employers and employees stay vigilant of this threat. Employers may consider doing additional training with employees on recognizing these phishing emails.

The IRS instructs any organization that receives a W-2 scam to forward that email to phishing@irs.gov and place “W2 Scam” in the subject line. Organizations that receive the scams or fall victim to the scam can file a complaint with the Internet Crime Compliance Center (IC3), which is operated by the Federal Bureau of Investigation. Organizations should also consider contacting an attorney with experience in data management to assist in the response to affected persons.

Day

By Michael D. Lowe

Last week, thousands of employees throughout the county skipped work as part of “a day without immigrants” demonstration. The employees were protesting the Trump administration’s recent actions regarding immigration. The stated intent was to negatively impact the nation’s economy in an effort to highlight the contributions of immigrant labor. Restaurants were the primary target. Businesses from New York to San Francisco were forced to temporarily close as employees either failed to report to work or “walked out.” In many cases, the protesting employees included both immigrants and their co-workers.

Several employers embraced the protests and promised not to discipline the participating employees. However, many employers took the opposite approach. According to various media reports, hundreds of employees in a number of different cities were terminated after they refused to report to work. With reports that additional demonstrations are likely, employers should prepare for the possibility that one or more employees might choose to participate.

As an initial matter, an employer should communicate its expectations to its employees in advance of any demonstration. If possible, this communication should be documented by internal memo, email, or even text message. Employees should also be reminded of any applicable attendance policies.

While the refusal to report to work is a legitimate non-discriminatory basis to terminate an employee, an employer must be consistent in its response. An employer that terminates some employees, while excusing the absences of others, may face a claim of disparate treatment. Those employers with a unionized workforce should consult labor counsel with regard to any collectively bargained rights.

Finally, affected employers should prepare for media coverage and press inquiries. The demonstrations have already garnered international attention as the debate regarding the Trump administration’s immigration policies shows no signs of slowing down. Employers should clearly define who within its organization may respond to media inquiries and what information will be shared. Any comments made following an employee’s termination will almost certainly be used in any resulting legal action.

liquor-bottles

By Jill Gautreaux

The City of New Orleans (“the City”) has amended and re-enacted a gallonage tax on alcoholic beverages of low and high alcoholic content. A “gallonage tax” is a tax on alcoholic beverages based upon the amount, calculated in gallons, of alcoholic beverages sold. The current ordinance became effective on January 1, 2017, but industry members have sought to enjoin the implementation of this “new” tax. The ordinance closely follows the wording of the State gallonage tax statutes, which causes the tax to apply to wholesalers or Louisiana manufacturers because they are the first parties to come into possession of the alcoholic beverages in the State of Louisiana. The City ordinance does not have the effect that it apparently intended, and is worded as follows:

Section 10-511 – Who is liable for tax.

The taxes levied in sections 10-501 and 10-502 of this division shall be collected, as far as practicable, from the dealer who first handles the alcoholic beverages in the city. If for any reason the dealer who first handled the taxable alcoholic beverages has escaped payment of the taxes, those taxes shall be collected from any dealer in whose hands the taxable beverages are found.

On February 9, 2017, the City Council introduced an ordinance to amend Section 10-511, which qualified the word “dealer” in the first sentence and the first phrase of the second sentence with “wholesale”. Nevertheless, according to the current wording of the ordinance, if the wholesale dealer has “escaped” the tax, the retailer will be responsible for paying the tax to the City.

There is a strong likelihood that New Orleans alcoholic beverage retailers will end up having to pay some of this tax if the ordinance is enacted and enforced as currently written. Several large wholesale companies, including Southern Glazers, Southern Eagle, and Republic, do not have any physical presence within the City of New Orleans, and therefore should not be subject to the tax.

A few trade organizations have challenged the enforceability of the ordinance in Orleans Parish Civil District Court. The plaintiffs were successful in obtaining a temporary restraining order, but were denied a preliminary injunction. The temporary restraining order has lapsed, but, as of this date, the City has indicated that it will not collect the tax until the litigation has concluded. One City official has suggested that if the City prevails, that the tax due will be retroactive to January 1, 2017.

 

la

By William Kolarik

The New Jersey Tax Court’s opinion in Elan Pharmaceuticals, Inc. v. Director, Division of Taxation, Dkt. No. 010589-2010 (Tax Ct. of N.J. February 6, 2017) highlights the potential constitutional concerns related to the application of Louisiana’s recently enacted throw-out rule.

On June 28, 2016, Louisiana Governor Edwards signed H.B. 20 (Act 8) (effective June 28, 2016) into law. In addition to changing the apportionment rules for certain industries and enacting market-based sourcing for sales of services, Act 8 also contains a throw-out rule. Specifically, Act 8 amends the Louisiana apportionment rules to provide that “[i]f the taxpayer is not taxable in a state to which a sale is assigned or if the state of assignment cannot be determined or reasonably approximated pursuant to [the Louisiana apportionment rules contained in La. R.S. 47:287.95 and its related regulations], the sale shall be excluded from the numerator and the denominator of the sales factor.”[1] The throw-out rule applies to all taxable periods beginning on or after January 1, 2016.

A throw-out rule is an, oftentimes controversial, alternative to a “throw-back” rule. A throw-back rule is a rule that sources a taxpayer’s sales that are not taxable in the state of destination to the state of origin. From a policy perspective, the proponents of throw-back rules assert that it is appropriate to redistribute non-taxed sales to the state of origin because the state of origin is ostensibly connected to the non-taxed sales in some manner. In contrast, a throw-out rule redistributes income derived from sales made to a state where a taxpayer is not subject to tax to another state where a taxpayer is subject to tax by removing the non-taxable sales from both the numerator and the denominator of the taxpayer’s sales factor. The proponents of throw-out rules justify the rule by asserting that a taxpayer’s entire taxable income should be subject to state income tax. As Elan Pharmaceuticals and its related cases demonstrate, a throw-out rule becomes problematic and raises constitutional concerns when a tax administrator attempts to apply the rule in a manner that taxes income earned in another state that the other state’s legislature has jurisdiction to tax but chooses not to tax.

Elan Pharmaceuticals is the latest in a series of New Jersey cases in which the New Jersey Courts prohibited the New Jersey Division of Taxation (the “Division”) from applying New Jersey’s, now repealed, throw-out rule in an unconstitutional manner. Elan Pharmaceuticals (“Elan”), the taxpayer, was a Delaware company headquartered in California. Elan had property in 39 states, inventory in seven states, and payroll in 48 states. Elan only filed tax returns in six states because the other states in which it did business chose not to tax Elan’s in-state business activity. In at least 17 of the states in which Elan did not file a corporate income tax return, Elan was not subject to state income tax by virtue of Public Law 86-272 (“PL 86-272”), a federal law that prohibits a state from levying a state income tax if a taxpayer limits its in-state business activity to the solicitation of sales orders that are accepted and filled from inventory located outside the state.[2]

On audit, the Division applied New Jersey’s throw-out rule to reduce the denominator of Elan’s sales factor to include only amounts included in the sales factor numerators of the six states in which Elan reported a sales factor numerator. Elan challenged the Division’s application of the throw-out rule and asserted that the exclusion of receipts from its sales factor denominator was arbitrary and improper because it excluded receipts that were (1) allocable to other states where Elan was taxable pursuant to a throw-back rule; or (2) allocable to states where Elan stored its inventory, an activity which is a constitutional basis for asserting nexus; and (3) allocable to California, where Elan was headquartered. In contrast, the Division asserted that its application of the throw-out rule was proper because it excluded receipts from states that lacked jurisdiction to tax due to PL 86-272.

The court began its analysis by explaining that the Division’s arguments overlooked the substance of the New Jersey Supreme Court’s decision in Whirlpool Properties Inc. v. Director, Division of Taxation, 208 N.J. 141 (2011). In Whirlpool, the New Jersey Supreme Court held that New Jersey’s throw-out rule was constitutional as applied only “when the category of receipts that may be thrown out is limited to receipts that are not taxed by another state because the taxpayer does not have the requisite constitutional contacts with the state or because of congressional action such as P.L. 86–272.”[3] In contrast, the throw-out rule violated the dormant Commerce Clause when it excluded receipts that were not taxed by another state because the state chooses not to impose an income tax.[4] Citing Lorillard Licensing Co. v. Director, Division of Taxation, 28 N.J. Tax 590 (Tax 2014), in which the Superior Court of New Jersey held that the phrase “subject to tax” under Whirlpool applied in the context of economic nexus, the court emphasized that the test for determining whether the throw-out rule was constitutionally applied is whether a taxpayer has the requisite constitutional contacts with a state to be subject to the state’s taxing jurisdiction. According to the court, the possibility that PL 86-272 was implicated did not foreclose the limitations on the application of the throw-out rule because PL 86-272 does not bar an origin state from taxing the income generated from sales of goods to a destination state that cannot tax the income.

After explaining the constitutional limitations that applied to the application of New Jersey’s throw-out rule, the court explored the extent to which the states where Elan did not file tax returns had the ability to tax Elan’s operations. The court noted that an origin state had the authority to tax Elan’s sales from that state via a throw-back rule and that several states where Elan did business had throw-back rules. Therefore, the Division could not isolate application of the throw-out rule to New Jersey and deny that other origin states could tax Elan’s sales via a throw-back rule. Next, the court rejected the Division’s contention that Delaware’s choice not to impose an income tax required a conclusion that Elan’s sales of goods shipped from Delaware be removed from Elan’s sales factor denominator. In addition, the court also explained that an origin state or a destination state could impose a business-presence based corporate tax on Elan as long as the state had a basis to assert nexus over Elan, such as Elan’s storage of inventory, ownership of property, or payroll in the state. Because other states could constitutionally tax Elan’s sales, the court reversed the Division’s determination that only receipts reported to six states could be included in Elan’s sales factor denominator.

Louisiana Implications

The Louisiana Department of Revenue (the “Department”) has not issued guidance regarding how it intends to apply Louisiana’s throw-out rule. Nevertheless, it is important to understand that the limitations on the application of a throw-out rule described in the New Jersey cases are constitutional limitations that apply to the application of any throw-out rule by any state, including Louisiana. A taxpayer preparing its 2016 Louisiana corporation income tax return should carefully consider the extent to which the Louisiana throw-out rule applies to its out-of-state business activity in states where it does not file a corporate income tax return. When considering how the Louisiana throw-out rule applies, a taxpayer should give extra scrutiny to any state that has the ability to levy a tax on its sales but that chooses not to do so, e.g., an origin state in which a taxpayer stores inventory that does not adopt a throw-back rule. In addition, a Louisiana taxpayer affected by the throw-out rule should carefully scrutinize any guidance issued by the Department that purports to apply the throw-out rule to sales in destination states that have the ability to levy a tax on the taxpayer.

For additional information, please contact: Christopher J. Dicharry at (225) 382-3492, Jaye Calhoun at (504) 293-5936, or Willie Kolarik at (225) 382-3441.

[1] La. R.S. § 47:287.95(M).

[2] 15 U.S. Code § 381.

[3] Whirlpool Prop. Inc. v. Director, Div. of Taxation, 208 N.J. 141, 172 (2011)

[4] Id. at 172-173.

ml

By Tod J. Everage

Until the U.S. 5th Circuit gets an opportunity to directly address the continued viability of Scarborough v. Clemco Industries, 391 F.3d 660 (5th Cir. 2004) in the wake of Atlantic Sounding v. Townsend, 557 U.S. 404 (2009), we are likely to see a lack of harmony among the district court judges considering this issue. Scarborough specifically protects third parties (see oil and gas companies) against punitive damage exposure (see uninsured) from injured seamen employed by their contractors (see vessel companies). We have been following the EDLA commentary on Scarborough as its erosion would significantly raise the potential liability of those companies who contract for the use of vessels. See previous posts here and here for more background on the Scarborough fight in the Eastern District of Louisiana. Recently, one of the two EDLA Judges holding the view that Scarborough was no longer good law reversed his course, resulting now in a 7-1 score in favor of Scarborough, further reducing concern for an unpredictable judicial roulette on this issue.

In a nutshell, Scarborough was the legal consequence of a long line of jurisprudence in the 5th Circuit holding that punitive damages were not available under the Jones Act or General Maritime Law (“GML”) that began with Miles v. Apex Marine, 498 U.S. 19 (1990). Where Miles protected the Jones Act employers from punitive damages, Scarborough protected all other third party defendants, such as oil and gas companies who had hired those Jones Act employers. In 2009, Townsend reined in the expanding prohibitions on punitive damages by finding that they could be awarded under GML for the employer’s willful and wanton failure to pay maintenance and cure. Townsend very directly and explicitly abrogated Guevera v. Maritime Overseas Corp., 59 F.3d 1496 (5th Cir. 1995) which had previously held just the opposite. That abrogation is relevant here because the Scarborough court cited Guevera favorably and extensively in its analysis.

Though Townsend definitely overruled Guevera, it also re-affirmed Miles, which remains a pillar of maritime jurisprudence in this area. Plaintiff attorneys view Townsend as a means to reverse the expansion of Miles and have renewed their attack on those judge-made roadblocks to the availability of punitive damages. With oil and gas companies being viewed as the “deep pockets” in lawsuits, Scarborough’s protection of those companies has become a popular focus.

After Townsend, several judges re-affirmed Scarborough with little more than lip service, as it seemed clear that Townsend was limited to maintenance and cure issues and the district courts could not “assume the Fifth Circuit has changed its position on personal injury claims falling outside the scope of Townsend.” See In re: Deepwater Horizon, 2011 WL 4575696 (E.D. La. 9/30/11) (Barbier, J.); see also O’Quain v. Shell Offshore, Inc., 2013 WL 149467 (E.D. La. 1/14/13) (Berrigan, J.); In re: International Marine, LLC, 2013 WL 3293677 (E.D. La. 6/28/13) (Lemmon, J.); Bloodsaw v. Diamond Offshore Mgmt. Co., 2013 WL 5339207 (E.D. La. 8/19/13) (Vance, J.); Ainsworth v. Caillou Island Towing Co., 2013 WL 3216068 (E.D. La. 10/21/13) (Brown, J.). Despite the perceived clarity, Judge Barbier foresaw the potential dispute that could arise on this issue given the underlying reasoning in Townsend. (“Though this conclusion is not without doubt given the Supreme Court’s recent decision in [Townsend]…”). In Todd v. Canal Barge Co., 2013 WL 5410409 (E.D. La. 9/25/13), Judge Fallon provided the first true analysis of the continued validity of Miles and its progeny after Townsend. Therein, Judge Fallon acknowledged the limitations of Townsend and the re-affirmation of Miles, and dismissed the plaintiff’s claims for punitive damages for negligence and unseaworthiness. This opinion makes his later decision in Collins all-the-more anomalous.

In 2014, the U.S. 5th Circuit decided McBride v. Estis Well Service, LLC, 768 F.3d 382 (5th Cir. 2014), wherein the en banc panel also held that Townsend was narrowly limited to maintenance and cure claims. McBride acknowledged the continued vitality of Miles to preclude all other forms of punitive damages claims under GML or the Jones Act, though it did not directly mention Scarborough. Judge Fallon then got another opportunity to address Scarborough in light of both Townsend and McBride. See Collins v. ABC Marine Towing, LLC, 2015 WL 5254710 (E.D. La. 9/9/2015). Therein, Judge Fallon distinguished Miles and McBride and was persuaded by Townsend’s abrogation of Guevera, which he felt served as the foundation for Scarborough. Judge Fallon held that Scarborough was “effectively overruled” by Townsend, finding that it was “inconsistent with current Supreme Court precedent.” He did not cite to his prior ruling in Todd just a year prior. This decision served as the first major blow to formerly-protected third party, non-Jones Act employers in the EDLA.

Shortly thereafter, Judge Morgan joined the majority, issuing two opinions upholding Scarborough. See Howard Offshore Liftboats, LLC, 2015 WL 7428581 (E.D. La. 11/20/15); Lee v. Offshore Logistical and Transports, LLC, 2015 WL 7459734 (E.D. La. 11/24/15). A few months later though, Judge Zainey issued an opinion against Scarborough, relying heavily on Judge Fallon’s reasoning in Collins. See Hume v. Consolidated Grain & Barge, Inc., 2016 WL 1089349 (E.D. La. 3/21/16). Judge Morgan again re-affirmed her confidence in Scarborough in Lewis v. Noble Drilling Services, 2016 WL 3902597 (E.D. La. 7/19/2016).

Heading into the 2017, only Judges Fallon and Zainey had rejected the continued viability of Scarborough and its punitive damages prohibition, while at least six of their colleagues held differently. Then, unexpectedly, Judge Fallon changed his mind and joined the majority. See Wade v. Clemco Indus., No. 16-00502 (E.D. La. 2/1/2017). Wade presented Judge Fallon with yet another opportunity to directly address Scarborough; but, this time his analysis and holding were fundamentally different. Wherein Collins, he focused on Scarborough’s reliance on Guevera, in Wade, he instead focused on Miles. Judge Fallon was also persuaded this time by McBride: “It has become clear since the en banc opinion in McBride that in wrongful death cases brought under general maritime law, a survivor’s recovery from employers and non-employers is limited to pecuniary losses.” Quite differently than holding that Scarborough was “effectively overruled,” this time he noted that McBride gave it “clarity and vitality.” As a consequence, Judge Fallon dismissed the plaintiff’s punitive damages claims against the third parties who were not the plaintiff’s Jones Act employer. This is good news for third party defendants finding themselves on the wrong end of a Jones Act lawsuit in the EDLA, as there is now only one judge’s opinion in favor of (and seven against) allowing punitive damage claims to proceed against them. Since these decisions are interlocutory in nature, they do not get appealed by right, and all prior cases have settled before the 5th Circuit could comment. Nevertheless, we will keep an eye out for any further developments, hoping that the remaining judges who get an opportunity to consider this issue fall in line with the legally-sound majority.

LouisianaPaddleboatStamp

By Mallory McKnight Fuller

When two parties agree to arbitrate, the obvious hope of the prevailing party is that the losing party will voluntarily comply with the arbitrator’s decision. This article is directed towards the situation in which the losing party refuses to so comply, and the prevailing party must petition the appropriate court system to “enforce” the arbitrator’s award.

Until confirmation, modification, or correction by a court of competent jurisdiction, an arbitration award is unenforceable under the law. The process for enforcing an arbitration award in Louisiana depends on whether the Federal Arbitration Act (“FAA”) or the Louisiana Binding Arbitration Law (“BAL”) applies.[1]

CONFIRMING ARBITRATION AWARDS

Whichever law applies, a party wishing to confirm an arbitration award must file a proceeding requesting confirmation of the award in a court of competent jurisdiction within one year of the award’s issuance.[2] While this one-year period is mandatory under the BAL, the federal courts of appeals are split on whether the same period is mandatory under the FAA. However, the U.S. Court of Appeals for the Fifth Circuit, which is the appellate court of federal jurisdiction over Louisiana, has implied that the one year limitations period is mandatory.[3]

In federal court, the FAA requires a party to begin the process of confirming an arbitration award by filing (and serving) either a petition or motion to confirm in the appropriate federal district court.[4]  Unlike the BAL, however, the FAA does not create independent subject matter jurisdiction, so the applicant must show that the federal district court has original subject matter jurisdiction over the dispute.[5]  The federal court has personal jurisdiction over the necessary parties once a party serves notice of the confirmation application on all parties.[6]

In both federal and state court, the confirmation of an arbitration award is a summary proceeding.[7]  The appropriate court will confirm the arbitration award (by granting the applicant’s motion) if no party challenges the enforcement of the award, and the court finds no grounds for vacating, modifying, or correcting the award.[8]  The court enters judgment on the award, which has the same force and effect as an ordinary judgment.[9]

VACATING, MODIFYING, OR CORRECTING AN ARBITRATION AWARD

Both the FAA and the BAL permit a party to challenge or request vacation, modification, or correction of an arbitration award.[10]  A notice of a motion to vacate, modify, or correct an arbitration award must be served upon the adverse party within three months after the award is issued.[11]  The grounds upon which an arbitration award can be changed or overturned are narrow and well-defined. Practically, this makes it very rare and difficult to alter an arbitration award.

Because arbitration is favored, both federal and state courts presume that an arbitration award is valid. Under the FAA and BAL, a court has authority to vacate an award only upon the following grounds:

  1. where the award was procured by corruption, fraud, or undue means;
  2. where there was evident partiality or corruption in the arbitrators, or either of them;
  3. where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced; or
  4. where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.[12]

The FAA and BAL also limit a court’s authority to modify or correct an arbitration award. An award can be modified or corrected only:

  1. Where there was an evident material miscalculation of figures or an evident material mistake in the description of any person, thing, or property referred to in the award.
  2. Where the arbitrators have awarded upon a matter not submitted to them, unless it is a matter not affecting the merits of the decision upon the matter submitted.
  3. Where the award is imperfect in matter of form not affecting the merits of the controversy.[13]

If one of these two grounds apply, the courts will modify or correct arbitration awards “so as to effect the intent thereof and promote justice between the parties.”[14]

AWARDS AND ORDERS SUBJECT TO APPEAL

Both the FAA and the BAL permit the appeal of certain arbitration orders, including any order confirming, modifying, correcting, or vacating an award.[15]  Under the BAL, a party appeals from an arbitration order or judgment entered on an award in the same manner as a party appeals from an ordinary order or judgment.[16]  The federal courts and Louisiana appellate courts review a trial court’s confirmation of an arbitration award de novo.[17]

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[1] Chapter 1 of the FAA governs domestic arbitrations and applies to maritime disputes and contracts “involving commerce.” 9 U.S.C. §§ 1-16. The BAL governs arbitration in Louisiana, unless preempted by the FAA. La. R.S. §§ 9:4201-9:4271.

[2] 9 U.S.C. § 9; La. R.S. 9:4209.

[3] Bernstein Seawell & Kove v. Bosarge, 813 F.2d 726, 731 (5th Cir. 1987) (noting the complaint to enforce the arbitration award was filed within one year “As required by 9 U.S.C. § 9”).

[4] If the arbitration agreement does not specify the particular court, the party applying for confirmation of the award may file in any court in the district where the award was issued. 9 U.S.C. § 9.

[5] Vaden v. Discover Bank, 556 U.S. 49 (2009).

[6] 9 U.S.C. § 9.

[7] Id.; La. R.S. § 9:4209; see also Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 22-23 (1983).

[8] 9 U.S.C. §§ 10-11; La. R.S. §§ 9:4205 and 9:4209.

[9] 9 U.S.C. § 13; La. R.S. § 9:4214.

[10] 9 U.S.C. § 11; La. R.S. § 9:4211.

[11] 9 U.S.C. § 12; La. R.S. § 9:4213.

[12] 9 U.S.C. § 10; La. R.S. § 9:4210.

[13] 9 U.S.C. § 11; La. R.S. § 9:4211.

[14] Id.; Gilbert v. Robert Angel Builder, Inc., 45,184 (La. App. 2 Cir. 4/14/10); 24 So. 3d 1109, 1113.

[15] La. R.S. § 9:4215; 9 U.S.C. § 16.

[16] La. R.S. § 9:4215.

[17] NCO Portfolio Mgmt., Inc. v. Walker, 08-1011 (La. App. 3 Cir. 2/4/09); 3 So. 3d 628, 632; Sarofim v. Trust Company of the West, 440 F.3d 213 (5th Cir. 2006)

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.