fifth

By Chase Zachary

On April 18, 2017, the U.S. Court of Appeals for the Fifth Circuit released a published opinion in Guilbeau v. Hess Corp.[1] The court affirmed the application of Louisiana’s subsequent purchaser doctrine to claims for environmental damages allegedly caused by activities of a former mineral lessee prior to the date that the plaintiff owned the property. Although the Fifth Circuit previously reached a similar conclusion in an unpublished decision,[2] Guilbeau is the court’s first precedential opinion addressing the subsequent purchaser doctrine.

As discussed on Kean Miller’s Louisiana Law Blog, here[3] and here,[4] the subsequent purchaser doctrine bars a plaintiff’s claims for property damages that occur prior to the plaintiff’s ownership of the property. The Louisiana Supreme Court provided a “thorough analysis”[5] of the doctrine in Eagle Pipe & Supply, Inc. v. Amerada Hess Corp.[6] There, the court “clarified that damage to property creates a personal right to sue, which unlike a real right, does not transfer to a subsequent purchaser ‘[i]n the absence of an assignment or subrogation.’”[7] However, plaintiffs have argued that the Eagle Pipe opinion did not address whether the subsequent purchaser doctrine applies “to fact situations involving mineral leases or obligations arising out of the Mineral Code.”[8]

The facts of Guilbeau are straightforward. Defendant Hess Corporation’s (“Hess’s”) predecessors operated until 1971 on the property-in-suit under several mineral leases.[9] All of those leases expired in 1973.[10] The plaintiff purchased the property-in-suit in 2007.[11] The “sale did not include any assignment of rights to sue for pre-purchase damages.”[12] After the plaintiff sued Hess for alleged contamination to the property, the federal district court granted Hess’s motion for summary judgment and dismissed the plaintiff’s claims based on the subsequent purchaser doctrine.[13] The Fifth Circuit affirmed.[14]

Making an “Erie guess” of how the Louisiana Supreme Court would decide the issue,[15] the Fifth Circuit identified a “clear consensus . . . among all Louisiana appellate courts that have considered the issue . . . that the subsequent purchaser rule does apply to cases . . . involving expired mineral leases.”[16] After tracing those Louisiana appellate decisions,[17] the Court found “no occasion to depart from the above-described precedent” and held that the subsequent purchaser doctrine barred the plaintiff’s claims.[18] The Court also noted that “the Louisiana Supreme Court has had multiple opportunities to consider this issue and has repeatedly declined to do so.”[19] Notably, the Fifth Circuit declined to certify the subsequent purchaser issue to the Louisiana Supreme Court on the basis that “[w]hen, as here, the appellate decisions are in accord, the law is not unsettled, and certification is unwarranted.”[20]

The Fifth Circuit is simultaneously considering a companion case, Tureau v. Hess Corp.[21] That suit involves an identical issue—i.e., whether the district court correctly applied the subsequent purchaser doctrine to dismiss claims for alleged property damage against former mineral lessees. The Fifth Circuit previously held Tureau in abeyance pending its decision in Guilbeau, and a decision in Tureau is expected shortly.

The Fifth Circuit’s Guilbeau opinion affirmatively resolves, for Louisiana federal courts, whether the subsequent purchaser doctrine applies to property damage claims against current and former mineral lessees. The decision accordingly provides much-needed certainty to both property owners and oil and gas operators involved in “legacy” litigation.

_____________________________

[1] No. 16-30971, — F.3d –, 2017 WL 1393709 (5th Cir. Apr. 18, 2017), http://www.ca5.uscourts.gov/opinions/pub/16/16-30971-CV0.pdf

[2] See Broussard v. Dow Chem. Co., 550 F. App’x 241 (5th Cir. 2013).

[3] http://www.louisianalawblog.com/coastalwetlands-issues/louisiana-supreme-court-expands-judicial-limitations-on-landowner-tort-claims/.

[4] http://www.louisianalawblog.com/energy/louisiana-second-circuit-court-of-appeals-upholds-application-of-subsequent-purchaser-doctrine-in-oilfield-legacy-case/.

[5] Guilbeau, 2017 WL 1393709, at *2.

[6] 79 So. 3d 246 (La. 2011).

[7] Guilbeau, 2017 WL 1393709, at *2 (quoting Eagle Pipe, 79 So. 3d at 279) (emphasis in original).

[8] 79 So. 3d at 281 n.80.

[9] Guilbeau, 2017 WL 1393709, at *1.

[10] Id.

[11] Id.

[12] Id.

[13] Id.

[14] Id.

[15] Id.

[16] Id. at *2.

[17] Id. at *2-4.

[18] Id. at *4.

[19] Id.

[20] Id.

[21] No. 16-30970.

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.

This August 14, 2016 US Coast Guard handout photo shows Coast Guard personel bringing in a boat to evacuate residents from floodwaters in Baton Rouge, Louisiana. Emergency crews in flood-devastated Louisiana have rescued more than 20,000 people after catastrophic inundations that left at least five dead, news reports said August 15. As many as 10,000 people are living in shelters after a weekend of torrential rains that has prompted the federal government to declare a disaster, according to Louisiana governor John Bel Edwards. / AFP PHOTO / US Coast Guard / Petty Officer 3rd Class Brandon GILES / RESTRICTED TO EDITORIAL USE - MANDATORY CREDIT "AFP PHOTO / US COAST GUARD / Petty Officer 3rd Class Brandon Giles" - NO MARKETING - NO ADVERTISING CAMPAIGNS - DISTRIBUTED AS A SERVICE TO CLIENTS PETTY OFFICER 3RD CLASS BRANDON /AFP/Getty Images

By Elisabeth Q. Prescott

The recent flooding of the Baton Rouge and surrounding communities has ravaged property, devastated lives, and impacted businesses.  Much of the legal discussion surrounding the flooding in Louisiana will inevitably involve the ins and outs of flood insurance and FEMA assistance.  However, there are other legal implications of the floods that need some consideration, such as the rights and obligations of landlords and tenants in light of the damage and devastation.

Whether a landlord or tenant, critical at this stage of the game is your knowing what Louisiana law provides by default, what your lease contract provides and where your lease is silent.  The following are key points to keep in mind.

Under default Louisiana law, a Louisiana landlord has the obligation to maintain the leased premise in a suitable condition for the purpose for which it was leased. La. Civil Code art. 2682.  Landlords must maintain the property by making all necessary repairs, and tenants must allow the Landlord to make all necessary repairs that cannot be postponed until the end of the lease.  La. Civil Code arts. 2691 and 2693.

Where damage to the leased premises is so significant that the premises are considered totally destroyed, as is likely the case in many of the present instances, default law provides that the lease terminates by operation of law (i.e., without the need for judicial intervention), with neither party owing damages to the other.  La. Civil Code art. 2714; see also Comment (d) to article 2714.  If the leased premises are only partially destroyed, the tenant may be entitled to diminution of rent until such time as the landlord can complete the necessary repairs or dissolution of lease, whichever is more appropriate under the circumstances.”  La. Civil Code art. 2715.

Landlords and tenants must bear in mind that the foregoing are default provisions.  Parties to a lease are free to negotiate the specific terms of their lease contracts, and it is important to note that many leases contain specific provisions relating to the rights and obligations of the parties in the context of partial or complete destruction of and repairs to the leased premises.  Louisiana case law has addressed article 2714’s provision that a lease terminates by operation of law in light of complete destruction of the leased premises and found that parties to a lease remain free to contract around the default law and, in so doing, prevent such automatic termination.  See, Comment (e) to La. Civil Code art. 2714 citing, Cerniglia v. Napoli, 517 So.2d 1209 (La.App. 4 Cir. 1987).

Important Tips to Consider:

  1. Read your lease and know your rights and obligations;
  2. In the aftermath of destruction to the leased premises, the landlord and tenant should communicate early, openly and clearly about the lease provisions and the parties’ respective intentions;
  3. The landlord and tenant should discuss the condition of the property and, if possible and so long as the premises are structurally and environmentally sound, landlord should attempt to provide tenant access to the leased premises to assess damage to and salvage the tenant’s movables. Where such is not possible, it is wise for the landlord to document his attempts to communicate with the tenant and to endeavor as best possible to document damage to the tenant’s movables so as to assist with tenant’s preservation of any insurance claims.
  4. It may go without saying but tenants should ensure their landlord is aware of the damage to the leased premises and, as best possible, landlord should attempt to account for the post-evacuation location of its tenant to ensure proper lines of communication regarding the lease and leased premises remain open.
  5. Landlords who did not have flood insurance or who may be under-insured should consider whether they may qualify for a Small Business Association loan for property or economic loss.

 

fracking

By Tod J. Everage

Since the announcement by Helis Oil & Gas that it intended to introduce hydraulic fracturing (“fracking”) to St. Tammany Parish, the local response has been vitriolic to stay the least – from public protests and interstate billboards to lawsuits. In fact, according to DNR officials, the large public hearing on Helis’ drilling permit application was a first for them. These fights are raging across the country between oil and gas companies and environmentalists and concerned citizens who worry the fracking will adversely affect their groundwater or adjoining lands. States like Vermont, Maryland, New York, and others have banned fracking altogether. Other local and state governments have banned fracking bans. Needless to say, this issue is a hot topic in the U.S. right now.

Helis, a New Orleans-based energy company, claims over 60 successful fracturing projects around the U.S., and now they hope to do one closer to home in St. Tammany Parish. In June 2014, the St. Tammany Parish Government filed a lawsuit against James Welsh, in his capacity as Commissioner of Conservation for the State of Louisiana, DNR seeking to prevent DNR from issuing a critical permit that Helis needed to begin drilling its exploratory well. St. Tammany argued that its zoning laws prohibited Helis from drilling the well at the proposed site – private timber lands, that were zoned A-3 residential. The Town of Abita Springs later filed similar suits in multiple courts. In December 2014, the Office of Conservation granted Helis’ permit application. In the St. Tammany Parish lawsuit, the state district court judge eventually granted a partial summary judgment on behalf of Helis, declaring that the St. Tammany Parish zoning ordinances were pre-empted by general state law, and on behalf of the Commissioner, declaring that DNR had complied with the law during the Master Plan review of the permit process. Other claims in the case remained unresolved, but this ruling was immediately appealed. On March 9, 2016, the Louisiana First Circuit affirmed the district court’s summary judgment. Though Helis’ opponents have publicly declared that they would not stop until the U.S. Supreme Court weighs in, this is latest in a string of victories for Helis in the various lawsuits filed to stop the proposed drilling.

In this case, St. Tammany Parish argued that its zoning ordinances precluded Helis (or anyone) from drilling wells on the proposed drilling site because it was zoned A-3 residential – “single-family residential environment on moderate sized lots.” The ordinances limit the land use of such zones to “certain specified cultural, educational, religious, and public uses.” The property has been used as a pine tree farm for over 30 years, and sits atop the Southern Hills Aquifer, the sole source of drinking water in the area. St. Tammany Parish argues that its authority to enact and enforce its own zoning ordinances within its geographic boundaries is provided by the Louisiana Constitution, and cannot be displaced.

Helis and DNR countered that La. R.S. § 30:28F expressly preempts local zoning ordinances where they contradict. The State Office of the Conservation is statutorily mandated to regulate the oil and gas resources in Louisiana, and that statute provides that DNR’s issuance of a permit is “sufficient authorization” for the permit holder to enter the property and drill. “No other agency or political subdivision of the state shall have the authority, and they are hereby expressly forbidden, to prohibit or in any way interfere with the drilling of a well or test well in search of minerals by the holder of such a permit.” La. R.S. 30:28F. These laws were enacted at a state level under the guidance of the Louisiana Constitution acknowledging environmental preservation as a public policy of the state.

On issues of pre-emption, unless there is an express provision mandating it, the courts must look to legislative intent, which includes “examining the pervasiveness of the state regulatory scheme, the need for state uniformity, and the danger of conflict between the enforcement of local laws and the administration of the state program.” Palermo Land Co., Inc. v. Planning Comm’n of Calcasieu Parish, 561 So.2d 482, 497 (La. 1990) (citing Hildebrand v. City of New Orleans, 549 So.2d 1218, 1227 (La. 1989)). The First Circuit found that the legislative intent and pervasiveness of the state regulatory scheme was clearly defined (see “expressly forbidden”) within La. R.S. 30:38F itself. As a result, the First Circuit agreed with Helis and found those ordinances that specifically interfered with Helis’ drilling of the well to be unconstitutional.

Underscoring that, the Louisiana Constitution reminds that “notwithstanding any provision of this Article, the police power of the state shall never be abridged.” La. Const. Art. §9(B). The Commissioner’s power is an exercise of police power and the statutes addressing local zoning regulations do not apply to the Commissioner in the exercise of that power. St. Tammany argues then that the Commissioner’s regulation of the oil and gas activity does not preclude those constitutional zoning powers reserved by the local government. The First Circuit disagreed. Specifically, those competing constitutional mandates are both found in Article VI of the Constitution, and §9(B) again provides that nothing within Article VI can abridge the Commissioner’s policing power.

Finally, La. R.S. § 30:28F is a general law enacted by the legislature that denies authority to a political subdivision – such as a Parish – by expressly prohibiting interference with the drilling of a well by a permit holder. Section 5 of the Article VI of the State Constitution further acknowledges that adopted home rule charters by local governments are limited by Louisiana general law and other sections of the Constitution. Consequently, the First Circuit affirmed the district court’s ruling in all respects, and unless reversed by the Louisiana Supreme Court, its order renders local ordinances that infringe on a permit-holder’s drilling rights unconstitutional.

MIL32099//1

By Kyle C. McInnis

The recent downturn in energy prices has given consumers a welcomed break at the gasoline pump. The people producing the energy, however, from landowners, to oil companies, to oil field service providers, have felt the full negative effects of the steep price decline. Those producers are seeing price pressure at every turn, reducing their net incomes and eroding their enterprise valuations. Things aren’t always as bad as they seem though. Today’s mix of low energy prices, low interest rates, and the recent rise in the federal estate tax rate make estate freeze transactions particularly attractive to those people in the oil and gas industry.

While this significant price drop is painful for those in the oil and gas industry, it presents a significant estate planning opportunity. For people lucky enough to be concerned about federal estate taxes (those with a net worth in excess of $5.45 million dollars individually or $10.9 million for a married couple) the 40% tax rate presents a significant threat to their family wealth. Therefore, these taxpayers try to minimize the value of their taxable estate, thereby minimizing their exposure to the federal estate tax. Taxpayers often use discount entities and other tax strategies to reduce the taxable value of their estates.

The recent energy price dip, however, has done much of the work of minimizing asset values already. The taxpayer’s current goal is freezing the current low values of their oil and gas assets in anticipation of a recovery in energy prices later. Several estate planning strategies can effectively freeze the current value of assets in a taxpayer’s estate. When energy prices eventually recover, the value of the taxpayer’s taxable estate is frozen at today’s values, being a function of today’s lower prices. The value of the assets grows with the subsequent increase in energy prices, but outside of the taxpayer’s taxable estate.

An example will illustrate the point. Assume Martin, a single man, has oil and gas holdings currently worth $10 million when the price of crude is $30 a barrel. Martin engages in an estate freeze transaction at current prices. Two years later, Martin dies. At that time, oil prices are at $60 a barrel and Martin’s former holdings are worth $20 million. The $10 million increase in value from the price jump is excluded from Martin’s taxable estate because Martin engaged in an estate freeze transaction when oil was at $30 a barrel. For federal estate tax purposes, Martin only has his $10 million frozen estate. The freeze transaction has avoided inclusion of the additional $10 million in Martin’s taxable estate and saved Martin’s estate $4 million in additional federal estate taxes!

Freeze transactions take a variety of forms. They include grantor retained annuity trusts or unitrusts in which the taxpayer transfers assets to a trust in return for a stream of payments that the trust promises to pay the taxpayer over time. Some taxpayers prefer a sale to a special type of trust called an “intentionally defective grantor trust.” Certain of these transactions allow for a freeze in estate tax values, but still allow the taxpayer to share in the appreciation of the sold asset through variable repayments that can increase as the value of the assets sold increase.

These transactions work best when interest rates are low. Historically, we are still in a low interest rate environment, a further incentive to consider a freeze transaction.

The attractiveness of these transactions won’t last forever. Oil prices will eventually recovery. Additionally, interest rates were hiked by the Federal Reserve last year and are forecasted to rise again in the near future.

For those in the oil and gas industry, today is a challenging business environment. But, this environment presents an exceptionally good opportunity to implement an effective estate planning strategy to save future federal estate tax liabilities.

Kyle McInnis is a partner in the Shreveport office of Kean Miller and practices in the estate planning, tax, and business and corporate practice groups. He represents business clients in entity formations, corporate acquisitions and dispositions, and all matters pertaining to closely held businesses. He represents individuals and families in all aspects of the estate planning process, including devising and implementing transfer tax minimization strategies. Kyle is a Tax Law Specialist and an Estate Planning and Administration Specialist certified under the Louisiana Board of Legal Specialization. He was named the Best Lawyers’ 2013 and 2015 Shreveport Trusts and Estates “Lawyer of the Year” and the 2016 Shreveport Tax “Lawyer of the Year.”

 

drone

By Elisabeth Q. Prescott

This year’s U.S. Open has brought its fair share of excitement on the court.  The sport’s beloved Serena Williams, who was just two matches away from being only the fourth female to complete a calendar grand slam, was eliminated by an unranked Italian player, and an potential showdown between tennis’ rock stars Novak Djokovic and Roger Federer make this year’s tournament one for the record books.  Perhaps more notably, the tournament has seen much entertainment off the court, from Jimmy Fallon and Justin Timberlake’s dance tribute to Beyonce’s All the Single Ladies to fans booing current GOP presidential front-runner, Donald Trump.  While celebrity sightings at the tournament are somewhat expected, drone sightings are not.

In the opening week of the U.S. Open, a small, privately-owned drone crashed into open seats inside Arthur Ashe stadium, reigniting in the media conversations over private-sector use of drones and, in light of the fourteenth anniversary of September 11th, security concerns.  To say that September 11th is fresh for most Americans is an understatement. In fact, since September 11th, dialogue regarding terrorism concerns is no longer left to high-ranking public officials; rather, those concerns have permeated the typical American living room. With certain national organizations advocating for increased private-sector (particularly commercial) use of drones, we can expect that citizens’ groups having an interest in ensuring that individuals’ security and privacy concerns are properly balanced will take notice and will join the dialogue.

One of those national organizations advocating for integrating commercial use of drones in the National Air Space (NAS) is the National Association of Realtors.  On September 10, 2015, ironically one day before the anniversary of the 9-11 event, testimony of the NAR’s president, Chris Polychron, was taken by a House Judiciary Subcommittee on Courts, Intellectual Property, and the Internet at a hearing on “Unmanned Aerial Vehicles: Commercial Applications and Public Policy Implications.”  In his testimony, Mr. Polychron highlighted that:

“the potential applications for UAS [unmanned aircraft systems] technology in the real estate industry are plentiful and growing.  They provide the opportunity for real estate practitioners to take unique and informative photographs and videos of properties that in many cases would require many time-consuming trips, or even using a helicopter or small plane to obtain.  Using UAS technology to do the same thing is less expensive, less time consuming, and less dangerous to everyone involved.”

and

“UAS technology will be an important tool especially for commercial real estate practitioners who work with these types of properties, such as shopping centers, office parks, parking structures or large tracts of land which can’t easily be captured in a single image.”

 Mr. Polychron readily acknowledged the reality that increased private-sector use of drones brings increased concerns regarding security and the protection of privacy.  In so doing, Mr. Polychron addressed, with the House Judiciary Subcommittee, NAR’s interaction with both the Federal Aviation Administration (FAA) and the National Telecommunications and Information Administration (NTIA), and the work of these groups to develop industry-wide standards for best practices, including security and privacy protection practices to allow for broader commercial use in the real estate industry.

Currently, commercial use of drones is prohibited unless a “Section 333” waiver has been obtained from the FAA.  However, earlier this year, the FAA took steps, through the FAA Modernization and Reform Act of 2012, towards more easily integrating drones for commercial use by releasing proposed rulemaking on integrating small UAS for commercial use into the NAS.  According to Mr. Polychron, “[t]his is the first step toward a regulatory environment where commercial drone use is legal and has prescribed federal guidelines.”

The use of drones in the real estate industry may be as exciting to real estate practitioners as a Djokovic-Federer U.S. Open match-up is to tennis lovers (or a Timberlake tribute to Beyonce is to SNL faithfuls).  Whether the ultimate regulatory regime, in which commercial use of drones is integrated, successfully balances security and privacy concerns remains to be seen.  Stay tuned.

louis

By Matthew C. Meiners

Effective January 1, 2015, the Louisiana Business Corporation Law was replaced in its entirety by the new Louisiana Business Corporation Act (LBCA).  Here are some of the highlights of the changes effected by the LBCA:

  • New Remedy for Oppressed Shareholders – Buyout. If a corporation engages in oppression of a shareholder, the shareholder may withdraw from the corporation and require the corporation to buy all of the shareholder’s shares at their fair value (without discounting for lack of marketability or minority status).
  • No Director or Officer Liability for Money Damages (default rule).  The default rule has been flipped, but the articles of incorporation may still modify the default rule.  Under the old law, the articles of incorporation of the corporation could eliminate or limit the personal liability of a director or officer to the corporation or its shareholders for monetary damages for breach of fiduciary duty, with certain exceptions.  Under the LBCA, no director or officer shall be liable to the corporation or its shareholders for money damages for any action taken, or any failure to take action, as a director or officer, with exceptions; however, the articles of incorporation can limit or reject this protection against liability.
  • Amendment to Articles of Incorporation – Required Approval.  An amendment to the articles of incorporation now requires a majority of the shareholder votes entitled to be cast on that amendment (unless the articles of incorporation require a greater vote).  Under the old law, an amendment to the articles of incorporation required the vote of at least 2/3 of the voting power present at a shareholders’ meeting (unless the articles of incorporation required a larger or smaller vote).
  • Corporate Records – New Inspection Right.  The old law’s 5% ownership requirement remains for shareholder inspection of “any and all of the records of the corporation,” but a new right of inspection of certain key records by any and all shareholders has been created.
  • Annual Meetings – Shareholder Right to Demand Calling.  Under the LBCA, a single shareholder still has the right to demand the calling of an annual shareholders’ meeting.  However, the LBCA now allows directors to be elected by written consent in lieu of an annual meeting, and a shareholder only has the right to demand the calling of an annual shareholders’ meeting if:  (1) no annual shareholders’ meeting is held for a period of eighteen months, and (2) directors are not elected by written consent in lieu of an annual meeting during that period.
  • Unanimous Governance Agreements Allowed.  The LBCA allows “unanimous governance agreements,” a new form of governance document which can eliminate the board of directors or restrict the discretion or powers of the board of directors, as well as provide for the management of the corporation by one or more shareholders or other persons.
  • Shares May Now Be Issued for Promissory Notes and for Contracts for Services to be Performed.  The LBCA permits the board of directors to authorize shares to be issued for consideration consisting of any tangible or intangible property or benefit to the corporation, including cash, promissory notes, services performed, contracts for services to be performed, or other securities of the corporation.  The old law did not permit issuance of shares for promissory notes or contracts of future performance.
  • Modification of Default Quorum Rule.  Under the LBCA, the default rule for the constitution of a quorum for purposes of a shareholders’ meeting (i.e., “a majority of the votes entitled to be cast on the matter”) can only be altered by the articles of incorporation, as opposed to the old law’s allowance of modification by the articles of incorporation or the bylaws.
  • Simplified Termination Option.  The LBCA allows corporations to terminate by simplified articles of termination if the corporation:  (1) does not owe any debts; (2) does not own any immovable property; and (3) has not issued shares or is not doing business.  Under the old law, “dissolution by affidavit” provided a similar option, but after dissolution, the shareholders became personally liable for any debts or claims, if any, against the corporation.   Under the LBCA’s simplified termination procedure, no such liability attaches to the shareholders.
  • Electronic Notices and Other Communications Now Permitted. A notice or other communication may be given or sent by any method of delivery, except that electronic transmissions must be in accordance with the statute.
  • Five Day Grace Period for Filing After Execution – Now Only for Original Articles of Incorporation.  Under the LBCA, a corporation’s original articles of incorporation become effective when signed if the articles are received for filing by the Secretary of State within five days, exclusive of legal holidays, after the date that the articles are signed.  This grace period no longer applies to any other filed document.
  • Grace Period for Filing Annual Reports Now 90 Days.  Under the LBCA, the grace period for the filing of annual reports has been reduced to 90 days (formerly 3 years), plus a 30 day notice period.

stethoscopeb

By Sonny Chastain

We have become accustomed to having regular check-ups with our doctors. The doctor will analyze our current physical condition, including heart rate, blood pressure, cholesterol level, lung condition or otherwise. The doctor may order a treadmill test or a screening for a particular function. The doctor will also compare current test results to any prior tests to determine any changes to the body and mind resulting from the stress of our daily lives. The doctor considers any symptoms to determine whether risks associated with developing any particular disease can be reduced through diet, exercise, medication or other intervention. The goal is to stay healthy and fit. While the probing, pricking, injecting, and waiting are all uncomfortable, these activities are certainly better than a stay in the hospital or worse.

Our businesses should undergo a similar checkup or audit – to analyze risks that are connected to the business. Vital signs of the business should be examined to determine the current state of affairs. Similar to the condition of a body, after the business is formed, business owners are often just too busy competing in the marketplace to “take a physical.” The important and urgent items such as payroll, inventory, and sales are the immediate focus. Matters which are important, but non-urgent, including the “vital signs of the business,” get placed on the back burner. Business owners just do not take the time to pay attention to signs or symptoms. No different than a frog that dies because it does not realize the water is heating up, business owners do not pay attention to growth, market changes, etc., which have caused their own “water to heat up.”

Too many times the legal issues in a business are not noticed until after the business has had a “heart attack.” Steps should be taken to proactively consider areas in which the business may be vulnerable. Remedying problems which may be identified in any check-up are much easier to address before a legal issue arises. A legal check-up should be customized for the particular business, but should typically include: (1) review of the By-Laws or Operating Agreement to determine if they are current and appropriately govern the operation of the business; (2) review of insurance coverage to determine whether operational risks of the business are covered or not; (3) identification of any trade secrets and consideration of whether reasonable steps are really being taken to keep them confidential; (4) review of logos, slogans, or other indicia utilized as a trademark to identify the business and whether they are protected; (5) analyze whether the business owns a copyright in or has a license for any works that are integral to operations, like software, publications, drawings, etc.; (6) review of employee handbook and consideration of whether the business is operating consistent with it; and (7) analysis of whether certain employees should have to execute a valid non-compete or non-solicitation agreement. Similar to action items for the body like exercise, diet, or medication, intervention or remedies can be considered for any identified shortcomings of the business.

So, maybe it is time for a check-up — to pick up your head and work “on” the business and not just “in” the business. Maybe it is time to consider the applicable vital signs of the business so as to get the “house in order.” After all, there are three outcomes for a business: (1) it fails/dissolves, (2) it is inherited by the owner’s heirs, or (3) it is sold or transferred to a third party. Failing to check vital signs may contribute to the first possible outcome. Otherwise, appropriate business checkups and action items to keep the business healthy, wealthy and wise make the other two outcomes much easier to accomplish.

How healthy is your business? Is it fit, fat, or on the verge of a heart-attack or stroke? Maybe it is time to conduct a business audit to determine the current condition of the business. Much like a routine physical exam, a legal check-up by your attorney will help you address any troubling finding, and provide you with a full report on the health of your company.

 

 

Louisiana-Legislature-e1366917085963

By Allison Lewis Reeves

On the recommendation of the Louisiana Law Institute, the Louisiana Legislature passed Act 281 (the “Act”). The Act concerns amendments to the Louisiana Civil Code relative to security, pledge and recordation. Civil Code art. 3133 et seq. concerning pledge have been deleted in their entirety and replaced with general articles on the liability of an obligor for his obligations and the relationship of creditors vis-à-vis the obligor and other creditors. The articles concerning pledge have moved to Civil Code art. 3141 et seq. although the substance of the pledge articles has also changed.

Civil Code art. 3136 defines security as “an accessory right established by legislation or contract over property, or an obligation undertaken by a person other than the principal obligor to secure performance of an obligation.” The article is new, but the concept is not. It broadens the scope of security beyond simply an obligation created by contract. The new Civil Code art. 3133 et seq. are consistent with previous articles from the 1984 Civil Code Revision. The latest revision seeks to align the civil code articles on security rights with the Louisiana Uniform Commercial Code in Title 10.

Importantly, new Civil Code art. 3346 provides that a pledge of the lessor’s rights in the lease of an immovable and its rents is recorded in the mortgage records of the parish in which the immovable is located. Note that new Civil Code art. 3169 provides that the pledge of the lessor’s rights in the lease of an immovable is not effective as to third parties until the contract is recorded. This represents a change in the law, which formerly required recordation in the conveyance records. For transitional rules applicable to the continued effectiveness of assignments of leases and rents filed in the conveyance records in accordance with former R.S. 9:4401 prior to January 1, 2015, as well as rules that apply to the reinscription, release, transfer, amendment, or other modification of those assignments, see R.S. 9:4403.

For a complete text of the Bill, click here.

 

By Wade R. Iverstine *

* This article originally appeared in the July 8, 2013 edition of Around the Bar

Act No. 88 makes an important change to a creditor’s right to collect a debt from property that the debtor has transferred to someone else. Unlike alternative approaches to transfer avoidance, the right of action in Louisiana – the “Revocatory Action” – makes a transferor’s intent to defraud creditors irrelevant. The proof is simple. The creditor may seize and sell the transferred property if the transfer of that property caused or increased the debtor’s insolvency.

Act No. 88 does not change the elements of the Revocatory Action;[1] it changes the limitations period in “cases of fraud.” Here is the relevant language from Act No. 88:

Civil Code Article 2041 is hereby amended and reenacted . . . to read as follows:

Art. 2041. Action must be brought within one year

The action of the obligee must be brought within one year from the time he learned or should have learned of the act, or the result of the failure to act, of the obligor that the obligee seeks to annul, but never after three years from the date of that act or result.

The three year period provided in this Article shall not apply in cases of fraud.

2013 La. Legis. Acts, No. 88 (newly added language underlined).[2]

In these undefined “cases of fraud” the creditor may look back to transfers passed in the last ten years, compared to three years in normal cases. In the world of transfer avoidance laws, the look-back period is everything. By more than tripling that period based on the transferor’s intent, Act No. 88 invites every plaintiff to plead fraud generally and take discovery into the transferor’s mind.

The 1984 revisions to the Civil Code eliminated the debtor’s fraudulent intent as an element of proof for a Revocatory Action in favor of the objective insolvency test. If Act No. 88 means anything, it must mean that we have returned to the old search for the debtor’s bad thoughts.

Act No. 88 Changes a Key Feature of this State’s Transfer Avoidance Policy

Each jurisdiction in the U.S. provides a system for creditors to collect from property that a debtor transfers to someone else. The basic policy goal is to protect the value of unsecured debt from deceitful transactions while balancing the opposing need for security of title. As time passes from the transaction date, the particular transferee’s property rights overshadow the generalized concern for the value of debt instruments. To strike a balance, each available system, including our own, provides creditors with limitations periods proportionate to a suspected level of deceit. As a result, creditors have more time to intercept deceitful transactions and less time for honest ones.

Louisiana’s solution is the Revocatory Action, derived from the “Paulian Action” under Roman law. The present Revocatory Action makes a creditor’s proof simple: the transfer is annulled if it 1) occurred after the debt was incurred and 2) increased the transferor’s insolvency. The creditor is protected from the detrimental effects of deceit by starting the one-year prescription period from the date when the creditor knew or should have known of the transaction. Transferee is protected by a three-year peremptive period beginning on the date of the transaction, regardless of the debtor’s intent to deceive.

By comparison, the debtor’s deceitfulness is the main focus of common law “fraudulent conveyance” doctrines, which, for 43 states, have been codified in the Uniform Fraudulent Transfer Act (the “UFTA”).

The UFTA establishes three types of fraudulent transfers, subject to the following limitations periods. For the worst kind of deceit – where the transferor has the “actual intent” to defraud creditors – a UFTA cause of action extinguishes after the later of 4 years from the transfer date or 1 year from the date the creditor either learned or reasonably should have learned of the transfer.[3] For the second worst kind of deceit – where actual intent is missing but the debtor should have known what it was doing, given the value it received for the transfer and the amount of its debts – the cause of action extinguishes after 4 years from the transfer date, regardless of whether the creditor discovered or should have discovered the transfer.[4] For the lowest level transfers – where the transferor received less than “reasonably equivalent value” at a time of insolvency – the cause of action extinguishes after one year from the transfer date regardless of what the creditor was able to know.[5]

Louisiana’s concise approach to transfer avoidance law was a major innovation of the 1984 Obligations Revisions to the Louisiana Civil Code of 1870. The pre-1985 Revocatory Action required proof of 1) insolvency of the debtor, 2) injury to the creditor, 3) intent to defraud the creditors, and 4) pre-existing and accrued indebtedness.[6] The evidence that established the debtor’s intent to defraud under transfer avoidance law was difficult to target.

The modern Revocatory Action provides the most direct solution to the main problem by shifting the focus away from the debtor’s bad faith and, instead, upon the damage to creditors. A seizing creditor cares only about preserving the debtor’s collectible net worth, not what the debtor was thinking in attempting to avoid collection. Much deliberation and explanation was expended in retracing the origins of the Paulian Action to bring us to our State’s modern-day objective insolvency test. The objective approach appropriately focuses on the restitution owed to unsecured creditors while balancing the rights of transferees, without the needless complexity of proving the debtor’s intent.

The Revocatory Action has Always Targeted “Cases of Fraud”

Act No. 88 in search of a problem replaces the three-year peremptive period with a special ten-year prescriptive period[7] reserved for “cases of fraud.” In the context of the Revocatory Action, however, the term “cases of fraud” is redundant. Every Revocatory Action targets a case of fraud.

The purpose of the objective insolvency test – the hallmark of the modern Revocatory Action – is to target transactions made “in fraud of creditors” in the way that Roman Paulian Action applied that concept.[8] That is, to ensure that a creditor’s process of execution is not prejudiced by transactions that deplete the debtor’s net worth, regardless of the debtor’s intent.

The debtor’s intent to defraud creditors was the primary cause for a Revocatory Action before 1985. However, the focus on the debtor’s deceitful intent was the result of a confusion in the meaning of the Latin phrase “in fraudem creditorum,” (“in fraud of creditors”), found in the source articles.[9] In Latin, fraus means “prejudice” or “disadvantage”; it does not mean deceit in the modern sense of the word “fraud.”[10] By missing the distinction, over time, the jurisprudence focused on the deceitfulness of the transaction. As a result, a formula was created for distinguishing between “actual” and “constructive” fraud.[11] That formula led to inconsistent applications.

The objective insolvency test introduced by the 1984 Obligations Revisions, eliminated that inconsistency and confusion. By eliminating the debtor’s intent as an element of proof, the modern Revocatory Action focuses on the prejudice the transaction has upon the creditor’s collection process, as opposed to the deceitful qualities of the transaction. Nevertheless, “fraud” in the sense of the Paulian Action remains the target of the modern Louisiana Revocatory Action.

Legislative History Notwithstanding, Act No. 88 Creates an Intent-Based Revocatory Action

Unfortunately, the legislative history of the Revocatory Action and importance of the objective insolvency test was lost on this year’s Legislature. It is unfortunate because had the Legislature retained a memory of its work in 1984 it would have recognized the redundancy and thus confusion created by (again) interjecting the concept of “fraud” into the Revocatory Action.

Legislation trumps history (and logic) as a source of law. We are not allowed to interpret legislation in a way that renders the words meaningless or superfluous.[12] We must search for a meaning, even if the Legislature gave us a poor, however “solemn[,] expression of legislative will.”[13]

Bound by these rules, creditors obviously cannot argue that the ten-year prescriptive period always expires after the three-year preemptive period on the basis that all Revocatory Actions are “cases of fraud.” If all Revocatory Actions are “cases of fraud” (as in fact they are in the Paulian Action sense of the word), then either the ten-year or three–year limitations period applies, but not both. That interpretation renders Act No. 88 superfluous. Instead, the ten-year Revocatory Action must be interpreted to guard against a type of transaction or protect a type of creditor that is different than the type targeted by three-year version.

Act No. 88 provides no way to distinguish the ten- from the three-year right. Unlike the other intent-based approaches to transfer avoidance law that we have seen in Louisiana, Act No. 88 is an incomplete thought. Nothing in the Civil Code can be read in pari materia to define the kind[14] of fraud that distinguishes between intent-based and objective Revocatory Actions. Nothing allows us to define against whom the fraud must be committed, and what must be the object of the fraud. The pre-1985 Revocatory Action and the UFTA were clear on these points.

At least under the pre-1985 Revocatory Action, we had a complete system for determining when the right of action prescribed and what triggered the right of action. Unlike Act No. 88, we had a way to define what the Legislature meant by “in fraud of a creditor’s rights.” Even our Legislature’s flirtation with the UFTA back in the early 2000’s[15] was better than Act No. 88. It was at least a complete thought.

Conclusion

Act No. 88 is a move backward in the area of transfer avoidance law. The new ten-year right of action in “cases of fraud” uses outdated, redundant terminology to define the limitations period, which is one of the most important aspects of the Revocatory Action. The terminology resurrects needless uncertainty in an otherwise artfully crafted, objective, easy-to-use law. That uncertainty will require judges to “proceed according to equity”[16] far too quickly than the primary source of Louisiana law (i.e., legislation[17]) should allow.

The Legislature should either repeal Act No. 88 or complete its thought, in that order of preference.

_______________________________

[1] La. Civ. C. art. 2036 (“An oblige has a right to annul an act of the obligor, or the result of a failure to act of the obligor, made or effected after the right of the oblige arose, that causes or increases the obligor’s insolvency.”)

[2] The original bill was sponsored by the Louisiana State Law Institute and introduced by Representative Abramson. It only dealt with tolling agreements which had previously not worked in Louisiana. After passing the House (with a technical amendment), it was amended in the Senate by Senator Martiny to include the revisions to Article 2041.

[3] Uniform Fraudulent Transfer Act § 9(a).

[4] Uniform Fraudulent Transfer Act § 9(b).

[5] Uniform Fraudulent Transfer Act § 9(c).

[6] Thomassie v. Savoie, 581 So.2d 1031, 1035 (La. App. 1 Cir. 1991).

[7] Now that the three-year period “shall not apply in cases of fraud,” no limitations period is “otherwise provided by legislation[; therefore, the] personal action is subject to a liberative prescription of ten years.” La. Civ. C. art. 3499.

[8] See Murray v. Mae M. Stacy Trust, et al. (In re Goldberg), 277 B.R. 251, 270-285 (Bankr. M.D. La. 2002), for a concise summary of scholarship following the origins of the modern Revocatory Action.

[9] Id. at 273

[10] Id. at 279.

[11] E.g., Gast v. Gast, 19 So. 2d 138, 141 (La. 1944).

[12] Credit v. Richland Parish Sch. Bd., 2011-1003 (La. 3/13/12); 85 So. 3d 669, 678 (“It is a cardinal rule of statutory interpretation that it will not be presumed that the Legislature inserted idle, meaningless or superfluous language in the statute or that it intended for any part or provision of the statute to be meaningless, redundant or useless.”).

[13] La. Civ. C. arts. 9-13.

[14] “As used in [the] source articles, the word ‘fraud’ has a meaning which is difficult to determine but which appears different from its meaning in other contexts.” La. Civ. C. art. 2036, cmt. b.

[15] The Legislature passed the UFTA in 2003 and then repealed it in 2004.

[16] La. Civ. C. art. 4.

[17] La. Civ. C. art. 1.