By Ben Jumonville

A decision handed down by Louisiana’s Third Circuit Court of Appeal on February 21, 2019, is the first reported case to examine the remedy granted to oppressed shareholders by the Louisiana Business Corporation Act (LBCA), which became effective in 2015.

The LBCA introduced in Louisiana a version of what is known as the “oppression remedy,” which entitles a shareholder to withdraw from the corporation and force it to buy all of their shares at “fair value” if the shareholder can demonstrate that the corporation’s distribution, compensation, governance, and other practices are “plainly incompatible with a genuine effort on the part of the corporation to deal fairly and in good faith with the shareholder.”[1]

In Kolwe v. Civil and Structural Engineers, Inc., the Third Circuit reviewed the judgment from a trial held for the limited purpose of valuing the ownership interest of a shareholder who had exercised his right to withdraw on grounds of oppression from a closely held professional engineering firm organized as a Louisiana corporation.[2]

Specifically, the court considered whether it was appropriate to allow for “tax-affecting” when computing the value of the plaintiff’s shares in the corporation, which was taxed as an S corporation. “Tax affecting” in this context means to reduce the value of corporate earnings to account for tax liability, and there is an ongoing debate among legal and valuation professionals about how best to recognize the tax benefits of pass through entities, such an S corporation, in an appraisal. In Kolwe, the corporation’s valuation expert believed the value of the corporation’s receivables should be reduced or “tax affected” to reflect the tax liability that would accrue upon their collection, while the plaintiff’s expert excluded tax affecting in his valuation. The differing opinions on this issue alone resulted in a discrepancy of more than $250,000 in the experts’ respective valuations of the plaintiff’s shares.

The appellate court ultimately followed the trial court in denying the application of tax affecting when valuing the shares. In so ruling, the court reasoned that tax affecting equates to applying a discount to the value of the corporation’s shares in violation of the LBCA’s definition of “fair value,” which prohibits discounting for lack of marketability or minority status when determining fair value. In particular, the court went to great lengths to make clear that a “fair value” determination under the LBCA requires the corporation to be valued as a whole and then allocating to each share its pro rata portion of the total enterprise value, without applying any shareholder-specific discounts.

Whether the Kolwe decision will be followed by other courts remains to be seen, but the case nevertheless serves as a cautionary tale of the thorny issues related to valuing and acquiring ownership interests in closely held companies. Even when the owners of a company have in place an agreement dealing with the departure process of a principal, significant questions may still arise as to the value of their ownership interest if the agreement is not carefully drafted.

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[1] La. R.S. 12:1-1435.

[2] 264 So. 3d 1262 (La. App. 3d Cir. 2019).

By: G. Trippe Hawthorne and Beau Bourgeois

On April 23, 2019, by a vote of 94-0, House Bill 273, which is an overall update and revision to Louisiana’s Contractor’s Licensing Law, passed out of the Louisiana House of Representatives.  The reengrossed version of the bill, including amendments made in the House Committee on Commerce and  those made on the House Floor is available here.

The bill was introduced and read in the Senate on April 24, 2019, and has been referred to the Senate Committee on Commerce, Consumer Protection and International Affairs.

HB 273 generally updates and modernizes the Louisiana Contractor’s Licensing Law, and gives the Louisiana State Licensing Board for Contractors more flexibility to manage and streamline the contractor licensing process. One potentially significant change to the enforcement provisions would be an increase in the maximum fine that can be assessed against a licensed contractor to 10% of the contract value.

By: G. Trippe Hawthorne

On May 8, 2019, by a vote of 91-0, House Bill 203, which is an overall update and revision to Louisiana’s Private Works Act, passed out of the Louisiana House of Representatives.  The reengrossed version of the bill, including amendments made in the House Committee on Civil Law and Procedure and  those made on the House Floor is available here.

The bill was introduced and read in the Senate on May 9, 2019.

HB 203 is the culmination of a project by the Louisiana State Law Institute which began in 2012 in response to Senate Resolution 158 calling on the Law Institute to study and propose revisions to the Private Works Act.

By A. Edward Hardin, Jr.

As was previously reported, in March, a Federal District Judge in Washington D.C. lifted a stay on the EEOC’s collection of pay data (known as “Component 2” data) from employers with EEO-1 reporting obligations.  The EEOC has now spoken regarding its collection of Component 2 data and stated that covered employers will be required to submit Component 2 data for both calendar years 2017 and 2018 by September 30, 2019.  Component 2 data includes information concerning hours worked and employee pay.  On its website, the EEOC specifically noted that covered employers must submit 2018 Component 1 data (i.e, numbers of employees by job category, race, ethnicity, and sex) by May 31, 2019.  The September 30, 2019 deadline does not upset the May 31 reporting deadline for Component 1 data.  Most private employers with 100 or more employees must comply with the EEO-1 reporting obligations.

By Tyler Moore Kostal

Over the past few years, Energy Intelligence Group (“EIG”) – the New York and London-based publisher of 15 newsletters for the oil and gas industry – has sued more than a dozen energy companies and investment houses, alleging violations of federal copyright law.  The alleged violations result from buying subscriptions to its publications (sent by email) and sharing with nonsubscribers in the office via email distribution.  EIG has reached confidential settlements in nearly all the cases.  The settlements reportedly include an agreement to buy more subscriptions.

One subscriber chose not to settle and faced a $585,000 jury verdict in Houston in December 2017.  EIG sued a $30 billion investment firm for sharing its five subscriptions of “Oil Daily,” which is $9 an article and $95 an issue, with others in the firm who did not have their own subscriptions.  EIG sought damages not just for its lost subscription revenue but also for all profits that the investment firm made from using the information in the newsletter.  The federal jury found the firm liable for copying 39 issues and determined the damages for each instance was $15,000.

It is clear that efforts used by some entities to protect their intellectual property can result in serious consequences.  EIG continues to file these lawsuits against existing energy and investment customers, as recently as this week.

By Daniel Stanton

Among the various duties that Jones Act employers are charged with is the duty to provide its seamen with reasonable medical care.  In a recent decision from the U.S. Fifth Circuit Court of Appeals, Randle v. Crosby Tugs, L.L.C., the Court considered the extent of this duty and how it may be satisfied.  The plaintiff was employed by Crosby aboard its vessel, the M/V DELTA FORCE.  While the plaintiff was loading aboard the vessel, he began to feel lightheaded and fatigued.  He retired to his cabin to rest and was later discovered incapacitated on the cabin by another crewmember.  The crewmember immediately notified the captain who called 911.

An ambulance raced to the scene and then transported plaintiff to Teche Regional Medical Center.  At Teche Regional, plaintiff’s attending physicians failed to diagnose plaintiff’s condition as a stroke as a result of failing to perform the proper diagnostic testing.  Having failed to diagnose plaintiff’s condition as a stroke, the physicians of Teche Regional failed to administer medications that would have improved plaintiff’s port-stroke recovery in time.  As a result of his stroke, plaintiff is permanently disabled and requires constant care.  Plaintiff sued Crosby and alleged, among other things, that Crosby failed to provide him with prompt and adequate medical care.  The district court granted Crosby’s motion for summary judgment on this claim, dismissing it, and the plaintiff appealed.  Plaintiff argued on appeal that his fellow seaman owed him more than merely calling 911 and that Crosby was vicariously liable for the acts of the physicians at Teche Regional.

Evaluating plaintiff’s first argument, the Court noted that the extent of a ship owner’s duty to provide prompt and adequate care depends on the circumstances of each case, the nature of the injury, and the relative availability of medical facilities.  This duty can be breached when a vessel owner fails to get a crewman to a doctor when it is reasonably necessary and the vessel can reasonably do so or if the vessel owner takes the seaman to a doctor it knows is not qualified to provide the necessary care.  With these obligations in mind, the Court considered the actions of Crosby after plaintiff was discovered.  Plaintiff was suffering from an unknown but clearly urgent medical condition, and the act of calling 911 was reasonably calculated to get plaintiff to a facility that could treat him.  Plaintiff did not dispute that, absent the misdiagnosis, Teche Regional would have been capable of treating his condition, and the plaintiff testified himself that his “instinct” would have been to call 911 as well under the circumstances.  The Court found that Crosby acted reasonably under the circumstances, when presented with an unknown but emergency medical condition, and therefore, no liability could attach.

Plaintiff also argued that Crosby should be vicariously liable for the alleged malpractice of the Teche Regional physicians.  Shipowners may be held liable for injuries negligently inflicted upon its employees.  This responsibility includes injuries suffered at the hands of a shipowner’s agents, including shipboard physicians or on-shore physicians that it chooses for the treatment of its employees.  But, a shipowner shall bear no responsibility for the treatment an injured employee receives from a physician of his own choosing.  Here, plaintiff argued that Crosby’s non-delegable duty to provide adequate medical care also included vicarious liability for the acts of the Teche Regional physicians even though Crosby neither employed, nor chose to send plaintiff to Teche Regional.  The Court found that this argument stretched beyond the limits of the law of agency, and while a principle may become liable for the failure of its agent to perform a non-delegable duty to a third party, there must first be an agent to whom such a duty was entrusted.  In the instant case, no such agency relationship exists.  Crosby did nothing to initiate any agency relationship with Teche Regional.  Crosby did not contract with Teche Regional for the plaintiff’s care; it did not direct the ambulance to take plaintiff to Teche Regional; and it likely did not even know why plaintiff was taken to Teche Regional instead of another facility.  In short, plaintiff produced no evidence that Crosby intended for Teche Regional to act as its agent by simply dialing 911.

Having considered and dismissed both of plaintiff’s arguments, the Court affirmed the summary judgment granted in favor of Crosby by the district court.

In light of the Court’s opinion, Jones Act employers should carefully consider their procedures for handling shipboard medical treatment needs for both emergency and non-emergency situations.  Jones Act employers must ensure that their policies and procedures satisfy their obligations to their employees but avoid incurring unexpected liability for the actions of medical professionals.

By Kyle P. Polozola

The Louisiana Risk Fee Act (La. R.S. 30:10) continues to be a big headache for operators.  The Louisiana Legislature revised the Act significantly in 2012, adding alternate and cross unit wells to the category of wells to which the statute applies, but also imposed new obligations on drilling owners during the recovery period.  These new obligations include making drilling owners responsible for paying the burdens owed by non-consenting owners to the parties they contract with.  La. R.S. 30:10A(2)(b)(ii)(aa).  Now, during the recovery period, a drilling owner must pay a nonparticipating owner certain royalties due the nonparticipating owner’s lessor.  During the recovery period, the drilling owner also must now pay a nonparticipating owner certain amounts for the benefit of overriding interest owners.  These payments must not only be made by the drilling owner, they must be made in conformity with the “check stub” statute.

The oil and gas industry reacted harshly to the Louisiana Legislature’s action.  The 2012 amendment was seen as controverting the central rationale for the Risk Fee Act – incentivizing risk taking and investment in Louisiana’s oil patch.  The industry’s response resulted in the Louisiana Senate passing Senate Resolution No. 31 in 2016, requesting that the Louisiana Law Institute study the implications of the 2012 amendments on the Louisiana Risk Fee Act.  The central focus of the Senate’s resolution was the manner in which the 2012 amendments frustrated the original policy and purpose of the Act, which was meant to incentivize parties to share the risk and expense of drilling wells, by rewarding a nonparticipating owner for its failure to share in such risk.  The Law Institute’s committee issued an Interim Report to the Senate outlining several issues that remain under the committee’s consideration, including the following that pertain to the payment of proceeds:

  1. Addressing the responsibility of a nonparticipating owner to demonstrate to an operator charged with responsibility to pay royalties the sufficiency of such owner’s title to its leases as well as the lease terms pertaining to royalties.
  2. Clarifying that any costs incurred by an operator to conduct title work with respect to a tract under lease to a nonparticipating owner is subject to recoupment as well as any applicable risk charge.
  3. Clarifying R.S. 30:10 with respect to the determination of the revenue stream to be applied against payout of any recoverable expenses and risk charge as it relates to the deduction or exclusion of royalties paid by the operator on behalf of the nonparticipating owner.

While the Law Institute committee’s work continues, addressing the foregoing aspects of the Act would be a welcomed development due to, at once, the legal and administrative burden the Act imposed on drilling owners in 2012.  Another report from the Law Institute committee is anticipated this year, and a legislative fix to the statute will likely be sought in the next non-fiscal legislative session in 2020.  In the meantime, operators should apply vigilance in navigating the Louisiana Risk Fee Act’s maze.  Stay tuned.

By: Matthew C. Meiners

The Louisiana Construction Anti-Indemnity Act (La. R.S. 9:2780.1) generally renders null, void and unenforceable any provision in a construction contract (defined broadly to include design, construction, alteration, renovation, repair, and maintenance) which either:

(1) purports to indemnify, defend, or hold harmless, or has the effect of indemnifying, defending, or holding harmless, the indemnitee against the negligence or intentional acts or omissions of the indemnitee, an agent or employee of the indemnitee, or a third party over which the indemnitor has no control; or

(2) purports to require an indemnitor to procure liability insurance covering the acts or omissions or both of the indemnitee, its employees or agents, or the acts or omissions of a third party over whom the indemnitor has no control.

However, the Construction Anti-Indemnity Act does not apply to any construction contract entered into prior to January 1, 2011.

In Moore v. Home Depot USA, Inc., 352 F.Supp.3d 640 (M.D. La. 10/15/2018), the United States District Court for the Middle District of Louisiana held that the indemnity and insurance-procurement obligations created by a Maintenance Services Agreement (which required the contractor to provide materials, equipment, tools, and labor to perform services described in future work orders) entered into in August, 2010 (the “MSA”) are not subject to the Construction Anti-Indemnity Act even though the claims at issue were regarding performance of a work order (governed by the MSA) confected by the parties in 2015.

The Court acknowledged that because the MSA failed to state the time, place, or nature of the contractor’s required performance, the MSA is not itself a binding contract, but instead, the MSA and the 2015 work order combine to form the contract.  However, the Court stated that this does not mean that the date of the work order controls, reasoning that if the Louisiana legislature wanted work orders issued after a master service agreement to dictate whether indemnity and insurance-procurement obligations created by the master service agreement are subject to the Construction Anti-Indemnity Act, it would have included such language in the statute.  By comparison, the Court noted that while the Louisiana Oilfield Anti-Indemnity Act (La. R.S. 9:2780) contains a sub-section stating that it applies to master service agreements creating indemnity obligations incorporated into future work orders, the Construction Anti-Indemnity Act does not contain such language.

Accordingly, the Court concluded that the MSA contracting date – 2010 – controls. By the terms of the contract documents, the 2015 work order was both incorporated in and subject to the MSA, and although the 2015 work order created the contractor’s obligation to perform the work at issue, the 2010 MSA governed that performance and created the contractor’s indemnity and insurance-procurement obligations.  Because the parties confected the MSA in 2010, and the Construction Anti-Indemnity Act does not apply to prohibited clauses in construction contracts confected before January 1, 2011, the Construction Anti-Indemnity Act does not apply to the indemnity and insurance-procurement provisions in the MSA.

By A. Edward Hardin, Jr.

Most private employers with 100 or more employees are required to submit an annual EEO-1 report to the Equal Employment Opportunity Commission regarding the number of workers employed in different categories, broken down by race, sex, and ethnicity.  The Obama administration proposed adding pay data to the required report, as a means of quantifying pay disparities.  The collection of pay data was initially approved by the Office of Management and Budget in September 2016, and the new requirement was set to take effect in 2018.  Businesses argued that the new requirements were too burdensome.  Following the election of President Trump, the OMB stayed implementation of the new requirement based on the Paperwork Reduction Act and alleged formatting issues.  However, earlier this month, a Federal District Judge in Washington D.C. rejected the OMB’s argument and ordered the OMB to lift its stay on the collection of the pay data.  Should the rule go into effect, employers who are required to submit the annual EEO-1 report will also have to submit pay data broken down by race, sex, and ethnicity.  The EEOC’s portal for the submission of EEO-1 reports is now open, but the EEOC is apparently not asking for pay data at this time.  What happens next is still to be determined, but additional legal challenges are possible.  Stay tuned.

By Blake Crohan

In In the Matter of 4-K Marine, No. 18-30348 (5th Cir. Jan. 30, 2019) the U.S. Fifth Circuit held that the owner of a stationary, “innocent” vessel is not entitled to reimbursement of the medical expenses of an employee who fraudulently claimed his preexisting injuries resulted from an allision. In June 2015, the M/V TOMMY, owned and operated by Enterprise Marine, was pushing a flotilla of barges on the Mississippi River when it allided with the MISS ELIZABETH, a stationary tug with barges owned and operated by CBR. Individuals aboard the MISS ELIZABETH, including Prince McKinley, alleged they were injured in the allision. CBR promptly commenced maintenance and cure payments to McKinley.

After suit was filed, CBR filed a counter-claim against Enterprise Marine for reimbursement of the amounts it paid to McKinley for medical expenses, because generally, an at-fault third party must reimburse a Jones Act employer for maintenance and cure paid to its Jones Act employee. CBR paid, and Enterprise Marine reimbursed, $23,000 in maintenance and $5,000 in cure to McKinley. CBR also agreed to pay for McKinley’s back surgery, but Enterprise Marine reviewed McKinley’s medical history and refused to reimburse those expenses, arguing the condition was not a result of the allision.

After a bench trial, the district court determined that McKinley injured his knee in the allision, but his back problems predated the accident and were unaffected by the allision. Further, the court held that McKinley fraudulently withheld material issues about his pre-existing medical conditions and medications before and after the incident. The district court held that CBR had no obligation to pay for McKinley’s back surgery, and Enterprise Marine had no obligation to reimburse CBR for the back surgery.

CBR appealed to the U.S. Fifth Circuit arguing that maritime principles compelled Enterprise Marine to reimburse CBR for McKinley’s back surgery regardless of McKinley’s fraud. The U.S. Fifth Circuit explained that a third-party must reimburse maintenance and cure payments only where its negligence caused or contributed to the need for maintenance and cure. Because McKinley’s back condition did not result from the allision, Enterprise Marine did cause or contribute to the need for maintenance and cure for that particular medical problem. Accordingly, Enterprise Marine did not owe reimbursement to CBR for McKinley’s back surgery.

The Fifth Circuit recognized the practical problems faced by CBR. It noted that the decision to cover McKinley’s back surgery had to be made early, and CBR was presented with what initially appeared to be a plausible claim for cure. Further, the denial of such claim could have exposed CBR to punitive damages. But the Court noted that CBR had options. An employer need not immediately commence maintenance and cure payments upon request. Further, an employer is only liable for compensatory damages if it “unreasonably rejects the claim” after an investigation, and punitive damages “only for behavior that is egregious”. Finally, CBR had the right to deny payment if, which was ultimately determined, McKinley intentionally misrepresented or concealed material facts, the disclosure of which was desired by CBR.

The U.S. Fifth Circuit’s opinion in In the Matter of 4-K Marine details the harsh realities facing Jones Act employers. Employers must quickly investigate maintenance and cure claims to determine their legal rights. Act too slowly, and the employer may face compensatory or punitive damages. Act too quickly, and an employer may pay for unnecessary medical expenses and not be able to recoup them.