April 23, 2014

More Changes to the SEC’s “Neither Admit Nor Deny” Consent Decrees

HerrickLidstoneBy Herrick K. Lidstone, Jr., Esq.

The Securities and Exchange Commission (the “SEC”) has the power and authority under the Securities and Exchange Act of 1934 to bring enforcement actions against persons who violate the securities laws. Most of these actions are settled well before trial by the defendant agreeing to a court-ordered “obey the law” injunction, where the defendant neither admits nor denies the factual statements alleged by the SEC to support the injunction. The SEC has received significant criticism from commentators and legislators for entering into settlements without requiring the respondent to admit allegations against it. These have included significant criticisms by Hon. Jed. S. Rakoff (S.D.N.Y.) in his November 28, 2011 memorandum order denying a joint motion by the SEC and Citigroup for approval of a $285 million settlement of certain allegations by the SEC. (SEC v. Citigroup Global Markets, Inc.) This was discussed in more detail in the January 2012 Business Law Section Newsletter.

Obtaining settlements where the defendant “neither admits nor denies” the allegations is a practice that commenced long before 1972, but was formalized in 1972 (17 CFR § 205.5) with the additional SEC requirement that consent judgments be accompanied by a formal written agreement by the defendant “not to take any action or to make or permit to be made any public statement denying, directly or indirectly, any allegation in the complaint or creating the impression that the complaint is without factual basis.” This changed the prior practice by defendants who would deny the underlying facts immediately after entering into a consent decree with the SEC.

Perhaps as a result of the outcry from Judge Rakoff and others, in January 2012, the Director of the SEC’s Division of Enforcement announced that the Division would no longer permit those convicted or who otherwise admitted the facts in a parallel criminal action to settle with the SEC based on ““not admitting or denying” the facts.

On June 18, 2013, SEC Chair Mary Jo White further refined the SEC’s “neither admit nor deny” policy when she advised the investment community that even in non-criminal settings, the SEC may require admissions in cases “where heightened accountability or acceptance of responsibility through the defendant’s admission of misconduct may be appropriate” (as reported in the New York Times at page B-1, June 22, 2013). In those cases, the SEC enforcement staff has been advised to seek admissions or litigate the case. This may, of course, make litigation more frequent since many defendants may have believed in their innocence, but chose the “neither admit nor deny” settlement to avoid the time, expense, and uncertainty of litigation. Chair White anticipates that the admissions will be required in cases involving “particularly widespread harm to investors” and “egregious intentional misconduct.”

The SEC defense bar has raised a number of concerns about Chair White’s announcement and the anticipated effect of the new SEC practice. Among these concerns is whether this new policy might be subject to arbitrary application by staff. Equally significant, where a defendant is given the option of making admissions (which can then be used in subsequent shareholder litigation or even a criminal proceeding) or contesting the claims, defendants are more likely to contest the claims and seek vindication. Where settlements used to be simpler, the resulting litigation will likely involve a significantly greater amount of SEC resources to prosecute and corporate (that is, shareholder) resources to defend. Defense lawyers have also pointed out that the SEC’s recent track record on significant litigation has not been stellar.

Predictably, the plaintiffs’ attorneys applauded this change since they will now be able to use any admissions in their civil litigation. This fact, itself, will be a significant disincentive to targets of investigation to settle cases with admissions of wrongdoing.

It will be interesting to see how this new policy plays out.

Herrick K. Lidstone, Jr., Esq., is a shareholder of Burns Figa & Will, P.C. in Greenwood Village, Colorado. He practices in the areas of business transactions, including partnership, limited liability company, and corporate law, corporate governance, federal and state securities compliance, mergers & acquisitions, contract law, tax law, real estate law, and natural resources law. Mr. Lidstone’s work includes the preparation of securities disclosure documents for financing transactions, as well as agreements for business transactions, limited liability companies, partnerships, lending transactions, real estate and mineral property acquisitions, mergers, and the exploration and development of mineral and oil and gas properties. He has practiced law in Denver since 1978. He writes for many publications, including the Colorado Bar Association Business Law Newsletter, where this article originally appeared.

The opinions and views expressed by Featured Bloggers on CBA-CLE Legal Connection do not necessarily represent the opinions and views of the Colorado Bar Association, the Denver Bar Association, or CBA-CLE, and should not be construed as such.

Floodgates: Riding the Wave of New Immigration Practitioners

KatharineSpeerBy Katharine Speer

Comprehensive immigration reform looks more promising now than at any time in the last 15 years. Approximately 11 million unauthorized immigrants—your neighbors, co-workers, and classmates—could benefit from the proposed changes. More immediately, the Supreme Court just eliminated DOMA’s barrier to same-sex spousal visa petitions, and about a third of the U.S. population now lives in a marriage-equality state.

What does this mean for young lawyers? A lot of prospective clients in a frequently overlooked area of the law and the chance to put your law degree to work making dreams come true!

Corny, perhaps, but true.

At the same time, immigration law is notoriously complex; equal parts rewarding and frustrating.

Remember your administrative law class? Your favorite subject? Yeah, me neither.

Where does a young lawyer begin when faced with such a challenge? First, why not talk to some immigration lawyers to see if the practice area interests you? We don’t bite, and you can find a bunch of us at AILAlawyer.com. If this piques your legal interest, consider taking a pro bono case through the Rocky Mountain Immigrant Advocacy Network. You will be matched with a client in desperate need of your services and an experienced mentor.

Okay, so you’ve finished your pro bono case, and now you’re hooked. How do you become a competent immigration lawyer? One way is to land a job as an associate at an immigration firm, but these scarce positions can be highly competitive and may require years of experience. Another way is to start your own firm or an immigration practice within an existing firm. If you choose one of these options, the following could be your life raft.

  1. Reach out ~ Join the American Immigration Lawyers Association (AILA) and the Immigration Section of the Colorado Bar Association. Meet all the immigration lawyers you can. They will be your best resource.
  2. Don’t reinvent the wheel ~ Ask about the best treatises and research tools for your immigration niche. Check out free resources from the National Immigration Project, American Immigration Counsel, AILA (which you joined, right?), and other non-profits.
  3. Address language and cultural differences ~ No one can be proficient in every language and culture. Learn to work with translators and interpreters. Understand that your clients may see the judicial system differently and take time to talk through their fears, expectations, rights, and responsibilities.
  4. Expect the unexpected ~ Each immigration case is unique. The stakes for your client may range from career advancement, to family unity, to protection from torture. Take time to assess (and re-asses) every case to be sure you are safeguarding your client’s immediate and long-term interests.

Don’t stop here. Your curiosity, sense of adventure, and willingness to admit what you don’t know will serve you well as an immigration practitioner. When the wave of new immigration lawyers hits, your preparation will help you ride the tide to an intellectually and personally rewarding career.

Katharine Speer is a solo immigration practitioner in Denver. She currently serves on the Executive Committee of the Colorado Chapter of AILA, chairs the Spanish Speaking Lawyers Committee of the Colorado Bar Association, and participates in Denver Legal NightGreeley Legal Night, and Ya Es Hora De Ciudadanía. She hopes to see you there! In the meantime, she can be reached on her homepage, by email, on Twitter, orLinkedIn. She also writes for the DBA Young Lawyers Division blog, where this post originally appeared.

The opinions and views expressed by Featured Bloggers on CBA-CLE Legal Connection do not necessarily represent the opinions and views of the Colorado Bar Association, the Denver Bar Association, or CBA-CLE, and should not be construed as such.

But Are You Helping?

Richard Pennington 1By Richard Pennington

In 2009, psychologist and MIT professor emeritus Edgar Schein published a book, Helping, that described a general model for effective helping. Schein is widely known for his work in organization development; he wrote the business classic Organization Culture and Leadership (2004).

I reached Schein circuitously. I had retired from the private of law in 2010 and was researching models for teaming, leadership, project management, problem solving, and organizational learning. In one of the better books on leadership in teams, Lateral Leadership, authors Roger Fisher and Alan Sharp distilled their advice down to one piece: “Choose to help.” But what was helping?

The idea lay dormant for a year while I finished a book on effective team performance. Then, during preparation for a short training seminar about consultancy and learning, the relevance of Schein’s ideas to law practice suddenly dawned on me.

Schein’s model is based on the conclusion that helping relationships – and he uses attorney-client relationship as one of his many examples – have a life cycle much like teams. They move from a period of pure inquiry to various roles: the expert, the doctor, and the process consultant. Here is how Schein would see the development of an effective attorney-client relationship.

1. Begin always with a period of pure inquiry. Effective helping begins with readiness. Early in a relationship, perhaps at the stage when many attorneys have initial consultations, there is an imbalance in the social economics. Clients feel “one down,” a feeling that they don’t bring anything of value to the relationship, uncertainty about their ability to influence the outcome, and insecurity about whether their goals will be achieved. The attorney needs to do something to adjust the imbalance in order to build trust. By simply listening to the client’s story, using “humble inquiry” as Schein calls the process strategy at this stage, the client begins to feel like there is a better balance in the relationship just by being heard. That begins the development of trust.

2. Use caution not to fall into the diagnostic trap too early. Experts are more comfortable with the kinds of questions that lead to solutions. Who was at the meeting? When did you meet? What did the other party say? How did the language in that meeting compare to prior email communications? Use of those kinds of diagnostic questions too early may impede the development of the relationship. The attorney is walking a tightrope here, because this also is the time when attorneys are hoping to gain a client. The quality of informed questions is an important factor in a client’s decision, and informed questions tend to be diagnostic.

3. Start with process inquiry and return to it often. Schein uses process inquiry to describe the underlying process of relationship building and problem solving, not a focus on the substance of the problem. For example, the question, “How would you see a successful outcome?,” at the conclusion of an initial consultation turns the focus to the client’s expectation of the process outcome. That question might uncover a discomfort with the unintended consequences of litigation, for example. Occasional questions during the engagement like, “How can we better communicate about the drafts?,” or “How am I doing keeping you informed about the progress of the case?,” turns the focus to the relationship, keeps it in balance as client input is sought, and continues to build trust. These also are the kinds of questions that help a relationship out of the quicksand when it gets bogged down.

Lawyers eventually move into the expert role in writing documents or handling litigation. This may be where the Schein model pauses in its relevance somewhat, because some consultants stay in the process mode throughout. “Clients own the problem” Schein says, but lawyers are paid to solve them. “Don’t give unwanted help,” counsels Schein, but the cost of legal services probably mitigates the risk of over-helping in unwanted ways.

Still, Schein’s emphasis on the importance of process feedback is relevant. So is the inquiry approach to developing the relationship. Attorneys are taught the art of questioning, but not this way. Pure inquiry and the use of real questions are key to fostering development of the relationship. Competency, professionalism and ethics are critical parts of client relationships. But effective helping may be the most important.

Richard Pennington returned to the practice of law in April 2013 as General Counsel for WSCA-NASPO Cooperative Purchasing Organization LLC. WSCA-NASPO is the nonprofit subsidiary of the National Association of State Procurement Officials that supports cooperative purchasing by the states and what formerly was the Western States Contracting Alliance. Richard is a member of the CBA/DBA Professionalism Coordinating Council. His book, Seeing Excellence: Learning from Great Procurement Teams, is scheduled for release in August 2013.

The opinions and views expressed by Featured Bloggers on CBA-CLE Legal Connection do not necessarily represent the opinions and views of the Colorado Bar Association, the Denver Bar Association, or CBA-CLE, and should not be construed as such.

Supreme Court Ruling on DOMA Raises More Questions Than it Answers for Colorado Families

By Ann Gushurst and Kristi Wells

On Wednesday, June 26, 2013, the Supreme Court struck down, in a 5-4 decision, Section 3 of the Federal Defense of Marriage Act, known as DOMA, which act defined and recognized marriages only as contracted between a man and a woman.  It did so on the basis that Section 3 of DOMA created a two tiered marriage system under Federal law, under which valid same-sex marriages were denied validity under Federal laws.

The Obama Administration released the following statement after the Supreme Court announced its ruling:

This ruling is a victory for couples who have long fought for equal treatment under the law; for children whose parents’ marriages will now be recognized, rightly, as legitimate; for families that, at long last, will get the respect and protection they deserve; and for friends and supporters who have wanted nothing more than to see their loved ones treated fairly and have worked hard to persuade their nation to change for the better.

This ruling will have interesting repercussions for states like Colorado, which has its own DOMA provision in the Colorado Constitution, although this ruling does not strictly challenge the constitutionality of DOMA in states that have state DOMA provisions.

In Colorado, we have the opposite problem to the DOMA case addressed by the Supreme Court in that Colorado recognizes complete state rights for same sex relationships as civil unions, but denies them the status of marriage.  By doing this, Colorado effectively denies those in same sex relationships from enjoying the benefits of marriage under federal statutes.  The question remains—is Colorado’s similar DOMA provision equally unconstitutional and how (and when) will that issue be addressed?

Until that issue is resolved, Colorado will be the Petri dish for issues that remain unaddressed by this Supreme Court decision.  For example, the Colorado statute recognizing civil unions specifically grants those in civil unions all of the rights of marriage, except that the right to file a joint income tax return is not permitted until federal law is changed to allow those who are not considered legally married to file joint income tax returns.

The Supreme Court’s decision regarding Section 3 of DOMA does nothing to require the federal government to recognize civil unions as equivalent to marriages.  Thus, couples in Colorado civil unions will continue to experience the exact disparate tax treatment that the Supreme Court struck down in its DOMA ruling.  And this disparate treatment will continue in Colorado until the Colorado Constitution is amended to repeal Colorado’s state DOMA provision, or until a federal statute is enacted which treats state-recognized civil unions the same as state-recognized marriages.

Further, the decision did nothing to address Section 2 of DOMA, which allows states to refuse to recognize same-sex marriages performed under the laws of other states.   While Section 2 still stands, Colorado can continue to refuse to recognize the same-sex marriages performed in other states, transforming the status of those couples who come to Colorado into civil unions.

This results in an anomaly for federal tax purposes.  The same-sex couple who marries in Massachusetts will be eligible to file a joint federal tax return as long as they continued to live in that state.  However, if the couple subsequently moves to Colorado and their marriage is no longer recognized, do they suddenly lose the right to file a joint federal tax return?

Perhaps most critical, this decision does not begin to unravel the complex issues that arise when same-sex couples have children.  As long as the non-biological parent formally adopts a child, these issues are fairly straightforward.  However, Colorado recognizes presumptions in favor of both a biological parent and a psychological parent in cases regarding allocation of parental responsibilities.  Thus, where a woman in a Colorado civil union becomes impregnated by a third party who is not involved in raising the child thereafter, Colorado Courts are still required to give weight to the biological connection between the child and the sperm donor when making decisions regarding who should have parenting time with that child.  However, a child born to a woman in a traditional marriage is presumed to be the child of that marriage.

For those fighting for equality, this decision is a powerful (yet mixed) step forward.  The other side of the equality coin is, of course, that with the ability to become legally married comes the need to legally end the marriage if a relationship ends.  As we move forward, divorce lawyers in Colorado now must begin the process of figuring out how to help these individuals deal with the questions left unanswered by today’s decision.

 

Ann Gushurst, Esq. has been practicing exclusively in family law for most of her law career. Her practice with Gutterman Griffiths PC in Littleton is currently a mixture of litigation, collaboration, and mediation. She is also responsible for the firm’s research and appellate work. Ms. Gushurst is the editor of the CBA Family Law Section newsletter, is on the section’s Executive Council, and is one of the three chairs of the Family Law Ethics Task Force.

Kristi Anderson Wells, Esq. has over 15 years of experience in the areas of taxation, benefits and executive compensation law which she brings to the practice of family law. Kristi’s practice focuses on the division of executive compensation, retirement assets and stock options in dissolution. In addition to her law degree, Kristi has a Master’s degree in Taxation (LL.M.) from the University of Washington School of Law.

The opinions and views expressed by Featured Bloggers on CBA-CLE Legal Connection do not necessarily represent the opinions and views of the Colorado Bar Association, the Denver Bar Association, or CBA-CLE, and should not be construed as such.

Colorado Anti-Discrimination Act Now Provides Remedies in Employment Discrimination Cases

Roseman, BarryBy Barry Roseman

In 2013, the Colorado General Assembly enacted remedies for the employment discrimination provisions of the Colorado Anti-Discrimination Act (CADA) that have been part of Title VII of the 1964 Civil Rights Act, the Age Discrimination in Employment Act (ADEA), and the Americans with Disabilities Act (ADA) for decades.

The bill, HB 13-1136, provides that Colorado employers found guilty of unlawful discrimination or retaliation, in violation of the CADA, can be held liable for compensatory damages, punitive damages and attorney fees. CADA cases also will be able to be tried to juries. The amounts that can be awarded for compensatory or punitive damages will depend on the size of the employer. Those caps are:

For employers with 1-4 employees: $10,000

For employers with 5-14 employees: $25,000

For employers with 15-100 employees: $50,000

For employers with 101-200 employees: $100,000

For employers with 201-500 employees: $200,000

For employers with more than 500 employees: $300,000

These remedies will not go into effect until 2015, and will apply only to discrimination or retaliation claims that are based on conduct in 2015 or later. Several groups will benefit the most from this bill:

  • Employees who work for smaller employers, who are not covered by Title VII, the ADEA or the ADA. Those statutes apply only to personnel decisions by companies with at least 15 employees (Title VII and the ADA) or at least 20 employees (the ADEA).
  • Employees who have claims not recognized under federal law, such as claims for discrimination because of sexual orientation or gender identity.
  • State employees in ADA and ADEA cases. The U.S. Supreme Court has held that the Tenth Amendment bars claims for monetary damages against State governments and State agencies under those statutes.
  • Employees who live and work far from the Denver area. Claims arising under federal law can be removed to federal court. Claims arising under state law will stay in state court, at least where diversity jurisdiction does not apply.

Public employees cannot recover punitive damages under CADA or under federal law. Employees of the State of Colorado who can file discrimination claims with the State Personnel Board (SPB), and private or public employees who bring claims in Colorado Civil Rights Commission (CCRC) hearings, will not be able to recover compensatory or punitive damages in CCRC hearings or compensatory damages in SPB hearings. Instead, if they prevail on liability in those hearings, those employees will have to file a civil action to try to recover those damages. The CCRC and the SPB will stay their proceedings, including appeal rights, for at least 30 days and possibly longer, to give employees an opportunity to file and prosecute those civil actions.

These amendments track provisions in federal law in several respects:

  • Employers that demonstrate that they acted in good faith to prevent discrimination cannot be held liable for punitive damages.
  • An employer cannot be held liable for punitive damages where that employer has established that it made good-faith efforts to provide a reasonable accommodation to an employee’s disability.
  • Employment discrimination that is unlawful because of the disparate impact of employment policies will not support an award for compensatory or punitive damages.

The courts also are to consider the size and assets of the employer and the egregiousness of its unlawful conduct in determining the appropriate level of damages.

In addition, the bill provides that it unlawful to discriminate against a person who is 70 years of age or older because of that person’s age. That has been part of the ADEA since the 1980s.

The delayed implementation of the bill will give smaller employers an opportunity to learn about CADA and to bring their employment practices into compliance, if they are not in compliance already. The CCRC also is required to establish a volunteer working group by September 1, 2013. That working group is to develop an education and outreach plan for employers, and to compile educational resources for employers. The CCRC shall make this information available to employers, including through its Web site.

Before this law was enacted, Colorado was one of only eight states – five of them in the South – that did not enable plaintiffs to recover compensatory damages, punitive damages or attorney fees in employment discrimination or retaliation cases. HB-1136 brought CADA, at long last, into the 21st Century.

Barry D. Roseman is a partner in the firm of McNamara, Roseman & Kazmierski LLP, and has been representing plaintiffs in employment cases since 1975. He currently serves as co-chair of the National Employment Lawyers Association’s (NELA) Judicial Nominations Committee. He served on NELA’s Executive Board between the organization’s founding in 1985 and 2007; is a former vice president of that organization; is one of the founders and is the chair of the executive board of NELA’s Colorado affiliate, the Plaintiff Employment Lawyers Association (PELA); and chairs PELA’s Legislative Committee. He also is a fan of the Colorado Rockies, in both good times and bad.

The opinions and views expressed by Featured Bloggers on CBA-CLE Legal Connection do not necessarily represent the opinions and views of the Colorado Bar Association, the Denver Bar Association, or CBA-CLE, and should not be construed as such.

May is Elder Law Month – a Message for Solo and Small Firm Types to Do Basic Succession Planning for Their Law Practices

CashmanBy Barbara Cashman

In 2013, the National Academy of Elder Law Attorneys has a calendar brimming full of Elder Law Month activities in several states. Our bar’s “signature event” for seniors is Senior Law Day and this year’s program is scheduled for July 27, 2013, once again at the Denver Merchandise Mart. So if folks are feeling left out in Colorado, I urge my fellow solo and small firm attorney types to . . . make it a durable Power of Attorney day!?

Say what Barb? Sure, You’re another year older and another year wiser – but have you made any efforts to put your house in order? I presented a CLE in February called “Death of a Solo, Death of a Practice” and it was well-attended. I distributed my forms to several people as a result of the program, but I suspect there are others who are inclined to get started but need a nudge.  So ask yourself:

  • Are you planning on retiring someday or are you committed to die with your boots on?
  • To stretch that expression: what happens if your boots fall off before you die?
  • Who’s got your back in the event of disaster?
  • How will your clients’ interests (and derivatively yours) be protected in the event of incapacity or disability?
  • Do you intend to leave a big mess from your failure to plan for the inevitable or are you just willing to let that happen?

If I’m sounding cheeky, well it’s because I do like to find humor in end of life scenarios. Thankfully, I’m not alone.

Fear is the cheapest room in the house. I would like to see you living in better conditions.
—Hafiz (14th century Persian-born mystic and poet)

Our death-denying culture takes these things far too seriously! Death is part of life, and for many of us who enjoy the benefits of longevity, disability – in the guise of short-term or long-term incapacity – is one of the byproducts of longevity. It’s time to face the music and recognize that every day is precious and a gift, and that we don’t know or have control over how many more days we will have. Here’s another line about our fear of mortality:

Perhaps all the dragons of our lives are princesses who are only waiting to see us once beautiful and brave.
—Rainer Maria Rilke

So if you would like to observe (no, I’m not going to use the term “celebrate”) Elder Law Month by making a plan for your law practice’s survival or for its demise, I can help. Get in touch with me and I can suggest some useful forms. The best place to get started however, is to identify a trusted colleague with whom you can share – perhaps mutually, that’s the best scenario – duties as each other assisting attorney (click here to read the recent Legal Connection article on succession planning by Amy Symons and Julie Davis). Bottom line is that you need to have documents in place. You can read posts from the current series on solo attorney succession planning on the CBA’s SOLOinCOLO blog.

Questions? You can reach me at barb@DenverElderLaw.org.

Barbara Cashman is a solo practitioner in Denver, focusing on elder law, estate law, and mediation. She is active in the Trust & Estate and Elder Law sections of the CBA and is the incoming chair of the Solo/Small Firm section. She contributes to the SOLOinCOLO blog and blogs weekly on her law firm blog.  She can be contacted at barb@DenverElderLaw.org.

The opinions and views expressed by Featured Bloggers on CBA-CLE Legal Connection do not necessarily represent the opinions and views of the Colorado Bar Association, the Denver Bar Association, or CBA-CLE, and should not be construed as such.

140-Year-Old Precedent Overturned in D.C. Court Due to Evolution of American Understanding of Mental Illness

LettyMaxfieldBy Letitia Maxfield

The District of Columbia Court of Appeals overturned a 140-year-old precedent earlier this month and joined the majority of jurisdictions in ruling that the contracts of mentally incapacitated persons are merely voidable and not inherently void.[1]

A voidable contract is binding and enforceable unless and until the incapacitated party, or his or her agent, elects to void the contract.[2]

Alternatively, the “void rule” automatically voids a contract if, after the contract is formed, one of the parties is found to have lacked capacity to contract.[3]

This somewhat nuanced legal distinction is best illustrated by an example:

Buyer, who has an undiagnosed mental illness, plans to buy a condominium. On the day the closing documents are to be executed, Buyer is experiencing symptoms related to her mental illness. Before the closing documents are signed, Sellers ask Buyer if she will consent to some additional terms that Buyer had on previous occasions adamantly rejected. Buyer agrees to the additional terms without hesitation. Buyer and Sellers then execute the closing documents. Later that day, Buyer seeks mental health treatment. A few days later, Neighbor, who was out of the country when Sellers listed the condominium for sale, offers to buy the condominium from Buyer for double the price Buyer paid. Buyer receives inpatient treatment for her symptoms and is released several days later. Buyer then sells the condominium.

The “void rule” dictates that if Buyer is found to have lacked the mental capacity to enter into the sales contract, the contract has no legal effect. Neither Buyer nor Sellers can rehabilitate the transaction. Further, the third-party who purchased the property from Buyer in good-faith does not have valid legal title to the property.[4] Sellers would be free to sell the condominium to Neighbor.

However, if the “voidable rule” applies, Buyer has three options: (1) Buyer (upon regaining capacity) or her legal representative can choose to ratify the contract; (2) if Sellers knew Buyer lacked capacity to contract, Buyer can choose to unilaterally void the contract; or (3) if the terms of the contract are unfair, or the contract is otherwise inequitable, Buyer can choose to void the contract.[5] Finally, Buyer’s right to void the contract may be equitably limited by the interests of any third-party, good-faith purchaser.[6]

The “voidable rule” is a well-settled rule[7] followed by the majority of States, including Colorado.[8] Consequently, the D.C. Court’s decision to overturn 140 years of its own precedent is less than groundbreaking for jurisdictions like Colorado, which has applied the “voidable rule” to the contracts of the mentally incapacitated for almost 100 years.

What is noteworthy about the D.C. Court’s opinion is its ardent position that the “void rule” is “based upon an outdated understanding of mental illness and of what it means to ‘protect’ mentally incapacitated persons.”[9]

The Court opines that the historical attitude that incapacity by reason of mental illness is a permanent and unwavering state is no longer tenable.[10] Further, it notes that advances in modern medicine and an evolving understanding of mental illness have led to policies and laws that “focus on protecting the civil and legal rights of people with mental illnesses.”[11]

Ultimately, the Court concludes that the “voidable rule” aligns more closely with modern society and law because it “better balances the competing interests of ensuring the security of transactions and enabling mentally incapacitated persons meaningful participation in society, while still protecting them from unfair imposition.”[12]

By contrast, Colorado courts have routinely taken the position that the primary judicial motivation behind the “voidable rule” as opposed to the “void rule” is its protection of innocent parties and bona fide subsequent purchasers.

Specifically, the Colorado Supreme Court in Davis v. Colorado Kenwoth Corp. relied on the following policy justifications when determining the proper application of the “voidable rule”:

The courts have made reasonably clear the judicial concept which motivates the enforcement of the contracts of an insane person in such situations. They are enforced against the insane person, not because such agreements possess all the legal characteristics of a binding contract, but primarily because the insane party has secured a benefit in the transaction which it would be inequitable to allow him to retain, without first restoring to their original position those who conferred such benefit, or with whom he entered into the agreement. Stated differently, it is grossly unfair to allow a person to repudiate a contract without returning, or offering to return, the benefits which he received thereunder. The rule which conditions a rescission of a contract upon the restoration of the status quo by the person seeking to avoid the obligation on the ground of his insanity in based upon principles of equity, as well as upon public policy and good faith.[13]

Colorado again emphasized the importance of the “voidable rule’s” protection of individuals other than the mentally incapacitated party in its 2008 decision in Delsas ex rel. Delsas v. Centex Equity Co., LLC:

The interest of a good faith purchaser who asserts ownership under a voidable deed will be protected. “[T]he distinction between void and voidable deeds becomes highly important in its consequences to third persons, ‘because nothing can be founded upon a deed that is absolutely void, whereas from those which are only voidable, fair titles may flow.’”[14]

The Restatement (Second) of Contracts recognizes that the “voidable rule” has two conflicting policy justifications: the protection of justifiable expectation and the protection of persons unable to protect themselves against impositions. The Restatement also notes that each policy may prevail to a greater or lesser extent which, consequently, will affect the rule’s judicial application.[15]

In adopting the “voidable rule” as a part of a modern legal trend aimed at better protecting the civil and legal rights of people with mental illness, the D.C. Court has chosen to shift the rule’s equitable focus away from the rights of innocent parties and bona fide purchasers and toward the rights of mentally incapacitated persons.

What, if any, potential affect the D.C. Court’s re-tooling of the “voidable rule” may have on Colorado’s common law applications of the “voidable rule” is at best speculative, but in the author’s opinion, nonetheless worth asking.

Letitia M. Maxfield is an associate at Poskus, Caton & Klein, P.C. Her practice includes elder law, litigation, protective proceedings, estate planning, and probate administration. She is a member of the Women’s Estate Planning Counsel and the Elder Law and Trust and Estate Sections of the Colorado Bar Association.

The opinions and views expressed by Featured Bloggers on CBA-CLE Legal Connection do not necessarily represent the opinions and views of the Colorado Bar Association, the Denver Bar Association, or CBA-CLE, and should not be construed as such.

 


[1] Hernandez v. Banks, 2013 WL 1831713, *9 (D.C. May 2, 2013).

[2] CORBIN ON CONTRACTS § 1.6 (1993). See Hernandez, 2013 WL 1831713, *4 (citing Richard A. Lord, 5 WILLISTON ON CONTRACTS § 10:5, at 313 (4th ed. 2009).

[3] CORBIN ON CONTRACTS § 1.7 (1993). See Hernandez, 2013 WL 1831713, *4 (citing, 5 WILLISTON ON CONTRACTS § 10:2, at 278-79.

[4] See Delsas ex rel. Delsas v. Centex Home Equity Co., LLC, 186 P.3d 141, 144 (Colo. App. 2008).

[5] Restatement (Second) of Contracts § 15 (1981).

[6] Davis v. Colorado Kenworth Corp., 156 Colo. 98, 105 (Colo. 1964).

[7] The Colorado Supreme Court, held as early as 1914 in Green v. Hulse, that a deed executed by an incapacitated individual was not inherently void but merely voidable. Green v. Hulse, 142 P. 416 (Colo. 1914).

[8] In 2008, the Colorado Court of Appeals expressly ruled that Colorado follows the majority rule that contracts executed by incapacitated people are voidable. See Delsas, 186 P.3d at 146-47.

[9] Hernandez v. Banks, 2013 WL 1831713, *7 (D.C. May 2, 2013).

[10] Id. at *7.

[11] Id. at *8.

[12] Id. at *9.

[13] Davis v. Colorado Kenworth Corp., 156 Colo. 98, 104-05 (Colo. 1964) (citing 29 Am. Jur. Insane Persons 215).

[14] Delsas, 186 P.3d 141, 144 (citing Medlin v. Buford, 115 N.C. 260, 20 S.E. 463, 463 (1894) (quoting Somes v. Brewer, 19 Mass. (2 Pick.) 184, 203 (1824)).

[15] Restatement (Second) of Contracts § 15 cmt. a (1981).

After You’ve Found Your Assisting Attorney, Face the Music and Make a Plan

JulieDavisAmySymons

By Amy Symons and Julie Davis

I am going to blame it on the natural highlights that are making an appearance at my temples, but for the first time in more than a decade of practice a client asked me, “So what happens if something happens to you?”

I had an answer for him because my co-author and I had previously discussed it over lunch, but it was my wake-up call that we needed to take our conversation to the next level. Fortunately, Barb Cashman made that easy with her CLE presentation “Death of a Solo, Death of a Practice.”  One of us attended her presentation and the other, in exchange for a peek at her materials, offered up a blog on what we did to put our own succession plan into place.

The first thing was to get permission from our clients to allow another attorney to access the client file if we were unable to complete the matter. Each of us added provisions in our engagement letter requesting that the client waive confidentiality if we were unable to complete the matter. The provision or casualty clause also included details about steps that would be taken after death, incapacity, or our inability to complete the mater. Although we noticed that some of the engagement letter provision examples that we reviewed didn’t provide contact information of the assisting attorney, we figured it was a comfort to our clients and provided the name, telephone number, and email address of the other attorney.

We met for coffee to discuss the ins and outs of the other’s practice.  Both of us are cloud-based – one uses Google Docs and the other Clio and Dropbox – making our offices accessible with a password. We discussed how to access that password and how to determine which client matters are open and which are closed. We also talked about general operations, such as the fact that one of us is paper-based while a client’s matter is open, and executed documents are scanned into the system before they are mailed to the client.

Clio is a cloud-based practice management system that allows the user to log client matters and report the status of each, including when a matter is completed.  It also includes COLTAF and Operating Account ledgers, making it easy to determine whose money is in the trust account.  Because the COLTAF funds are still the client’s money, not knowing to whom they belong is another ethical violation waiting to rear its head.

Being able to slip into the others’ shoes in a password-based world is easy enough, but we needed to have documentation in place for financial institutions. A trip to the bank ensured that our Limited Power of Attorney was effective and that the safe deposit box could be accessed. One of us banks at a local, small bank and was asked by a teller if the COLTAF should be POD.  It was worth a conversation with her as to why that should never be the case!

We each are drafting policy manuals that will offer a compass to the other.  These include:

  • a copy of the Limited Power of Attorney;
  • a copy of our will and contact information for our Personal Representative;
  • passwords to our computers, document retention systems, and online bank accounts;
  • instructions to access our calendaring system;
  • bank location and contact information, account numbers and where to access COLTAF balances;
  • safe deposit box or office-safe access information;
  • insurance information, including malpractice carrier and when we renew, life insurance policy numbers, providers, and amounts;
  • disability insurance numbers and providers;
  • health insurance providers, amount, and how paid;
  • an explanation of how clients pay us and/or where to find that information in each client’s engagement letter;
  • financial information such as annual and monthly budgets and operating expenses;
  • contact information for accountants and bookkeepers or information about Quick Books and Intuit or other accounting systems;  contact information for employees;
  • employees’ salaries and employment arrangement or contract;
  • general instructions about client files such as where to find engagement letters (including the casualty clause or relevant succession plan provision) and billing information;
  • information about closed client files and how to access scanned documents after the paper file has been destroyed;
  • the procedure the succession attorney is to follow when contacting clients and how to handle particular matters;
  • and the procedure the succession attorney is to follow regarding death notices to the Bar and others.

There is nothing that illustrates the analogy of the shoemaker whose children have holes in their shoes as much as two estate planning attorneys who admit to each other that they have not drafted their own estate plans.  The Limited Power of Attorney was drafted after we had coffee and we are committed to completing wills in the near future.

It is an interesting play in psychology to see yourself in your client’s shoes.  One of us knows that she needs to call her insurance agent and increase her life insurance and acquire disability insurance but there is a hesitancy there – the same hesitancy that we see clients have about planning for their own demise. It isn’t so much that the fear of death is bothersome, it is the rationalization that there is plenty of time to do this.  Most lawyers make a living based on planning for the unknown happening at any time.  This blog post has prompted inquires of other solos and it is shocking how many of us do not plan for our own practice as we would for a client’s.

Follow this series and see previous articles about solo attorney succession planning here.

Amy Symons is an estate planning and estate administration attorney who has an office in Denver and Colorado Springs.  Three years ago she started her own practice after working in larger firms.  She is the incoming treasurer for the Colorado Bar Association Solo-Small Firm Section Council.

Julie Davis is an Elder Law and Estate Planning Attorney who started her own firm in 2009. Julie is an accredited attorney with the Veterans Administration and is a member of NAELA.

Amy and Julie are contributors to the SOLOinCOLO blog, where this post originally appeared.

The opinions and views expressed by Featured Bloggers on CBA-CLE Legal Connection do not necessarily represent the opinions and views of the Colorado Bar Association, the Denver Bar Association, or CBA-CLE, and should not be construed as such.

The Impact of Colorado’s Civil Unions Act on Estate Planning

EmilyBloedelBy Emily L. Bloedel

In the past twenty years, Colorado has gone from being dubbed the “hate state” for its discrimination against same-sex individuals (See Romer v. Evans, 517 U.S. 620 (1996)) to allowing civil unions. Beginning at midnight on May 1, 2013, same-sex couples will be able to enter into civil unions. A number of legal benefits, protections, and responsibilities that are granted to spouses under the law apply to parties to a civil union.

These changes include: the ability to inherit real or personal property from a party in a civil union under the probate code; priority for appointment as a conservator, guardian, or personal representative; survivor benefits; the ability to file a complaint about the care or treatment of a party in a civil union in a nursing home; rights related to declarations concerning the administration, withholding, or withdrawing of medical treatment, proxy decision-makers and surrogate decision-makers, CPR directives, or directives concerning medical orders for scope of treatment forms with respect to a party to a civil union; rights concerning the disposition of last remains of a party to a civil union; and the right to make decisions regarding anatomical gifts (C.R.S. 14-15-101 et seq).

The impact that the new Act will have on estate planning is not yet clear. The previous norm in Colorado for same-sex couples, designated beneficiary agreements, may no longer be necessary for an individual in a same-sex relationship to dispose of his or her property as desired and allow for his or her partner to make important medical decisions. The Act makes it clear that, for the most part, a “party to a civil union has the benefits, protections, and responsibilities under law as are granted to spouses” (C.R.S. 14-15-106 (1)).

The legislature has made it clear that for estate planning purposes, if a partner in a valid civil union dies intestate, his or her partner can now inherit via the intestacy statute. Although the full extent of the benefits to same-sex couples remains to be seen, the best way for any partner to a civil union to ensure the desired disposition of his or her property, or that the proper person handles decision-making when the partner is no longer able, remains, like any marriage, in informing loved ones of his or her wishes and creating valid estate planning documents.

Emily Bloedel joined Felser, P.C. in October 2012 as an associate attorney and can be reached on LinkedIn. She received her bachelor’s degree in Japanese Language and Literature from the University of Colorado and graduated from the University of Denver Sturm College of Law in 2012. She is licensed in Colorado. While in law school, Emily was a traveling oralist on the Willem C. Vis International Commercial Arbitration moot team and served on the board of editors of the Denver Journal of International Law and Policy. She also mediated small claims and FED cases through the Mediation-Arbitration Clinic. She enjoys playing the koto (a traditional Japanese instrument), reading, and traveling. She is a contributor to the DBA Young Lawyers blog, where this post originally appeared.

The opinions and views expressed by Featured Bloggers on CBA-CLE Legal Connection do not necessarily represent the opinions and views of the Colorado Bar Association, the Denver Bar Association, or CBA-CLE, and should not be construed as such.

Report Regarding The 2013 ABA Mid-Year House Of Delegates Meeting In Dallas, Texas

Troy RackhamBy Troy Rackham

I have the privilege of serving the Denver Bar Association as a delegate to the American Bar Association (“ABA”) House of Delegates. The ABA House of Delegates met at the ABA’s midyear meeting held in Dallas, Texas on February 11, 2013. The agenda was relatively light. This Article summarizes the House of Delegates events at the midyear meeting and the action taken by the House.

The House opened with a welcome speech by Senator Kay Bailey Hutchinson. Senator Hutchinson thanked the House for its leadership in maintaining the integrity of the profession and ensuring the quality of judges.

ABA President Laurel Bellows also spoke to the House. She thanked the House for the privilege of serving as President. She discussed the concept of justice as fairness. She raised important questions on how best to improve the quality of justice delivered and how to make justice more accessible. She also discussed the Gender Equity Task Force and commented on the fact that it is addressing issues of unfairness to women, including inequity of pay to women lawyers. Additionally, President Bellows discussed human trafficking and the ABA initiatives relating to the epidemic of human trafficking. Finally, President Bellows discussed promoting programs supporting law students and young lawyers, as well as reforms to legal education.

After hearing some other speeches, the House got to work on resolutions submitted to the house. First, the House passed Resolution 108, which encouraged practitioners, when appropriate, to consider limiting the scope of their representation, including the unbundling of legal services as a means of increasing access to legal services. The House also considered and approved three resolutions relating to administrative law.

Additionally, the House considered and approved Resolution 109 which supported the position that United States Bankruptcy Judges have the authority, upon the consent of all the parties to the proceeding, to hear, determine, and enter final orders and judgments in those proceedings designated as “core” within the meaning of 28 U.S.C. § 157(b) but that may not otherwise be heard and determined by a non-Article III tribunal absent consent. The House voted to revise the resolution and later approved it.

The House considered nine resolutions relating to issues of criminal justice. Those were as follows:

  • Resolution 104A – Indigent Defense. The Criminal Justice Section urged the adoption of Resolution 104A, as revised, which urged Congress to establish an independent federally funded Center for Indigent Defense Services for the purpose of assisting state, local, tribal and territorial governments in carrying out their constitutional obligation to provide effective assistance of counsel for the defense of the indigent accused in criminal, juvenile and civil commitment proceedings. The House adopted the resolution as revised.
  • Resolution 104C – Prohibiting Retaliatory Discharge Against Public Defenders. The Criminal Justice Section also urged the House to adopt Resolution 104C. Resolution 104C urged state and local governments to enact legislation to prohibit the retaliatory discharge of a Chief Public Defender or other head of an indigent defense services provider because of his or her good faith effort to control acceptance of more clients than the office can competently and diligently represent. The House adopted the resolution.
  • Resolution 104D – Increased Funding for Prosecutor Training. The Criminal Justice Section moved the House to adopt Resolution 104D, which urged the federal government to restore, maintain, and, where appropriate, increase funding to organizations which provide training to state and local prosecutors, to better promote justice, increase public safety, and prevent wrongful convictions. The House approved the resolution.
  • Resolution 104E – Investigation of Immigration Status of the Accused. Fourth, the Criminal Justice Section asked the House to adopt Resolution 104E, which urged courts to ensure that defense counsel inquires and investigates a juvenile defendant’s immigration status and informs the juvenile about any possible collateral consequences that may flow from different dispositions of the case. The resolution also sought to minimize adverse immigration consequences. Several revisions were made to the resolution and the House adopted it, as revised.
  • Resolution 104F – Victims of Human Trafficking. Additionally, the Criminal Justice Section urged the House to adopt Resolution 104F, as revised. Resolution 104F urged governments to enact laws and regulations and to develop policies that assure that once an individual has been identified as an adult or minor victim of human trafficking, that individual should not be subjected to arrest, prosecution or punishment for crimes related to their prostitution or other non-violent crimes that are a direct result of their status as an adult or minor victim of human trafficking. The House approved the resolution as revised in the House.
  • Resolution 104G – Affirmative Defenses for Victims of Human Trafficking. Consistent with President Bellows’ focus on Human Trafficking, the Criminal Justice Section also moved the House to adopt Resolution 104G, which urged governments to enact legislation allowing adult or minor human trafficking victims charged with prostitution related offenses or other non-violent offenses to assert an affirmative defense of being a human trafficking victim. The House revised the resolution and later adopted it.
  • Resolution 104H – Vacating Convictions for Victims of Human Trafficking. The Criminal Justice Section further moved the House to adopt Resolution 104H, which urged governments to aid victims of human trafficking by enacting and enforcing laws and policies that permit adult or minor victims of human trafficking to seek to vacate their criminal convictions for offenses related to their prostitution or other non-violent offenses that are a direct result of their trafficking victimization. The House approved the resolution as revised.
  • Resolution 104I – Training Relating to Human Trafficking. As the final human trafficking resolution, the Criminal Justice Section and the Commission on Domestic and Sexual Violence jointly urged the House to adopt Resolution 104I, which was revised. Resolution 104I urged bar associations to work with judges, lawyers, and other professionals with subject matter expertise in human trafficking, to develop and implement training programs for judges, prosecutors, defense counsel, law enforcement officers, immigration officials, civil attorneys, and other investigators that will enable them to identify adult and minor victims of human trafficking and enable them to direct victims and their families to agencies that offer social and legal services and benefits designed to assist adult and minor victims of human trafficking. The House approved Resolution 104I as revised.
  • Resolution 104J – Model Charge for Grand Juries. Finally, the Criminal Justice Section moved the House to adopt Resolution 104J, which urged the Judicial Conference of the United States to amend the Model Grand Jury Charge to clarify that the Grand Jury should be instructed to vote separately on each defendant. After hearing the arguments in support of the resolution, the House passed it without revision.

Additionally, the House considered several resolutions proposed by the Ethics 20/20 Commission. The resolutions largely sought amendments to the Model Rules of Professional Conduct, or other Model Rules, to address the realities of increasing lawyer mobility. The Ethics 20/20 Commission resolutions are discussed in turn.

First, the House approved revised Resolution 107A, which approved proposed amendments to Model Rule of Professional Conduct 5.5(b) and the ABA Model Rules of Professional Conduct (Unauthorized Practice of Law; Multijurisdictional Practice of Law) to allow foreign lawyers to serve as in-house counsel in the United States, as long as the foreign lawyers not advise on United States law except in consultation with a U.S.-licensed lawyer. There was a variety of interesting debate and discussion on this resolution. Ultimately, the House passed Resolution 107 as revised.

Second, the Ethics 20/20 Commission urged the House to adopt Resolution 107B. Resolution 107B proposed amendments to the ABA Model Rule for Registration of In-House Counsel so that the model rule would permit foreign lawyers to serve as in-house counsel in the United States with some restrictions. The House revised the resolution and adopted it.

Third, the House considered Resolution 107C, which proposed amendments to the ABA Model Rule on Pro Hac Vice Admission. The amendments were designed to provide judges with guidance about whether to grant limited and temporary practice authority to foreign lawyers to appear in courts in the United States. There was some interesting discussion prior to the House, and during the House debates, on the resolution. Ultimately, after an amendment, the House adopted the resolution.

Finally, the Ethics 20/20 Commission urged the House to adopt Resolution 107D, which proposed amendments to Model Rule of Professional Conduct 8.5. Rule 8.5 relates to choice of law applicable to conduct standards and lawyer discipline. The proposed amendments were designed to address common choice of law problems that are more frequently occurring in the context of conflicts of interest. The House approved the resolution.

The House considered a number of resolutions in addition to the nine resolutions proposed by the Criminal Justice Section and the four resolutions urged by the Commission on Ethics 20/20. Those are described below:

  • Resolution 10A – Court Funding Crisis. The New York State Bar Association moved the House to adopt Resolution 10A, which urged federal elected officials to adequately fund the federal courts and the Legal Services Corporation as they negotiate deficit reduction with the imminent threat of the implementation of sequestration if they fail. The House approved the resolution.
  • Resolution 101A – Patentable Subject Matter. The Section of Intellectual Property Law moved the House to adopt Resolution 101A, which was revised. Revised Resolution 101A provided that the ABA would support the principle that laws of nature, physical phenomena, and abstract ideas are not eligible for patenting as a process under 35 U.S.C. §101, even if they had been previously unknown or unrecognized. The House approved the resolution as revised.
  • Resolution 101B – Standards for Finding Direct Infringement. Additionally, the Section of Intellectual Property Law urged the House to adopt Resolution 101B, which supported clarifying the standards for finding direct infringement under 35 U.S.C. § 271(a) for a patent directed to a multiple-step process in the fact situation where separate entities collectively, but not individually, perform the required steps of the patented process. After a revision, the House approved the resolution.
  • Resolution 106 – Principles for Jury Trials. As its one resolution, the Commission on the American Jury Project asked the House to adopt Resolution 106, which proposed amendments to the 2005 ABA Principles for Juries and Jury Trials. The amendments were to Principles 1(C) through (F), 6(C), 10(C) and 11(A) of those Principles. After an interesting discussion in support of the resolution, the House approved the resolution.
  • Resolution 100 – Medicare Reimbursements. The ABA’s Standing Committee on Medical Professional Liability moved the House to adopt Resolution 100. Resolution 100 supports timely and efficient resolution of requests from a claimant or applicable plan for conditional payment reimbursement amounts where Medicare has a right to reimbursement from a recovery by way of settlement, judgment or award. The resolution also urged Congress and the Department of Health and Human Services to establish reasonable time limits and procedures for responding to such requests. The House approved the resolution.

Finally, the House of Delegates also considered a number of uniform acts proposed by the National Conference of Commissioners on Uniform State Laws. It is fairly typical for the House to consider proposed uniform laws at its meetings. The three uniform laws that the House considered were the Uniform Asset Freezing Orders Act, the Uniform Deployed Parents Custody and Visitation Act, and the Uniform Premarital and Marital Agreements Act. The House approved all three resolutions.

Conclusion

I hope this Article sufficiently highlighted many of the more interesting or important the agenda items considered by the House of Delegates at the midyear meeting in Dallas. The annual meeting this year will be in August 2013 in San Francisco. I appreciate all input that any members of the Denver Bar Association have regarding any of the issues that have been considered, or will be considered, by the ABA House of Delegates.

Troy Rackham defends lawyers, hospitals, nursing homes, long term care facilities and other health care organizations in a wide variety of cases and claims. He regularly advises legal professionals on ethics, malpractice and professional liability issues. Mr. Rackham co-wrote a treatise on Colorado Legal Malpractice litigation, which is updated annually. He has orally argued and prepared briefs in dozens of appellate cases, most of which involved claims against lawyers, hospitals, physicians, or health care systems. Mr. Rackham is a member of the American, Colorado, and Denver Bar Associations, and he is a member of the CBA Ethics Committee and the ABA House of Delegates.

The opinions and views expressed by Featured Bloggers on CBA-CLE Legal Connection do not necessarily represent the opinions and views of the Colorado Bar Association, the Denver Bar Association, or CBA-CLE, and should not be construed as such.

Funding a Small Business with Retirement Funds? Think Twice

AlexWenzelBy Alexander Wenzel

If you have listened to AM radio in the last three years, you may have heard advertisements for arrangements by which small business owners could use tax-deferred funds to inject some capital into their small business from their retirement funds. The IRS refers to these arrangements as Rollovers as Business Start-Ups (or “ROBS”), although the scheme is not limited to start-ups.

Structure of ROBS

One may be able to understand how the IRS feels about these arrangements by the acronym it has chosen for them. The ROBS arrangement is a fairly simple tax work-around that takes funds from an existing tax-deferred retirement account, rolls-over those funds to a new tax-deferred retirement account (the “ROBS Plan”) that has but one client (the business owner) and one investment (the small company). The ROBS Plan would acquire shares of stock in the company as an “investment”by making a nice tax-deferred injection of capital into the company. While this arrangement may be acceptable to the IRS in a narrow set of circumstances, there are some dangers to this type of funding.

Items of Concern

The IRS is most concerned with two aspects of these arrangements: (i) violations of nondiscrimination requirements of retirement plans; and (ii) faulty valuations of the small business stock traded for the capital injection.

Non-discrimination Issue: The Internal Revenue Code prohibits contributions or benefits provided under a qualified retirement plan from discriminating in favor of highly compensated employees—those who either own at least 5 percent of the company, or receive more than $80,000 in salary. The Treasury Regulations also provide that the benefits, rights, and features of a qualified retirement plan (including, in this case, the ROBS Plan) cannot be discriminatory in effect. That is, employees must be able to invest in the ROBS Plan, not just the business owner.

As is often the case, employees may not even know of the existence of a ROBS Plan, much less be able to participate in it. If either the business owner or the ROBS Plan holds more than 5 percent of the company’s equity and employees are not permitted to participate in the ROBS Plan, the ROBS Plan is in danger of violating the non-discrimination requirement.

Valuation Issue: The IRS is also concerned that the valuation of the stock issued to the ROBS Plan may be inflated. The business owner may not want to lose control of the business ownership to the ROBS Plan and may seek to sell a small percentage of the shares to the ROBS Plan at a high price not supportable by the company’s operations or financial condition. Any such transaction should be supported by a well-documented appraisal. Additionally, if the company’s only asset is the capital injected, the investment may be characterized as a “prohibited transaction” which may result in a 15 percent tax on the transaction, or even 100 percent tax if not promptly corrected.

Dangers abound with ROBS Plans, and it may be wise to pursue other avenues of funding a small business before using those hard-earned retirement funds.

Alex Wenzel is an associate attorney at Burns, Figa & Will, P.C. His practice focuses on real estate transactions and litigation, securities, and corporate formation and transactional work. Prior to becoming an attorney, Mr. Wenzel was a Presidential Writer for the White House in the Office of Special Letters and Responses. A native Ohioan, he earned his B.A. at the University of Cincinnati and his J.D. at the University of Denver.

The opinions and views expressed by Featured Bloggers on CBA-CLE Legal Connection do not necessarily represent the opinions and views of the Colorado Bar Association, the Denver Bar Association, or CBA-CLE, and should not be construed as such.

SEC Issues Report on Social Media Disclosures

TrevorCrow

By Trevor A. Crow

The Securities and Exchange Commission (SEC) recently issued a report of its investigation relating to a Facebook post by Reed Hastings, the CEO of Netflix, which stated Netflix’s monthly online viewing had exceeded 1 billion hours. The SEC’s investigation was to determine whether Hastings or the Company violated Regulation FD under the Securities Exchange Act through the posting of this information.

In general, Regulation FD prohibits public companies, or persons acting on their behalf, from selectively disclosing material, nonpublic information to certain securities professionals, or shareholders, where it is reasonably foreseeable that they will trade on that information, before it is made available to the general public. Here, the SEC decided not to initiate an enforcement action against Netflix or Hastings. However, the report also offers guidance to public companies on the application of Regulation FD to disclosures made through social media.

The report explains that, under certain circumstances, public companies may disseminate material, nonpublic information through social media without violating Regulation FD if investors previously have been notified that specific social media will be used to spread such information. The report states that the framework set forth in theSEC’s August 2008 Guidance on the Use of Company Websites should be used when analyzing communications made through social media. Specifically, “the central focus of this inquiry is whether the company has made investors, the market, and the media aware of the channels of distribution it expects to use, so these parties know where to look for disclosures of material information about the company or what they need to do to be in a position to receive this information.”

The report also explained that without prior notice to investors, it is unlikely that a corporate officer’s personal social media site used to disseminate corporate information would qualify as a method “reasonably designed to provide broad, non-exclusionary distribution of the information to the public” as required under Regulation FD. In the Netflix inquiry, Hastings’ Facebook page had never been previously used to announce company metrics, yet the SEC still chose not to initiate an enforcement action against Netflix or Hastings.

Bottom Line: Public companies should have social media policies in place for their directors and executive officers to educate them about Regulation FD. Before a representative of the company posts any material and nonpublic information on a social media platform, the company should take steps to ensure that investors, the market, and the media are aware of this channel of distribution.

Trevor A. Crow is an associate in Dufford & Brown’s corporate transactions group. He focuses on public company securities compliance, M&A, entity formation, and startup company financing. He has counseled clients on a variety of business issues including entity selection, formation, finance, acquisitions, and numerous operating transactions. Trevor’s LLM in taxation makes him uniquely qualified to handle complex issues regarding business transactions and tax planning.

Trevor received his J.D. and LL.M. in Taxation from the University of Denver’s Sturm College of Law.  He is a member of the American, Colorado, and Denver bar associations; an executive member of the Colorado Bar Association Tax Section; he belongs to the Denver Metro Chamber Impact Denver Class of 2012; and he is a member of the Colorado Association of Business Intermediaries (CABI). He writes for the CBA Business Law Section newsletter, where this article originally appeared.

The opinions and views expressed by Featured Bloggers on CBA-CLE Legal Connection do not necessarily represent the opinions and views of the Colorado Bar Association, the Denver Bar Association, or CBA-CLE, and should not be construed as such.