A publication of the
Arkansas Bar Association
In this Issue: Partnership and LLC Interests Not All Back Pay is Created Equal Class Action Lawsuits in Arkansas
Vol. 45, No. 4, Fall 2010 online at www.arkbar.com
“THE PARTNERS FIGURED THEY COULD GIVE ME MORE WORK NOW. TURNS OUT THEY‘RE RIGHT.” BRENT KIMBALL, ASSOCIATE GREENSPOON MARDER, P.A. ORLANDO
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PUBLISHER Arkansas Bar Association Phone: (501) 375-4606 Fax: (501) 375-4901 Homepage: www.arkbar.com E-Mail: email@example.com EDITOR Anna K. Hubbard EXECUTIVE DIRECTOR Karen K. Hutchins EDITORIAL BOARD Gordon S. Rather, Jr., Chair Judge Wiley A. Branton, Jr. O. Milton Fine, II Judge Victor A. Fleming Brandon J. Harrison William D. Haught Philip E. Kaplan Mary Beth Matthews Drake Mann David H. Williams Teresa M. Wineland OFFICERS President Jim L. Julian Board of Governors Chair Sean T. Keith President-Elect Tom D. Womack Immediate Past President Donna C. Pettus Secretary F. Thomas Curry Treasurer William A. Martin Parliamentarian Charles D. Roscopf Young Lawyers Section Chair Brandon Moffitt BOARD OF GOVERNORS Thomas M. Carpenter Amy Click Richard C. Downing Jeffrey E. McKinley Robert R. Estes, Jr. Amy Freedman David M. Fuqua L. Kyle Heffley Anthony A. Hilliard Don Hollingsworth Paul W. Keith Harry A. Light Laura E. Partlow Jerry D. Patterson Brian H. Ratcliff John C. Riedel Brian M. Rosenthal Gwendolyn L. Rucker Brock Showalter John T. Vines Danyelle J. Walker Dennis Zolper
LIAISON MEMBERS Zane A. Chrisman Frank B. Sewall Jack A. McNulty Harry Truman Moore Judge Kim Bridgforth Carolyn B. Witherspoon Judge Ralph E. Wilson, Jr. Karen K. Hutchins The Arkansas Lawyer (USPS 546-040) is published quarterly by the Arkansas Bar Association. Periodicals postage paid at Little Rock, Arkansas. POSTMASTER: send address changes to The Arkansas Lawyer, 2224 Cottondale Lane, Little Rock, Arkansas 72202. Subscription price to non-members of the Arkansas Bar Association $35.00 per year. Any opinion expressed herein is that of the author, and not necessarily that of the Arkansas Bar Association or The Arkansas Lawyer. Contributions to The Arkansas Lawyer are welcome and should be sent to Anna Hubbard, Editor, firstname.lastname@example.org. All inquiries regarding advertising should be sent to Editor, The Arkansas Lawyer, at the above address. Copyright 2010, Arkansas Bar Association. All rights reserved.
Lawyer Vol. 45, No. 4
10 The Pledge of Partnership and LLC Interests. A Trap for Lenders and Borrowers? John Alan Lewis 16 Not All Back Pay is Created Equal The Arkansas Supreme Court Holds Employers Cannot Withold Taxes on Back Pay Award Allen C. Dobson and Travis Bo Loftis, Sr. 20 A Dynamic Development Under the Arkansas Rules of Civil Procedure: Arkansasâ€™s Favorable Approach to Class Actions Kenneth S. Gould
25 Practice Tip: Keys to Solving Trial Puzzle: Read Law, Have Strategy Judge Vic Fleming 26 Fake Check Scams are Targeting Law Practices Learn the Red Flags and Avoid the Traps Gloria J. Barr and Patricia Sallen 28 Steele Hays and His Wit Fred Petrucelli 30 Fiduciary Court Bonds 101 Cindi Thessing Cover Photograph courtesy of Bear Spirit Photography Contents Continued on Page 2
Lawyer The Arkansas Vol. 45, No. 4
in this issue Association News
Lawyer Community Legacy Award
Congratulations to New Members
Young Lawyers Section Report
Jim L. Julian
Brandon K. Moffitt
Congratulations to 25 Year Members
Your Name in Print
Judicial Advisory Opinions & Disciplinary Actions 32 Lawyer Disciplinary Actions
Arkansas Bar Foundation Memorials and Honoraria
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Arkansas Bar Association
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HOUSE OF DELEGATES Delegate District A-1: Anthony W. Juneau, Anthony W. Noblin, Kristin Pawlik, William J. Trentham, and Hollie Greenway Delegate District A-2: Brock Showalter, Tim Tarvin, Debby Thetford Nye, Paul D. Reynolds, W. Marshall Prettyman, Jr., Charles M. Duell, Troy L. Whitlow, Suzanne Clark, Stan B. Baker, Matthew L. Fryar, and Tina M. Hodne Delegate District A-3: Farrah L. Fielder, C. Michael Daily, Jeffrey D. Rickard, Joel D. Johnson, Stephanie Harper Easterling Delegate District A-4: John C. Riedel Delegate District A-5: Brent Capehart Delegate District A-6: Emily Sprott McIllwain Delegate District A-7: Michael E. Kelly Delegate District B: Gwendolyn L. Rucker, M. Stephen Bingham, Joel M. DiPippa, Khayyam Eddings, Christian Harris, Gill A. Rogers, Alan G. Bryan, Tim J. Cullen, JaNan A. Davis, Jennifer W. Flinn, Anne Hughes White, Tasha Sossamon Taylor, Patrick L. Spivey, Shaneen Kelleybrew Sloan, Jason Earley, Jerald “Cliff” McKinney, II, John P. Perkins, III, Victor D. “Trey” Wright, Mark W. Hodge, Cathy Underwood, Jodie Lynn Hill, Grant M. Cox, James Paul Beachboard, Phillip M. Brick, Jr., Whitney L. Foster, Stephen R. Giles, Aaron L. Squyres, Adam Wells, Dan C. Young Delegate District C-1: Jay Scurlock Delegate District C-2: Jerrie Grady Delegate District C-3: Keith Chrestman, Brant Perkins, Teresa M. Franklin Delegate District C-4: Curtis Walker Delegate District C-5: Albert J. Thomas, III, A. Jan Thomas, Jr. and Winston B. Collier Delegate District C-6: Charles E. Clawson, III, Shane A. Henry Delegate District C-7: William N. Reed Delegate District C-8: Brandon C. Robinson, Paul T. Bennett, Charles D. Roscopf Delegate District C-9: Timothy R. Leonard, C.C. Gibson III, Leslie Jo Ligon Delegate District C-10: Shivali Sharma and George M. Matteson Delegate District C-11: John C. Finley, III, J. Philip McCorkle Delegate District C-12: Jonathan D. Jones and Wade T. Naramore Delegate District C-13: Cecilia Ashcraft, Sam E. Gibson Law Student Representatives: Malcolm Means, University of Arkansas School of Law; Kimberly Eden, UALR William H. Bowen School of Law
The Arkansas Lawyer
WHO’S WATCHING YOUR FIRM’S 401(k)?
• Is your firm’s 401(k) subject to quarterly reviews by an independent board of directors? • Does it include professional investment fiduciary services? • Is your firm’s 401(k) subject to 23 contracted service standards? • Does it have an investment menu with passive and active investment strategies? • Is your firm’s 401(k) sponsor a not-for-profit whose purpose is to deliver a member benefit? • Does it feature no out-of-pocket fees to your firm? • Is your firm’s 401(k) part of the member benefit package of 36 state and national bar associations? If you answered no to any of these questions, contact the ABA Retirement Funds to learn how to keep a close watch over your 401(k).
Unique 401(k) Plans for Law Firms Phone: (877) 947-2272 • Web: www.abaretirement.com • email: firstname.lastname@example.org The American Bar Association Members/Northern Trust Collective Trust (the “Collective Trust”) has filed a registration statement (including the prospectus therein (the “Prospectus”)) with the Securities and Exchange Commission for the offering of Units representing pro rata beneficial interests in the collective investment funds established under the Collective Trust. The Collective Trust is a retirement program sponsored by the ABA Retirement Funds in which lawyers and law firms who are members or associates of the American Bar Association, most state and local bar associations and their employees and employees of certain organizations related to the practice of law are eligible to participate. Copies of the Prospectus may be obtained by calling (877) 947-2272, by visiting the Web site of the ABA Retirement Funds Program at www.abaretirement.com or by writing to ABA Retirement Funds, P.O. Box 5142, Boston, MA 02206-5142. This communication shall not constitute an offer to sell or the solicitation of an offer to buy, or a request of the recipient to indicate an interest in, Units of the Collective Trust, and is not a recommendation with respect to any of the collective investment funds established under the Collective Trust. Nor shall there be any sale of the Units of the Collective Trust in any state or other jurisdiction in which such offer, solicitation or sale would be unlawful prior to the registration or qualification under the securities laws of any such state or other jurisdiction. The Program is available through the Arkansas Bar Association as a member benefit. However, this does not constitute an offer to purchase, and is in no way a recommendation with respect to, any security that is available through the Program. C09-1005-035 (07/10)
The Arkansas Lawyer
by Jim L. Julian
The Bar Association Needs You! The title of this article is reminiscent of the war time recruitment posters featuring Uncle Sam. As our country needs volunteers in times of need, so does our Association. We have current issues that need the attention and assistance of our members. The success of these endeavors will pay dividends to our members for many years to come. An issue of concern has arisen regarding the Ark Bar PAC and the support, or lack thereof, which it receives from this Association. We currently enjoy membership in our Association of over 5,000 members. That is something of which we should be proud. Unfortunately, we have fewer than 200 members who choose to become members of, and contribute to, the PAC. This Association saw a significant weakening of our position in the Arkansas Legislature with passage of term limits laws. In the 1990s, there were many legislative sessions where the House and Senate Judiciary Committees were mainly composed of members of our Association. We enjoyed the benefit of those members taking care to make sure that imprudent legislation was not passed into law. As an Association, our legislative program was very successful in those days. In the years immediately following implementation of term limits, we saw a significant drop in the number of lawyers seeking legislative positions. As a result, the Association undertook to actively encourage its members to seek Arkansas Legislative positions and in 2004 created the Ark Bar PAC. The Arkansas Bar PAC was created to provide funds to attorneys who were willing to sacrifice their time and practice for the public good. The PAC does not base its contributions on party affiliations or political philosophy. Its existence is to help those who wish to run for legislative office in Arkansas. To accomplish that task, the PAC needs money. There has been a disheartening trend regarding membership and contributions to the PAC
in recent years. We have seen the membership in the PAC slowly decline year after year along with the amount of contributions to the PAC. In order to continue to have a political action committee that is relevant to the political process, it is imperative that we reach a larger number of our members and obtain contributions from those members to assist in the process of electing more lawyers to the Arkansas Legislature. In the current election cycle, we have had 23 lawyers and one law student run for either a Senate or House position in the primary. The PAC expended all available funds in order to assist these lawyers in their efforts to be elected to the Arkansas Legislature. We have successfully assisted nine lawyers in their election to the House of Representatives in the primary and four lawyers who were elected to the Senate. We have a number of lawyers who are still facing opposition in the general election for positions in both the House and the Senate. Our current funds are almost depleted. We have urged our fellow members to make a commitment to seek positions in the Arkansas Legislature so they may assist the Association with issues regarding our common interests. It will be unfortunate if we are unable to provide them with financial assistance in their efforts to seek election to the Legislature. It is important that we obtain much greater support from the Association membership. The minimum amount for membership in the Ark Bar PAC is $30 per year. You may contact the Association office and sign up for PAC membership at any time. This is a worthwhile effort that needs and deserves the attention of our membership at this critical time. I urge you to consider membership in Ark Bar PAC and help provide the money necessary to secure the election of our members to the Arkansas Legislature. We are approaching the start of the 2011 General Assembly in early January. Our
Jurisprudence and Law Reform Committee, chaired by Dennis Zolper, carefully vetted numerous legislative proposals in selecting our 2011 legislative package. There are five bills that we will be advancing as part of our package. They are: • Uniform Principal and Income Bill • Uniform Adult Guardianship Bill • Revised Uniform Unincorporated Nonprofit Association Act • Revised Uniform Arbitration Act • Revised Scire Facias Each of these legislative proposals can be viewed in their current form on the Association’s website. We expect that there will be many bills introduced during the session that will have direct and indirect impacts on the practice of law. Our Legislation Committee, chaired by Roy Beth Kelley, will carefully review every bill introduced at the legislature in order to determine whether the Association should take a position on that bill. The Association has a top-notch lobbyist in Jack McNulty. Jack has developed a reputation for being able to provide members of the General Assembly with a good understanding of the effect that pending legislation may have on existing law. Legislators count on him to help them understand these issues as they arise. We are fortunate to have him. Here is where the help is needed. Jack has set up a Legislative Action Network in which our members who have a relationship with a legislator can sign up to make a call to legislators when matters of interest come before committees or the House or Senate. We need more of our members to sign up for the Legislative Action Network so that when the time comes, we can act quickly and seek out the legislative support we need. I urge you to join the Legislative Action Network and provide help to Jack McNulty when he calls on you. If you are not a member of the Ark Bar PAC, join today! n
Vol. 45 No. 4/Fall 2010 The Arkansas Lawyer
Association News Association Board of Governors Met in August The Association’s Board of Governors met August 20-21, 2010, at Petit Jean Mountain Lodge with Chair Sean T. Keith presiding. President Jim L. Julian thanked 2010 Annual Meeting Chair Gwendolyn L. Rucker and Immediate Past President Donna C. Pettus for hosting the largest Annual Meeting ever. He asked the Board to thank the Association sponsors who helped make the meeting possible. President Julian provided the results of the most recent elections for the House of Delegates and Board of Governors. He announced the appointment of Board of Governors Chair Sean T. Keith, Parliamentarian Charles D. (Chuck) Roscopf, Governor Jeffrey Ellis McKinley to an “At Large” position, and Governor Gwendolyn L. Rucker to serve a one-year term for Sean T. Keith’s position as he serves as Board of Governors Chair. He announced the appointment of Association Committee Chairs and the schedule for Board meetings for the balance of the Bar year. At the President’s request, the Board of Governors voted to disband the Senior Task Force, which has completed its assigned tasks. The Board approved the appointments to the Arkansas Law Review, Inc. The following committee chairs gave reports to the Board: Gwendolyn Rucker, Chair of the Membership Development Committee; Zane Chrisman, Chair of the CLE Committee; Brian Rosenthal, Chair of the Long Range Planning Committee;
Lamar Pettus, Chair of the Governance Committee; Immediate Past President Donna C. Pettus gave a report on the Leadership Academy; President-Elect Tom D. Womack gave a report from the Audit Committee. Arkansas Bar Foundation President Frank B. Sewall gave a report on the Foundation. Young Lawyers Section Chair Brandon K. Moffitt presented the YLS report via conference call. Annual Meeting Chair J. Cliff McKinney II gave a report on plans for the 2011 Annual Meeting. Annual Meeting Task Force Chairs Jeffrey Ellis McKinley and Harry A. Light gave a report from the task force. Tina Medlock, president of the Arkansas Paralegal Alliance, Inc., discussed with the Board the possibility of reactivating the Association’s Paralegal Committee. The committee was disbanded in 2002. Association Executive Director Karen K. Hutchins provided reports on the new online legal research tool Fastcase and Arkansas Bar Center usage by members. The Association has received positive feedback on the free access to Fastcase. President Julian welcomed the following new members to the Board of Governors: Amy Click, Don Hollingsworth, YLS Chair Brandon Moffitt, H.T. Moore, Gwendolyn L. Rucker, Brock Showalter and Danyelle J. Walker. The next meeting of the Board of Governors will be held in Little Rock at the Arkansas Bar Center on December 3-4, 2010.
Arkansas Bar Foundation Mid Year Dinner Friday, February 4, 2011 The Capital Hotel
The Arkansas Lawyer
Ann Dixon Pyle Celebrates 15 Years as Executive Director of the Arkansas Bar Foundation by Frank B. Sewall, Arkansas Bar Foundation President
Ann Dixon Pyle and Frank B. Sewall On September 1, 2010, the Arkansas Bar Foundation reached a significant milestone—the 15th anniversary of its Executive Director Ann Dixon Pyle. Ann is the Foundation’s first executive director who is responsible exclusively to the Foundation. Ann has and continues to provide outstanding service to the Foundation, its fellows and its officers. She implements policies established by the Board of Directors. She carries out the day-to-day administrative functions of the Foundation. She assures that the Foundation has an excellent public image. Ann does everything to assure that the officers of the Foundation are prepared to carry out their responsibilities. She even drafts all the minutes of Foundation member, board and committee meetings. The secret that Ann drafts minutes for the Foundation was revealed a few years ago when David Vandergriff—the then secretary/treasurer of the Foundation—had to amend a set of minutes being presented during a board meeting to correct the spelling of his name. Ann has often said that she has used the late Judith Gray as a role model. One of Judith’s endearing characteristics was to make every lawyer with whom she dealt believe that he or she was Judith’s favorite lawyer. Ann has the same trait. I know that I am Ann’s favorite Bar Foundation president!
Arkansas Bar Center
ACCOLADES The Arkansas Association of Defense Counsel (AADC) awarded Gordon S. Rather, Jr. of Wright, Lindsey & Jennings LLP the 2010 Outstanding Defense Attorney Award. David P. Glover of Wright, Lindsey & Jennings LLP in Little Rock received the W.A. Eldredge, Jr. Award presented at AADC annual meeting in July. The Barber Law Firm celebrated its 100th anniversary by forming the Barber Law Firm Century Fund which is designed to positively impact the community for the next century. The Arkansas Bar Association awarded the Lawyer Community Legacy Award to William A. Waddell, Jr. of Friday, Eldredge and Clark in Little Rock. The Texarkana Young Lawyers Association presented Judge W. Kelvin Wyrick with the 2010 Attorney of the Year Award for Texarkana. Brent M. Langdon of Texarkana has been selected as the very first Fellow in Arkansas of the American Academy of Matrimonial Lawyers. Karen Baim Reagler, managing attorney of The Baim Law Firm’s Hot Springs and Hot Springs Village offices, recently completed her Masters of Laws in Elder Law and Estate Planning from Western New England College of Law. Pre-Paid Legal Services, Inc. (PPD) awarded Mona Teague, an associate of Lisle Rutledge, with the PPD Member Choice WOW Award for the third consecutive year. Cathy Underwood was recently presented with the NALS Foundation Scales of Justice Award. Rosalind M. Mouser of Ramsay, Bridgforth, Robinson and Raley LLP in Pine Bluff completed five years of service on the Pine Bluff Aviation Commission that manages Grider Field Airport in Pine Bluff. Rosalind M. Mouser received the Ouachita Alumni Milestone Award for the Class of 1980 in the inaugural class of awards presented by Ouachita Baptist University. Wilson & Associates received the 2010 Diamond Award of Excellence from the USFN (America’s Mortgage Banking Attorneys) for the 17th consecutive year. APPOINTMENTS AND ELECTIONS Judge John Dan Kemp was elected president of the Arkansas Drug Court Professionals Association. Elizabeth Bowles, president of Aristotle Inc., was elected president of the Wireless Internet Service Provider Association. The Sebastian County Bar Association announced its officers for 2010-11: President, Sonya Mattingly Hall, Vice President & Trust Officer, First National Bank of Fort Smith; Vice President, Kathryn Stocks, Warner, Smith & Harris, PLC; Secretary/Treasurer, Sam Terry, Hayes, Karber, Alford & Smith, PLLC. Governor Mike Beebe appointed Amy Brazil of Conway as Conway District Court Judge. The Governor also appointed Susan Hickey of El Dorado as Circuit Judge, 13th Judicial District and Howard Yates of Morrilton as Conway County District Court Judge. Conner Eldridge of Arkadelphia has been nominated by President Obama to become the U.S. Attorney for the Western District of Arkansas. Harry Truman Moore has been appointed to the American Bar Association Standing Committee on Bar Services. WORD ABOUT TOWN Mitchell, Williams, Selig, Gates & Woodyard, P.L.L.C. announced that Scott Schallhorn joined the Little Rock office as counsel in the law firm’s business group. Robert P. Plummer has joined Summit Bank as Sr. Vice President and Director of Wealth Management. Quattlebaum, Grooms, Tull & Burrow PLLC announced that R. Ryan Younger, Nicholas E. Kelley, and Lindsey C. Pesek joined the firm as associates. ADR, Inc. announced that John Dewey Watson joined the firm as a mediator. Davis, Clark, Butt, Carithers & Taylor, PLC in Fayetteville announced that J. David Dixon and William F. Clark joined the firm as associates. Ben F. Arnold announced the relocation of his office to 111 Center St., Suite 1200 in Little Rock. Hamilin Dispute Resolution, LLC announced the association of Chris Gomlicker as mediator/arbitrator. The Law Offices of David Williams announced the opening of its Texas office and the addition of Andy Payne serving Of Counsel. The Asa Hutchinson Law Group, PLC in Rogers announced that Kristi L. Hunter joined the firm as an associate.
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Vol. 45 No. 4/Fall 2010 The Arkansas Lawyer
Arkansas Bar Association Members:
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The Arkansas Lawyer
Young Lawyers Section Report
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Abundance of Opportunities to Serve in YLS 18 and Life to Go:
2009 #4 Fall Vol. 13
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Discovery deadlines. Client meetings. Business development. Where does it end? The demands on young lawyers today are not significantly different from the days of old, however, the environment in which we practice has changed considerably. With the adoption of smart phones and the expectation of your clients to have accessibility 24/7, we rarely have a moment to take a step away from our daily law practice. Often this connection keeps us from being involved with the work of the Bar Association or providing public service to our local communities. It is my hope that is where the Young Lawyers Section (YLS) can help by creating opportunities to be involved that do not require a substantial time commitment. One of my primary goals when seeking the Chair position in the YLS was to provide a conduit for young lawyers to be actively involved within their community, while also providing an outlet to interact with other young lawyers in a social setting. The Executive Council of the YLS is diligently working to schedule events across the state where local members of the Section conduct a public service project, followed by a small networking event. The logistics for the events will be covered by the Executive Council and you will only have to attend to participate. Hopefully everything will be finalized within the coming weeks. Please look for announcements regarding the YLS’s events in our quarterly publication In Brief, as well as the Association’s e-bulletins. If you cannot break away from the office to join us for an event, the YLS offers several ways to be involved within the Section without leaving your office. Some upcoming opportunities include: 18 & Life to Go: A Legal Handbook for Young Arkansans This publication aims to provide young
Prepared by Arkansas Bar Association Young Lawyers Section
Arkansans with a basic understanding of our legal system, as well as the answers to common legal questions. Our goal is to provide every Arkansas high-school senior with a copy of the publication prior to graduation. Currently the publication is available on our website as a free pdf download, or for purchase as a paperback on Lulu, or as a download on the Kindle. We are in the process of securing funds to print the publication for the upcoming school year. How you can be involved: Take the opportunity to download and review the publication. Brainstorm regarding new topics or issues to include in the handbook and author the content. Submit your contribution to the YLS Citizenship Education Committee. In Brief In Brief is the YLS’s quarterly publication to inform section members of upcoming events, as well as provide content relevant to young lawyers. How you can be involved: The YLS’s Communications Committee is always seeking contributors to provide content for the publication ranging from articles on topics affecting young lawyers to simple updates regarding members of the Section. We are working to expand the coverage of the publication and always welcome the input of section members. In addition to articles, some of the areas included within the publication where you can contribute are: Hats Off: Need to announce your new law practice? Have an addition to your family? Know other YLS members who deserve recognition for their work? Then submit the information to be included in Hats Off. Hats Off provides brief snippets of the latest news and achievements of our membership. Quarterly Book Review: Read an interesting book lately that may interest young lawyers? Write a brief review (150 words or
less) to be included within our publication. There is no requirement that the book be related to law. The Arkansas Traveler: This is the newest section of our publication. Is there a “hidden treasure” that you have run across while traveling through the state? Then tell us about it. We are looking for unique places to visit all across Arkansas. From restaurants to hiking trials, we want to know about the best places you have encountered. Just write a brief review and tell us why we should visit. A Level Playing Field If you would like to head a larger project in your local community, I would suggest that you consider this year’s YLS service project A Level Playing Field. A Level Playing Field is a DVD program developed by the Association’s Law Related Education Committee that discusses the constitutional basis of the American judicial system and the four fundamental principles of the judicial system—the Rule of Law; Equal Justice under the Law; Fair, Impartial and Independent Judiciary; and the Jury System. The series is designed for elementary to high school students. The presentation can be completed in as little as an hour and the materials are available online, with the exception of the DVD. If you would like to conduct the program in your community, the YLS will provide the materials, as well as,assist in organizing and recruiting members for the event. As you can see, there are a number of possibilities for you to become involved in the YLS, despite a busy schedule. Please join the YLS in reaching out to our local communities through one of our public service events or take time to contribute to the section from the comforts of your office. I look forward to working with you over the next year. n
Vol. 45 No. 4/Fall 2010 The Arkansas Lawyer
The Pledge of Partnership and LLC Interests. A Trap For Lenders and Borrowers? by John Alan Lewis Introduction. The situation is a common one. Borrower presents himself/ herself to a lender and proposes to pledge an interest in a limited liability company (“LLC”) or partnership (either entity being referred to herein as an “ownership interest”) as collateral for a loan. The lender, in recognition of the balance sheet of the partnership or LLC (either entity being referred to as the “entity” or “issuer”) or the distributions the entity throws off, is open to the idea so long as it has a perfected, first lien in the ownership interest. Is this possible? While the answer is yes, the priority rules of Article 9 of the Uniform Commercial Code (“UCC”) do not always depend on the order of perfection, particularly when Article 8 is considered. A lender can lose its lien position or never fully secure it against competing claims because the UCC treats ownership interests in partnerships and LLCs differently from corporate stock. For the reasons noted below, a lender should take the rather circuitous route of requiring the issuer to “opt-in” to Article 8 for lien priority purposes. The issues noted in this discussion pose a problem for a borrower and his or her counsel as well. Great care should be taken in reviewing the representations contained in most loan agreements (or in borrower’s counsel’s opinion letter) as to the status or senior position of a lien secured by an issuer’s ownership interest. It is common to see language in loan agreements that state that the lender has a first security interest in the ownership interest. Or borrower’s counsel is frequently required to say that the lender has taken all necessary action to perfect its interest in the collateral. Until the issues noted below are resolved, the answer for borrower’s counsel may be no. First, some basic assumptions and disclaimers need to be cleared away. We assume the ownership interest proposed as collateral for the loan is not a publicly traded security that is dealt in or traded on a recognized securities exchange. Next, we assume the entity’s governing documents either (i) permit the pledge, hypothecation, transfer, or assignment of the ownership interests; or (ii) are silent on this point.1 In addition, we assume the ownership interest in question does not reside under the custody or control of a securities intermediary (clearing corporation), broker, or bank. Finally, we will not discuss the federal or state securities laws associated with issuance of the ownership interests by a partnership or limited liability company. The securities laws ramifications associated with closely held business entities are too complex to address in detail here. 10
The Arkansas Lawyer
General Rules. The UCC, and the corresponding Arkansas Code, treat interests in some partnerships or LLCs differently from corporate stock. Corporate stock is specifically identified as investment property under Articles 8 and 9.2 Section 8-102(a)(15) defines the term “security” as, among other things, an obligation of an issuer or a share, participation, or other interest in an issuer represented by a security certificate in bearer or registered form, the transfer of which may be registered upon books of the issuer maintained for that purpose, and which is one of a class or series of shares, participations, interests, or obligations and which is, or is a type, dealt in or traded on securities exchanges or securities markets or is a medium for investment and by its terms expressly provides that it is a security governed by Article 8.3 Under Ark. Code Ann. § 4-9-102(a)(49) and § 4-8-102(a)(15) (2000), the term “issuer” includes a partnership or LLC as well as a corporation. However, § 8-103 of Article 8 establishes a special rule for partnerships and LLCs with regard to the treatment of ownership interests in those entities. Unless the governing documents say otherwise or the securities are traded on a recognized securities market or securities exchange, partnership or LLC interests are not securities and are not subject to Article 8 of the UCC.4 In other words, Article 8 will only control if the terms of the partnership or LLC’s governing documents expressly provide that its ownership interests are to be governed by Article 8. If the governing documents of the partnership or LLC are silent as to the application of Article 8, Article 9 controls. So we now have the general rule as articulated in § 8-103(c). If the governing documents of the partnership or LLC are silent, Article 9 controls and the ownership interests are not investment property or “securities” under § 8-102(a)(15). By default, ownership interests in partnerships and LLCs are treated as general intangibles under Article 9.5 The Comments to § 9-102 describe general intangibles as a “residual category” or catch all.6 A security interest in a general intangible under Article 9 is perfected through the filing of a financing statement under § 9-312(a). Should there be a dispute between competing lien holders, generally speaking the “first to file” rules of § 9-322(a)(i) apply. At this point it might be useful to look back on transactions all of us have worked on and consider how the consequences of the Article 8 versus Article 9 issue might play out. Issuer’s counsel carefully drafts the organizational/governing documents for the entity and even prepares certificates evidencing the ownership interests of the parties. However, never a word is mentioned in the entity’s governing documents or the certificates as to applicability of Article 8. If the documents are silent, we know that Article 9 will control. Having drafted and reviewed many partnership agreements and operating agreements, I have concluded that Article 8 is seldom invoked. Whether this omission is by design or ignorance is unclear, but it can be dangerous not to invoke it when the transaction calls for it. Now, let’s recap where we are. If (i) the issuer’s governing documents permit the pledge or assignment of the ownership interest and (ii) these same documents do not contain specific “opt-in” language stating that Article 8 governs, then Article 9 controls. This ownership interest is a general intangible and a security interest in it is perfected by the filing of a financing statement with the proper office. Potential Problems. As you might guess, complications may arise. If, subsequent to the loan closing, the issuer determines that additional equity capital is re-
quired and the new investors demand that certificates evidencing their ownership interests be issued, the issuer itself (or the new investor’s counsel) may decide that the provisions of Article 8 should be utilized.7 Or, as is common in the healthcare field, a new, outside entity is willing to invest money in a physician’s ancillary operation such as an ambulatory surgery center. Is the original lender/secured party’s lien still perfected as to the issuer’s ownership interest? While the lender (Lender 1 for our purposes) retains a perfected security interest in the ownership interest, Lender 1 may lose in a priority dispute with a subsequent lender (Lender 2). Even though issuer’s counsel carefully prepared the organizational documents as well as certificates evidencing the ownership interests of its owners, such steps may not be sufficient in a priority dispute with another lender. If the issuer subsequently adopts “opt-in” language as to Article 8 and new certificates are issued, then Borrower 1 (he or she now becomes Forgetful Borrower or Bad Borrower for our purposes) could take the newly issued certificate and pledge it to Lender 2. Who prevails in such a situation? Does Lender 1 maintain a perfected security interest in the ownership interest? Does Lender 1’s security interest have priority over Lender 2? In most cases, under the UCC the answer is yes as to perfection but, for the reasons set out below, no as to priority. We have established that under § 8-103(c) in order to be classified or treated as securities under Article 8, the governing documents of the issuer must explicitly provide that Article 8 controls.8 If the governing documents for the entity provide that Article 8 is to control, the partnership or LLC ownership interest is treated as investment property. A security interest in investment property is perfected in one of three ways: control,9 possession,10 or filing.11 Under the priority rules of Article 9, a security interest perfected only by filing is subordinate to a conflicting security interest perfected by control or delivery.12 Article 9 tells us to look to Article 8 (§ 8-106 (2000)) to determine when the secured party has control of a certificated security. If represented by a certificate, the secured party is deemed to have perfected its security interest in the collateral when it takes control of the security. Section 8-106 provides that a party has control of a certificated security in registered form if the certificate of security is delivered to the purchaser [secured party] and endorsed over to the purchaser [secured party] or endorsed in blank. Comment 1 to § 8-106 provides that “control” means the purchaser [secured party] has taken whatever steps are necessary, given the manner in which the securities are held, to place itself in a position where it can have the securities sold, without further action by the owner.13 If the securities issued by the entity are uncertificated, a party is deemed to have control under § 8-106 if (i) the uncertificated security is delivered to the purchaser (or secured party in our case); or (ii) the issuer has agreed that it will comply with instructions originated by the purchaser (secured party) without further consent by
John Alan Lewis is a member of Mitchell, Williams, Selig, Gates & Woodyard, P.L.L.C. whose primary practice areas include commercial and business transactions. Mr. Lewis is located in Mitchell Williams’ Rogers office.
Vol. 45 No. 4/Fall 2010 The Arkansas Lawyer
“These are the suggested steps a lender should take to ensure compliance with Articles 8 and 9: • review the terms of the governing documents to confirm that the interest can be pledged; • require the issuer to “opt-in” to Article 8; • determine whether the interest to be pledged is certificated or uncertificated and, if possible, require that certificates be issued so as to avoid further complications in the event of default; • if the interest is certificated, have an endorsement in blank made over to the secured party, like a stock power; • so as to prevent the issuer from “opting-out” of Article 8 at some later date, have the issuer and its members enter into an agreement with the lender to this effect as part of the loan closing and which agreement requires that the lender consent to this step; • take possession of the certificated security or receive an acknowledgement from the issuer as to the security interests held by the secured party if the security is uncertificated (but see concerns as to this approval noted above); • confirm that your security agreement contains language that specifically references the right of the lender to receive all proceeds of the described collateral including the right to distributions from the issuer of any sort, type, form, or classification; and • as a backup, file a financing statement referencing the security interest in the partnership or limited liability company interest as well as the lender’s rights to all proceeds.” 12
The Arkansas Lawyer
the registered owner or borrower.14 Quite naturally, the question arises, how does one “deliver” an uncertificated security? Comment 3 to § 8-106 says that delivery of the uncertificated security occurs in one of two ways. The first method is when the issuer acknowledges that the purchaser (second party) is now the registered holder of the interest and is thereby entitled to exercise all rights of ownership under § 8-107. The second way in which control is established over an uncertificated security is if the uncertificated security is delivered to the purchaser or the issuer agrees to comply with instructions of the purchaser even though the owner remains listed as the registered owner.15 While the issuer’s cooperation is necessary to achieve control and thereby perfection over an uncertificated security, the issuer is not required to enter into such an agreement. The secured party must make sure it has the issuer’s consent, which will require a thorough review of the issuer’s governing documents to determine what constitutes approval to the issuer. Can this be accomplished through a manager or should the other partners or members consent to it? Also, what other actions must be taken before the issuer’s action can be deemed to be binding on the issuer?16 Finally, to further protect itself against the possibility that issuer might “opt-out” of Article 8 at some later date, an agreement among the issuer, all of its members/partners, and the lender is recommended which requires the lender’s consent before the Article 8 “opt-in” language can be changed or amended in any way. There is another important reason why a lender may require an issuer to provide certificates to evidence the ownership interest and not uncertificated securities. If governing documents of the entity provide for uncertificated securities, the lender will need the cooperation of the issuer in order to transfer its ownership interest to the lender or a purchaser at a foreclosure sale. If the issuer is controlled (or even influenced) by the defaulting borrower, the transfer process may prove difficult. Certificates endorsed in blank may be conveyed at a foreclosure sale without the necessity of cooperation from the issuing entity.17 There is little case law in Arkansas dealing with the interplay of Articles 8 or 9. J.M. Products, Inc. v. Arkansas Capital Corporation,18 involved a dispute over corporate stock between the secured creditor, Arkansas Capital Corporation (“ACC”), and the is-
suer, J.M. Products, Inc. (“JPI”). ACC’s borrower was a minority shareholder in JPI and pledged his corporate security certificate in JPI. JPI claimed that ACC had notice of an issuer’s lien or prior claim against the security pledged. The Court was asked to consider, among other things, whether ACC had notice of JPI’s lien and what constitutes notice of such a lien to another creditor. The Court held that ACC was neither on notice as to JPI’s alleged lien nor could any form of constructive knowledge of such lien be imputed to it. While interesting, the case is not particularly instructive for purposes of this discussion. Even with the issuer’s consent and cooperation, the secured party must resolve at least two other issues. First, the terms of the certificated security must be carefully reviewed, including any references on the face of the security to other, extraneous documents, instruments, or indentures or to any constitution, statute, rule, regulation, order, or the like.19 The secured party’s review of the extraneous sources or materials may result in a finding that such a transfer, pledge, or hypothecation of the ownership interest is restricted or prohibited. The case of ALH Properties Ten, Inc., v. 306-100 Street Owners Corp.,20 analyzed the validity of a lien on corporate shares and certain restrictions imposed on the transfer of those shares contained in other documents. Not surprisingly, the ALH court concluded that when the corporate security pledged to secure a loan which references restrictions to transfer in the corporation’s bylaws, the lender is obliged to consult them and is bound by the terms of those extraneous documents. In keeping with this holding, the Official Comments to the 2000 amendments to the UCC offer some guidance. Comment 1 to § 8-202 recognizes that an issuer is estopped from denying representations made in the text of a security as to its transferability.21 On the other hand, Comment 2 to § 8-202 states that a purchaser or second party who obtains a certificate is entitled to assume that all of the qualifying and conditional terms of the security have been noted or referred to on the certificate.22 No doubt many of you find this discussion interesting, but irrelevant. At the end of the day, the lender and its counsel want the right to receive distributions from the issuer should the Pledge continued on page 39
Vol. 45 No. 4/Fall 2010 The Arkansas Lawyer
Lawyer Community Legacy Award
William A. Waddell, Jr. Honored with the
Lawyer Community Legacy Award
William A. Waddell Jr.’s work for access to justice has helped move Arkansas closer to the ideal of equal justice under law. Mr. Waddell of Friday, Eldredge & Clark in Little Rock has led a distinguished legal career that has prominently featured service to the community. Since his appointment to the Arkansas Access to Justice Commission in 2008, Mr. Waddell has led a number of efforts to expand access to justice. He took a leadership role in developing and implementing the first statewide campaign to raise significant private funds for legal aid. His days of devoted work on this project made it a major success including, for the first time, major corporate gifts of over $100,000 to legal aid. Mr. Waddell’s efforts to aid the administration of justice did not stop with the development campaign alone. He facilitated the creation of The Arkansas Access to Justice Foundation, Inc. and secured non-profit status from the IRS. Mr. Waddell and other members of his firm donated many hours pro bono to this effort. The end result is a permanent operational arm of the Commission that can accept and distribute funds in such a way as to positively impact the access to justice for all Arkansans. Mr. Waddell has also devoted his time and energy pro bono to a number of religious institutions. He has served as the Chancellor of the Arkansas Conference of the United Methodist Church and serves as a member of the General United Methodist Church Audit and Review Committee. He also serves as counsel to Bethany Christian Services in their wideranging adoption work. Mr. Waddell’s community work also extends into issues of housing and health. He has served as a member of the Little Rock Community Housing Advisory Board and currently serves on the Board of Directors of Camp Aldersgate. Mr. Waddell’s involvement in the legal profession is extensive. He is a Fellow of the American College of Trial Lawyers and past chair of the Arkansas Supreme Court Committee on Model Civil Jury Instructions. He is listed in the Chambers USA Leading Business Lawyers - Business Litigation Section. He also serves as legal advisor to the United Methodist Church’s Council of Bishops, a position in which he advises bishops across the United States. He is currently serving as President of the Access to Justice Foundation. According to his nominator, “through his memberships, especially the Arkansas Access to Justice Commission, he has clearly had an impact on supporting the administration of justice and the legal profession. I can think of no one more qualified or more deserving of this award than Mr. Waddell.”
The Arkansas Lawyer
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Union Station 1400 W. Markham, Suite 206 Little Rock, AR 72201 501-372-1116 • 888-220-2723 firstname.lastname@example.org CEO Heather Larkin, JD, CPA Vol. 45 No. 4/Fall 2010• www.arcf.org The Arkansas Lawyer
Not All Back Pay is Created Equal The Arkansas Supreme Court Holds Employers Cannot Withhold Taxes on Back Pay Awards by Allen C. Dobson and Travis Bo Loftis, Sr.
n late 2007, the Arkansas Supreme Court created a complex challenge for employers subject to a judgment or settlement for wrongful termination when it decided Arkansas Department of Health and Human Services v.
Storey.1 The issue before the court was whether the Arkansas Department of Health and Human Services (“DHHS”) should have withheld taxes from the amount it paid as a judgment to the plaintiff, Betty Storey, for “lost wages, benefits, and other remuneration” recovered under the Arkansas Whistleblower Act.2 The court answered this question in the negative, arguably rejecting both federal statutory and common law in the process. The immediate impact of Storey is that DHHS was not released from the judgment even though it paid the entire award to the plaintiff, minus the withholdings. This article examines the rationale behind the Storey decision and analyzes the problem it poses for employers who are faced with the difficult task of deciding if they should deduct federal income taxes from a back pay amount awarded to a former employee. I. To Withhold or Not to Withhold: That is the Question. Since 1943, the Internal Revenue Service (“the IRS”) has required employers to deduct from their employees’ paychecks a statutory defined percentage of their employees’ pay and remit this amount to the federal government.3 Employers are well aware of the steep penalty that will result if they fail to withhold the required amounts from an employee’s check.4 This penalty can even be personally assessed against the person responsible for withholding and paying the tax.5 Therefore, wise employers automatically deduct federal income taxes from any compensation paid to an employee, including amounts paid as a result of an employee’s lawsuit for wrongful termination. With the Arkansas Supreme Court’s ruling in Storey, this default practice of automatically deducting federal income tax becomes a dangerous one. No longer can an employer assume an award is subject to federal withholding. If it does, it might find itself subject to an unsatisfied judgment claim by the plaintiff. This will result in the employer having to pay the employee the additional amounts that it withheld as taxes and then having to try to recoup this sum from the IRS. Meanwhile, the employer will be subject to additional costly litigation against both the employee and the IRS — this after the employer has paid to defend the original suit. This places the employer in an impossible Morton’s Fork6 situation. The employer can choose not to withhold taxes on a back pay award and risk having one of its management representatives be held personally liable by the IRS for the amount of the tax it failed to withhold, or it can choose to withhold taxes and have the trial court declare that the judgment has not been satisfied, leaving the employer vulnerable to execution on the unpaid judgment. 16
The Arkansas Lawyer
A. Prevailing Federal Case Law The Internal Revenue Code (“the IRC”) and federal case law lead to a relatively simple resolution to this issue. Under the IRC, an employer must deduct the required withholding amounts from “wages” paid to an employee.7 The IRS defines wages as “all remuneration… for services performed by an employee for his employer.”8 In addition, the IRS does not limit what must be considered wages to the traditional weekly paycheck; it includes payments to employees as wages, even when they are no longer employed. The governing treasury regulations provide that “[r]emuneration for employment … constitutes wages even though at the time paid the relationship of the employer and employee no longer exists between the person in whose employ the services were performed and the individual who performed them.”9 Further, with regard to employment taxes and the collection of income tax at the source, the IRC expressly states that “[a]ny payments made by an employer to an employee on account of dismissal, that is, involuntary separation from the service of the employer, constitute wages regardless of whether the employer is legally bound by contract, statute, or otherwise to make such payments.”10 This broad view of wages and the employment relationship in general was first articulated by the United States Supreme Court in Nierotko v. Social Security Board.11 (Nierotko was the primary case relied on by DHHS in Storey). In Nierotko, an employee was reinstated with back pay by the National Labor Relations Board after the Ford Motor Company wrongfully discharged him for participating in union activity.12 The Social Security Board refused to credit his old age and survivors’ insurance account with the amount of the award, claiming the payment did not constitute “wages.”13 Ni-
erotko appealed this decision to the district court. The district court upheld the Board’s decision, but the Court of Appeals for the Sixth Circuit reversed.14 The United States Supreme Court affirmed the Court of Appeals and held that back pay was “wages” under the Social Security Act (which has the same definition for wages as the IRC).15 The Nierotko Court construed the definition of “service” broadly, and found that an employer-employee relationship remained despite the employer’s attempt to terminate him, and that any payment as a result of that attempted termination was “wages.”16 The Court noted that back pay is not a fine or penalty, but rather “reparation based upon the loss of wages which the employee has suffered from the employer’s wrong.”17 The fact that back pay was properly viewed as “wages” seemed obvious to the Court because it stated in its opinion, “surely the back pay is remuneration.”18 Not only does Supreme Court case law hold that back pay is “wages,” but the IRS has made a similar determination. The IRS voiced its opinion on this issue in its publication, Market Segment Specialization Program. In this publication, which can be found on the IRS website, the IRS states, “[b]ack pay paid to an employee or former employee by an employer in a settlement related to a claim under a workers’ right statute or civil rights statute for a period during which no services were performed by the employee is also wages for federal employment tax purposes.”19 Additionally, the IRS Office of Chief Counsel outlined the information necessary to determine the correct tax treatment of employment-related court judgments and settlement payments in its internal memorandum dated October 22, 2008, but released July 2009.20 Similar to the opinion expressed in the Market Segment Specialization Program, the IRS Counsel Memorandum provides that “back pay is awarded to an employee if the employee is illegally terminated by an employer,” and “the back pay relates to a period when no services for the employer were performed.”21 Further, the IRS Counsel Memorandum expressly states that “[the IRS] and the courts agree that back pay is wages for FICA and income tax withholding purposes, except where received on account of a personal physical injury or physical sickness.”22 These statements directly conflict with the Storey case. The Market Segment Specialization Program and the IRS Counsel Memorandum do not have the “force and effect” of law because they are not properly promulgated rules;23 however, these statements, along with case law, clearly denote the IRS’s position on the issue. B. The Storey Deviation In Storey, the Arkansas Supreme Court held that DHHS was not allowed to withhold federal and state income taxes from a judgment
awarded against it for violations of the Arkansas Whistleblower Act.24 In the underlying action against DHHS, the jury awarded Ms. Storey $75,000 for “lost wages, benefits, and other remuneration,” and the circuit court granted Ms. Storey $40,000 for front pay in lieu of reinstatement.25 The circuit court held that neither of these payments constituted “wages” and therefore withholding taxes from the payments was not allowable.26 The Arkansas Supreme Court agreed with this assessment.27 The supreme court framed the issue by stating, “the focus is on whether an employer-employee relationship existed, such that the award constituted ‘wages,’ thus triggering the withholding requirement.”28 The court held that during the time period for which the judgments were meant to compensate the employee, Ms. Storey was not actually an employee because she had been fired.29 The court reasoned that because she was not an employee, the compensation was not “for services performed in the nature of an employment reAllen C. Dobson is an attorney with Cross, Gunter, Witherspoon & Galchus, P.C. in Little Rock. His practice includes work before the Equal Employment Opportunity Commission and the Wage & Hour and OSHA Divisions of the Department of Labor, as well as related federal and state court litigation.
Travis Bo Loftis, Sr. is an attorney with Cross, Gunter, Witherspoon & Galchus, P.C. in Little Rock. His primary practice areas include labor relations, employment and business litigation.
Vol. 45 No. 4/Fall 2010 The Arkansas Lawyer
DAVIS, CLARK, BUTT, CARITHERS & TAYLOR, PLC
is pleased to announce that J. David Dixon and William F. Clark have joined the firm as associates J. David Dixon, University of Arkansas, B.S.B.A., Oklahoma State University, M.S.H.A., University of Arkansas School of Law, Juris Doctor, cum laude. David focuses his practice on general civil litigation, including, labor and employment law, insurance law, nursing home negligence defense, construction law, family law, medical malpractice defense and workers’ compensation defense. William F. Clark Vanderbilt University, B.A., cum laude, University of Arkansas School of Law, Juris Doctor, magna cum laude, Associate Editor, Arkansas Law Review. Will focuses his practice on general civil litigation.
DAVIS, CLARK, BUTT, CARITHERS & TAYLOR, PLC 19 East Mountain Street, P.O. Box 1688 Fayetteville, AR 72702 www.davis-firm.com (Phone) 479-521-7600 (Fax) 479-521-7661 Partners: Sidney P. Davis, Jr. Constance G. Clark William Jackson Butt II Kelly Carithers Don A. Taylor Casey D. Lawson
Associates: Joshua D. McFadden Colin M. Johnson J. David Dixon William F. Clark
The Davis Law Firm was established in 1953 and has been providing general and specialized legal services to clients in Northwest Arkansas for over 50 years. lationship.”30 Thus, according to the court, if payments did not represent services performed in the nature of an employment relationship, the employer should not have withheld taxes.31 Finally, the court concluded, “[b]y their very nature, the awards cannot be ‘wages’ because they did not arise out of an employer-employee relationship but rather the lack thereof.”32 Other than requiring that 18
The Arkansas Lawyer
an employer-employee relationship exist, the opinion gave no further guidance as to when, if ever, back pay constitutes wages. This leaves an employer and former employee with a glaring unanswered question—when does this all important employer-employee relationship exist? The following section will discuss the Catch 22 an employer faces as a result of this unanswered question.
II. The Realities of the Employer-Employee Relationship Because the guidance given by the Arkansas Supreme Court in Storey conflicts with an abundance of federal case law, employers are left to wonder when exactly it is appropriate to withhold taxes from an award of back pay or settlement of an employment-related claim. A cursory reading of the court’s opinion might lead an employer to believe that any time the employee is no longer employed with the company, or according to the court, when there is no employer-employee relationship, then the payments are not subject to withholding. But because several federal courts have taken the opposite approach, such a course of action would likely be the equivalent of taking the “ostrich in the sand approach” and might result in a costly mistake on the part of the employer. For example, the Sixth and Eighth Circuits have held that settlement payments made to plaintiffs in cases asserting ERISA violations were “wages” even though the plaintiffs had been wrongfully laid off and performed no services during the period of time that the award compensated.33 Under the reasoning of these courts, the settlement payments the plaintiffs received would have been paid as wages had the plaintiffs not been wrongfully terminated. Therefore, the payments were properly subjected to federal income tax withholding. The Storey court addressed both of the above cases in its opinion but did not find them persuasive. It seems clear from the language of the Storey opinion that the lack of an employer-employee relationship was the primary controlling factor that kept the back pay award from being “wages.”34 Because Ms. Storey and DHHS allegedly lacked an employer-employee relationship when the jury rendered its verdict, the court reasoned that the payments could not be wages. On its face, this seems like a simple and logical argument. However, it ignores both federal case law and the practical realities of the employer-employee relationship from which Ms. Storey’s claim arose. III. Wages for One, Wages for All When faced with DHHS’s argument that a majority of federal circuit courts required the withholding of taxes regardless of whether actual services had been performed, the Storey court found these cases to be non-controlling. Instead, the court misinterpreted an Eighth Circuit holding35 and chose to rely
on the trial court decisions of several states, namely, Iowa,36 New Jersey,37 Pennsylvania,38 and California.39 In Newhouse v. McCormick & Co., Inc., the Eighth Circuit held that back pay awards to a job applicant who was never hired were not “wages” because no employer-employee relationship of any type existed between the parties “at the time of the discrimination from which the judgment arose.”40 The Eighth Circuit reasoned the company could not establish the existence of an employment relationship that justifies employment tax withholdings “absent an existing employment relationship,” or at a minimum, “a preexisting employment relationship that was cut short by an involuntary separation or termination out of which the back pay award arose.”41 While the Storey court cited Newhouse as support for its decision,42 Newhouse is noticeably distinguishable from Storey owing to the fact that Ms. Storey was a terminated employee, and not merely a job applicant. In addition, Storey is further distinguishable from Newhouse because Storey states that an employer-employee relationship must exist “at the time the compensation is being paid for,”43 while Newhouse instructs that an employment relationship must merely
exist “at the time of the discrimination resulting in the judgment.”44 Therefore, because Ms. Storey was an employee at the time of the discrimination from which her back pay award arose, an employment relationship most likely would have been established if the case had been brought in federal court. With regard to the state trial court decisions relied upon by the Storey court, each of these cases was brought by an employer who had withheld taxes and was seeking to be released from a satisfied judgment. The majority of the cases relied on by DHHS, however, were brought by taxpayers against the IRS who were claiming that the taxes had been improperly withheld from their payments. The Storey court found this distinction to be controlling, stating “[t]hese cases are inapposite as they all deal with the question of whether certain types of awards are taxable, and not the question of whether a former employer is obligated to withhold taxes from an award.”45 While most of the cases relied on by DHHS were indeed brought by taxpayers, the identity of the plaintiff provides a thin, if not non-existent basis on which to distinguish contrary cases. The federal courts have repeatedly held that back pay is “wages”
under the federal tax code.46 This is a valid determination for the definition of the term wages, made not only by the courts, but also by the IRS.47 Not only have these authorities determined that back pay constitutes “wages,” but the distinction makes sense. It is illogical for a payment to fall under the definition of “wages” and be properly withheld within the context of a taxpayer seeking a refund, but not fall under the definition of “wages” for the employer who withholds the payment in the context of settlement or award. This dual definition of “wages,” which depends on the identity of the plaintiff, is unsound legal reasoning and can create a multitude of planning problems for both the employer and the former employee. If the definition of “wages” is not consistently applied, regardless of the context of the litigation, then employers and employees will have a difficult time understanding when taxes must be withheld and paid from wrongful discharge awards. Employers and employees need consistent rulings between the state and federal courts so that they can properly specify whether a payment is wages, from Back Pay continued on page 42
Vol. 45 No. 4/Fall 2010 The Arkansas Lawyer
A Dynamic Development Under the Arkansas Rules of Civil Procedure: Arkansas’s Favorable Approach to Class Actions By Kenneth S. Gould I. Introduction In what may fairly be described as the most dramatic development under the 1979 Arkansas Rules of Civil Procedure, the Arkansas Supreme Court has raised class action procedure from a state of near dormancy to a dynamic doctrine that is among the most favorable to class actions of all state procedures. The development began with the 1988 seminal decision of International Union of Electrical, Radio & Machine Workers v. Hudson,1 received a boost from the 1991 way station decision of Summons v. Missouri Pacific Rail Road2 in which the Court found certification proper for a fivethousand member class in a mass tort case, and has continued to evolve to current time. Although by the time of the 1991 Summons decision the Arkansas Supreme Court had clearly established a favorable approach to certification of consumer type class actions, clarification of the class certification standard was needed and many details remained to be fleshed out. Now, thanks in large measure to the volume of decisions generated by Arkansas Rule of Appellate Procedure-Civil 2(a)(9)3 that allows interlocutory appeal by right of all class certification decisions, the Arkansas class action doctrine is maturing, if not matured, and many voids have been filled. As a matter of ancillary interest, a surprising and somewhat mystifying aspect of the development of Arkansas class action procedure is that many of the large scale cases have been filed in the circuit court of one county, Miller County. This article will explore the signature characteristics of the modern Arkansas class certification doctrine that make it dynamic and liberal and conclude with a summary overview of the restricting impact of the 2005 Federal Class Action Fairness Act4 on the Arkansas class action practice. But first, a brief review of the basic elements of Arkansas class action procedure followed by a comment on the significant role played by the class certification decision.
nance” and “superiority,” each of the six requirements of Rule 23 has developed a short hand version of the rule language. Those abbreviated statements of the elements of Rule 23 and the textual standards are as follows:
II. Review – The Elements of Arkansas Class Action Procedure; Importance of the Class Certification Decision
In addition to the explicit requirements of Rule 23(a) and (b), the Arkansas Supreme Court has found another requirement for class certification implicit in the rule. The additional requirement is that a class must exist and be susceptible of definition; as stated by the Court, “class identity must be feasible and that the class cannot be excessively broad or amorphous.”7 The aim is that the identity of the class members be ascertainable by reference to objective criteria.8
A. The Elements of Arkansas Class Action Procedure Class actions in Arkansas are governed by Rule 23 of the Arkansas Rules of Civil Procedure. Rule 23 allows one or more members of a class of similarly situated persons to sue on behalf of the entire class if the trial court determines that the four 23(a) “prerequisites” and the two additional 23(b) requirements of common question predominance and procedural superiority are satisfied. The four prerequisites are generally easily met.5 If class certification is denied, it is most often because of failure to satisfy the predominance and superiority requirements.6 As is indicated by use of the abbreviated terminology of “predomi20
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1. Numerosity. Rule 23(a)(1) - The class is so numerous that joinder of all members is impracticable. 2. Commonality. Rule 23(a)(2) - There are questions of law or fact common to the class. 3. Typicality. Rule 23(a)(3) - The claims or defenses of the representative parties are typical of the claims or defenses of the class. 4. Adequacy of Representation. Rule 23(a)(4) - The representative parties and their counsel will fairly and adequately protect the interests of the class. 5. Predominance. Rule 23(b) - Questions of law or fact common to the members of the class must predominate over any questions affecting only individual members. 6. Superiority. Rule 23(b) - A class action must be superior to other available methods for the fair and efficient adjudication of the controversy.
B. Importance of the Class Certification Decision The Arkansas rule also requires that “[a]t an early practicable time”9 after the case is filed, the trial court decide whether the case is to proceed as a class action, commonly known as the certification decision. In class action litigation the certification decision is generally the most critical determination in the case.10 If the case is certified as
a class action, the defendant may be faced with the prospect of a judgment resulting from a single trial that, because of the class size, could be overwhelming. As a result, class action defendants often have to give serious consideration to settlement, with diminished regard for possible valid defenses, prior to the court’s certification decision. On the other hand, cases not allowed to proceed as class actions are generally not of sufficient potential judgment value to merit pursuing to trial.11 The recent case of General Motors v. Bryant12 provides a good example of the dilemma that can be faced by the defendant if the case is certified as a class action. The primary remedy sought in that case was money damages to replace a brake part on the Chevrolet trucks owned by approximately four million class members who were scattered over all 50 states and the District of Columbia. The Arkansas Supreme Court upheld certification of the case as a class action, holding that the common issue of defectiveness of the brake part should be tried first with individual issues, including possible variations in the law of 51 jurisdictions, reserved for later determination by the trial court.13 Certification of the case as a class action put General Motors at risk for a potential judgment of over $350 million if it lost the single trial on the common issue of product defect. III. Signature Characteristics of Modern Arkansas Class Action Doctrine Generally Favoring Class Certification Since the 1988 Hudson decision, over 100 decisions of the Arkansas Supreme Court have contributed to the evolution of Arkansas Rule 23 class action doctrine. This section will focus on those aspects of the doctrine that indicate an approach favoring class certification.
A. The Primary Components of Arkansas’s Overarching Approach to Class Certification: (a) “Certify now, decertify later” plus (b) “Delving into the merits is prohibited” = (c) Determination of whether the case can be managed as a class action may be postponed until after the case has been certified as a class action – The primary components of the Arkansas Supreme Court’s overarching approach to class certification are related. The first has been loosely described as “certify now, decertify later.”14 In the words of the Court: The mere fact that individual issues and defenses may be raised by the defendant regarding the recovery of individual class members cannot defeat class certification where there are common questions concerning the defendant’s alleged wrongdoing that must be resolved for all class members.15 [A]s to manageability, this court has made it abundantly clear that a circuit court can always decertify a class should the action become too unwieldy.16 In many Arkansas Supreme Court class action decisions the “certify now, decertify later” approach has been coupled with the Court’s oft
Professor Kenneth S. Gould teaches law at the University of Arkansas William H. Bowen School of Law. His teaching and research interests are especially in the civil procedure – class action and water law areas.
Vol. 45 No. 4/Fall 2010 The Arkansas Lawyer
Your Association maintains the largest and most accurate database of Arkansas attorneys. To purchase mailing labels at a reduced rate to members contact Crystal Newton at 501-375-4606 or email@example.com repeated admonition that “neither the circuit court nor this court may delve into the merits of the underlying claims when deciding whether the Rule 23 requirements have been met.”17 That means that if an issue going to the merits of the case overlaps with any of the Rule 23 requirements for determining whether the case should proceed as a class action, the trial court may not consider that issue as part of the certification decision. For instance, in considering whether a case should be certified as a class action, the trial court would be forbidden from examining the likely validity of an affirmative defense of release of claims even if the court’s determination that the defense was valid would preclude the claims of enough of the putative plaintiff class members to defeat the Rule 23(a) requirement that the class be so numerous that joinder of all members is impracticable.18 An example of how the prohibition on considering overlapping Rule 23 and merits issues can affect the court’s consideration of whether common questions predominate over individual questions under 23(b) is provided by a case involving usury claims of a plaintiff class. For the court to examine the payment history of each class member to determine whether the actual loan repayment interest rate was usurious would be “delving into the merits,” thus removing those individual inquiries from the Rule 23(b) predominance determination.19 The combined effect of these two approaches is to substantially diminish the importance of the Rule 23(b) requirements of predominance and superiority and the authority of the trial court to manage and guide a class action as a necessary part of the court’s certification deci22
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sion. With individual issues and defenses and matters going to the merits of the case removed from the certification equation, predominance, superiority, and manageability are more easily surmounted. As a result, some cases pass the certification stage without consideration of whether the resolution of the individual issues of class members will, as a practical matter, be manageable by the trial court. In answer to a claim by the defendant in the May 20, 2010, case of Farmers Union Mutual Insurance v. Robertson that Arkansas “stands alone” in its “certify now, decertify later” approach,20 the Court responded, “we have not been presented with any convincing argument that gives us cause to reconsider our prior decision concluding that our approach is what we believe to be the more efficient method.”21 In similar fashion, the Court has indicated continued adherence to the prohibition against delving into the merits.22 B. Other characteristics of Arkansas’s favorable approach to class certification: 1. Class size – The Court has consistently eschewed adoption of a bright-line test for determining whether the proposed class is so large that “joinder is impracticable,” the standard of Rule 23(a)(1). Class sizes found to be sufficient by the Arkansas Supreme Court have ranged from 184 members to a class of approximately 4,000,000 in a Miller County Circuit Court class action, while a class of only 17 potential plaintiffs was rejected as too small.23 The favorable approach to class actions is reflected in the Arkansas Supreme Court’s assessment that “[w]here the numerosity question is a close one, the balance should be struck in favor of a finding of numerosity in light of the trial court’s option to later decertify.”24 As a practical matter, the size of the class, large or small, will seldom if ever present a problem for certification. 2. Commonality and typicality – Since the Arkansas Supreme Court has often dealt with these two Rule 23(a) prerequisites in a similar fashion, they will be considered together here. The Court has found that commonality does not require that all questions of law or fact raised in the litigation be common. In fact, only a single issue of law or fact common to all members of the class will suffice.25 Unlike the approach to commonality in many federal cases, the Arkansas commonality standard focuses on the conduct of the defendant,
rather than the differences in the factual or legal positions among the plaintiff class: When the party opposing the class has engaged in some course of conduct that affects a group of persons and gives rise to a cause of action, one or more of the elements of that cause of action will be common to all of the persons affected.26 The Court has used a similar standard and language in addressing typicality: [A] plaintiff’s claim is typical if it arises from the same event or practice or course of conduct that gives rise to the claims of other class members, and if his or her claims are based on the same legal theory.27 Our caselaw is clear that the essence of the typicality requirement is the conduct of the defendants and not the varying fact patterns and degree of injury or damage to individual class members.28 In addition, the Court has noted that “the class representative’s claim must only be typical and not identical” with the claims of the class members.29 3. Adequacy of representation – The Rule 23(a)(4) requirement of adequacy of representation has two components: the adequacy of the named class representative and the adequacy of the attorney representing the class.30 Although not markedly different than the federal adequacy of representation standard for the class representative, the Arkansas class action standard is easily satisfied. The class representative need only “display some minimal level of interest in the action, familiarity with the practices challenged, and ability to assist in decision making as to the conduct of the litigation.”31 Under that standard, the representative plaintiff in Advance America Servicing of Arkansas, Inc. v. McGinnis32 satisfied the adequacy standard though she suffered from schizophrenia, anxiety, and depression, refused to take prescribed medication to treat her medical conditions, and had hallucinations in which she saw people and heard voices.33 In regard to the adequacy of the class representative, the Arkansas Supreme Court also requires “there be no evidence of collusion or conflicting interest between the representative and the class.”34 There are, however, substantial differences between the federal and Arkansas approaches to determining the adequacy of class counsel. Federal Rule 23(g) establishes an elaborate procedure and a number of substantive standards that the court must follow for the appointment of class counsel in federal court class
actions. The Arkansas standard is simply that, “the representative counsel must be qualified, experienced, and generally able to conduct the litigation.”35 Under that standard the adequacy of the class counsel is seldom actually examined by the trial court because the Arkansas Supreme Court consistently holds that, “absent a showing to the contrary, we may presume the representative’s attorney will vigorously and competently pursue the litigation.”36 In short, the adequacy of class counsel will be considered only if challenged by the defendant. 4. Choice of law considerations – The Arkansas Supreme Court’s approach to resolving choice of law considerations in cases involving class members from different jurisdictions is the most liberal of the various aspects of the development of Arkansas class action procedure since the 1988 International Union of Electrical, Radio & Machine Workers v. Hudson case. In General Motors v. Bryant,37 a Miller County Circuit Court case, the Court framed the choice of law issue as follows, “we have suggested that multistate class actions are not per se problematic for Arkansas courts. A question of first impression still remains, however, as to whether an Arkansas circuit court must first conduct a choice-of-law analysis before certifying a multistate class action.”38 The Court’s answer is instructive in regard to the choice of law question and also reflects the Court’s reluctance to consider certification issues that overlap with merits determinations: [W]e cannot say that our class-action jurisprudence requires an Arkansas circuit court to engage in a choice-of-law analysis prior to certifying a class, as we
have not hesitated to affirm a finding of predominance so long as a common issue to all class members predominated over individual issues. While General Motors argues that a failure to require such an analysis precertification allows that analysis to evade review, it is mistaken. Upon a final order by the circuit court, General Motors would be able to challenge the circuit court’s choice of law, just as in any other case. Moreover, were we to require the circuit court to conclude at this time precisely which law should be applied, such a decision could potentially stray into the merits of the action itself, which we have clearly stated shall not occur during the certification process.39
definite, pertinent findings and conclusions upon the contested matters’”44 and need not “enter into the record a detailed explanation of why it concluded that certification was proper.”45 Regardless of the extent of differences between the federal “rigorous analysis” and the Arkansas “meaningful review” standards, the Arkansas Supreme Court frequently dismisses arguments that the trial court’s analysis of the Rule 23 factors was insufficient by simply noting that Arkansas does not require a rigorous analysis.46
5. No rigorous analysis – The Arkansas Supreme Court has consistently declined to require that trial courts conduct a “rigorous analysis” in determining whether the Rule 23 standards are factually supported, as has the United States Supreme Court for federal court class certification decisions.40 Addressing the rigorous analysis standard, the Arkansas Supreme Court has said that “[t]he fact that we have refused to adopt such a strict standard, however, does not mean that there is no standard at all.”41 The Arkansas standard is that the trial court must conduct a sufficient analysis to enable the appellate court to “conduct a meaningful review of the certification issue on appeal.”42 Although what constitutes a sufficient analysis for “a meaningful review” and how that analysis differs from the federal court “rigorous analysis” is not clear from the Court’s opinions, the Court has stated that, “[a]t a minimum, this requires more than a cursory mention of the six criteria or bare conclusions that those criteria have been satisfied. The trial court cannot simply rubber stamp the complaint”43 but “need only make ‘brief,
6. Disinclination to follow federal court class action procedure – In early cases under its modern class action doctrine, the Arkansas Supreme Court noted that it would follow the lead of the federal courts in developing Arkansas class action procedure, noting that “[t]he federal rule leans toward allowing class actions.”47 However, as the federal court interpretation of class action procedure began to retreat from the zenith of its favorable approach to class actions, the Arkansas Supreme Court began responding to citations to federal class action cases by stating that, “federal authority, however, is not controlling on this court.”48 IV. Though the General Approach is Favorable to Class Actions, the Arkansas Supreme Court has Declined to Recognize Class Certification in a Number of Cases Even though the approach of Arkansas class action jurisprudence since 1988 has generally been favorable to class actions, the Arkansas Class Action continued on page 45
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Keys to Solving Trial Puzzle: Read Law, Have Strategy
By Judge Vic Fleming
saying that is so familiar to me that I have forgotten the source is “Read the directions, even when you have no intention of following them.” A principle that is as familiar is that trying a case is like solving a puzzle. Even in traffic court. A trial, before it starts, is the table top before the jigsaw pieces are spread out; the blank crossword, Sudoku, or KenKen grid; the encoded cryptoquote; … (You get the picture.) Where puzzles are concerned, reading the directions would include doing what is necessary to know what the puzzle at hand is all about. You don’t try to solve a crossword until you know what a crossword is. You’ll embarrass yourself. As anyone who regularly solves puzzles like Sudoku, KenKen or even cryptoquotes will tell you, having a strategy, however simple, will enhance the chance of success. In 1976, during my second year in law school, I was hired by the then-newly-elected North Little Rock City Attorney, Jim Hamilton, who now has been a district judge himself for 20 years. During my third year, I was prosecuting traffic cases in front of Judge Dean Morley (father of Judge Randy and Lawyer Steve). It was a fantastic educational experience, and I remain grateful to Judge Hamilton for giving me that opportunity. One day, a lawyer whom I’ll not name, asked me in the courtroom where he could find the “negligent driving” ordinance with which his client was charged. Lending him my code book, I pointed the law out to him. At the conclusion of the trial, the lawyer argued, “What my client did may have been reckless, but it wasn’t negligent.” Judge Morley politely pointed out that reckless driving was far
more serious than negligent driving and asked if the lawyer wanted to plead his client guilty to a Class B misdemeanor. While it did not then register with me in these exact words, what this lawyer had shown me was how to proceed without having read the directions. He had not read the law. He had no discernable strategy. He was egregiously unprepared, and it showed. He may have been embarrassed. I was embarrassed for him. Even if you “know” the law your client is accused of violating, read it again before coming to court. Trials in which a lawyer is not up to speed on that law are not as rare as they ought to be! After reading that law, put together some kind of outline of your strategy. Then, try to follow it. If you do so, it will show. It will help. My observation has been that when all other things are about equal, the better prepared contestant, or team, tends to win. Lawyers who show themselves not to be prepared—as by crossexamining witnesses who do no damage to their client’s cases—may not realize how glaring it can be. But, to judges who preside over hundreds of similar case, it is glaring. Another glaring matter that is far more common than those mentioned above is what I call the “lack of specificity syndrome.” From bail to jail, I deal with issues where some lawyers finish their remarks with “… we leave that to the discretion of the court” (or similar wording). Rightly or wrongly, such phraseology cries out to me, “I haven’t researched that” or “I haven’t thought about that,” or the like. This lack of specificity translates, to me at least, into the following: “There’s more work to do on this, and we’re going to let you do that yourself, Judge!” Some lawyers, however, are always armed with specificity. I could be wrong, but it seems to me that they are the ones who have read the law and have a discernable strategy. District court traffic proceedings take place at the lowest tier of the judicial system. Nevertheless, they, like all other trials, are puzzles with solutions available to those who will read the directions and employ a strategy. n Judge Vic Fleming is a District Court Judge in Little Rock, Second Department and also teaches law at the William H. Bowen School of Law. Vol. 45 No. 4/Fall 2010 The Arkansas Lawyer 25
Fake Check Scams Are Targeting Law Practices Learn the Red Flags and Avoid the Traps
by Gloria J. Barr and Patricia Sallen
Originally published by the State Bar of Arizona. Reprinted with Permission.
Anyone with questions about or information on this scam may contact Stark Ligon at the Arkansas Supreme Court’s Office of Professional Conduct, 501-376-0313 or 1-800-506-6631, or the FBI at 501-221-9100 in Little Rock.
Out of the blue, you receive an email from the representative of a potential foreign client, maybe from China. He flatteringly tells you–in pretty decent English–that he is looking for a trustworthy attorney in Arizona to help his company with a collections issue. You–you!–are the trustworthy attorney he has found. Your charge: you would receive money from a debtor and then transfer it to the potential foreign client. You might even be paid with a percentage of the money. Sounds promising, right? Some easy money? And tempting, because who knows where this one job for an international client might lead? You send a fee agreement to the representative. He maybe sends the agreement back, signed, and tells you that it’s imperative that you wire the money as soon as possible after receiving it from the debtor. You promptly receive a check from the debtor and deposit it into your trust account. Being a diligent attorney, you confirm with your bank that the money has been credited to your account, and you wire it as directed. And then a few days later, your bank tells you that the check wasn’t legitimate. The bank has debited your trust account thousands of dollars. You already know about the email scams in which a Nigerian government official allegedly needs your help to move money out of the country. You’ve probably received those emails and immediately–and rightly–disregarded them because they look so bogus. This new wave of check scams just looks less bogus, more legitimate, and targets attor26
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neys. It has hit close to home, too. The State Bar is aware of several Arizona attorneys who have been approached by the scammers, and a few who have taken the bait. The checks that scammers send you, whether they are personal checks or cashier’s checks, look and feel real, and may even fool bank tellers. The checks may even be from a legitimate business or corporation, but may have been written fraudulently. In another variant of the scam, no checks are involved. Instead, money is transferred directly from another account to your trust account. The other account is often the account of someone who fell for another scam. Once again, when the scam is discovered your bank will cancel the deposit. You will lose your other client’s money and you could be charged with the crime of moneylaundering. The following is a compilation of information from the Comptroller of the Currency (http://www.occ.treas.gov.ftp/ bulletin/2007-2.html), National Fraud Information Center (http://www.fraud. org/tips/internet/fakecheck.htm), Internet Crime Complaint Center (http://www.ic3. gov/crimeschemes.aspx#item-3) and Federal Bureau of Investigation (http://www.fbi.gov/ majcases/fraud/fraudschemes.htm) about the scams, with additional information we’ve added specifically for attorneys. How these scams work These scams work well for three reasons: •The scammer appears to send you “real” money–usually a cashier’s check or certified check drawn on a U.S. bank (sometimes even a postal money order)– before asking you to wire or express-mail part or all of that
money to the scammer or a third party. The scam relies on your belief that real cashier’s and certified checks and postal money orders are more trustworthy than personal checks. However, the counterfeit checks or money orders that the scammers send are very good and tough to identify as fake. •The scam is initiated in response to a legitimate activity, such as offering legal services and legal representation. In the original versions of the Nigerian scam, the “offer” arrives unsolicited, in a letter, an email or a fax. •Once the scammer is in touch with you, he often will chat via email or phone, talking about the legal services he needs. He appears friendly, sincere and aboveboard. He works hard to win your trust, but appearing trustworthy is the con artist’s primary tool in getting you to act. Specific red flags to keep in mind You are asked to pay money out of your account. This is a five-star red flag. If you are asked to do this, run, don’t walk, away from the “deal.” The basic pattern of all the fake check scams is that the con artists will send you a “cashier’s” or “certified” check (or postal money order) to deposit into your account. Then they will give you a reason to quickly wire or express part or all of the money out of your account to them or to some third party they identify. Often the wired money is to go to a foreign country. You are asked to act very quickly. The scammers don’t want you to have time to verify whether the cashier’s check or certified check is authentic or counterfeit or to wait for the check to clear. The scammers typically ask you to wire cash as quickly as
Reduce Risk from Disability Cases Why expose your practice to unnecessary risk by taking on Social Security and SSI disability cases if a professional-to-professional referral will better serve your clients? Referring those cases to H. Mayo Smith, P.A., provides your client an attorney who has limited his practice to Social Security/SSI disability claims exclusively since 1986, who has a Master of Science Degree in Disability Evaluation, and who provides competent, compassionate representation on disability matters. Your practice will be safer, and you’ll have the knowledge that your clients understand that you act in their interest.
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possible. They know that their fakes are very professional and usually will pass an initial visual inspection at the financial institution taking the deposit. Some counterfeits are so good that it may take weeks to identify the check as counterfeit. At that point, you are left holding the bag: the scam artists have your money and you may even be suspected of fraud. Fake check scammers often claim to be in another country. That makes it difficult, they say, for them to do business in the U.S. so they need your help to receive payments by checks on U.S. banks. Often you are asked to wire the funds out of the country. The deal is too good to be true. This old, smart consumer advice holds true in these cases. If a “client” is eager, sight unseen, to enlist your legal services, smell a rat. If after a few emails or phone conversations, a “client” wants to hire you, slow down. Avoiding the scam Wait for a cashier’s or certified check to clear before using the money. Although your financial institution may quickly make funds available that you’ve deposited, or may tell you that the deposit has been credited
to your account, that does not mean that the check is good or has cleared through the original issuing institution. That can take many days. Sometimes it can take weeks to discover a very good forgery, and the check won’t bounce until then. Therefore, verify the check with the issuing bank and then wait for final clearance. All it will take is one insufficient-funds check for your trust account to be in the red. (And you know, of course, that banks have to report to the State Bar when your trust account becomes overdrawn?) Don’t be fooled into thinking that the company is real or legitimate just because its website looks good. Some of the sites run by scammers look extremely professional. Know with whom you are dealing. The law generally assumes that you, not your financial institution, have the best knowledge of the person who gave you the check because you are dealing directly with them. Therefore, if you are dealing with a stranger, make sure you have that person’s name, address and phone number, then verify those independently using online directories. If the number or address in the directory is different, call the person using those
numbers. You may have stumbled into an identity-theft situation and can help another consumer. There is no legitimate reason for someone who is giving you money to ask you to wire money back. Always insist that the check be in the exact amount or deal in cash. Emphasize that you prefer a check from a local bank or a national bank with a branch in your area. Your deposits are your responsibility. If you have deposited a check that then bounces, the bank will withdraw the original dollar amount credited to your trust account. If your trust account doesn’t have enough money to cover the deduction, the bank may freeze your trust account or, worse, the bank may sue you to recover the funds. The problem for attorneys is that if you hold funds for clients or third parties, you have to hold it in your client trust account. As a result, in this scam, if you’re complying with the ethical rules, you would have put the money into your trust account and then you’re disbursing out of your trust account. If the check you deposit turns out to be fake, then you may have converted the other clients’ funds in your account. n
Vol. 45 No. 4/Fall 2010 The Arkansas Lawyer
Arkansas Supreme Court Historical Society
Steele Hays and His Wit By Fred Petrucelli An effusion of wit and humor are the marks of a man imbued with a winning personality, and such a man is Steele Hays, former attorney, circuit court judge, state Supreme Court justice and storyteller par excellence, not to mention bon vivant. Over the years, he has been called upon to speak to many groups, finding often that his audience was taken by his light-hearted bestowals. The Hays storehouse of witticisms, quips and wordplay is loaded. His delicious humor aside, Hays is a serious scholar, well read and articulate and charming in conversation and in formal speech. His knowledge of literature is impressive and his range of information concerning President Abraham Lincoln is vast, as it is of other historical figures and events. So, on one recent occasion he was scheduled to present a talk on the famed John Scopes Trial, of whom he is an acknowledged student. Hays stood at the lectern, looked over the group assembled to hear him and announced that it was simply too hot to delve into the labyrinth of evolution. Instead, he told the story of the Yankee soldier who wrote to his family in Michigan during the Civil War, “They sent us down here to Arkansas where it’s summer all winter and hell all summer.” The laughter that followed cleared the air for Hays, giving him carte blanche to proceed as he would. And proceed he did, relating with obvious relish some of his experiences when he was a “street lawyer trying to scratch out a meager living.” One day Hays found himself lollygagging in the courtroom when a man was brought in from the lockup to stand trial. The judge asked the man if he had a lawyer. No, the man said, he did not know any lawyers, and he didn’t have any money to pay one, if he did. The judge said, “In that case I’ll appoint one for you. There’s Mr. Hays at the counsel table. I can appoint him or lawyer Bill Wilson, who is out in the hall. I can appoint him.” The man turned and looked at Hays; looked him over pretty good–up one side and down the other, as they say. He finally turned back to the judge and said, “I’ll take the one in the hall!” 28
The Arkansas Lawyer
Hays said he was shaken by that retort, and wondered if others would see him as the man had. He said that Wilson, who is now a federal judge, was a good friend and good lawyer. In fact, Hays said his grandfather had given the eulogy at Wilson’s grandfather’s funeral. He said he told Judge Wilson that he was ready to do that for him at any time. Hays said he saw his friend at a bar function later on and they traded barbs, Wilson saying that his adversary led his witness so shamelessly it was a crime. Hays retorted that at least he hadn’t brought a halter to the court as his foe had. Hays recalled that his opponent told the judge that he was not fair. He responded, “For my opponent to claim something wasn’t fair reminds me of a poker game the boys were holding down in the barn one afternoon when one of them said, ‘Play the cards fair, Rueben, I know what I dealt you.’” Moving on, Steele Hays postulated that it is permissible and even prudent for a speaker to deal in falsehoods and there are times when it is absolutely essential. He admits that he sometimes operates in accordance with his father’s favorite motto which he actually coined, “never dilute the oil of anecdote with the vinegar of fact.” On his honor–as a lawyer–he tells about a witness who was about to testify in a trial and some issue came up concerning his qualifications. The judge asked him if he knew any member of the jury. The man looked at the panel and told the judge that he knew some of them. The judge said, “Would you say you know more than half of them?” This time the man looked at the faces of the jury carefully and turned back to the judge and exclaimed, “I’d say I know more than all of them put together!” Hays, who was a member of the prestigious law firm of Spitzberg, Mitchell and Hays after graduating from the University of Arkansas and George Washington University, is cut from the same cloth as his father, Brooks Hays, the distinguished member of Congress, one time president of the Southern Baptist Convention, and one of the wittiest men of his day. It is to be remembered that Hays was turned out of office during the Little Rock integration crises when he had attempted to mediate the conflict between President
Eisenhower and Governor Orval Faubus. Hays was the rare voice Justice Steele Hays of reason during the turbulent days when black students attempted to enter Central High School. Hays served on the Arkansas Supreme Court from 1980 to 1995. He is a graduate of the George Washington University School of Law, and served as a circuit court judge for Pulaski and Perry Counties, named by former Gov. Winthrop Rockefeller, and on the first Arkansas Court of Appeals, to which he was appointed by former Gov. Bill Clinton. He is married to the Reverend Peggy Hays, a former vicar of St. Peter’s Episcopal Church in Conway. Hays said he came to the bar in 1953 in a time when it was difficult to make a living. “I was having lunch with a lawyer friend one day, probably jam sandwiches–that’s two slices of bread jammed up against each other. That wasn’t any hardship for me however. I was raised during the Depression and many was the day all we had to eat was water for breakfast, soda crackers for lunch, and swellup for dinner.” After some 10 years or so as a practicing attorney, Hays one day was called to testify in a trial. On cross examination, the lawyer asked him who he thought was the best lawyer in the state. “I am,” Hays replied. “After the trial, a friend who had been in the courtroom approached me and said, ‘Don’t you think your answer to that question was rather immodest?’ I said, Yes, I suppose it was. But what could I do, I was under oath!” Fred Petrucelli is a veteran newspaperman who has written for several newspapers in Connecticut, Alabama, and Arkansas including the Arkansas Democrat, Arkansas Gazette and Conway Log Cabin Democrat. He is a freelance writer who has authored magazine pieces, digests. This article is provided by the Arkansas Supreme Court Historical Society, Inc. For more information on the Society contact Rod Miller at 501-682-6879.
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Vol. 45 No. 4/Fall 2010 The Arkansas Lawyer
Fiduciary Court Bonds 101 by Cindi Thessing, CIC Many professionals, both attorneys and insurance agents, are not familiar with fiduciary or surety bonds and when they are needed, and do not know where to obtain them. So what are these fiduciary bonds and why are they needed? In my view, a bond is a blend of traditional insurance and banking. It is a three-party contract where the bonded party (the principal), provides a financial and performance guarantee to another party (the obligee). The third party to the contract is the insurance company (the surety), which provides a bond to the obligee cementing the guarantee. If the principal fails in its obligation, the surety company would provide restitution to the obligee. However, unlike insurance coverage, the surety would then seek indemnification (or restitution) from the principal. A fiduciary is a person who manages the affairs or funds of another or who is otherwise in a position of trust. These bonds would include: Administrator/Executor, Guardian of a minor or Guardian of an incompetent, and Receivers and Trustees in Bankruptcy. Administrator/Executor bonds are usually short-term obligations because the estate can generally be handled in less than 24 months. Due to the nature of the performance/financial guarantee underlying the bond, the surety would like to see that the principal has experience handling such official duties and usually requires qualified legal counsel to remain involved. In some cases, the surety may require joint control of funds between the attorney and principal. Guardianships are generally long-term in nature. The court appointed guardian of a minor promises to manage, preserve, invest and reinvest the property of a minor until the ward reaches legal age. The guardian must post an accounting to the court on an annual basis. Because of the long term nature of the bond, some sureties may require an upfront billing on an expected expiration of at least five years. Attorney involvement is an important underwriting requirement and, depending on the limit needed for the bond, the guardian must provide evidence of experience handling diverse and complicated financial matters. The guardian may also have to provide a personal financial statement to the surety as a matter of underwriting. The Guardian of an Incompetent, or Conservator, guarantees that the guardian will faithfully discharge the trust delegated to them and will obey all instructions of the court and account for all properties, whenever the court requires. Again, attorney involvement is crucial to the surety and accounting documentation is required annually. The court would also require its approval of a full and final accounting. A Receiver is sometimes appointed by the court to take over property of an alleged bankrupt petitioner during the time between the filing of the petition for bankruptcy and either its dismissal or the appointment of a trustee in bankruptcy. After the court declares the petitioner bankrupt, any assets left in the estate would be under the supervision of the appointed trustee. The trustee must handle the assets for the benefit of the bankrupt petitioner’s creditors. Under the liquidation section, the main responsibility is to convert all assets to cash to pay the expenses and distribute to the creditors. If the debtor 30
The Arkansas Lawyer
petitions for reorganization, the trustee must continue the business indefinitely. This requires an individual who is experienced in the type of business under their direction. Often the appointment is an attorney or businessperson of good reputation and extensive experience. One of the main differences between insurance and bonding is the guarantee of the principal to indemnify, or repay, the insurance company in the event of a claim under the bond. The principal agrees to the administrative and financial obligations given and, should these be broken, the insurance company will step in and provide restitution but would then fully expect to be repaid by the principal. Thus, depending on the limit needed for the bond, the party of whom the bond is required may have to prove their financial wherewithal so the surety is comfortable with their ability to repay the “loan” in the event of a claim. Fiduciary Bonds provide a valuable service to the Probate Court System in offering a financial and performance guarantee in an effort to protect those who can’t protect themselves. Before a party is considered for these positions of trust, it is important to ascertain their ability to handle financial matters and to respond to directives from the court. Whenever a judge requires a bond posted, there is no need for alarm. Simply call a reputable insurance agency that has an experienced bond department. Most of the larger insurance agencies do and some even offer special programs for these fiduciary bond requests. Protecting those who can’t protect themselves is an admirable goal and surety companies strive to provide that protection. Regions Insurance is staffed with experienced bond underwriters in its dedicated Bond Department. If you have questions about surety or fidelity bonds, Regions Insurance possesses the expertise and resources to assist you. Cindi Thessing is a Certified Insurance Counselor and Bond Underwriter for Regions Insurance with over 30 years insurance experience.
Bond Options for Members of the Arkansas Bar Association Probate Bonds Judicial/Litigant Court Bonds Notary Bonds For more information on Bonding please contact: Cindi Thessing at (501) 660-7149 firstname.lastname@example.org Go to www.arkbar.com for more on member benefits from Regions, including Cyber Liability & Medical Insurance
Celebrating 25Years Congratulations to members of the Arkansas Bar Association celebrating their 25th year of practice. Mark H. Allison Joyce Bradley Babin Cynthia J. Baker Robert E. Bamburg Bob Beach Patricia VanAusdall Bell A. Mark Bennett, III J. Lee Brown Bettina E. Brownstein Paul Byrd Joe D. Calhoun, III Stephen P. Carter Wm. David Carter T. Scott Clevenger Linda P. Collier Cathleen Compton M. Gayle Corley Nate Coulter John F. Courtway Valerie Denton Allen C. Dobson Joy Carol Durward Raymond Easterwood, Jr. Cynthia S. Edwards Jeff C. Elliott Mark E. Ford Roland Ray Fulmer, II Kenneth E. Galchus Jeffrey D. Germany Steven D. Gunderson Kenneth R. Hall Michele A. Harrington Harry F. Hauser Clifford J. Henry Victor L. Hill Martha McKenzie Hill S. Kyle Hunter Robert K. Jackson Shirley Guntharp Jones Donald Judges John Thomas Kennedy Ann Killenbeck Loretta A. Kleve Scott J. Lancaster Randal Lee J. Mark Lewis John D. Lightfoot Mark E. Long Rita S. Looney
S. Randolph Looney Anthony G. Mansell Lucinda McDaniel J. Randall McGinnis Lance R. Miller Roger L. Morgan Rosalind M. Mouser Mike Mullally Guy W. Murphy, Jr. John W. Murry, Jr. Edward A. Nelson Brad K. Newman James Robin Pace Chris L. Palmer Annabelle Patterson Lynn Pence James R. Pender Tom Pendowski Suzanne Penn Reginald A. Rogers Roger D. Rowe Nora H. Sams Vicki J. Sandage Susan A. Schneider Barry A. Sims Berl A. Smith H. Mayo Smith J. Brent Standridge Kevin J. Staten Gregory K. Stewart June L. Stewart Wallace M. Story, Jr. Sallie Stroud John C. Throesch C. Tab Turner Mary Ellen Vandegrift Bart F. Virden Ralph W. Waddell Jack Vernon Walker, Jr. Karen V. Wallace Field K. Wasson, Jr. Steve Weaver Elizabeth Anne Weinstein John T. Wilkinson, III A. Gene Williams Todd Williams Stephen P. Williams Rufus E. Wolff Terry Anne Zelinski
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Judicial Advisory Opinions, Disciplinary Actions & Attorney Disciplinary Actions The Judicial Discipline and Disability Commission issued the following Final Actions. Full text documents are available on-line at http://www.state.ar.us/jddc/ press_releases.html
Professional Conduct are prior to May 1, 2005. The “Arkansas” Rules are in effect from May 1, 2005.]
August 31, 2010 Advisory Opinion No. 2010-01 The Honorable Mary Ann Gunn Washington/Madison County Circuit Judge Fourth Division
JAMES SCOTT ADAMS, Bar #81001, of Morrilton, in Supreme Court Case No. 10633, petitioned to surrender his Arkansas law license to avoid further disciplinary proceedings in six complaints before the Committee. The Supreme Court accepted his surrender in its Per Curiam Order filed August 2, 2010, noting that its action was in lieu of potential disbarment proceedings.
September 28, 2010 Report and Recommendation of Panel In the Matter of L.T. Simes Circuit Judge, First Judicial District Case No. 06-260/05/-123 Final actions from July 1, 2010, through September 30, 2010, by the Committee on Professional Conduct. Summaries prepared by the Office of Professional Conduct. Full text documents are available on-line at http://courts.arkansas.gov and by entering the attorney’s name in the attorney locater feature under the “Attorney” link on the home page. [The “Model” Rules of
SURRENDER OF LICENSE:
MARQUIS E. JONES, Bar #74089, of Little Rock, in Supreme Court Case No. 10-807, petitioned to surrender his Arkansas law license to avoid further disciplinary proceedings in several complaints before the Committee. The Supreme Court accepted his surrender in its Per Curiam Order filed September 16, 2010, noting that its action was in lieu of Mr. Jones facing disciplinary proceedings for serious misconduct, including a matter involving client funds. In Case No. CPC 2009-093, Panel A
on July 19, 2010, had voted to initiate disbarment proceedings against Mr. Jones on a complaint from Elizabeth Shaneyfelt of Manila, Arkansas, and had placed Mr. Jones on interim suspension pending the resolution of that proceeding. JOHN M. ROBINSON, JR., Bar #81137, of Fort Smith, in Supreme Court Case No. 10-947, petitioned to surrender his Arkansas law license to avoid further disciplinary proceedings in several complaints. The Supreme Court accepted his surrender in its Per Curiam Order filed September 30, 2010, noting that its action was in lieu of potential sanctions or suspension. The Complaint before the Committee arose from the action of United States Bankruptcy Judge Ben Barry on March 31, 2010, suspending Mr. Robinson from practice before that court for multiple violations, and upon five other complaints before the Committee. SUSPENSION OF LICENSE: CLAUDENE ARRINGTON, Bar #2002033, of Hope, on July 21, 2010, had her Arkansas law license suspended for six (6) months in Case No. CPC 2010-035, on a
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Attorney Disciplinary Actions reciprocal action from Texas, where an order of license suspension in the State of Texas against Ms. Arrington, who is also licensed in Texas with Bar #24031824, issued on April 26, 2010, sanctioning her by agreement with a suspension of sixty (60) months, with six (6) months to be active suspension, beginning on June 1, 2010, and fifty-four (54) months to be probated suspension beginning December 1, 2010, for a violation of Texas Rule 4.02(a) (lawyer communicating with a person represented by counsel). RICHARD H. YOUNG, Bar #94149, of Russellville, by Committee Findings & Order filed July 16, 2010, in Case No. CPC 2008086, had his Arkansas law license suspended for twenty-four (24) months on a complaint by Peggy Prose of Russellville for violation of Rules 1.1, 1.3, 1.4(a)(3), 1.4(b), 1.5(c), and 8.4(d), where he failed to properly prosecute Ms. Prose’s auto injury claim within the statute of limitations. The Panel found the sanction should be enhanced based on Mr. Young’s disciplinary history. In October 2004, Ms. Prose was a passenger in a vehicle and suffered a shoulder injury when that vehicle was “rear-ended” in Little Rock. She employed attorney Young to represent her in the matter. She has no copy of any written fee agreement with Mr. Young. She had surgery on her shoulder, now has a disability in her arm, and had medical bills of over $25,000 which were paid by her insurance company. On October 26, 2007, Mr. Young filed suit for her in this matter, and he had a Summons issued. Young only attempted service on the at-fault driver by mail and never got her served. On May 2, 2008, an Order was filed dismissing Prose’s lawsuit for failure to obtain service. Ms. Prose did not learn of this dismissal from Mr. Young. Thereafter Prose went to another Russellville attorney for assistance in this matter. He has been unable to revive her lawsuit and claim. REPRIMAND: JIMMY RAY BAXTER, Bar #78012, of Benton, by Committee Consent Findings & Order filed July 20, 2010, in Case No. CPC 2009-143, was reprimanded on a complaint by Flora White for his violation of Rules 1.3, 1.4(a)(3), and 1.15(a)(2). Prior to this
resolution, Mr. Baxter made restitution of $6,450 to Ms. White. Ms. White was sued by family members over a dispute regarding the probate of her late father’s will. In April 2005 she hired Mr. Baxter and paid him a total of $6,000 in legal fees and $450 for a handwriting expert to represent her in the matter. There was no written contract between Ms White and Mr. Baxter. To assist Mr. Baxter with her defense, Ms. White gave him the originals of her father’s Will, the probate documents, the documents related to the sale of the father’s home, bank financial records, and a signed agreement between Ms. White and her other siblings for a change of deed to some lake front property. Mr. Baxter advised Ms. White that these documents would be supplied to a handwriting expert to verify the deceased father’s signature. A handwriting expert was never used in the matter. Mr. Baxter and opposing counsel then suggested that the parties try mediation to resolve the matter. No mediation ever took place. After a few years, a final hearing was set in the matter for February 23, 2009. Mr. Baxter failed to appear at that hearing. On February 24, 2009, the day after the scheduled hearing, Ms. White sent Mr. Baxter a letter terminating his representation of her and requesting return of her file. After several telephone calls and a certified letter from Ms. White, Mr. Baxter forwarded her file to her new attorney; however, none of the original documentation she provided to Mr. Baxter was included in the file. Mr. Baxter acknowledges that Ms. White entrusted documents to him, but that they were at
some time extracted from his file and lost. GARFIELD BLOODMAN, Bar #97053, formerly of Little Rock, now of the U.S. Virgin Islands, by Committee Findings & Order filed July 12, 2010, in Case No. CPC 2010-018 was reprimanded and ordered to pay $2,500 restitution to his former client, Gerald Barber, for violation of Rules 1.3, 1.4(a)(1), 1.4(a)(3), 1.4(a)(4), and 1.16(d). In September 2007, Mr. Barber hired Mr. Bloodman to represent him in a criminal matter in Jefferson County. Mr. Bloodman initially filed various pleadings on behalf of Mr. Barber, but he then failed to communicate with Mr. Barber for several years. Mr. Bloodman failed to inform Mr. Barber when Mr. Bloodman relocated out of State in July 2008. Mr. Bloodman did not communicate a reduced charge to Mr. Barber. Mr. Bloodman terminated his representation of Mr. Barber before the legal matter was concluded but failed to give Mr. Barber notice, failed to surrender papers and / or property from the file to which Barber was entitled, and failed to refund the unearned portion of the advanced fee payment of $4,000 for the representation. JOSEPH D. HUGHES, Bar #97021, of Paragould, by Committee Consent Findings & Order filed July 16, 2010, in Case No. CPC 2009-140 was reprimanded and fined $1,000 for violation of Rules 1.3, 3.4(c), and 5.5(a) in a matter referred by the Supreme Court dealing with a criminal appeal for James Montgomery in No. CR 09-1259. Mr. Hughes tendered the record on appeal to the Supreme Court Clerk seventeen days late. In his Motion for Rule on the Clerk, he
Vol. 45 No. 4/Fall 2010 The Arkansas Lawyer
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accepted responsibility for his late filing of the record, the Motion was granted allowing the appeal to proceed, and the Court referred the matter to the Committee. During 20072009, Mr. Hughes failed to pay his law license 34 The Arkansas Lawyer www.arkbar.com
renewal fee on time, March 1 annually, in each of those three years, and failed to pay it at all for 2008 until May 2009. As a result, for part or all of those years he was practicing law on a license that was in suspended status.
The Committee found that his disciplinary record was a material factor in assessing the sanction. NEWTON DONALD JENKINS, JR., Bar #94231, of Van Buren, by Committee Findings & Order filed September 15, 2010, was reprimanded and fined $1,000 in Case No. CPC 2010-030, for violation of Rules 1.1, 1.3, 1.4(b), 3.4(c), and 8.4(d) on a complaint arising out of the facts in a bankruptcy matter he handled involving Mr. and Mrs. Beliles, Case No. 08-bk-73231, that came to the attention of the Office of Professional Conduct. In arriving at these sanctions, the Panel stated it considered his disciplinary record as a factor. In August 2008, Mr. Jenkins, an experienced debtor’s attorney, filed a Chapter 7 Petition for debtors Beliles in the Western District of Arkansas. The Trustee filed an objection to the extent of the statutory exemptions claimed by the Belileses in their Schedule C. In November 2008, the Court sustained the objection and directed debtors to amend their claimed exemptions to comply with appropriate bankruptcy law. The next day, on November 13, 2008, an Order was generated and filed granting the Belileses their discharges under Chapter 7. The case was not “closed.” In April 2009, the Trustee wrote Jenkins, as debtors’ counsel, requesting that an amended exemption schedule be filed or he would have to move to set aside the discharge and to dismiss the case. Jenkins did not respond to the letter. On July 20, 2009, the Trustee filed a motion to set aside and deny the Belileses’ discharge. Jenkins filed a response on July 23, 2009, attaching a copy of an amended Schedule C as to the exemptions. On August 11, 2009, the Court heard the Trustee’s Motion to Set Aside Discharge, Mr. Jenkins failed to appear and represent his clients, and the motion was granted. The next day, the court entered its Order granting the Trustee’s motion and setting aside the Belileses’ discharges. On August 21, 2009, the U.S. Trustee filed her Motion to Disgorge Attorney’s Fees, seeking to have the court require Jenkins to refund to his clients all legal fees they had paid him in their bankruptcy case because they received inadequate representation and ultimately no benefit from Jenkins’
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Vol. 45 No. 4/Fall 2010 The Arkansas Lawyer
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Attorney Disciplinary Actions representation. Jenkins filed a response to the motion to disgorge. This motion was stayed pending his appeal. Jenkins appealed to the United States District Court from the order setting aside the Belileses discharge, as Case No. 09-cv-02115. On December 21, 2009, the District Court entered its Order finding that Jenkins filed his notice of appeal too late and dismissed the Belileses’ appeal. On February 22, 2010, back in the bankruptcy court, the Belileses substituted a new attorney in their case, who filed a Motion to Dismiss their case, which was granted by Order issued March 18, 2010. The U. S. Trustee obtained an Order withdrawing its Motion to Disgorge Attorney’s Fees, attaching proof from the Jenkins Law Firm, PLLC, that $1,000 has been paid to the Belileses as a full legal fee refund. As of April 21, 2010, when the Committee Complaint was filed, the Belileses had not filed or refiled any bankruptcy case, and had no legal protection offered by a discharge of debts under a bankruptcy order. CAUTION: DARRELL W. JOHNSON, Bar #65026, of Fort Smith, by Committee Consent Findings & Order filed July 16, 2010, was cautioned in Case No. CPC 2010-029, for violation of Rule 5.5(a) on a complaint from the Oklahoma Bar Association. During 2008-2009, Johnson practiced law in the district courts in two Oklahoma counties, filing signed pleadings in cases there while not licensed or admitted to do
so. A Complaint was filed against him by the Oklahoma Bar Association on a complaint filed by Oklahoma counsel in those cases. Johnson was ordered to cease practicing law in Oklahoma until he was duly admitted by the Oklahoma Supreme Court or by pro hac vice application. Johnson admitted he had practiced law in these Oklahoma courts as charged. He explained that the bulk of his practice is in bankruptcy, and that his appearances and filings in Oklahoma courts were for clients who were going to file bankruptcy petitions through him. His filings in Oklahoma state courts were for the purpose of “buying time” to get the new client’s cases filed in federal bankruptcy court in Oklahoma, where he could practice without being admitted or licensed by the Supreme Court of Oklahoma. STEPHEN B. NISWANGER, Bar # 96012, of Little Rock, was cautioned by Committee Consent Findings and Order in Case No. CPC 2010-044, for violation of Rule 3.4(c). The Supreme Court referred Mr. Niswanger to the Committee for the language he used in his Petition for Rehearing and accompanying brief in Darryl V. Talley v. City of North Little Rock, Supreme Court No. 2009-11. Mr. Niswanger wrote that the Court may have used dishonest legal reasoning in reaching its decision, along with other statements questioning the Court’s decision. The cumulation of all the various statements made about the Court making erroneous decisions, having other than legal reasons, etc., made
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Pledge continued from page 12
borrower default. Distributions from a partnership or LLC constitute proceeds under the Code.23 The underlying ownership interest must first be properly perfected and the rights to the proceeds (distributions) will be perfected automatically and will have priority over the holder of a security interest in the distributions alone who does not have control.24 In short, these issues matter. Earlier, reference was made to the effect that this conflict might have on the lives of the issuer, borrower, or borrower’s counsel. It is common to see language in loan agreements that the lender has a first security interest in the ownership interest. Or, opinion letters required from borrower’s counsel frequently ask the lawyer to state that the lender has taken “all necessary steps” to perfect its interest in the collateral. Are those statements true? Short of opting-in to Article 8, it is doubtful. Besides being accused of unnecessarily running up the transaction costs, there can be other not-so-pleasant consequences associated with the issuer opting-in to Article 8. First, lender’s counsel must make sure the issuer and all of its entity’s owners agree they will not opt-out of Article 8 without lender’s consent. This problem can typically be addressed with some sort of tri-party agreement among the issuer, lender, and borrower. Next, careful attention must be paid to § 8-204, § 8-209, and § 8-108. In other words, to retain the priority position the lender will need to ensure that the issuer actually complies with Article 8. Finally, as noted above, lender’s counsel must plan for the day when it may foreclose. Certificated securities (with appropriate transfer instructions and endorsements) will make this process much easier than if you are relying on uncertificated securities and upon the cooperation of the issuer to transfer the ownership interest into the name of the lender. Conclusion – Steps to follow. So what is a lender to do to avoid a priority dispute and maintain peace of mind? These are the suggested steps a lender should take to ensure compliance with Articles 8 and 9: • review the terms of the governing documents to confirm that the interest can be pledged;25 • require the issuer to “opt-in” to Article 8; • determine whether the interest to be pledged is certificated or uncertificated and, if possible, require that certificates be issued so as to avoid further complications in the
event of default; • if the interest is certificated, have an endorsement in blank made over to the secured party, like a stock power; • so as to prevent the issuer from “optingout” of Article 8 at some later date, have the issuer and its members enter into an agreement with the lender to this effect as part of the loan closing and which agreement re-
quires that the lender consent to this step; • take possession of the certificated security or receive an acknowledgement from the issuer as to the security interests held by the secured party if the security is uncertificated (but see concerns as to this approval noted above); • confirm that your security agreement contains language that specifically references
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the right of the lender to receive all proceeds of the described collateral including the right to distributions from the issuer of any sort, type, form, or classification; and • as a backup, file a financing statement referencing the security interest in the partnership or limited liability company interest as well as the lender’s rights to all proceeds. By taking these steps, the secured party has obtained control and protected itself from any subsequent actions that might be deemed to call into question the priority of its security interest as well as provided a “notice filing” as to the security interest being granted. The alternative is simply a failure of priority and perfection. Endnotes 1. If the documents prohibit the pledge or assignment of the ownership interest, the lender must first obtain the consent of the other owners of the issuer. However, once this housekeeping measure has been accomplished, the nagging uncertainties noted in this article may continue to pester the lender and its lien position. 2. Ark. Code Ann. § 4-9-102(a)(49), §4-8102(a)(15), and § 4-8-103(a) (2000). 3. Ark. Code Ann. § 4-8-103(c)(2000). 4. Ark. Code Ann. § 4-8-103(c) (2000). 5. Ark. Code Ann. § 4-9-102(a)(42) (2000). 6. See Official Comment 5(d) to § 4-9-102 (2000). 7. The new investor’s request could be made for a variety of reasons, including its fear that the partnership or LLC interest might be further diluted. In such a situation it is not uncommon for the new investor to require the issuer to “opt-in” to Article 8 and amend its governing documents accordingly so as to ascertain exactly what its ownership is. 8. There is nothing particularly technical or special about such “opt-in” language. Adding the following language to the partnership agreement or operating agreement should work for most purposes: “The [membership interest] [units] [partnership interest] in this partnership company shall constitute a ‘security’ governed by Article 8 of the Uniform Commercial Code and any certificate evidencing such [membership interest] [units] [partnership interests] is a ‘certificated security’ within the meaning of § 8-102(a)(4).” However, it is advisable to comply with § 8-207 and note on the face of any certificates that are issued that the issuer is governed by Article 8. 9. Ark. Code Ann. § 4-9-106, § 4-9-310(B) (8), § 4-9-314 (2000). 10. Ark. Code Ann. § 4-8-301 (1999), § 4-9-
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313(a) (2000). 11. Ark. Code Ann. § 4-9-312(a) (2000). 12. See Ark. Code Ann. § 4-9-328(1) § 4-9106(a) (2001). 13. Official Comment 1 to § 4-8-106 (2000). 14. See Ark. Code Ann. § 4-8-106(c). 15. See Official Comment 3 to § 4-8-106 (2000); see also Ark. Code Ann. § 4-8-106(c) (2000). 16. See Ark. Code Ann. § 4-8-106(g). 17. The disposition of collateral under Ark. Code Ann. § 4-9-610 and § 4-9-620 are beyond the scope of the article. Careful attention should be paid to the procedures and guidelines of the two sections should an event of default arise. 18. 51 Ark. App. 85, 910 S.W.2d 702 (1995). 19. See generally, Ark. Code Ann. § 4-8202(a). 20. 191 A.2nd 1, 600 N.Y.S.2d 443 (1993). 21. Official Comment 1 to § 4-8-202. 22. Official Comment 2 to Ark. Code Ann. § 4-8-202 (2000). 23. Ark. Code Ann. § 4-9-102(a)(64)(B) (2000). 24. Ark. Code Ann. § 4-9-328(a)(2) (2000).
25. If the interest cannot be pledged, then
consideration needs to be given to either amending the governing documents to permit the contemplated loan or obtaining an affirmative statement from the partnership or LLC that it will not so amend the governing documents at some later date without giving the lender adequate notice. n
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Back Pay continued from page 19
which withholdings must be taken. This consistency is essential, regardless of who the plaintiff might be. During settlement negotiations in particular, parties base their decisions partly on the tax effect of a proposed award. If neither side can anticipate what that effect might be, then settlement efforts will be hampered. Parties in the midst of employment litigation, especially employers who face hefty fines from the IRS for not making appropriate withholdings, cannot be expected to guess at whether the decision they are making is proper. Conclusion If we accept the practical reality and federal case law approach that the employer-employee relationship continues even after the termination of the employee, then the resolution of this issue becomes fairly straightforward—whether the plaintiff’s award arises out of the context of an employer-employee relationship. If it does, such as in the case of a violation of the Arkansas Whistleblower Act, then the award should be considered wages. As the United States Supreme Court has stated, such payments are “reparation based upon the loss of wages which the employee has suffered from the employer’s
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wrong,”48 and reparation based upon loss of wages is clearly subject to income tax withholding. So what must an Arkansas employer do when faced with the decision to withhold federal taxes from an award or settlement for wrongful termination? At present, the answer is unclear. At the very least, the employer must closely examine the underlying dispute that led to the wrongful termination action. If the wrongful termination action is a state law claim, the correct choice of action might be to refrain from withholding taxes, relying on the Storey decision that compensation paid for a wrongful discharge claim will not be considered “wages” by the IRS or Arkansas state courts. Another practical option might be to withhold only the federal taxes from the settlement or judgment award. In this way, an employer would not run afoul of the IRS and could hide behind the Storey decision if the state taxing authorities made a claim upon the payment. Such a maneuver would still not provide an employer protection if the plaintiff brought an action for the unpaid portion of the judgment or settlement that represents federal withholding, but the Arkansas courts might decide that a decision regarding federal withholdings is beyond its jurisdiction.
Even with these risky courses of action, however, the only clear situation under Arkansas law in which these payments are not “wages” would be a recovery under the Arkansas Whistleblower Act. Furthermore, this determination would only be for the purposes of satisfying the judgment awarded by an Arkansas state court. There is no guarantee that the IRS will not hold the employer accountable for federal taxes it did not withhold from the back pay award; the IRS considers back pay taxable, and it does not base its enforcement scheme on Arkansas state court decisions. If Arkansas employers choose to follow the Storey decision and ultimately get penalized by the IRS, the Arkansas legislature should intervene and pass legislation overturning the Storey decision. Endnotes: 1. Arkansas Dep’t of Human Services v. Storey, 372 Ark. 23, 269 S.W.3d 803 (2007). 2. Ark. Code Ann. § 21-1-601. 3. History of the Income Tax of the United States, Tax Foundation, 2007 Pearson Education, Inc. available at www.infoplease.com/ipa/ A0005921.html. 4. If an employer fails to deduct withholding taxes from an employee’s paycheck, the employer will be subject to a fine equal to 100% of the
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unpaid tax under the Internal Revenue Code. (IRC) § 6672. 5. Id. 6. Morton’s Fork is an expression that describes two equally unpleasant alternatives. The expression originates from a policy of tax collection devised by John Morton, Lord Chancellor of England in 1487. His approach was that if the taxpayer lived in luxury and had clearly spent a lot of money on himself, he obviously had sufficient income to spare for the king. Alternatively, if the taxpayer lived frugally and showed no sign of being wealthy, he must have substantial savings and could therefore afford to give it to the king. 7. 26 U.S.C. § 3402. 8. 26 U.S.C. § 3121(a). 9. 26 C.F.R. § 31.3121(a)-(1)(i) (emphasis added). 10. 26 U.S.C. § 31.3401(a)-1(b)(4) (emphasis added). 11. 327 U.S. 358 (1946). 12. Nierotko v. Social Security Board, 327 U.S. 358, 359 (1946). 13. Id. at 360. 14. Id. 15. Id. at 370. 16. Id. at 365.
17. Id. at 364. 18. Nierotko, 327 U.S. at 364. 19. Market Segment Specialization Program, Lawsuit Awards and Settlements, available at: http://www.irs.gov/businesses/ page/0,,id%3D7051,00.html#Chap3 (emphasis added). 20. Office of Chief Counsel Internal Revenue Service Memorandum, dated October 22, 2008, UILC: 61.00-00, 3101.00-00, 3111.0000, 3402.00-00, Income and Employment Tax Consequences and Proper Reporting of Employment-Related Judgments and Settlements. 21. Id. at 2. 22. Id. at 9. 23. Only “[p]roperly promulgated, substantive agency regulations have the ‘force and effect of law’ necessary to preempt state law under the Supremacy Clause.” Chrysler v. Brown, 441 U.S. 281, 295-96 (1979). 24. Storey, 372 Ark. 23, 269 S.W.3d 803. 25. Id. at 25, 269 S.W.3d at 804. 26. Id. at 26, 269 S.W.3d at 804. 27. Id. at 31, 269 S.W.3d at 808. 28. Id. at 29, 269 S.W.3d at 806-07. 29. Id. at 31, 269 S.W.3d at 808. 30. Storey, 372 Ark. at 31, 269 S.W.3d at 808. 31. Id.
32. Id. 33. Mayberry v. United States, 151 F.3d 855 (8th Cir. 1998); Gerbec v. United States, 164 F.3d 1015 (6th Cir. 1999). 34. Storey, 372 Ark. at 31, 269 S.W.3d at 808 (stating that “the focus is on whether an employer-employee relationship existed”). 35. Newhouse v. McCormick & Co., 157 F.3d 582 (8th Cir. 1998). 36. Longstreth v. Copple, 101 F. Supp. 2d 776, 778 (N.D. Iowa 2000). 37. Sang-Hoon Kim v. Monmouth College, 320 N.J. Super. 157 (1998). 38. Churchill v. Star Enters., 3 F. Supp. 2d 622 (E.D. Pa. 1998). 39. Lisec v. United Airlines, 10 Cal. App. 4th 1500 (1992). 40. Newhouse,157 F.3d at 585. 41. Id. at 585. 42. Storey, 372 Ark. at 29, 269 S.W.3d at 807. 43. Id. at 31, 269 S.W.3d at 808. 44. Newhouse,157 F.3d at 585. 45. Storey, 372 Ark. at 30, 269 S.W.3d at 808. 46. See e.g, Nierotko, 327 U.S. at 359; Mayberry, 151 F.3d 855; Gerbec, 164 F.3d 1015 . 47. Market Segment Specialization Program, supra n. 14. 48. Nierotko, 327 U.S. at 364. n
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Supreme Court has declined to recognize class certification in a number of cases. In those cases the Court usually finds “preliminary issues” that are individualized, with the result that the predominance requirement is not satisfied: This court has further said that if a case involves preliminary issues common to all class members, predominance is satisfied even if the court must subsequently decertify a class due to individualized damages. However, if the preliminary issues are sufficiently individualized, then predominance is not satisfied and class certification is improper. Indeed, a case that presents numerous individual issues regarding the defendants’ conduct, causation, injury, and damages will best be resolved on a case-by-case basis.49
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In addition, the Court has stated that “[c]lass certification is inappropriate where there is ‘no one set of operative facts [that] establishes liability.’”50 V. The Impact of the Federal Class Action Fairness Action Fairness Act on Arkansas Class Action Procedure The 2005 federal Class Action Fairness Act (“CAFA”)51 has effectively placed significant limitations on class action practice in the Arkansas state courts. Congress enacted CAFA in response to its perception that abuses in state court class actions had “harmed class members with legitimate claims and defendants that had acted responsibly;” “adversely affected interstate commerce;” and “undermined public respect for the judicial system.”52 In particular, Congress found that state courts were keeping class actions of national importance out of federal courts and favored forum state plaintiffs over out of state defendants.53 CAFA’s remedy for the perceived abuses was to “federalize” many large class actions in which plaintiff class members were located in several states by greatly expanding the definition of diversity of citizenship for class action purposes, allowing more class actions to be filed in federal court and making cases falling within the expanded diversity definition removable to federal court. The specific mechanism for the expansion of diversity jurisdiction for class actions was to add a subsection to the federal court diversity of citizenship jurisdiction statute giving federal courts original jurisdiction over class actions in which the amount in controversy of the class members’ claims in aggregate exceeds $5 mil-
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TaylorLawFirm.com 124 West Capitol Avenue, Suite 1805 • Little Rock, AR 72201 lion and there is “minimal diversity.”54 Minimal could be offered here. The most significant diversity under CAFA is satisfied if only one impact of CAFA on Arkansas class action pracmember of the plaintiff class and one defendant tice is that many large multi-state class actions are citizens of different states, almost always the that might have been filed in the Arkansas case in a class action.55 CAFA and the case law state court system will now either be filed in or interpreting the Act constitute a complex body removed to federal court. of law that is far beyond any description that CAFA does incorporate several specific Vol. 45 No. 4/Fall 2010 The Arkansas Lawyer 45
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exceptions to the general federalizing approach of the Act. The exceptions most likely to play a role in Arkansas state class action practice are: (1) The “interests of justice” exception – The federal court may in the interest of justice decline to exercise jurisdiction if more than one-third but less than two-thirds of the proposed class and the “primary” defendants are citizens of the forum state upon consideration of whether: (a) the claims involve matters of national or interstate interest; (b) the claims will be governed by laws of the forum state or other states; (c) the case has been pleaded in a manner that seeks to avoid federal jurisdiction; (d) the case was brought in a forum with a distinct nexus with the class members, the alleged harm, or the defendants; (e) the number of citizens of the forum state is substantially larger than the number of citizens from any other state, and the citizenship of the other members of the proposed class is dispersed among a substantial number of states; and (f) no similar class action has been filed against any of the defendants in the prior three years.56 (2) The “local controversy” exception – The federal court must decline jurisdiction if greater than two thirds of the members of the proposed plaintiff class are citizens of the forum state and (a) significant relief is sought from at least one local defendant whose alleged conduct forms a significant basis for the claims of the proposed class; (b) the principal alleged injuries resulting from the conduct of all defendants occurred in the forum state; and (c) no similar class action has been filed against 46
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any of the defendants in the prior three years.57 (3) The “home state controversy” exception – The federal court must decline jurisdiction if more than two-thirds of the members of the proposed class and the primary defendants are citizens of the forum state.58 In addition to the specific exceptions to CAFA jurisdiction recognized in the Act itself, other language in the Act has been employed to avoid federal court jurisdiction. A number of Federal Courts of Appeals, including the Eighth Circuit, have recognized that federal court jurisdiction may be avoided by the simple expedient of the plaintiff limiting the request for recovery to less than $5 million.59 To overcome the plaintiff’s claim that amount in controversy is less than $5 million, the defendant must show that the plaintiff is legally certain to recover at least five million dollars.60 Since CAFA jurisdiction does not apply to suits of fewer than 100 plaintiffs, at least under some circumstances state court jurisdiction has been preserved by breaking a larger case into a series of actions in which fewer than 100 persons are joined as plaintiffs. For instance, in Tanoh v. Dow Chemical Co.61 the Ninth Circuit Court of Appeals held that a 664 plaintiff case that was filed as seven separate identical lawsuits each with fewer than 100 plaintiffs should be remanded to the state court. In addi-
tion, federal courts have held that class actions involving forum selection clauses that specify jurisdiction and venue in state court require that the case be remanded to state court.62 An overriding consideration in preserving state court jurisdiction over class actions is that federal courts have uniformly held that CAFA does not change the traditional rule that the party seeking to remove the case to federal court bears the burden of establishing federal jurisdiction.63 The combination of the exceptions to CAFA jurisdiction specifically recognized in the Act itself, the exceptions recognized as arising from other language in the Act, and the placement of the burden of establishing federal court jurisdiction on the defendant in removal cases, yields the prospect that some significant class action litigation may still proceed in Arkansas state courts. Endnotes: 1. 295 Ark. 107, 747 S.W.2d 81 (1988). 2. 306 Ark. 116, 813 S.W.2d 240 (1991). 3. Ark. R. App. P.–Civ. 2(a)(9): “An appeal may be taken from a circuit court to the Arkansas Supreme Court from: ... An order granting or denying a motion to certify a case as a class action in accordance with Rule 23 of the Arkansas Rules of Civil Procedure.” 4. Pub. L. No. 109-2, 89 Stat. 26 (codified in scattered sections of 28 U.S.C.). 5. In many cases, defendants concede that one or more of the six Rule 23(a) and (b) prerequisites are satisfied. For instance, in the 2009 case of Advance America Servicing of Arkansas, Inc. v. McGinnis, 2009 Ark. 151, 300 S.W.3d 487, on appeal defendant challenged only the 23(a)(4) requirement of adequacy of representation. And, in Arkansas Media, LLC v. Bobbitt, 2010 Ark. 76, 2010 WL 565280, typicality, predominance, and superiority were the only issues raised on appeal. 6. In regard to the requirement found in both Arkansas and Federal Rule 23 that common questions predominate over individual issues, a leading treatise on federal civil procedure states: [A]n action is maintainable under Rule 23(b)(3) only if there is a finding that common questions predominate over individual issues. Since predominance obviously is a more stringent standard than that prescribed by Rule 23(a)(2), subdivision (a)(2) would be satisfied any time the court finds that the subdivision (b)(3) test has been met. Not surprisingly, therefore, a few courts in actions brought under subdivision (b)(3) have not drawn a distinction between the two requirements. They either have dealt with the commonissue question simultaneously with their inquiry into whether common questions predominate or have assumed that Rule
23(a)(2) was satisfied and thought it necessary only to rule on the question whether the suit fit within subdivision (b)(3). 7A Charles Alan Wright & Arthur Miller, Federal Practice & Procedure § 1763 (3d ed. 2004). 7. Ferguson v. Kroger Co., 343 Ark. 627, 632, 37 S.W.3d 590, 593 (2001). 8. Id. at 631, 37 S.W.3d at 593. 9. Ark. R. Civ. P. 23(b). 10. “[D]enying or granting class certification is often the defining moment in class actions (for it may sound the ‘death knell’ of the litigation on the part of plaintiffs, or create unwarranted pressure to settle nonmeritorious claims on the part of defendants) . . . .” Newton v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 259 F.3d 154, 162 (3rd Cir. 2001). 11. Id. In regard to the potential impact of a negative certification decision on class members having small claims, the Arkansas Supreme Court in Farmers Ins. Co., Inc. v. Snowden reiterated a sentiment expressed in a number of its class actions decisions: [T]his case involves multiple claims that could just “go away,” as most of the claims involve small amounts of damages, most of the claimants are average consumers of limited financial means, rather than sophisticated entities, and the claimants are widely distributed throughout the state. If the class is not certified, many of the claimants will lack the knowledge or financial means to proceed against Farmers in individual actions. This consideration alone may not justify class certification, but is a compelling reason to approve it if the other requirements have been met. Farmers Ins. Co., Inc. v. Snowden, 366 Ark. 138, 151, 233 S.W.3d 664, 672-673 (2006). 12. 374 Ark. 38, 285 S.W.3d 634 (2008). 13. Id. at 47, 285 S.W.3d at 641. 14. The appellant in Farmers Union Mutual Insurance Co. v. Robertson, 2010 Ark. 241 at 12, 2010 WL 2006406, referred to the Arkansas Supreme Court’s approach to classcertification as “certify now, decertify later.” For an excellent, succinct commentary on the Arkansas Supreme Court’s general approach to class certification, see John J. Watkins, A “Different” Top Ten List: Significant Differences Between State and Federal Procedural Rules, 45 Ark. Lawyer 12, 14-15 (2010). 15. See, e.g., General Motors v. Bryant, 374 Ark. 38, 49, 285 S.W.3d 634, 643 (2008). 16. Id. at 51, 285 S.W.3d at 644. The Court cannot mean that the case literally would be decertified for purposes of resolving individual issues. Since the only basis for the trial court’s jurisdiction over the non-representative class
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Expert Witness Testimony Real Estate Related Matters •Tax Appeals •Court Testimony •Condemnation •Divorce 40 Years Experience See Web Site for References www.arkansasappraisers.com email: firstname.lastname@example.org members is their membership in the class resulting from the decision to certify the case as a class action, decertification “to resolve individual issues” would cause the court to lose jurisdiction over the class members for any purpose, including resolution of individual issues. f the case were decertified, the non-representative class members would be dropped from the case, and the only parties remaining before the trial court would be the named representatives. 17. See, e.g., Arkansas Media, LLC v. Bobbitt, 2010 Ark. 76, 2010 WL 565280. The Arkansas Supreme Court has recited the prohibition on “delving into the merits” in over forty class action cases. An Arkansas Law Review comment notes that the Court’s prohibition on considering merits based factors in determining whether the Rule 23(a) class certification standards have been met stems from a misinterpretation of the United States Supreme Court’s decision in Eisen v. Carlisle & Jacquelin, 417 U.S. 156 (1974). F. Ehren Hartz, Certify Now, Worry Later: Arkansas’s Flawed Approach to Class Certification, 61 Ark. L. Rev. 707 (2009). 18. See Fraley v. Williams Ford Tractor and Equip., 339 Ark. 332, 5 S.W.3d 423 (1999). 19. See Johnson’s Sales Co., Inc. v. Harris, 370 Ark. 387, 260 S.W.3d 273 (2007). 20. 2010 Ark. 241 at 12, 2010 WL 2006406 at *7. 21. Id. at 17, 2010 WL 2006406 at *9.
22. See, e.g., FirstPlus Home Loan Owner 1997-1 v. Bryant, 372 Ark. 466, 277 S.W.3d 576 (2008). In FirstPlus the Court acknowledged its long held view barring consideration of the merits in connection with the certification decisions, saying, “[w]e have repeatedly held that we will not delve into the merits of a case when reviewing an order denying or granting class certification.” Id. at 481, 277 S.W.3d at 587. 23. Addressing class size with an oft repeated statement, the Court, in Arkansas Blue Cross and Blue Shield v. Hicks, 349 Ark. 269, 287, 78 S.W.3d 58, 69 (2002), said: [W]e held that the exact size of the proposed class and the identity of the class members need not be established for the court to certify a class, and the numerosity requirement may be supported by common sense. We have not adopted a bright-line rule to determine how many class members are required to satisfy the numerosity requirement. Mega Life, supra (citing Summons v. Missouri Pac. R.R., 306 Ark. 116, 813 S.W.2d 240 (1991) (approving a class of several thousand claimants)); International Union of Elec., Radio, & Mach. Workers v. Hudson, 295 Ark. 107, 747 S.W.2d 81 (1988) (declaring that “at least several hundred” class members were sufficient); Cooper Communities, Inc. v. Sarver, 288 Ark. 6, 701 S.W.2d 364 (1986) (holding that 184 potential class members were enough); City of North Little Rock
Vol. 45 No. 4/Fall 2010 The Arkansas Lawyer
Ben F. Arnold is pleased to announce the relocation of his law office to: 111 Center Street, Suite 1200, Little Rock, AR 72201 Telephone: (501) 374-2225 Facsimile: (501) 374-3390 Email: email@example.com v. Vogelgesang, 273 Ark. 390, 619 S.W.2d 652 (1981) (rejecting a class of only seventeen potential plaintiffs). 24. Lenders Title Co. v. Chandler, 358 Ark. 66, 73, 186 S.W.3d 695, 699 (2004) (quoting Fraley v. Williams Ford Tractor & Equip. Co., 339 Ark. 322, 344, 5 S.W.3d 423, 437 (1999)). 25. International Union of Elec., Radio and Mach. Workers v. Hudson, 295 Ark. 107, 111, 747 S.W.2d 81, 83 (1988). 26. Rosenow v. Alltel Corp., 2010 Ark. 26 at 6, 2010 WL 199247 (quoting Simpson Housing Solutions, LLC v. Hernandez, 2009 Ark. 480 at 10, 2009 WL 3231256). 27. Teris, LLC v. Chandler, 375 Ark. 70, 79, 289 S.W.3d 63, 70 (2008). 28. BNL Equity Corp. v. Pearson, 340 Ark. 351, 357-358, 10 S.W.3d 838, 842 (2000). 29. Van Buren School District v. Jones, 365 Ark. 610, 619, 232 S.W.3d 444, 452 (2006). 30. “[T]he representative parties and their counsel will fairly and adequately protect the interests of the class.” Ark. R. Civ. P. 23(a)(4).
Website: www.bfalaw.net 31. Beverly Enterprises-Arkansas, Inc. v. Thomas, 370 Ark. 310, 320, 259 S.W.3d 445, 452 (2007). 32. 2009 Ark. 151, 300 S.W.3d 487. 33. Id. at 6-7, 300 S.W.3d at 492. 34. Id. at 6, 300 S.W.3d at 491. 35. Id. at 5-6, 300 S.W.3d at 492. 36. Id. at 6, 300 S.W.3d at 492. 37. 374 Ark. 38, 285 S.W.3d 634 (2008). 38. Id. at 45, 285 S.W.3d at 640. 39. Id. at 47, 285 S.W.3d at 641. 40. General Telephone Co. of Southwest v. Falcon, 457 U.S. 147, 161 (1982). 41. Lenders Title Co. v. Chandler, 353 Ark. 339, 349, 107 S.W.3d 157, 162 (2003). 42. Id. 43. Id. 44. Id. at 346, 107 S.W.3d at 160. 45. Id. at 348, 107 S.W.3d at 162. 46. See, e.g., Beverly Enterprises-Arkansas, Inc. v. Thomas, 370 Ark. 310, 322, 259 S.W.3d 445, 453 (2007). 47. In International Union of Elec., Radio and Mach. Workers v. Hudson, 295 Ark. 107,
747 S.W.2d 81 (1988), the seminal Arkansas class action case adopting the more favorable approach to class certification, the Court noted that, “[a]lthough our class action rule is patterned somewhat after the federal rule, there is a considerable difference in application. The federal rule leans toward allowing class actions whereas our position tends to discourage class actions if the matter can be handled by individual action.” Id. at 115, 747 S.W.2d at 85. Following Hudson, the Court announced its intention to follow Federal Rule 23 as a guide for its interpretation of class action procedures. As late as 2001, the Court recited its view that, “Rule 23 of the Arkansas Rules of Civil Procedure is comparable to Rule 23 of the Federal Rules of Civil Procedure, and this court interprets our Rule 23 in the same manner as the federal courts interpret the federal counterpart.” Williamson v. Sanofi Winthrop Pharmaceuticals, Inc., 347 Ark. 89, 99, 60 S.W.3d 428, 434-435 (2001). 48. Simpson Housing Solutions, LLC v. Hernandez, 2009 Ark. 480 at 18, 2009 WL 3231256. 49. See, e.g.,Teris, LLC v. Chandler, 375 Ark. 70, 82, 289 S.W.3d 63, 71 (2008). 50. Union Pacific R.R. v. Vickers, 2009 Ark. 259 at 14, 308 S.W.3d 573, 581 (quoting Baker v. Wyeth-Ayerst Labs. Div., 338 Ark. at 247, 992 S.W.2d at 800 (1999)). 51. Pub. L. No. 109-2, 89 Stat. 26 (codified in scattered sections of 28 U.S.C.). 52. Class Action Fairness Act of 2005, Pub. L. No. 109-2, sec. 2(a)(2), 119 Stat. 4 (2005) (Findings and Purposes section). 53. Id. at sec. 2(a)(4)(A). 54. 28 U.S.C. § 1332(d)(2). 55. Id. 56. 28 U.S.C. § 1332(d)(3). 57. 28 U.S.C. § 1332(d)(4). 58. Id. 59. See, e.g., Bell v. Hershey Co., 557 F.3d 953 (8th Cir. 2009). 60. Id. at 959. 61. 561 F.3d 945 (9th Cir. 2009). 62. Norris v. Commercial Credit Counseling Services, Inc., No. 4:09-CV-206, slip op. 2010 WL 1379732 (E.D. Tex. March 31, 2010). 63. Bell v. Hershey Co., 557 F.3d 953, 956 (8th Cir. 2009). n
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In Memoriam and Paul Sims Koerber; stepson, Ryan Wilson; daughter, Kara Barrett Koerber Jones; and stepdaughter, Sheryl Ann Wilson Mayer.
Judge Carol Crafton Anthony Judge Carol Crafton Anthony of El Dorado died July 18, 2010, at the age of 56. She attended Trinity University in San Antonio, Texas, on a tennis scholarship and later transferred to the University of Arkansas and graduated in 1976 with the distinction of Outstanding History Student, according to an obituary in the Arkansas Democrat Gazette. She played on the Lady Razorbacks tennis team. She earned a juris doctorate degree from the University of Arkansas School of Law in 1979 where she served on the Arkansas Law Review. After graduation, she served as a law clerk to Judge Marian Penix of the Arkansas Court of Appeals and United States District Judge Oren Harris. In 1987, while in private practice with the firm of Compton, Prewett, Thomas & Hickey, she was selected to be a part-time United States Magistrate Judge for the Western District of Arkansas. In 1993, Gov. Jim Guy Tucker appointed Carol to the Circuit Court for the 13th Judicial District. She was re-elected five times as Circuit Judge. She was instrumental in establishing the “School in School” program to help juveniles in El Dorado and the Union County Drug Court to help addicted offenders and to help alleviate prison overcrowding. She was recognized in 2009 as one of two judges in the state to have the highest rate of affirmed decisions appealed to the Arkansas Supreme Court with 96 percent approval. She was a member of the Arkansas Bar Association and served on the Women in the Profession, Mock Trial and Federal Legislation and Procedures Committees. She is survived by her husband, Aubra Anthony, Jr; and children, Aubra Hayes III, James Hunter, Clayton Harris, and Jordon Anthony.
Gwendolyn D. Hodge Gwendolyn D. Hodge of Little Rock died September 29, 2010, at the age of 45. She was an assistant U.S. attorney for the Eastern District of Arkansas and was actively involved in community service and the legal profession. She graduated from Wellesley College and the earned a juris doctorate from the University of Arkansas at Little Rock William H. Bowen School of Law, according to an obituary in the Arkansas Democrat Gazette. She served as chair of the American Bar Association’s Government Public Section Lawyers Division Council. She was a member of the Arkansas Bar Association where she served on the Board of Governors and as Chair of the Young Lawyers Section. She was awarded the Frank Elcan II Award. She served as co-chair of the Membership Development Committee. She served on the Professionalism Task Force, Member Benefits Committee and Government Practice Section. She was a member of the W. Harold Flowers Law Society, Pulaski County Bar Association and Arkansas Supreme Court Ethics Committee. She is survived by her parents, Dr. Charles and Elizabeth Hodge and one brother, Clinton Hodge. William “Bill” Leo Koerber William “Bill” Leo Koerber of Gilbert died July 25, 2010, at the age of 76. He graduated from Mississippi State University and the Tulane University School of Law. He practiced law for 45 years in Vidalia, Louisiana, until his retirement in 2003, according to an obituary in the Arkansas Democrat Gazette. He was a member of the Arkansas Bar Association. He is survived by his wife, Lois Ann Weidler Koerber; sons, James Anderson, Ward Brinton
Justice John Purtle Justice John Purtle died September 14, 2010, at the age of 87. Purtle was first elected to the Arkansas Supreme Court in 1978 and served until 1989. After stepping down from the bench, he returned to private practice and moved to Conway, according to an obituary in the Arkansas Democrat Gazette. He served in the U.S. Army and served in the Pacific in World War II. He earned his juris doctorate from the University of Arkansas at Fayetteville School of Law. In 1950, he was elected to the state House of Representatives in Faulkner County, serving one term before moving to Little Rock. He served another term in the House from 1968 to 1970, representing parts of Pulaski and Perry counties. He was a member of the Arkansas Bar Association and served on the Judicial Nominations, Legal Services, Appellate Practice and Civil Procedure Committees. He is survived by his wife Phyllis. Eddie Christian Jr. Eddie Christian Jr. of Fort Smith died August 9, 2010, at the age of 48. He was an attorney at Christian & Byars law firm in Fort Smith. He earned a juris doctorate from the University of Arkansas at Fayetteville School of Law. He was a member of the Arkansas Bar Association, American Bar Association, the Arkansas Trial Lawyers Association and the National Association of Criminal Defense Lawyers. He is survived by his wife, Sara Christian; daughter, Regan Christian; and parents, Betty and Eddie Christian, Sr.
Vol. 45 No. 4/Fall 2010 The Arkansas Lawyer
In Memoriam William Henry Enfield William Henry Enfield of Bentonville died August 23, 2010, at the age of 89. He completed his first year of law school at the University of Arkansas at Fayetteville School of Law before enlisting in the U.S. Marine Corps reserve officers training, according to an obituary in the Arkansas Democrat Gazette. Serving in the South Pacific Theater in 1942, he participated in the Battle of Midway and the Battle of Bougainville. After a brief stint in Washington, D.C., where he worked at the office of the Secretary of the Navy, he returned to Fayetteville and earned a juris doctorate degree in 1948. Following graduation, he established a law practice in Bentonville and taught parttime at the University of Arkansas. He was appointed by Governor Sid McMath to finish an unfulfilled term as Benton County judge. When the 13-month appointment ended he partnered with Clayton Little to form the law firm of Little and Enfield. In 1968, he was elected circuit judge and initially held court in Benton, Madison and Carroll counties. He was never opposed for re-election during the 20 years he served. He is survived by a son Bill Enfield and daughter Letitia Letson. Albert Leigh Tenney Albert Leigh Tenney of North Little Rock died September 1, 2010, at the age of 85. He earned a Bachelor of Arts from the University of Arkansas at Fayetteville and a juris doctorate from the University of Arkansas School of Law. He served with Company I in the 271st Infantry Regiment, 69th Infantry Division during World War II, according to an obituary in the Arkansas Democrat Gazette. He was awarded the Combat Infantryman’s Badge, two Battle Stars, European/African/Middle Eastern Theater Ribbon and two Bronze Stars. He served as the standing Chapter 13 Trustee for 33 years and the Chapter 12 Trustee for nine years. He was a charter member of the National Association of Chapter 13 Trustees and served as president and the Board of Directors. He was awarded a fellow in the American College of Bankruptcy. He was a member of the Arkansas Bar Association. He is survived by his wife, Mae; and daughter, Dinda Hemphill. William (Brooks) Clower, Jr. William (Brooks) Clower, Jr. of Fayetteville died August 5, 2010, at the age of 52. He 50
The Arkansas Lawyer
earned a bachelor’s degree and a master’s degree in geology from the University of Arkansas at Fayetteville and a juris doctorate from the University of Arkansas School of Law. Following graduation, he worked at Southwestern Energy Co. where he became senior attorney during his 15-year tenure, according to an obituary in the Arkansas Democrat Gazette. He then worked for Wal-Mart as an environmental/real estate attorney until 2003. He was a member of the Arkansas Bar Association where he served as Chair of the Natural Resource Law Section in 2002 and served on the Environmental Law Section. He is survived by his mother, Janet Clower; his wife, Janet; and children, Williams Brooks and Evan Asbury Clower. Dan Moody Burge Dan Moody Burge of Blytheville died July 14, 2010, at the age of 83. He earned a juris doctorate degree from the University of Arkansas at Fayetteville School of Law. He began his practice in Blytheville in 1952 with the late Max B. Reid and was active in practice for over 50 years. He served as special Associate Justice of the Arkansas Supreme Court on several occasions and served six years as a member and chairman of the state board of law examiners, according to an obituary in the Arkansas Democrat Gazette. He was a member of the Arkansas Bar Association and served on the Financial Institutions Section. In 1998 he was named the Outstanding Defense Attorney of the Year by the Arkansas Association of Defense Counsel. At the time of his retirement he was senior managing partner in the firm of Reid, Burge, Prevallet & Coleman. He served in the U.S. Navy during World War II on the battleship U.S.S. Arkansas and participated in the atomic bomb test at Bikini when it was sunk. He is survived by his wife, Crete Mooody Burge and daughter, Danece Burge. Hugh Longino, Jr. Hugh Longino, Jr. of Texarkana, Arkansas, died August 1, 2010, at the age of 82. He attended Hendrix College for one year until he accepted an appointment to the United States Naval Academy in 1949, according to an obituary in the Arkansas Democrat Gazette. He completed advanced seaplane training and the school of Naval Photography and served in numerous operations overseas and in combat. He retired from the U.S. Navy in 1975 with
the rank of Captain. He earned numerous medals including Meritorious Service Medal and World War II Victory Medal. He earned a master’s of science degree in business administration from George Washington University and a juris doctorate from the University of Arkansas at Fayetteville School of Law. He practiced law in Fayetteville. He was a member of the Arkansas Bar Association and served on the 100 Hours for 100 Years Committee. He is survived by his wife, Phyllis Longino; and sons, William and James Longino. Gregory Louis Yeatman Gregory Louis Yeatman of Little Rock died July 19, 2010, at the age of 52. He earned a bachelor’s degree in economics from Southwestern College (now Rhodes) in Memphis, TN. He earned a bachelor’s degree in civil engineering from Georgia Tech University. He worked as a professional engineer before earning a juris doctorate from the University of Arkansas School of Law. He founded his own law firm Yeatman & Associates according to an obituary in Arkansas Democrat Gazette. He was a member of the Arkansas Bar Association and served on the Environmental, Natural Resources and Business Law Sections. He is survived by Virginia Marr Yeatman; and children, Carrie Ellen and Christopher Louis Yeatman. Judge Henry Samuel Wilson Judge Henry Samuel Wilson of Trumann died September 18, 2010, at the age of 90. He graduated from the University of Wyoming and earned a juris doctorate from Vanderbilt School of Law in 1951. Following graduation, he went into private practice with the firm of Reeves and Smith in West Memphis. In 1958 he moved his practice to Trumann until 1973 when he was appointed to fill the remainder of the term of Circuit Judge Charles Light of Paragould, according to an obituary in the Blytheville Courier News. At the end of that term he was elected to the Second Chancery Circuit. He served as chancellor for 11 years until his retirement in 1986. He then completed the unexpired term of Trumann’s municipal court judge in 1987 where he served until 1996. A veteran of World War II, Judge Wilson served in the U.S. Army in the 2nd Signal Service Battalion. He is survived by his wife of 67 years, Carlene Wilson; and a daughter, Myra Jane Biggers.
Arkansas Bar Foundation Memorials and Honoraria The Arkansas Bar Foundation acknowledges with grateful appreciation the receipt of the following memorial, honorarium and scholarship contributions received during the period July 1, 2010 through September 30, 2010: In Memory of Doug Anderson Designated to the Ernest G. Lawrence Scholarship Fund Judge James G. Mixon In Memory of Judge Carol C. Anthony Justice Robert L. and Charlotte Brown Edward T. Oglesby
In Memory of Paul W. “Pete” Hoover Ben F. Arnold In Memory of Judge John Purtle Judge William R. Wilson, Jr. and Cathi Compton In Memory of Judge Russell L. “Jack” Roberts Judge William R. Wilson, Jr. and Cathi Compton
In Memory of Dan Burge Branch, Thompson, Warmath & Dale, P.A.
In Memory of H. Y. Rowe Dennis and Jane Shackleford
In Memory of Jim E. Burnett Judge John R. Scott In Memory of Eddie N. Christian, Jr. Rex M. Terry In Memory of Judge William H. Enfield Justice Robert L. Brown Judge James G. Mixon* Fred S. Ursery
In Memory of Ann L. Sharp James D. Sprott, P.A. In Memory of Albert Leigh Tenney Designated to the Ernest G. Lawrence Scholarship Fund Judge James G. Mixon In Memory of Judge Henry Wilson Judge John M. Pittman
In Memory of Jo Carol Gill Arkansas Supreme Court Committee on Model Jury Instructions – Civil
In Memory of Gregory Louis Yeatman Edward T. Oglesby *Designated to the Ernest G. Lawrence Scholarship Fund
Memorial Gifts Please remember the Arkansas Bar Foundation when you choose to make a memorial gift honoring a family member, a colleague or a friend of the profession. Acknowledgements are sent by the Foundation to the family advising them of the contribution. The Foundation also receives and acknowledges gifts honoring individuals for a special event in their lives. Gifts to the Foundation are tax deductible for federal income tax purposes and support the Foundation’s work in making scholarship funds available for law students, aiding in education of the public about legal matters, supporting projects that assist in improving and facilitating the administration of justice and funding other law-related charitable efforts. Contributions may be sent directly to the Arkansas Bar Foundation at 2224 Cottondale Lane, Little Rock, Arkansas 72202. The staff appreciates having the name of the family member to whom acknowledgments should be sent. Please feel free to call the Arkansas Bar Foundation at 501.375.4606 or 800.609.5668 for further information.
Vol. 45 No. 4/Fall 2010 The Arkansas Lawyer
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