THL_SeptOct_2010

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Advising Boards of Directors on Compliance with Dodd-Frank Preventing Boilerplate Provisions from Bubbling Over Corporation or Partnership? Offshore Drilling: How to Survive in the New Regulatory Environment BOEMRE in the Aftermath of the Deepwater Horizon

lawyer

THE HOUSTON

inside...

Volume 48 – Number 2

September/October 2010

Corporate & Tax Law


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contents Volume 48 Number 2

September/October 2010

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FEATURES Boards of Directors on 10 Advising Compliance with Dodd-Frank:

Focus on Executive Compensation and Corporate Governance Matters By Aaron J. Scheffler, Jonathan B. Newton and Maidie Ryan

Watched Pot Never Boils: 18 APreventing Boilerplate Provisions from Bubbling Over By Liz Klingensmith and Larry Huelbig

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or Partnership? 22 Corporation Proposed Federal Tax May Affect Your Choice

By Barbara S. de Marigny

Drilling in the 24 Offshore Gulf of Mexico How to Survive in the New Regulatory Environment

By Zack A. Clement and R. Andrew Black

Changes to the Minerals 30 Major Management Service and

Off-Shore Drilling Regulation in the Aftermath of the Deepwater Horizon Explosion

The Houston Lawyer

By Robert Painter

The Houston Lawyer (ISSN 0439-660X) is published bimonthly by The Houston Bar Association, 1300 First City Tower, 1001 Fannin St., Houston, TX 77002-6715. Periodical postage paid at Houston, Texas. Subscription rate: $12 for members. $25.00 non-members. POSTMASTER: Send address changes to: The Houston Lawyer, 1300 First City Tower, 1001 Fannin, Houston, TX 77002. Telephone: 713-759-1133. All editorial inquiries should be addressed to The Houston Lawyer at the above address. All advertising inquiries should be addressed to: Quantum/SUR, 12818 Willow Centre Dr., Ste. B, Houston, TX 77066, 281-955-2449 ext 16, www.thehouston lawyer.com, e-mail: leo@quantumsur.com Views expressed in The Houston Lawyer are those of the authors and do not necessarily reflect the views of the editors or the Houston Bar Association. Publishing of an advertisement does not imply endorsement of any product or service offered. For article REPRINTS, please contact Wright’s Reprints: 1-877-652-5295. ©The Houston Bar Association, 2010. All rights reserved.

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September/October 2010

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contents Volume 48 Number 2

September/October 2010

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departments Message 6 President’s You Should Try It! By T. Mark Kelly the Editor 8 From That Ever-changing

Legal Environment By John S. Gray

Spotlight 36 Committee Law and the Media Committee By Joy Sanders

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Reviews 38 Media Now Playing at a Theater Near You (And Featuring Houston Attorney Charles Foster)

By Keri D. Brown and Joy E. Sanders

Rainmaking 101 How to Grow Your Client Base & Maximize Your Income Reviewed by Angela L. Dixon

Bond Daddy Reviewed by Nicole S. Soussan Trends 41 Legal Massive Fines and Puni-

Cows:“Legal Thuggery” Might Now Affect Exemplary Damages By Erin Reed

Kagan Confirmation Contentiousness Continues Partisan Trend By Edward C. Dawson the Record 43 OffCharting a New Path–

at High Speeds

By Hannah Sibiski

44 At the Bar Profile in Professionalism: 46 AJUSTICE KEM THOMPSON FROST The Houston Lawyer

Fourteenth Court of Appeals

47 Placement Service 48 Litigation MarketPlace 4

September/October 2010

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Join the Houston Bar Association’s 100 Club The Houston Bar Association 100 Club is a special category of membership that indicates a commitment to the advancement of the legal profession and the betterment of the community. The following law firms, corporate legal departments, law schools and government agencies with five or more attorneys have become members of the 100 Club by enrolling 100 percent of their attorneys as members of the HBA. Firms of 5-24 Attorneys Abraham, Watkins, Nichols, Sorrels, Agosto & Friend Abrams Scott & Bickley, L.L.P. Adair & Myers PLLC Ahmad, Zavitsanos & Anaipakos, P.C. Ajamie LLP Allen Boone Humphries Robinson LLP Andrews Myers Coulter & Hayes, P.C. Bair Hilty, P.C. The Bale Law Firm, PLLC Barker Lyman, P.C. Bateman/Pugh, PLLC Bell, Ryniker & Letourneau, P.C. Berg & Androphy Bingham, Mann, House & Gibson Brown McCarroll L.L.P. Buck Keenan LLP Burck, Lapidus, Jackson & Chase, P.C. Bush & Ramirez, L.L.C. Butler I Hailey Caddell & Chapman Cage Hill & Niehaus, L.L.P. Campbell & Riggs, P.C. Christian Smith & Jewell, L.L.P. Cochran Baker Williams & Matthiesen LLP Cokinos Bosien & Young Conley Rose P.C. Connelly • Baker • Wotring LLP Cooper & Scully, P.C. Cozen O’Connor Crady, Jewett & McCulley, LLP Currin, Wuest, Mielke, Paul & Knapp, PLLC David Black & Associates De Lange Hudspeth McConnell & Tibbets LLP Devlin Naylor & Turbyfill PLLC Diamond McCarthy LLP Dinkins Kelly Lenox Lamb & Walker, L.L.P. Dobrowski L.L.P. Dow Golub Remels & Beverly, LLP Doyle Restrepo Harvin & Robbins, L.L.P. Drucker, Rutledge & Smith, L.L.P. Ebanks Taylor Horne L.L.P. Ellis, Carstarphen, Dougherty & Griggs P.C. Essmyer, Tritico & Rainey, L.L.P. Fibich Hampton & Leebron, L.L.P. Fisher, Boyd, Brown & Huguenard, LLP Fizer Beck Webster Bentley & Scroggins, P.C. Fleming & Associates L.L.P. Foreman DeGeurin & Nugent Frank, Elmore, Lievens, Chesney & Turet, L.L.P. Fullenweider Wilhite PC Funderburk & Funderburk, L.L.P. Galloway Johnson Tompkins Burr & Smith Germer Gertz, L.L.P. Givens & Johnston PLLC

Goldstein, Faucett & Prebeg, L.L.P. Gordon & Rees LLP Hagans Burdine Montgomery & Rustay, P.C. Harris, Hilburn & Sherer Harrison, Bettis, Staff, McFarland & Weems, L.L.P. Hays McConn Rice & Pickering, P.C. Hicks Thomas LLP Hirsch & Westheimer, P.C. Hogan Lovells US LLP Holm I Bambace LLP The Hudgins Law Firm Jackson Gilmour & Dobbs, PC Jenkins Kamin, L.L.P. Johnson, DeLuca, Kennedy & Kurisky, P.C. Johnson Radcliffe Petrov & Bobbitt PLLC Johnson, Trent, West & Taylor, L.L.P. Jones, Walker, Waechter, Piotvent, Carrere & Denegree, L.L.P. Joyce, McFarland + McFarland LLP Kane Russell Coleman & Logan PC Kasowitz Benson Torres & Friedman LLP Kelly Hart & Hallman, LLP Kelly, Sutter & Kendrick, P.C. Linebarger Goggan Blair & Sampson LLP Liskow & Lewis Lorance & Thompson, PC MacIntyre & McCulloch, LLP Manning, Gosda & Arredondo, L.L.P. McGinnis Lochridge & Kilgore LLP McLeod Alexander Powel & Apffel PC MehaffyWeber PC Mills Shirley L.L.P. Morris Lendais Hollrah & Snowden Munsch Hardt Kopf & Harr, P.C. Nathan Sommers Jacobs Nickens Keeton Lawless Farrell & Flack LLP Ogden, Gibson, Broocks, Longoria & Hall, LLP Ogletree, Deakins, Nash, Smoak & Stewart, P.C. Pagel Davis & Hill PC Perdue Brandon Fielder Collins & Mott Phelps Dunbar LLP Phillips & Akers, P.C. Pillsbury Winthrop Shaw Pittman LLP Ramey, Chandler, McKinley & Zito Ramsey & Murray PC Roberts Markel P.C. Ross, Banks, May, Cron & Cavin, P.C. Rusty Hardin & Associates, P.C. Rymer, Moore, Jackson & Echols, P.C. Schirrmeister Diaz-Arrastia Brem LLP Schwartz, Junell, Greenberg & Oathout, LLP Schwartz, Page & Harding L.L.P. Seyfarth Shaw LLP Shannon Martin Finkelstein & Alvarado, P.C. Shepherd, Scott, Clawater

& Houston, L.L.P. Shipley Snell Montgomery LLP Short Carter Morris, LLP Singleton Cooksey LLP Slusser Wilson & Partridge LLP Smith & Carr, P.C. Smith Murdaugh Little & Bonham, L.L.P. Smyser Kaplan & Veselka, L.L.P. Sprott, Rigby, Newsom, Robbins & Lunceford, P.C. Steele Sturm P.L.L.C. Strong Pipkin Bissell & Ledyard, L.L.P. Sutherland Asbill and Brennan LLP Tekell, Book, Allen & Morris, L.L.P. Thompson & Horton LLP Thompson, Coe, Cousins & Irons, LLP Tucker, Taunton, Snyder & Slade, P.C. Ware, Jackson, Lee & Chambers, L.L.P. Watt Beckworth Thompson & Henneman, LLP Westmoreland Hall Maines & Lugrin PC Weycer Kaplan Pulaski & Zuber, P.C. White Mackillop & Gallant P.C. Williams, Birnberg & Andersen, L.L.P. Williams Kherkher Hart Boundas LLP Williams Morgan & Amerson, P.C. Willingham, Fultz & Cougill, LLP Wilson, Cribbs & Goren, P.C. Wilson, Elser, Moskowitz, Edelman & Dicker Wong, Cabello, Lutsch, Rutherford & Brucculeri, P.C. Wright Brown & Close, L.L.P. Yetter Coleman LLP Ytterberg | Deery LLP Zimmerman, Axelrad, Meyer, Stern & Wise, P.C. Zukowski, Bresenhan & Sinex, L.L.P. Firms of 25-49 Attorneys Baker & McKenzie LLP Beck Redden & Secrest, L.L.P. Gibbs & Bruns LLP Greenberg Traurig, LLP Hoover Slovacek LLP Hughes Watters Askanase LLP Jones Day Littler Mendelson, PC Looper Reed & McGraw, P.C. Morgan, Lewis & Bockius LLP Olson & Olson LLP Susman Godfrey LLP Firms of 50-100 Attorneys Akin Gump Strauss Hauer & Feld LLP Baker Hostetler LLP Beirne, Maynard & Parsons, L.L.P. Chamberlain Hrdlicka White Williams & Martin Coats I Rose Gardere Wynne Sewell LLP Howrey LLP Jackson Walker L.L.P.

King & Spalding LLP Martin, Disiere, Jefferson & Wisdom, L.L.P. Porter & Hedges LLP Thompson & Knight LLP Winstead PC Firms of 100+ Attorneys Andrews Kurth LLP Baker Botts L.L.P. Bracewell & Giuliani LLP Fulbright & Jaworski L.L.P. Haynes and Boone LLP Locke Lord Bissell & Liddell LLP Vinson & Elkins LLP Corporate Legal Departments Anadarko Petroleum Corporation AT&T Texas BP CenterPoint Energy El Paso Corporation Kellogg Brown & Root Inc Lyondell Petrochemical Company MAXXAM Inc Newfield Exploration Company Petrobras America Inc. Plains Exploration & Production Co. Pride International Inc. Rice University Sysco Corporation Texas Children’s Hospital Total E&P USA Inc. University of Houston System Law School Faculty South Texas College of Law Thurgood Marshall School of Law University of Houston Law Center Government Agencies City of Houston Legal Department Harris County Attorney’s Office Harris County District Attorney’s Office Harris County Domestic Relations Office Metropolitan Transit Authority of Harris County Texas Port of Houston Authority of Harris County Texas


president’s message

By T. Mark Kelly Vinson & Elkins LLP

You Should Try It!

The Houston Lawyer

R

eturning on the plane from the Middle East this week, I reflected on the first four months of my term as president of the HBA. One of the questions often asked is, “What do you do at the Bar, and is there a way for me to be involved?” One of the primary focuses of the HBA is serving low-income residents through the Houston Volunteer Lawyers Program (HVLP), the Dispute Resolution Center and many other programs. According to 2009 Census Bureau statistics, nearly 57 million Americans now qualify for civil legal assistance from programs such as our HVLP. That is an increase of 3 million from 2008 and the highest number of people eligible for legal aid in our country in the 35-year history of the Legal Service Corporation (LSC), set up to provide federal funds to legal aid providers. Even more disturbing, 19.6 million are children. Looking at statistics closer to home, the Texas Equal Access to Justice Foundation (TEAJF) reports there are 5.3 million people in Texas who qualify for legal aid, yet our state ranks 39th in the nation in per capita revenue for the provision of civil legal aid. We are meeting only 20-25 percent of the need. The HVLP is funded in part by the TEAJF, but a primary source is the Houston Bar Foundation. So, there are a number of ways that you can be involved that will make a positive difference in the Bar’s focus on providing pro bono services to low-income residents of Harris County. • If you are a member of a law firm or corporate legal department, encourage your organization to become an HBA Equal

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September/October 2010

• Help a veteran through the HBA’s VeterAccess Champion. This is a program in ans Legal Initiative. You can volunteer which law firms and legal departments for the legal clinics held every Friday commit to handle a certain number of afternoon at the Michael E. DeBakey pro bono cases through the HVLP each VA Medical Center; year, for five years. you can volunteer for The level of com“...there are a number Saturday legal clinics mitment depends of ways that you can held twice a year at on the number of American Legion and attorneys in your be involved that will VFW halls; or you can firm or legal departmake a positive difference volunteer to handle a ment. The Equal pro bono case or apAccess Champiin the Bar’ s focus on peal for a veteran dions program is virectly through HVLP. tal to the success providing pro bono Since 2008, over 3,000 of HVLP. Because services to low-income veterans have received of this program, services through this HVLP has been residents of program. You can read able to increase its Harris County.” more about the initiarepresentation of tive and opportunities poor Houstonians to help our veterans on the HBA Web from approximately 1,000 cases a year site, www.hba.org. to nearly 2,400. It is also good market• Underwrite the Harvest Party, the main ing for your organization. Your name fundraising event for the Houston Bar appears in every Houston Bar Bulletin, Foundation, set for November 15 at Rivevery issue of The Houston Lawyer, on er Oaks Country Club. It is the most imthe HBA Web site, and even in the lobby portant thing lawyers in our community of the HBA office. can support financially during the year. • If you are a solo practitioner, you can One hundred percent of the net proceeds also become an Equal Access Champion from underwriting go to the Houston Bar if you agree to handle just one pro bono Foundation, which allows us to continue case for HVLP each year, for five years. to fund the Houston Volunteer Lawyers Solos and firms with fewer than five atProgram and the services it provides to torneys make up a significant percentage poor Houstonians. As of last week, we of the Equal Access Champions. had raised $475,000, but were $50,000 • If you or your firm is already an Equal short of reaching our goal. Access Champion, sign on again for an• If you can’t underwrite, buy tickets to other five years. In 2011, it will be time the Harvest Party. Ticket sales cover the for all our charter firms and individuexpenses for the party, which allows the als to re-commit to equal access for all underwriting to go directly to the FounHoustonians. Make sure your organizadation. For $110 per person, you get tion continues its support.

thehoustonlawyer.com


food, drink and the camaraderie of your friends in the legal profession. Visit the HBA Web site for a ticket order form. • Call HVLP at 713-228-0735 and tell them you want to accept a pro bono case on your own. Handle a divorce for an abused spouse, prepare a will for an elderly person, help someone get their disability benefits or keep their home. There are as many different types of cases as there are types of legal problems. If every lawyer in Harris County handled one pro bono case every year, we could quickly wipe out the critical status of legal services in our area. With all the demands on our time, I know adding more activities to a person’s schedule can sometimes be daunting. Two events I participated in during September reminded me of how spending a little time in the service of others is so worthwhile. On September 12, the HBA provided a wills clinic at Ellington Air Force Base, and close to 90 Marine Reservists were given peace of mind in settling some of their affairs before their deployment. Attorneys from 15 law firms and legal departments prepared the wills, while 36 lawyers and 36 notaries volunteered a part of their Sunday to execute the documents in this worthwhile endeavor. I found it uplifting to visit with these brave individuals about their lives and their dreams. The next week, I read to four classes of 2nd graders on Constitution Day about the Bill of Rights. Unbeknownst to me, two television stations showed up to film the event, and afterward I was asked why I would teach the Constitution to kids at such an early age. I noted how quick their minds are and how honest and uninhibited their questions were. Besides, where else after a lecture do you have people fill the front of the classroom eager to hear what you have to say (as opposed to the back row) and come up after to give you a hug! Without question, involving yourself in a pro bono activity is invigorating, and I believe you will find it infectious. Having done it once, you will want to do more. You should try it. thehoustonlawyer.com

September/October 2010

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from the editor

By John S. Gray Gardere Wynne Sewell LLP

Associate Editors

Keri Brown Baker Botts L.L.P.

Catherine Le Law Firm of Catherine Le

Robert W. Painter The Painter Law Firm

The Houston Lawyer

Don Rogers Harris County District Attorney’s Office

Tamara Stiner Toomer Attorney at Law

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That Ever-changing Legal Environment

O

ne of the goals of The Houston Lawmoratorium, and the resultant transformation of the yer is to help Houston Bar AssociaMMS into the BOEMRE (you will have to read the artion members fulfill their obligation to ticles to learn what these acronyms mean). keep current with the changes taking In addition to these substantive articles, be sure to place in the legal environment by pubread our Legal Trend on exemplary damages, Spotlight lishing articles on topics or issues that on the HBA’s Law and the Media Committee, Off the Rewe believe are important. Most of cord on attorney Ned Barnett and the articles printed in The HousMedia Review on Houston attorney “In this issue, ton Lawyer or available online at Charles Foster and the compelwe strive to achieve www.thehoustonlawyer.com were ling film Mao’s Last Dancer, about chosen because they help hone our a promising young ballet dancer that goal by focusing practice skills, increase our knowlfrom China, Li Cunxin, who joined edge of the corpus of the law, assist the Houston Ballet in the 1980s for on two topics of us in maintaining our workloads, three months as part of a cultural substantive law— help develop client relationships, exchange program and decided he provide assistance to those in need did not want to return to China. corporate and taxation.” in our communities or teach us The film focuses on his efforts to where we have been and perhaps where we should be stay in Houston and the lawyering of Charles Foster to heading. Given that Houston is the nation’s energy cenhelp him realize his dream. ter, it is important that Houston lawyers keep abreast of Tamara Stiner Toomer, an associate editor of The the ever-changing legal environment we are facing; not Houston Lawyer, has done an excellent job of coordinatonly for the energy, refining and petrochemical indusing this issue as our guest editor. She deserves our gratitries, but all other industries you may represent, as well tude and thanks for her efforts. Without her assistance as the people working and living in Houston. and the work of all the members of The Houston Lawyer In this issue, we strive to achieve that goal by focusing editorial board, the continued publication of this fine on two topics of substantive law—corporate and taxamagazine would not be possible. Likewise, we are gratetion. Towards that end, we bring you five feature articles ful for the continued commitment of the advertisers that that not only provide insightful perspectives on the corsupport this magazine. Due to the efforts of the editopus of the law, but also focus on timely issues and legal rial board; dedicated HBA staff such as managing editor, changes that will affect many practices in Houston as the Tara Shockely and executive director, Kay Sim; our pubgovernment reacts and responds to the explosion of the lisher, Quantum/SUR Inc.; and the many companies and Deepwater Horizon drilling rig and resulting oil spill. individuals who advertise in The Houston Lawyer, we Included in this issue are articles on complying with the are able to provide the nearly 12,000 Houston Bar Asrecently enacted Dodd-Frank Wall Street Reform and sociation members with a professional, award-winning Consumer Protection Act, a discussion of problems aspublication. Please take a few moments to look at the sociated with using boilerplate contractual provisions, advertisers in this magazine, give them a call, and then proposed taxation changes that may affect your client’s use their products and services when possible. Your pachoice of corporation/partnership, the offshore drilling tronage will keep our journal alive and growing.

September/October 2010

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BOARD OF DIRECTORS President

Secretary

T. Mark Kelly

David A. Chaumette

President-Elect

Treasurer

Denise Scofield

Brent A. Benoit

First Vice President

Past President

M. Carter Crow

Barrett H. Reasoner

Second Vice President

Laura Gibson

DIRECTORS (2009-2011)

Alistair B. Dawson Jennifer A. Hasley

Benny Agosto, Jr. Warren W. Harris

Hon. David O. Fraga Daniella D. Landers

DIRECTORS (2010-2012) Todd M. Frankfort John Spiller

editorial staff Editor in Chief

John S. Gray Associate Editors

Keri D. Brown Robert W. Painter Tamara Stiner Toomer

Catherine Le Don Rogers

Editorial Board

Julie Barry Angela Dixon Dori Kornfeld Goldman Farrah Martinez Caroline C. Pace Joy E. Sanders Hannah Sibiski Mark R. Trachtenberg N. Jill Yaziji

Sharon D. Cammack Don D. Ford III Al Harrison Judy L. Ney Maidie Ryan Mark Schuck Lisa Brindle Talbot Gary A. Wiener

Managing Editor

Tara Shockley

HBA office staff Membership and Technology Services Director

Executive Director

Kay Sim Administrative Assistant

Ashley G. Steininger Administrative Assistant

Ronald Riojas Membership Assistant

Billy Salinas

Bonnie Simmons

Committees & Events Director

Receptionist/Resource Secretary

Miguel Trevino

Lucia Valdez

Committees & Events Assistant

Director of Education

Ashley Sugg

Lucy Fisher Communications Director

Communications Assistant/Web Designer

Tara Shockley

Brooke Eshleman

Advertising sales Design & production QUANTUM/SUR

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Advising Boards O of Directors on Compliance with Dodd-Frank: Focus on Executive Compensation and Corporate Governance Matters

By Aaron J. Scheffler, Jonathan B. Newton and Maidie Ryan

n July 21, 2010, President Obama signed the “Dodd-Frank Wall Street Reform and Consumer Protection Act” (the “Act”). Portions of the Act were effective immediately, while others have delayed effective dates or require the SEC to adopt implementing regulations. This article focuses on the executive compensation and corporate governance provisions under the Act applicable to public companies registered under the Securities Exchange Act of 1934 (the “Exchange Act”) and provides practical suggestions that boards of directors may wish to consider. The key executive compensation and corporate governance provisions under the Act include the following: • Allow shareholders to have a nonbinding advisory vote on compensation packages of key executives not less than once every three years. • Allow shareholders to have a nonbinding advisory vote on golden parachute payments in conjunction with certain business combinations. • Require companies to implement policies to “clawback” incentive compensation from current and former executives if there is an accounting restatement due to material noncompliance with financial reporting requirements, with a three-year look-back period. • Require enhanced disclosure in proxy statements regarding executive compensation. • Provide heightened independence requirements for compensation committee members and disclosure requirements regarding their relationship with compensation consultants and any conflicts of interest. • Provide new independence standards for compensation consultants, law firms and other advisers to compensation committees.


• Authorize the SEC to implement shareholder proxy access for the election of directors. • Prohibit broker discretionary voting in director elections, executive compensation or other significant matters to be determined by SEC rulemaking. It should be noted that mandatory majority voting in director elections was originally included in the Senate version of the Act but was not included in the final legislation. Say-On-Pay - Executive Compensation The Act requires companies to provide shareholders with a nonbinding advisory vote on compensation packages of key executives at least once every three years. In addition, shareholders are entitled to determine, at least once every six years, the frequency (once every one, two or three years) with which such advisory vote on executive compensation must be sought. Although the vote is nonbinding, a negative vote would send a message to the company and may be indicative of future results for votes for directors that are members of the company’s compensation committee. Both resolutions on executive compensation must be included in proxy statements for shareholder meetings occurring six months after July 21, 2010, the date of enactment of the Act (the “Date of Enactment”). No further SEC rulemaking is required in order for this say-on-pay legislation to take effect. In order to assist companies in implementing these new requirements, we offer the following: • Engage in a dialogue with shareholders and proxy advisory firms. New processes should be implemented to communicate with shareholders and proxy advisory firms regarding compensation programs, provided that companies adhere to the prohibition against selective disclosure under Regulation FD. • Explain philosophy behind all compensation. Provide specific information in SEC filings and in dialogues with

shareholders regarding the rationale for all compensation being paid, including differences in compensation paid to executive officers versus other employees. • Review compensation arrangements. Review the current compensation arrangements to ensure that they correlate with stated objectives, including pay for performance that your board intends to be incentivized. Say-On-Pay - Golden Parachute Payments The Act provides that in any proxy statement where shareholders are asked to approve an acquisition, merger, consolidation, sale or other disposition of all or substantially all the assets of an issuer, the company must: i. Disclose any agreements or understandings it has with any named executive officers concerning any compensation payments (whether present, deferred or contingent) that are based on or otherwise relate to the transaction and the aggregate total of all such compensation (including conditions, if any) that may be paid or become payable; and ii. Provide shareholders with a separate nonbinding advisory vote to approve such agreements and the compensation payments disclosed. Such advisory vote is non-binding and is not required if such payments have already been subject to the general say-on-pay on executive compensation described above. The golden parachute say-on-pay resolution must be included in proxy statements for shareholder meetings occurring six months after the Date of Enactment. Within six months following the Date of Enactment, the SEC will implement further rules regarding say-on-pay for golden parachute payments. In order to assist companies in implementing these new requirements, we offer the following: • Review what pay practices or executive rights would be considered a payment for purposes of the new rule. Relevant

payments could be everything from rights under employment agreements to severance plans to deferred compensation arrangements to stock option and restricted stock grants. • Consider whether your pay practices need to be more integrated and rationalized. Most companies implement pay programs one-at-a-time and don’t look at the interrelation of the programs. Consider all the cumulative rights these plans create; disclosure may be needed to explain why certain practices exist or modifications may be needed to harmonize all compensation elements. Clawbacks The Act requires a company to implement and disclose its policy on incentive-based compensation and recoup (clawback) incentive-based compensation (including stock option or restricted stock awards) from any current or former executive officer in the event of an accounting restatement as a result of the company’s “material noncompliance” with any financial reporting requirement under the securities laws. The amount recoverable is the excess over what would have been paid under the accounting restatement, with a three-year look-back period. “Material compliance” is not defined under the Act but may be clarified in the implementing SEC regulations. Misconduct is not required. As the Act requires the SEC to direct the national securities exchanges to implement listing standards that require listed companies to have clawback policies, further NYSE and NASDAQ rulemaking is required before these provisions take effect. In order to assist companies in implementing these new requirements, we offer the following: • Craft clawback policy and prepare corresponding disclosure. Implement a policy that provides clear guidelines regarding the recoupment of incentive compensation from current and former executive officers and prepare the corresponding disclosure in the proxy statement.

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September/October 2010

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• Review existing compensation arrangements, including incentive plans and employment agreements for any necessary modifications. Review incentive plans and forms of award letters or agreements to determine whether explicit provisions outlining the clawback should be added and whether changes in employment agreements or other agreements need to be implemented. Determine if such modifications or implementation of a clawback policy would trigger severance payments (e.g., “right to terminate employment for good reason.”) Disclosure on Executive Compensation The Act requires the following disclosure on executive compensation: i. The (i) median of the annual total compensation of all employees other than the CEO, (ii) annual total compensation of the CEO and (iii) ratio of such median employee annual total compensation to the CEO annual total compensation; ii. Enhanced disclosure on the relationship between executive compensation actually paid and the financial performance of the company, taking into account any change in the value of the shares of stock and dividends of the company; such disclosure may include a graphic representation of the required information to be disclosed; iii. Enhanced disclosure of the reasons why a company has chosen the same (or different) persons as Chairman and CEO; and iv. Disclosure as to whether any employee or director (or designee) is permitted to purchase financial instruments that are designed to hedge or offset any decrease in the market value of the equity securities granted to such employee or director as part of such employee or director’s compensation, or held, directly or indirectly, by such employee or director. While the disclosure of each of the above items is required in a company’s annual proxy statement, the disclosure of 12

September/October 2010

the CEO’s pay versus the median pay of employees is also required in all SEC filings set forth in Item 10(a) of Regulation S-K, including registration statements and 10-K annual reports. The Act directs the SEC to enact new rules regarding this enhanced executive compensation disclosure within 180 days of the Date of Enactment, so companies should continue to monitor new disclosure requirements. In order to assist companies in implementing these new requirements, we offer the following: • Prepare ratio of CEO pay versus employee pay. Calculate and analyze the ratio of CEO total compensation in relation to the median total compensation for all other employees for the past fiscal year. Consider the disclosures that will need to be made to explain the differences in compensation. In doing so, consider the following: –– Total compensation is defined in Item 402(c)(2)(x) of Regulation S-K, and includes salary, bonuses, values of equity awards, perquisites and all other compensation. –– Review the elements of CEO total compensation as calculated in the current Summary Compensation Table. • Prepare enhanced disclosure on executive compensation for 2011 proxy statement. Review last year’s proxy statement and consider providing greater disclosure regarding your compensation policies and alignment to financial performance. • Prepare disclosure on hedging policy. Implement a policy regarding hedging by employees and directors in respect of equity securities granted by the company or held by them and prepare the corresponding disclosure in the proxy statement. Independence of Compensation Committees, Consultants and Legal and Other Advisers The Act requires the SEC to direct the national securities exchanges to adopt listing standards that would require each

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member of a company’s compensation committee to be independent, similar to the requirements currently in place for audit committee members pursuant to Sarbanes-Oxley. Whether a member of the compensation committee would be considered independent would depend on such factors as the source of compensation paid to a compensation committee member (including any consulting, advisory, or other compensatory fee paid by the company to such member), and whether the member is affiliated with the company directly or through an affiliate or subsidiary of the company. The Act also requires that compensation consultants, legal counsel and other advisers engaged by the compensation committee be selected only after considering factors that may affect the advisers’ independence. The Act directs the SEC to identify such factors, including: i. The services by the employer of the adviser to the company; ii. The amount of fees received by the employer of the adviser to the company as a percentage of total revenue of such employer; iii. The policies and procedures of the employer of the adviser that are designed to prevent conflicts of interest; iv. Any business or personal relationship the adviser has with a member of the compensation committee; and v. Any stock of the company owned by the adviser. The company must provide appropriate funding for the compensation committee to retain compensation consultants, legal counsel or other advisers, leaving the direct responsibility for the appointment, compensation and oversight of the compensation consultant, legal counsel or other advisers to the compensation committee. The Act further requires the company to disclose in its annual proxy statement whether the compensation committee retained or obtained the advice of a compensation consultant and whether the work associated with the compensation consultant raised any conflict of interest, and, if so, the nature of


Equal Access

Champions

What does it take to become an “Equal Access Champion”? The firms and corporations listed below have signed 5-year commitment forms that indicate they will uphold a pledge to provide representation in a certain number of cases each year, based on the number of attorneys in the firm or legal department. The goal is to provide pro bono representation in at least 1,500 cases through the Houston Volunteer Lawyers Program each year, and to increase that goal each year. For more information contact Kay Sim at (713) 759-1133.

Large Firm Champions Andrews Kurth LLP Baker Botts L.L.P. Bracewell & Giuliani LLP Fulbright & Jaworski L.L.P. Locke Lord Bissell & Liddell LLP Vinson & Elkins LLP Corporate Champions Baker Hughes Incorporated BP CenterPoint Energy, Inc. ConocoPhillips Continental Airlines, Inc. Exxon Mobil Corporation Marathon Oil Company Port of Houston Authority Rosetta Resources Inc. Shell Oil Company Waste Management, Inc. Intermediate Firm Champions Akin Gump Strauss Hauer & Feld LLP Beirne, Maynard & Parsons, L.L.P. Gardere Wynne Sewell LLP Haynes and Boone, L.L.P. King & Spalding Thompson & Knight LLP Mid-Size Firm Champions Adams & Reese LLP Baker & Hostetler LLP Chamberlain, Hrdlicka, White, Williams & Martin Greenberg Traurig, LLP Howrey LLP Jackson Walker L.L.P. Jones Day

Morgan, Lewis & Bockius LLP Porter & Hedges, L.L.P. Strasburger & Price, L.L.P. Susman Godfrey LLP Weil, Gotshal & Manges Winstead PC Small Firm Champions Abraham, Watkins, Nichols, Sorrels, Agosto & Friend Beck, Redden & Secrest, L.L.P. Doyle, Restrepo, Harvin & Robbins, L.L.P. Gibbs & Bruns LLP Hays, McConn, Rice & Pickering, P.C. Hughes Watters Askanase LLP Johnson DeLuca Kennedy & Kurisky, P.C. Kroger Frisby Schwartz, Junell, Greenberg & Oathout, L.L.P Shook Hardy & Bacon, L.L.P. Sutherland Asbill & Brennan LLP Weycer, Kaplan, Pulaski & Zuber, P.C. Yetter Warden & Coleman LLP Boutique Firm Champions Abrams Scott & Bickley, L.L.P. Coane & Associates Connelly • Baker • Wotring LLP Edison, McDowell & Hetherington LLP Fullenweider Wilhite PC Funderburk & Funderburk, L.L.P. Hicks Thomas LLP Jenkins & Kamin, L.L.P. Ogden, Gibson, Broocks, Longoria & Hall, L.L.P. Squire, Sanders & Dempsey L.L.P. Strong Pipkin Bissell & Ledyard, L.L.P. Wilson, Cribbs & Goren, P.C.

Solo Champions Law Office of O. Elaine Archie Basilio & Associates Peter J. Bennett Fatima Breland Law Office of Fran Brochstein Law Office of Barbara Calderon Law Office of Robbie Gail Charette De la Rosa & Chaumette Papa Dieye The Ericksen Law Firm Frye & Cantu, PLLC Fuqua & Associates Terry L. Hart Law Office of David S. Hsu Katine & Nechman L.L.P. The Keaton Law Firm, PLLC Gregory S. Lindley Law Office of Maria S. Lowry Martin R. G. Marasigan Law Offices The Law Office of Evangeline Mitchell, PLLC The Montalvo Law Firm Morley & Morley, P.C. Bertrand C. Moser Pilgrim Law Office Robert E. Price W. Thomas (Tommy) Proctor Gwen E. Richard Law Offices of Judy Ritts Cindi L. Robison Scardino & Fazel Shortt & Nguyen, P.C. Sadler Law Firm Jeff Skarda Teal & Associates Tindall & England, P.C. Diane C. Treich Norma Levine Trusch


the conflict and how the conflict is being addressed. The disclosure regarding retention of compensation consultants and any conflicts of interest must be included in proxy statements for shareholder meetings occurring one year after the Date of Enactment. Within 360 days of the Date of Enactment, the SEC will be required to direct the national securities exchanges to implement listing standards that prohibit any listed company that is not in compliance with the compensation committee and compensation consultant requirements of the Act from listing its securities on such exchanges. The existing standards for the stock exchanges test independence through a variety of factors that might signal a potential conflict of interest and requires the issuer to make an affirmative determination that independence is satisfied. In order to assist companies in implementing these new requirements, we offer the following: • Review need for independent legal

counsel. In light of these new requirements, directors should review the current legal needs of the compensation committee and the current relationships they have with legal counsel to determine whether there is a need to engage independent legal counsel to the compensation committee. • Review independence of compensation committee members. Consider the changes that might be necessary to the composition of your compensation committee in anticipation of the heightened independence standards. • Review independence of advisers. Review the factors enumerated above to determine whether compensation consultants, legal counsel and other advisers will be deemed independent. According to the Act, this assessment is required before such adviser is retained by the compensation committee. • Review relationships with compensation consultants. Review relationships with compensation consultants to determine if any conflicts or potential

Defending Texans Since 1994 Former Assistant United States Attorney Former Assistant District Attorney Founding Member of the National College of DUI Defense of Counsel Williams Kherkher LLP Law Offices of Ned Barnett

Gulf Freeway Office: 8441 Gulf Freeway, Suite 600 • Houston, Texas 77017 Downtown Office: 440 Louisiana, Suite 800 • Houston, TX 77002

713-222-6767 • www.nedbarnettlaw.com

Board Certified in Criminal Law by the Texas Board of Legal Specialization 14

September/October 2010

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conflicts of interest exist. If conflicts or potential conflicts exist, prepare the corresponding disclosure and take steps to eliminate such conflicts. Proxy Access The Act provides that the SEC may adopt proxy access rules to facilitate the ability of shareholders to nominate directors. The SEC’s most recent proposal on proxy access in May 2009 called for a sliding ownership threshold ranging from 1 to 5 percent depending on a company’s market capitalization, as well as a one-year holding period. It is likely that the SEC will issue rules to implement the Act’s proxy access requirements in time for the 2011 proxy season. In order to assist companies in implementing these new requirements, we offer the following: • Anticipate shareholder activism. Understand your company’s shareholder base and identify significant shareholders, and engage them in regular communications.


• Anticipate the areas of concern of shareholder activists. Consider “hot” areas of shareholder activism and factors that might provide an invitation to activists to use proxy access to push for changes in corporate behavior. • Review your by-laws, nominating committee charter and any corporate governance guidelines. In light of expected SEC rulemaking to provide for shareholder proxy access, consider potential changes to your by-laws, nominating committee charter and any corporate governance guidelines to reflect the requirements that shareholders will need to meet to nominate directors. Broker Discretionary Voting The Act now prohibits broker discretionary voting with respect to director elections, executive compensation or other significant matters as will be determined by further SEC rulemaking. As a consequence, brokers may no longer vote uninstructed shares on significant proposals

such as “say-on-pay,” which increases the possibility of such proposals being voted down by shareholders. Given the risks associated with the prohibition of broker discretionary voting in these important matters and the mandate for shareholder say-on-pay, companies may wish to consider the following: • Anticipate impact of broker non-votes. Anticipate the impact of broker nonvotes and abstentions. • Examine proxy advisory policies. Review proxy advisory policies to determine the likelihood of a “vote against” or “withhold” recommendation. • Consider hiring proxy solicitation firm. If your company maintains a large retail shareholder base, consider hiring a proxy solicitation firm to “get out the vote” for director elections and sayon-pay proposals. Additional Requirements for Financial Institutions The Act imposes additional requirements on certain financial institutions, includ-

ing registered broker-dealers, with assets of $1 billion or more. Under the Act, the appropriate Federal regulators must prescribe the following regulations or guidelines no later than nine months after the Date of Enactment: i. Require the disclosure by covered financial institutions to the appropriate Federal regulator the structure of all incentive-based compensation arrangements to determine whether the compensation structure provides an executive officer, employee, director or principal shareholder with excessive compensation, fees or benefits or could lead to material financial loss to the covered financial institution; and ii. Prohibit incentive-based payment arrangements that the regulators determine encourage inappropriate risks by covered financial institutions by providing an executive officer, employee, director or principal shareholder with excessive compensation, fees or benefits or that could lead to material

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15


financial loss to the covered financial institution. Disclosure Requirements for Oil & Gas, Mining and Other Resource Extraction Companies While not directly related to executive compensation or corporate governance, the Act’s impact on the natural resource industry is of particular importance to many lawyers across the Houston area. The Act requires any company who engages in the commercial development of oil, natural gas or minerals to include in its annual reports filed with the SEC disclosure regarding any payments made by the company to the United States or a nonU.S. government, agency, instrumentality or department for the purpose of furthering the commercial development of oil, natural gas or minerals. The disclosure must include the type and total amount of such payments made for each project of the issuer and the type and total amount of such payments made to each government, agency, instrumentality or depart-

ment. The Act requires the SEC to issue final rules to enact the foregoing within 270 days after the Date of Enactment. Additionally, any company that is an operator, or has a subsidiary that is an operator, of a coal or other mine subject to the Mine Safety Act must include in each annual and quarterly report it files with the SEC detailed information regarding the safety record of each such mine for the time period covered by such report. The SEC is authorized to issue rules to carry out the purposes of the foregoing. Aaron J. Scheffler is an associate and Jonathan B. Newton is a partner in the Corporate & Securities section of the Houston office of Baker & McKenzie LLP. Maidie Ryan is the Assistant General Counsel of Seahawk Drilling, Inc. and is a member of The Houston Lawyer editorial board. Author’s Note: Roslyn Tom, a Corporate & Securities partner in the New York office of Baker & McKenzie LLP, provided valuable contributions to the content of this article.

The Texas Lawyers’ Assistance Program (TLAP) is a confidential crisis counseling and referral program that helps Texas lawyers, law students and judges who are challenged by substance use and other mental health disorders, including clinical depression, anxiety, and stress related concerns. TLAP has teamed up with Houston Lawyers Concerned for Lawyers (LCL) to offer a support group for lawyers with substance use issues that meets Tuesday at noon at 303 Jackson Hill Street, Houston, Texas. TLAP and local volunteers have also joined together to form the Houston Lawyers’ Forum on Depression, which meets on the first Monday of every month from 6-8 pm. This group provides participants with a light dinner, presentations by local mental health professionals and peer support. For more information, please call TLAP at

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September/October 2010

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A Watched W Pot Never Boils: Preventing Boilerplate Provisions from Bubbling Over

By Liz Klingensmith and Larry Huelbig

hen documenting a potential deal, attorneys and clients tend to focus on the “deal terms,� like the sales price, and overlook seemingly innocuous boilerplate provisions. Failure to watch out for the potential pitfalls associated with typical boilerplate provisions can result in problematic litigation when the deal falls apart or a dispute arises. Transactional attorneys should avoid the false sense of security in boilerplate provisions, and consider such provisions with an eye toward future litigation. The efficacy of any agreement remains unknown until the agreement comes under scrutiny in litigation. Once under a microscope, conflicting choice of law, forum selection, dispute resolution or arbitration provisions, unintelligible variable interest rate provisions, insufficient merger or entirety clauses, or incomplete force majeure clauses can create costly and unnecessary litigation headaches. This article considers the litigation pitfalls that arise when transactional attorneys fail to watch the pot, and offers potential solutions to keep the pot from boiling over. A. Watch for Consistency: Conflicting Provisions in Separate Agreements In any given deal, there can be myriad separate, but related agreements: purchase agreements, guaranties, financing agreements, indemnity agreements, pledge agreements, and security agreements. Although separate agreements executed at the same time as part of the same transaction are construed as a single transaction, problems arise when the separate agreements contain conflicting provisions regarding the same topics. A claim arising from one document may be subject to arbitration while a claim arising under a separate document may be subject to litigation in a particular forum.


Construction of one agreement may require application of Texas law, but construction of a related agreement may require application of Louisiana law. There may be instances where separate agreements both provide for arbitration, but the procedure set forth for initiating the arbitration process or the selection of an arbitrator or arbitrators differs. When such provisions clash, litigators face the unpleasant task of navigating through unnecessarily complex procedural hoops. Such navigation requires litigating gateway issues before getting to the merits of the dispute. These threshold issues often relate to how to initiate litigation or arbitration, where the dispute will be heard, what law applies, or what procedural rules apply. The end result can be expensive piecemeal litigation in separate forums applying different law with the very real risk of conflicting rulings or judgments. Conflicting provisions generally arise from the use of forms from prior transactions, combining standard forms with a unique document, or mixing and matching forms from separate parties. From the outset, parties involved in a transaction comprised of separate agreements should consciously decide on a particular forum, arbitration procedure, and the applicable law. As forms to be used in the transaction come into play, attorneys should carefully proofread the forms to make sure that the provisions related to dispute resolution accurately reflect the parties’ agreement for future resolution of any disputes, and that they do not inadvertently conflict with one another. B. Watch the Forum: Crafting an Arbitration Agreement Many clients include boilerplate arbitration agreements in their forms based on a perception that arbitration is more efficient, less costly, more predictable, confidential, more final, and generally better for complicated fact situations that require expertise to understand. In reality, arbitration often does not cost less than a trip to the courthouse, and may not re-

sult in a “quick” or more predictable resolution. In the event the arbitrator issues a clearly erroneous award against your client, your client has little-to-no right to appeal the award. The realities of arbitration often conflict with a client’s perception of the process. Instead of automatically assuming arbitration is the preferable form of dispute resolution, attorneys should first consider the inclusion of a jury waiver provision in lieu of an arbitration agreement.1 In arbitration, parties typically share the cost for the arbitrator or arbitrators—costs that can quickly skyrocket. The courthouse down the street is a free forum. A jury waiver allows the judge to act as the finder of fact and avoids the uncertainty inherent in any jury pool. If the judge makes the wrong call, then a party has the right to appeal, a right essentially forsaken in binding arbitration. If, after dismissing the virtues of the courthouse, the parties remain committed to arbitration, careful attention should be paid to the drafting of the arbitration clause. Too often such clauses appear to be drafted by attorneys who may have never actively participated in an arbitration. Without knowledge of the arbitration process, the arbitration clause may contain gaps that can cause costly litigation of gateway issues related to arbitrability, e.g. whether an arbitration agreement exists, or whether certain claims fall within the scope of the arbitration provision. To dodge troublesome and costly gateway issues, the drafting attorney should consider the following checklist when constructing a custom arbitration agreement: 1. carefully define the scope of the clause to include the claims subject to arbitration, and specifically exclude those claims (or third parties) that will not be subject to arbitration; 2. specify whether the arbitration agreement is subject to application of the Federal Arbitration Act or the Texas Arbitration Act, and when the Texas Arbitration Act applies determine

whether to specifically and expressly exclude application of the Federal Arbitration Act; 3. detail the steps necessary to initiate the arbitration process, which may include written notice, followed by an attempt at resolution by senior management representatives from the parties or mediation; 4. specify the locale for the hearing, the governing law, and the applicable arbitration rules;2 5. specify the number of arbitrators and the process for selecting the arbitrators; 3 6. set forth the requirements for the arbitrators, such as years of experience in a specific industry, and any other considerations for ensuring the neutrality and independence of potential arbitrators; 7. set forth the parameters of discovery, depositions (if any), the exchange of documents, initial disclosures, interrogatories, or other custom discovery tools; 8. consider whether to allow parties to the arbitration to file dispositive motions or prohibit such motions in arbitration; 9. include any limitation on any future award by the arbitrator, whether the exclusion of consequential damages or limiting the amount of any single award; 10. consider defining the form of the award, e.g., requiring findings of fact and conclusions of law, a reasoned award, or a simple monetary award; and 11. determine whether the prevailing party will be entitled to attorneys’ fees or costs of arbitration. Last but not least, ask an attorney experienced in arbitration to review the clause. C. Watch for Cracks: Making a Merger Clause Count Merger or entirety clauses purport to tie the deal up in a neat little bow. They allegedly prevent future oral amendments

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or modifications to the agreement and future claims of fraud based on representations outside the agreement. A typical merger clause contains language similar to the following: This Agreement, together with all Exhibits referenced herein, constitutes the entire agreement between the Parties in relation to the Subject Matter of this Agreement and supersedes all prior agreements, understandings and commitments, whether oral or in writing, between the Parties. This Agreement may not be amended or modified in any manner except by a written document signed by both Parties that expressly amends this Agreement. Despite a transactional attorney’s best intention to tie a bow around the deal, cracks in the clause may allow room for oral amendments or modification of the agreements, and claims of fraudulent inducement. The statute of frauds requires certain types of agreements to be in writing.4 Where an underlying agreement is not subject to the statute of frauds, it is likely that any amendment or modification will likewise not be subject to the statute of frauds. Thus, if the alleged amendment or modification does not fall within the statute of frauds, it may be enforceable, despite the contrary working of the merger clause. A merger clause does not shield a deal from future claims of fraudulent inducement. Although the typical merger clause purports to define the entire agreement within the four corners of the agreement and specifically excludes any prior agreements between the parties, a party to an agreement may nevertheless assert claims of fraud based on oral or written representations that occurred outside the four corners of the document.5 To ward off the threat of future claims of fraudulent inducement, the merger clause should knock out the reliance element necessary to establish a claim of fraudulent inducement by including an express waiver of any reliance on any representation made outside the four corners of the agreement. 20

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Consideration should also be given to expressly waiving reliance on specific representations that naturally flow from the subject matter of the transaction, such as the value or condition of the subject matter. The merger clause may also include an affirmative statement of exclusive reliance on each individual party’s own due diligence, evaluation or investigation of the subject matter of the agreement. D. Watch the Unforeseen: Defining Force Majeure Often considered the ultimate boilerplate provision, the force majeure clause can excuse a party’s performance when certain unexpected events occur. Recent events have brought overlooked force majeure provisions to the forefront, including the government’s drilling moratorium in response to the Deepwater Horizon oil spill. Hurricanes in the Gulf of Mexico have shut down refineries and manufacturing plants, raised the price of commodities and restricted transportation access and routes. China’s massive construction programs have caused a rapid rise in commodity prices. When these types of purportedly unexpected events occur, parties may look to the force majeure clause to justify non-performance, late delivery or an increase in price. Clients seeking relief or receiving a force majeure notice may be disappointed to learn that the force majeure clause was nothing but an afterthought. Transactional attorneys should bring the force majeure clause into focus by clearly defining what constitutes a force majeure event, and what happens when such an event occurs. For example, if a hurricane constitutes a force majeure event, the agreement should identify the parties’ remedies, whether performance delay, cancellation of the contract, an increase in price, or a duty to cover. The duration of those remedies should likewise be defined to alleviate uncertainty as to how long deliveries can be delayed, performance excused, or prices elevated. The force majeure provisions should not only describe what constitutes a force

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majeure event and what remedies are available, but also how to proceed after such an event. For example, the provision should detail how to provide notice of a force majeure event, and when any response to such notice may be due. Consideration should be given to whether the responding party has an option to cancel the contract altogether or delay performance. Contractual force majeure terms control over common law rules that can fill gaps.6 To eliminate future reliance on the common law gap fillers, the parties may detail their rights, remedies, and the procedure in the force majeure clause. E. Watch for Clarity: Keep Variable Interest Simple Variable interest rate provisions often complicate the litigation process and impede enforcement of a judgment at the conclusion of the dispute resolution process. The law allows recovery of preand post-judgment interest, but exactly what that amounts to may be in jeopardy when neither the jury, nor the court, nor the sheriff can make heads or tails of the provision on which an award of interest is based. Variable interest rate provisions can include definitions that go on for pages and pages amounting to an unintelligible mess that only the drafting attorneys can decipher. Confusion arising from variable interest rate provisions can be caused by a number of situations. Many variable interest rate provisions rely on sources outside the agreement to determine the applicable rate. Those sources may include various financial publications or pronouncements by other large financial institutions. Complications also arise when different rates may apply to different tranches or levels of funding. To further obscure the applicable interest rate, calculation of the rate may be based on subjective conditions or events occurring outside the agreement. The litigator faces the challenge of offering specific proof of the applicable interest rate and interest calculation at trial. A judgment must be complete on its face,


and cannot change based on future fluctuations in the market. If the applicable interest rate is based on a third-party publication, the litigator can acquire proof of the interest rate during discovery through a deposition on written questions. However, at trial, the applicable rates determined during discovery may have changed due to more recent publications by third parties, or the occurrence of certain events or subjective conditions. Without a crystal ball, future fluctuations in the applicable rate are simply indeterminable. The inability to determine a future interest rate throws a wrench in the path to achieving a judgment that is complete on its face. To establish a future interest rate, there must be a quantitative formula for doing so on the face of the note or applicable agreement. In the absence of such a provision, there is no way to prove the future rate. The litigator must then attempt to convert the variable interest rate into a fixed rate. The uncertainty of future interest rates generates risks beyond the court room. The judgment, if uncertain or incomplete, can hinder a party’s ability to recover on the judgment. The sheriff responsible for executing a judgment must also be able to calculate the amount of the judgment, including interest to enforce it against a judgment debtor. If unable to do so, the sheriff cannot enforce the judgment. Moreover, a client may be subject to liability for any miscalculation that leads to an event of default and premature acceleration of any underlying note. To avoid the pitfalls associated with complex variable interest rates, transactional attorneys should keep it simple. Consider the inclusion of a provision that applies “the highest rate allowed by law” upon an event of default or post-maturity. Prior to reaching maturity or default the variable interest applies, but upon maturity or an event of default the applicable interest rate defaults to the highest rate allowed by law. Where an outside source is the basis for the rate, such as LIBOR or the prime commercial rate of a large bank, such as Citibank, consider a pro-

vision that makes the current lender’s records prima facie evidence of the applicable interest rate. Both of these solutions curb the challenge of proving the uncertain, and provide a sound basis for an enforceable award of pre- and postjudgment interest without subjecting the client to potential liability. F. Watch the Note: Who’s got it? Lenders today frequently fail to confirm prior to initiating litigation or foreclosure proceedings that they hold the underlying note. To prevail in a suit upon a promissory note, the lender must establish standing to bring the suit. To establish standing, the lender must prove that it is the owner and holder of the promissory note. Because lenders today slice, dice, sell and flip loans, the original note can get lost in the transfers, and with it, the ability to establish standing in a subsequent foreclosure action. If the note is not lost, then it may be improperly pledged to another lender.7 For example, A borrows money from B to loan to C, and gives B the original note with an absolute endorsement as security. In such a situation, the agreements between A and B may reflect that the absolute endorsement is only for security purposes, but the effect is nevertheless the same—B is the owner and holder of the note. Thus, when A seeks to foreclose on a loan to C, A lacks standing because B owns and holds the note through the absolute endorsement. To avoid this problem, lenders should keep track of the underlying note during any slicing and dicing of the loan. In the above example, A should only collaterally endorse the note to B, and B should give A the note in trust when A seeks to foreclose on the loan with C. To avoid any owner and holder debacles, drafters of loan agreements should consider structuring the loan strictly in the form of a contract rather than as a negotiable instrument. G. Conclusion Preventing the pot from boiling over requires nothing more than careful draft-

ing of traditional boilerplate provisions with an eye toward future litigation of the agreement. Liz Klingensmith, a University of Houston Law Center graduate, practices in the business litigation section of Haynes and Boone, LLP. She primarily focuses her practice on disputes arising from oil and gas-related projects. Larry Huelbig, a partner at Haynes and Boone, LLP, has more than 40 years in business related litigation with a primary focus on litigation involving financial institutions and post-judgment remedies. Endnotes 1. Parties may contractually agree to waive their rights to a trial by jury. In re Prudential Ins. Co., 148 S.W.3d 124, 132 (Tex. 2004) 2. The American Arbitration Association (“AAA”) rules for various industries can be found at http://www.adr.org/arb_med (last visited April 23, 2010). 3. The AAA rules set forth a procedure for the selection of an arbitrator or arbitrators, but the parties may agree on a different selection process independent from the AAA. See, e.g., AAA, Commercial Arbitration Rules, R-11 – R-19. Where the parties agree on such a process, and exclude the AAA’s involvement in that process, the parties may receive a 50 percent reduction in proceed fee in the Pilot Flexible Fee Schedule. See id. at Administrative Fees. 4. See TEX. BUS. & COM. CODE § 26.01, et. seq. (2010) (Statute of Frauds). 5. See Schlumberger Tech. Corp. v. Swanson, 959 S.W.2d 171, 179 (Tex. 1997) (emphasizing that a merger clause will not always bar a claim of fraudulent inducement); Desert Palm Props., N.V. v. Macfarlane, No. 01-0900967-CV, 1994 Tex. App. LEXIS 2951 (Tex. App.—Houston [1st Dist.] Dec. 8, 1994, writ denied) (observing that the merger clause “does not preclude liability for, or provide grounds for summary judgment on, plaintiffs’ claims for fraud, conspiracy, and negligent misrepresentations because it contemplates only contractual obligations, and would not obviate tort liability.”); Burleson State Bank v. Plunkett, 27 S.W.3d 605, 616 (Tex. App.—Waco 2000, pet. denied) (concluding that a merger clause in the form of a “notice of final agreement” is not binding and neither prevents nor limits the right to pursue tort claims). The parol evidence rule will not bar proof of fraudulent inducement claims. See Desert Palm Props., 1994 Tex. App. LEXIS 2951 at *27 (noting that the parol evidence rule does not bar proof of claims for fraud, conspiracy or negligent misrepresentation). 6. R & B Falcon Corp. v. Am. Exploration Co., 154 F. Supp. 969, 973 (S.D. Tex. 2001) (citing Sun Operating Ltd. v. Holt, 984 S.W.2d 277, 283 (Tex. App. –Amarillo 1998, no pet.)); see also TEX. BUS. & COM CODE § 2.616 (providing procedure upon receipt of a notice claiming force majeure). 7. See Vestal v. Conner, No. 14-96-00576-CV, 1997 Tex. App. LEXIS 4244 (Tex. App.—Houston [14th Dist.] Aug. 14, 1997, pet. denied) (granting summary judgment based on lender’s failure to establish lender’s status as the owner and holder of the underlying promissory note when lender collaterally assigned note to a bank for a loan); Lawson v. Gibbs, 591 S.W.2d 292 (Tex. App.—Houston [14th Dist.] 1979, no writ) (superceded by statute on other grounds) (upholding substitute trustee’s sale authorized by bank after determining that bank despite having been collaterally assigned the underlying note by the payee was also the owner and holder of the note when the payee also endorsed and delivered the underlying note to the bank).

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Offshore Drilling in the Gulf of Mexico

How to Survive in the New Regulatory Environment Editor’s Note:

As this issue went to press, the Obama administration announced it was lifting the deepwater drilling moratorium. Look for more details in the next issue of The Houston Lawyer.


By Zack A. Clement and R. Andrew Black

I

n the last six months, the offshore drilling industry in the Gulf of Mexico has been affected by a national regulatory policy that has vacillated between: (1) initially favoring new drilling in the eastern Gulf; (2) ordering a moratorium on all deep water drilling based on safety concerns in response to the blowout on the Deepwater Horizon drilling rig (the “Original Moratorium”); (3) imposing a second moratorium based on a stronger statement of environmental concern shortly after a court found that the Original Moratorium was likely “arbitrary and capricious” (the “Second Moratorium,” collectively the “Moratoria”); and (4) beginning the development of new offshore drilling regulations to be enforced by the newly created Department of Interior’s Bureau of Ocean Energy Management, Regulation and Enforcement (“BOEMRE”). While to date only a few drilling rigs have been re-deployed away from the Gulf to other international areas of activity, there is concern that the Moratoria and upcoming regulatory changes could cause drilling companies to decide to move more rigs out of the Gulf. Drilling industry sources have expressed fear that the new government regulations under discussion (the “New Rules”) will have a fundamentally adverse impact on the industry. For example, in a July 22, 2010 press release, the National Ocean Industries Association (“NOIA”), an offshore drilling industry trade association, warned: Many in the current administration and Congressional leadership have indicated that it is perfectly acceptable to reduce the number of oil and gas exploration companies to those judged to be big enough to pay . . . The move to drastically increase the amount of financial responsibility necessary to bid on leases and to make an unlimited liability cap will, without a doubt, result in many com-

that cannot easily be abandoned when panies being no longer able to stay a sufficient supply of alternative fuels is in business. The result is more and not available to replace these hydrocarmore jobs lost and less energy probons, and acquiring them overseas puts duced at home. the United States at greater risk of conThis article describes strategies that flict over energy resources in a world in a company in the offshore drilling inwhich national oil companies are assertdustry (the “industry”) can use to suring greater control over their country’s vive the fundamental changes caused oil and gas. by these changing government policies. Independent (non-major) oil compaThis survival process includes: (1) undernies act as operators on more than half standing the structure and extent of the of the wells drilled in the Gulf. Currently offshore drilling industry in the Gulf of shallow water drillMexico and its longing and production term importance to “A study published is dominated by inthe United States; in July 2010 by IHS Global dependent explora(2) understanding tion and production how long the MoraInsight concludes that U.S. companies (“indetoria will continue offshore oil and gas operations, pendents”) who do and whether court not need to find huge action is likely to primarily in the Gulf of reserves to justify a shorten them; (3) drilling program. developing a plan to Mexico, produced about But even in deepconserve cash and 30 percent of U.S. oil and water projects with other resources to survive during the 10 percent of U.S. natural gas their higher capital requirements and Moratoria; (4) unin 2009. Of this, over potentially larger derstanding the New finds, the particiRules and what they 50 percent comes from pation of indepenwill mean for future deepwater drilling projects.” dents in many deals business operations enables many more and net revenue; (5) wells to be drilled, permitting major oil considering how, if necessary, to modify companies to spread risk over a larger a company’s capital structure to meet number of projects, thus expanding sigprojected new levels of net revenue; and nificantly the amount of drilling activity (6) determining whether a sale or merger that occurs. transaction is an appropriate strategy in The IHS study expresses concern that the new regulatory environment. the New Rules will make it more difficult for independents to continue, much I. The Industry less expand, the level of drilling activiA study published in July 2010 by IHS ties, thus reducing the amount of work Global Insight concludes that U.S. offavailable in the Gulf for drilling compashore oil and gas operations, primarily nies and providers of related services. in the Gulf of Mexico, produced about The concern is that tightening of safety 30 percent of U.S. oil and 10 percent of regulations, related requirements for U.S. natural gas in 2009. Of this, over additional capital investment in safety 50 percent comes from deepwater drilltechnology, and additional bond and ining projects. The industry has a huge surance costs might make it prohibitive economic impact throughout the Gulf of for all but the largest independents to act Mexico region, employing over 380,000 as operators in the Gulf. If this is true, people and generating over $70 billion it will reduce the level of drilling and of economic value in 2009, according reduce net revenues for other indepento IHS. This is a vital national resource thehoustonlawyer.com

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dents and their vendors and suppliers. While larger drilling companies might be able to respond by deploying their rigs elsewhere around the world, smaller drilling companies that have focused on the Gulf will have difficulty doing so, as will many of their equipment and service providers.

II.The Two Moratoria and Related Lawsuits On May 30, 2010, the U.S. Department of Interior’s Minerals Management Service (the “MMS”), now known as BOEMRE, issued the Original Moratorium barring the issuance of new permits for deepwater drilling for six months; a similar Second Moratorium was issued in July. Two pending lawsuits have challenged the Moratoria and a preliminary injunction has been issued staying enforcement of the Original Moratorium, but the Moratoria will likely expire by their own terms on November 30, 2010, before plaintiffs’ claims are finally resolved through the appeals process. The next scheduled hearing in either suit was set for September 22, 2010 (after the press deadline for this article). 24

September/October 2010

A. The Hornbeck Lawsuit On June 7, 2010 Hornbeck Offshore Services, LLC and other industry participants filed a complaint in a federal district court in Louisiana alleging that the Original Moratorium was “arbitrary and capricious and an abuse of discretion” and seeking an injunction staying its enforcement. On June 22, the district court issued an Order preliminarily enjoining the Original Moratorium, finding that it was likely “arbitrary and capricious” because: (1) it was not supported by factual data; (2) it was overly broad; (3) it did not balance competing interests; and (4) its enforcement would cause irreparable injury through the loss of jobs and consequent harm to the economy. The next day, the MMS and other government agencies appealed the district court’s Order and sought a stay pending the appeal. On July 8, 2010, the Fifth Circuit denied the government’s request for a stay. On July 12, 2010, the BOEMRE rescinded the Original Moratorium and issued a Second Moratorium that imposed the same bans and suspensions and purported to include additional evidentiary support. Simultaneously, the government filed a Motion to Dismiss in the district court and a Motion to Vacate in the circuit court, both arguing that the Hornbeck suit is now moot. On August 16, 2010, the Fifth Circuit asked the district court to consider: (1) whether BOEMRE has authority to rescind the Original Moratorium, (2) whether the evidence supporting the Second Moratorium was available for the First Moratorium, and (3) the differences between the two Moratoria. Although the district court has responded to the Fifth Circuit’s request, the Fifth Circuit, as of September 13, has not scheduled oral arguments on the Government’s appeal of the pre-

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liminary injunction of its Original Moratorium. B. The Ensco Lawsuit On July 20, 2010, Ensco Offshore Company (“Ensco”) filed an amended complaint against the Government before the same Louisiana federal district court challenging the Original Moratorium and the Second Moratorium under many of the same theories asserted by Hornbeck. The Ensco suit also challenges new shallow and deepwater drilling and permit requirements imposed by BOEMRE that have essentially shut down all deepwater drilling operations in the Gulf. Ensco and the government filed cross-motions for summary judgment. Oral argument on the motions was scheduled for September 22, 2010. C. The De Facto Moratoria There is a substantial likelihood that neither the Hornbeck Lawsuit nor the Ensco Lawsuit will have reached a final order vacating the Moratoria before they expire by their own terms on November 30, 2010. Meanwhile, the BOEMRE is reported to have substantially reduced its pace in granting new drilling permits and has proposed that some spill response plans satisfy newly imposed requirements. III. The New Rules A. What Will the New Rules Be? One result of these lawsuits is the creation of a climate pressuring the government to end the Moratoria and promulgate the New Rules by November 30, 2010. It is difficult to know with precision what New Rules BOEMRE will propose. It has available to it a number of sources for advice. For example, there is the May 27, 2010 Safety Report that formed the basis for the Original Moratorium (this is the report that was purportedly based on the work of a number of listed experts who later claimed their conclusions were misrepresented). In addition,



expiration of the Moratoria and the BOEMRE has been in consultation with likely promulgation of the New Rules. a group from the Natural Academy of Numerous experts will offer their inEngineering that has focused on stansight as drafts of the New Rules are dardizing technology and practices for released and they are ultimately pro(1) blowout prevention, (2) well operamulgated. tions and (3) other safety systems. NOIA and the American Petroleum IV. Stand-Alone Restructure Institute have issued two reports datA. Short-Term Survival of the Moratoria ed September 3, 2010 (the “ industry The short term goal for companies in Reports”) setting forth the industry’s the industry is to survive until the recommendations concerning the New Moratoria expire. This could require Rules. It is not possible to know whetha stringent program of cash conservaer these recommendations will be foltion. Because it may be difficult and lowed. expensive to obtain a new loan or raise Perhaps the best insight into BOEMnew equity financing during the MoraRE’s thinking are Notices to Lessees toria, the most likely available source 2010 No. 5 and No. 6 published in June for any needed ad2010. These notices ditional cash would reiterate a require“The short term goal be the sale of assets. ment for more deHowever, the curtailed checking and for companies in the rent situation has certification of (1) industry is to survive made valuation of blow out prevenassets particularly ters; (2) all proceuntil the Moratoria challenging; moredures concerning over, it is important well operations; (3) expire. This could that a company sell safety procedures; only those assets and (4) training of require a stringent that are ancillary to personnel to deal its future core opwith emergencies. program of cash erations. There are Company CEO’s conservation.” numerous financial are required to restructuring excertify compliance perts who can help with programs to with all rules in these four areas. Moreconserve cash, identify core assets, and over, these notices list a number of adassist in valuing and marketing nonditional things that must be done based core assets. on recommendations made by the May 27 Safety Report. B. Long-Term Restructure To Survive Under the New Rules B. What Impact Will the It will be important to quickly appreNew Rules Have? ciate the effect of the New Rules on The New Rules are likely to increase capital expenditures and operating capital costs for new safety equipment expense, and their impact on net revand increase operating expense by reenue available to service debt. The quiring more expensive methods of opsame financial restructuring advisors erating, larger bonds and more expenwho can help with survival during the sive insurance based on higher liability Moratoria can undertake this analysis limits. They will likely result in larger and assist in any necessary restructurcapital requirements and reduced net ing negotiations with lenders and other earnings after expenses. The extent of capital suppliers. these economic impacts will be clearer In the last several years, many seas we approach the November 30, 2010 26

September/October 2010

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cured lenders have been willing to negotiate to lower current debt service payments and extend maturities. And many unsecured bondholders have been willing to negotiate the conversion of debt to equity. There are numerous capital providers willing to lend and make equity investments in restructuring situations. Restructuring negotiations involving these same three elements have often occurred outside of bankruptcy courts and resulted in many successful stand-alone restructurings. If these negotiations fail, the Bankruptcy Code permits stretching out secured debt payments, converting unsecured debt to equity, making new loans with “priming” first priority liens and making new equity investments upon exit from bankruptcy. Often, the essential questions for the viability of a stand-alone plan of reorganization, whether in bankruptcy or out, are (1) can a feasible plan be shown that merely stretches out secured debt and converts some, or all, unsecured debt to equity; or (2) will it be necessary to obtain additional restructure/ exit financing; and (3) is restructure/ exit financing available for the company at an acceptable price? V. Transactions By Sale or Merger If new capital cannot be attracted to a stand-alone restructuring of a company, it is often an indication that a restructuring plan is not feasible. In that situation, it might be useful to consider the sale of the company or its assets. Although these sales can be done outside of bankruptcy, some purchasers favor buying assets from a Chapter 11 estate because the purchased assets can be acquired free and clear of claims by creditors of the seller. Some purchasers care so much about this clean, unencumbered title that, to obtain it, they are willing to go through the cumbersome process of being a “stalking horse” bidder at a bankruptcy auction, entitled to a break up fee if they lose. A catalyst for a sale transaction might


participate in such a merger as they exit be that one or more companies have debankruptcy. Again, this process would cided to act as accumulators or consolidabe greatly facilitated if capital providers tors to achieve a larger size which may be were willing to inbeneficial under the vest new capital as New Rules. However, “It will be important bankruptcy exit fithat larger size can nancing. also be achieved by to quickly appreciate The analysis dea “roll up” merger of the effect of the New Rules scribed above could a number of smaller apply not only to companies into a on capital expenditures independents but merged company also to drilling comable to function betand operating expense, panies and all types ter in this new marof industry-related ket. This could be and their impact on equipment and seraccomplished in two vice providers. Some ways. First, a number net revenue available industry companies of companies might to service debt.” in each of these catrecognize the need egories may be betfor a merger and do ter able to survive the Moratoria and New so in an out of court transaction. It would, Rules either by stand-alone reorganizaof course, greatly facilitate this approach tions or by horizontal or vertical consoliif a capital provider were willing to put dations through sale or merger. new capital into the new combined entity. Second, if a number of smaller companies VI. Conclusion are forced into Chapter 11 cases by the How does a company in the industry Moratoria and the New Rules, they might

survive the Moratoria and New Rules? Accept the fact that cash must be conserved to survive as long as the Moratoria are in effect. Come to grips early with the impact the New Rules will have on operations, insurance, risk management, capital requirements and net revenues. If nothing further needs to be done, great! If capital structures need to be adjusted to fit projected new lower net revenue streams, negotiate consensual restructure deals promptly. If needed restructuring is not possible on a stand-alone basis, look for a purchaser or merger partner sooner rather than later. Staying agile in the face of this uncertain, rapidly changing environment will be essential and the chances of survival much greater for those who act early. Zack A. Clement is a partner and R. Andrew Black is senior counsel in the Bankruptcy and Insolvency Practice Group of Fulbright & Jaworski L.L.P.

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Major Changes to the Minerals Management Service and Off-Shore Drilling Regulation in the Aftermath of the Deepwater Horizon Explosion September/October 2010

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While the time period covered by the Inspector General’s investigation preceded the recent Gulf of Mexico disaster, the findings in the report helped to he Deepwater Horizon propel the need for comprehensive MMS explosion and spill in the reform to the forefront once the DeepwaGulf of Mexico left many ter Horizon incident occurred. Shortly casualties—the death of 11 after the Deepwater Horizon explosion platform workers and injutook and injured lives, and initiated the ries to 17 others, damage worst offshore environmental disasto the environment and marine life, and ter in American history, MMS Director a staggering economic impact. One govElizabeth Birnbaum resigned. Secretary ernmental agency has reluctantly joined Salazar seized this undistinguished the opportunity list, the Minerals “While the time period to reform MMS Management Service covered by the Inspector by issuing two (MMS), the division of secretarial orders the U.S. Department General’s investigation that will result of the Interior with in a sweeping repreceded the recent Gulf of responsibility for both organization of regulatory oversight Mexico disaster, the findings the beleaguered and revenue management for oil, gas and in the report helped to propel agency. The shakeup mineral projects on sounds simple the need for comprehensive the Outer Continental enough at first Shelf. MMS reform to the forefront glance, but the For years MMS was plagued by accusaonce the Deepwater Horizon details of where the former agentions of disturbing incident occurred.” cy’s broad powers ethical lapses, conwill reside in the flicts of interest, and new structure are anything but straightpoor oversight. Most recently, in May forward. The task is so complex, in fact, 2010, the Department’s Acting Inspecthat the Obama Administration has not tor General wrote a memorandum to yet been able to think it through to conInterior Secretary Ken Salazar announcclusion; it will take around 18 months to ing the findings of an investigation of 1 be fully implemented.2 This drawn-out, MMS’s business and ethical practices. incremental approach will, no doubt, The report expressed tremendous concreate a confusing climate for extraction cern about fraternization between MMS companies, attorneys, and even the govemployees and industry, and the revolvernment regulators themselves. ing doors that whisked personnel easily The highest level of restructuring may from one sphere to the other. The Inspecactually be little more than rebranding. tor General’s investigation revealed nuSecretarial Order 3302, signed on June merous serious problems that betrayed 18, 2010, changed the name of the entire public confidence and diminished orgaagency to the Bureau of Ocean Energy nizational effectiveness, including govManagement, Regulation and Enforceernment employees routinely accepting ment (BOEMRE).3 Days later, President gifts from companies they regulated. The Barack Obama named Michael Bromreport detailed one incident in which an wich the first Director of BOEMRE. inspector conducted four inspections of Bromwich quickly assumed the post beoffshore platforms while in the process cause the position does not require conof negotiating and later accepting emfirmation by the U.S. Senate.4 ployment with that company.

By Robert Painter

T

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Bromwich, an attorney, has a reputamore significant. Secretarial Order 3299, tion for cleaning up troubled organizadated May 19, 2010, splits the formertions.5 At the time of his appointment MMS’s authorities among three new divisions, all of which fall under BOEMBromwich was a partner at a WashingRE.6 Whether this ton, DC law firm, Fried, Frank, Harwill turn out to be a “While the renaming ris, Shriver and Jagame of bureaucratcobson, where he ic musical chairs is of MMS will probably was a litigator and the subject of some have little real impact conducted internal debate, but it seems investigations for probable that the on industry or Americans, private companies. holders of the new Bromwich was prepositions created the divvying up of its viously a federal by Order 3299 will prosecutor and Inchoose to put their extensive powers will likely spector General for marks on governbe much more significant.” the Department of mental policy. Thus, Justice, and has led attorneys handling investigations into numerous governmenoffshore matters need to be aware of the tal entities, including our own Houston new structure and pay careful attention Police Department’s famously troubled to new developments as the staggered Crime Lab. implementation takes place. Even at that While the renaming of MMS will point the changes will not be complete probably have little real impact on inbecause the new governmental entidustry or Americans, the divvying up of ties will likely start issuing their own its extensive powers will likely be much regulations.

One of the principal goals in the MMS restructuring is to create independence and separate financial considerations from the regulatory arm. Secretary Salazar attempts to achieve this by having these functions supervised by different directors and chains of command. The Assistant Secretary of Interior of Policy, Management and Budget will oversee the Office of Natural Resources Revenue (ONRR), which will be led by its own director. ONRR’s mission will involve royalty and revenue management, and will be separate from the bureau in charge of safety and environmental practices. Offshore activities have contributed a significant sum to the U.S. Treasury, recently averaging $13 billion per year. In order to satisfy criticisms that there is an inherent conflict of interest in having the same agency that regulates oil and gas operators also collect revenue from the operators, the ONRR aspect of the reorganization has been expedited, with the goal of an effective date of October 1, 2010.7

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Empowering the new regulatory bureaus will take more time, with a phased implementation beginning in January 2011, and lasting at least one year. The Assistant Secretary of the Interior for Land and Minerals Management will oversee the two new regulatory bureaus, each of which will be led by its own director. First, the Bureau of Ocean Energy Management will be in charge of balancing environmental considerations with appropriate development of the Outer Continental Shelf for energy and mineral resource projects. In this role, the bureau will oversee resource evaluation, permitting and leasing, and all residual powers of the previous agency not otherwise assigned by Secretarial Order 3299. In July, Director Bromwich informed Congress of the creation of an Investigations and Review Unit within the Bureau of Ocean Energy Management, which will function as an internal watchdog to probe allegations of misconduct or unethical behavior by bureau employees

or the industry, and ensure readiness to comprehensive Congressional reform of 8 respond to spills and accidents. the former MMS. This, too, is something attorneys involved in offshore interSecond, the Bureau of Safety and Enviests must monitor because it will have ronmental Enforcement will be charged an immediate and with promoting and sweeping impact on enforcing safety in “Empowering the new the industry if it beoffshore energy excomes law. ploration and proregulatory bureaus will In September duction, with approtake more time, with a 2009, U.S. House priate consideration of Representatives of environmental phased implementation Energy and Natural impacts. The bureau Resources Chairwill be responsible beginning in January 2011, man Nick Rahall for safety and over(D-WV) introduced sight, with powers and lasting at least H.R. 3534, the “Conto inspect, investione year.� solidated Land, Engate, summon witergy, and Aquatic nesses, obtain eviResources (CLEAR) Act,� a bill to credence, levy penalties, and cancel or susate a new agency within the Department pend extraction activities. of the Interior to revamp the federal The Department of the Interior is offshore royalty system and administer implementing these changes based on oil and gas leasing on federal lands (insecretarial orders rather than new legiscluding offshore).9 Congressman Rahall lation. The horrifying scope of the Deepwater Horizon incident, though, has remade significant amendments to the bill kindled ongoing efforts for an even more after the Deepwater Horizon incident,

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plans.11 The CLEAR Act would also esincluding his own take on MMS restructuring, which is actually quite similar to tablish a training academy for federal oil those currently underway by the Departand gas inspectors, which would have the 10 ment of the Interior. The bill was voted goal of supplying BOEMRE with qualified inspectors who would abide by strict favorably out of committee to the House ethical standards. of Representatives. At this stage, it is If the amended “We also do not know impossible to say what CLEAR Act becomes what policy and specific responsibililaw there would be a ties each of the new number of specific reregulatory changes bureaus will possess quirements and policy and when responsichanges to contend will follow once bilities will shift from with that have not the transition to the old structure to yet been addressed in the new ones. We also the reforms generated the new structure do not know what by Secretarial Orders is finished.� policy and regulatory 3299 and 3302. For changes will follow example, the Rahall once the transition to the new structure legislation would require new offshore is finished. Confounding this uncertainty drilling safety standards, independent is the possibility that Congress may get certifications of critical offshore equipinvolved. Suffice it to say that, in the afment, operator demonstration of readitermath of the Deepwater Horizon tragness to respond to blowouts or spills, edy, considerable change to offshore exmore inspections, harsher penalties, and ploration and production is coming, and elimination of the practice of granting enit is coming soon. vironmental waivers for offshore drilling

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Robert Painter is an associate editor of The Houston Lawyer. He is an attorney at Painter Law Firm PLLC, where he handles litigation matters, including representing plaintiffs in oil and gas explosions. Endnotes 1.

http://www.doioig.gov/images/stories/reports/pdf/Island OperatingCo.pdf

2.

http://www.doi.gov/deepwaterhorizon/loader. cfm?csModule=security/getfile&PageID=38543%20

3.

http://www.doi.gov/deepwaterhorizon/loader. cfm?csModule=security/getfile&PageID=35872

4.

The former MMS, now called BOEMRE, is the only major Department of the Interior bureau led by an official that does not require U.S. Senate confirmation. See Noelle Straub, Sweeping Rahall Bill Would Overhaul Federal Oil and Gas Leasing, Royalties, N.Y. TIMES, Sept. 9, 2009.

5.

http://www.boemre.gov/ooc/PDFs/ BromwichTestimony0722.pdf

6.

http://www.doi.gov/deepwaterhorizon/loader. cfm?csModule=security/getfile&PageID=32475

7.

http://www.doi.gov/deepwaterhorizon/loader. cfm?csModule=security/getfile&PageID=38543%20

8.

http://www.boemre.gov/ooc/PDFs/ BromwichTestimony0722.pdf

9.

http://thomas.loc.gov/cgi-bin/bdquery/z?d111:h.r.03534:

10.

http://resourcescommittee.house.gov/images/Documents/ h3534_001_xml.pdf

11.

http://resourcescommittee.house.gov/images/Documents/ clear%20act%20%20discussion%20draft%20ans.pdf


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Corporation Y or Partnership? Proposed Federal Tax May Affect Your Choice

By Barbara S. de Marigny

ou may have seen news about a potential tax increase on the “carried interests” of hedge fund managers and dismissed it, first because you refused to worry about the tax problems of some fat cats in Connecticut but also because it seemed to have no relevance to your general business practice. Think again. The proposed tax would have a reach far beyond hedge fund managers and may become a scale-tipper when you decide whether to recommend a partnership (or LLC) or a corporation for your client’s new business. H.R. 4213, “The American Jobs and Closing Tax Loopholes Act,” narrowly missed passage by the Senate on June 24, 2010. The Act would deny capital gains rates to income from certain partnership interests referred to as “carried interests,” thereby changing the tax rate on the partner’s profit share from 15 percent to potentially as high as 42.5 percent. This change was scored as raising as much as $24 billion, however, and, given the never-ending need of Congress for revenue raisers, it is generally thought to be a question of when, not if, the bill will pass. In general, carried interests are interests that receive a share of the profits of the partnership but that are not contingent upon a proportionate capital contribution to the partnership. Many businesses in partnership and LLC form, particularly those in the securities, real estate, and oil and gas industries, as well as entrepreneurial start-ups, have traditionally structured the compensation of the managers or developers of the business to include a carried interest. Use of a carried interest allows the investment managers, developers or entrepreneurs to participate in the partnership’s upside without a significant front-end capital contribution. In the past, to the extent a partnership

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had capital gains from, for example, the sale of stock, securities, or real estate, the partner’s share of that gain was also treated as capital gain on the partner’s tax return, even though the partner may not have contributed capital to the partnership. Similarly, if the partner sold the partnership interest, the partner recognized capital gain on the sale. The proposed tax change is based on the theory that, if the partner did not contribute capital to the partnership and yet receives a share of its profits, and if the partner is providing advice or management services to the partnership, then the profit share must really be compensation for services. Then, as the theory goes, if the profit or gain is really compensation for services, it should really be taxed at ordinary income rates, just like other compensation for services, such as salaries. The concept sounds reasonable, except that it throws out the window close to a century of precedent in partnership tax treatment. One reason that consistency in the tax law is valuable is that it allows businesses to plan their affairs with some hope that actual results will match projections. Imagine the magnitude of this change: I don’t want to be the one to break the news to a real estate developer that when the shopping center he developed finally sells, he’ll be paying ordinary income tax rates on his gain. The proposed legislation would change the tax rate from the 15 percent rate on capital gains to the ordinary income rate, which in 2011 is expected to revert to 39.6 percent. In addition, these amounts would be subject to self-employment (Social Security) taxes, which generally figure at a rate around 2.9 percent, suggesting a potential tax rate of as much as 42.5 percent. The proposed legislation also would change the rates on not just the profits distributed by the partnership to the partner but also on the gain on all sales or other dispositions of the partnership interest. The current proposal does not define “disposition” to exclude transfers of the interest that otherwise would be

nontaxable, such as an incorporation. For example, under the proposed legislation, the incorporation or liquidation of a partnership or LLC in preparation for an IPO would trigger ordinary income for partners with carried interests, even

“The proposed tax change is based on the theory that, if the partner did not contribute capital to the partnership and yet receives a share of its profits, and if the partner is providing advice or management services to the partnership, then the profit share must really be compensation for services.” though the partners may not receive any cash in the incorporation. A partner’s profits would not be subject to ordinary rates if the partner contributed capital to the partnership in an amount that is proportionate to the capital contributions of the other partners. Therefore, one way to avoid the impact would be to identify a contribution of capital for the partner. This is not likely to be a very useful exception for most clients, however, since the very reason that they are receiving a carried interest is their lack of seed capital to contribute. Although this change in tax treatment was first proposed in 2007, it has not been enacted due to heavy lobbying by the securities industry. Compensation structures in the financial sector have come under increasing scrutiny, however, and hedge fund managers don’t get a lot of sympathy votes. In the current economic and regulatory climate, it appears likely that some version of the proposal will be enacted this year. Congress also needs this revenue-raising provision to offset the cost of a tax extenders package. The earlier versions of the proposal targeted

hedge fund managers, but the more recent versions have broadened the application in order to maximize the revenue. The latest version extends beyond securities investment firms to any partnership or LLC if a partner does not contribute proportionate capital and receives the partnership interest for advising or managing the partnership’s assets, including real estate and interests in other partnerships. Now, in addition to the securities industry and many other business groups, the real estate industry has been lobbying hard against enactment, pointing to the precarious state of commercial real estate today and the potentially devastating impact of increased taxes on the real estate industry. The effective date of these rules is expected to be post-enactment, without any grandfathering for existing partnerships. Therefore, any postenactment partnership distributions or sales would be subjected to ordinary income rates when the partner holds a carried interest. Tax lawyers are busily considering structures that could reduce the impact of the change but, as the title of the “Closing Tax Loopholes Act” would suggest, do not expect any quick fixes. The proposal even contains what is referred to as an “anti-abuse” provision that could be loosely paraphrased as “if you are thinking about structuring to avoid these rules, it won’t work” or, put into the words you use with your children, “don’t even think about it.” As you can see, we are about to have a whole new cost-benefit analysis to perform when advising on business structures. And you thought choiceof-entity criteria were well-settled and straightforward. On the bright side, you may get the opportunity to be your clients’ hero by protecting them from a looming tax problem. Barbara Spudis de Marigny is a partner in the Houston office of the law firm of Gardere Wynne Sewell LLP, where she specializes in the taxation of partnerships and LLCs.

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COMMITTEE SPOTLIGHT

Law and the Media Committee By Joy Sanders

The Houston Lawyer

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he Law and the Media ComThe program is offered free of charge to mittee was established in 1986 media professionals and students. with the goal of encouraging The 2010 seminar was held January 30 dialogue and education beat South Texas College of Law, with nearly tween the legal and media pro90 individuals in attendance. The twofessions. This year, the Committee is led panel program focused on transparency by an attorney co-chair, Scott A. Durfee of in the courts and in government. Disthe Harris County District Attorney’s Ofcussing transparency in the courts were fice, and two media co-chairs, Phil Archer Harris County District Attorney Patricia of KPRC TV Lykos, Harand Mark ris County Babineck of District Clerk Argus MeLoren Jackdia, Inc. The son, Houston membership Chronicle leis comprised gal reporter of both attorMary Flood, neys and meand moderatdia and coming attorney munication 2009-2010 HBA President Barrett Reasoner, at the podium, introduces a panel from the Brian Wice. professionals. 2010 seminar on “Transparency in the Courts” that included, from left, attorney Brian The second Originally Wice; Mary Flood, former legal reporter with the Houston Chronicle; Harris County panel, exDistrict Clerk Loren Jackson; and Harris County District Attorney Patricia Lykos. established ploring transas a project parency in of the HBA government, Continuing included FBI Legal EducaSpecial Agent tion ComShauna Dunmittee, a prilap, Houston mary funcChronicle intion of the vestigative committee is reporter Terri planning and Langford, executing an Sam Bassett, former chair of the Texas Forensic Science Commission, discusses Texas Tribune annual Law forensic science reform in Texas at the 2010 seminar. reporter Matt and the Media seminar in coordination Stiles, and moderator Alan Bernstein of with the Society of Professional Journalthe Harris Country Sheriff’s Office. The ists and the Houston Press Club. Each seminar featured a keynote address enyear, the seminar brings together lawyers, titled “Forensic Science Reform in Texas – journalists, communication professionDead or Just Delayed?” presented by Ausals, law students and journalism students. tin attorney Samuel E. Bassett of Minton,

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Burton, Foster and Collins LLP, who once chaired the Texas Forensic Science Commission. In addition to the Law and the Media Seminar, the committee also provides a bi-annual Media Training Program for HBA board members. The program involves a simulated press interview during which media representatives question board members on tape, and then critique their performance. The program is a lively and fun way for board members to hone their interviewing skills, while building relationships with print, radio and television media. This year, the committee will continue its mission of fostering educational objectives at the intersection of law and media. This will be the 25th anniversary of the Law & the Media Seminar, and it has been set for Saturday, January 29, 2011 at South Texas College of Law. The committee is already working on discussing topics and speakers. Co-chair Scott Durfee notes that “[t]he committee has done a great deal over the years in helping to find common ground between the often adversarial professions of law and journalism. I am proud to have the opportunity to advance the committee’s work in developing lines of communication between legal and media professionals, educating each other on professional standards, and increasing mutual respect and trust between our respective communities.” Joy Sanders (jsanders@fonglegal.com) practices immigration law with Fong & Associates, L.L.P., and is a member of The Houston Lawyer editorial board.


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37


Media Reviews

Now Playing at a Theater Near You

(And Featuring Houston Attorney Charles Foster)

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The Houston Lawyer

By Keri D. Brown and Joy E. Sanders eaders of The Houston Lawyer who already know Charles Foster also undoubtedly already know what this article is about. For the uninitiated, the answer is Mao’s Last Dancer. Finally making its way to the United States, this independent movie, originally released in 2009 and opening in Houston this past August 20, tells the story of Li Cunxin, a promising young ballet dancer from China who began his rise to international acclaim in the early 1980s. The film includes Charles’ role in helping Li remain in the United States after a 21-hour standoff at the Chinese Consulate on Montrose Blvd. in Houston. It is not often that an attorney is the hero in a movie without ever stepping foot in a courtroom, but that is exactly what happened here. For those of you unfamiliar with the story, Li Cunxin was the first Chinese national to visit the U.S. as part of its new cultural exchange program, and was quickly becoming a star of the Houston Ballet after less than a year’s stay in Houston. Just prior to the end of his scheduled visit, Li’s heart led him to remain in Houston. Concerned with what his decision might mean for U.S.-China relations, the Houston Ballet and Ben Stevenson (then Artistic Director of the Houston Ballet), Li confided in a friend who assisted him in seeking out legal representation. With some guidance from the University of Texas Law School, Li found counsel in Charles Foster. No one could have antici-

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vessel, but because the deck of the cutter pated how auspicious their relationship was U.S. soil, the return was wrongful and would become. the responsible Coast Guard officers were Charles thought that the matter would subject to a court martial and, following be fairly routine: seek an employment visa a reprimand, for Li based took early on his incredretirement. ible dancing Coincidenability (equivtally, Charles alent to a visa had already based on “exdiscussed traordinary the particuability” tolars of the day). Given Kudirka case Li’s ballet talBen Stevenson, former artistic director of the Houston Ballet, director Bruce ents and ris- Beresford, Li Cuxin, Charles Foster and Kyle MacLachlan at a reception at the with Judge Wo o d r o w ing stardom, Museum of Fine Arts this summer. Seals, a federal judge in Houston. Equipped Charles did not think there would be a with this knowledge, Charles did several problem. What Charles did not foresee things upon Li’s detention: (1) he called was Li being tackled and dragged away by and woke Judge Seals to obtain a restrainfive Chinese consular officials upon ening order and writ of habeas corpus; (2) tering the consulate for discussions of his he called the State Department and spoke intent to remain in the U.S. Those events with the China desk officer, politely notpitted the Chinese embrace of collective ing his obligations per the Kudirka fiasco rights against the United States’ embrace and warning of the repercussions should of individual rights. the desk officer stand by and allow Li The night of the stand-off, Li was schedto be forcibly removed from the United uled to attend a going-away party hosted States; and (3) he called the Executive by Louisa Sarofim. When Li didn’t show, Assistant to then-Vice President George Ben Stevenson tracked him down and H.W. Bush. discovered his plan to remain in the U.S. All the while, Charles tried to convince Li and Charles decided to meet with Chithe Chinese to release Li. Having longnese consular officials, declare Li’s intenstanding ties to the Chinese community, tion and exonerate the U.S. government Charles knew that he had to balance the and the Houston Ballet. But curiously, legal issues with the diplomatic issues. Chinese officials insisted that the meeting Diplomatic relations aside, Charles shared take place at the consulate, instead of the Li’s deep concerns for his family back in restaurant that Charles suggested. Upon China. At first he told the two members arrival, Charles was separated from Li and of the Houston press that had gathered Li was seized. The standoff ensued. late that evening almost nothing, hoping Fortuitously, Charles knew specifically that everything was about to be resolved, of perhaps the only other instance of forcand then telling the Chinese officials that ible repatriation. In 1970, a Lithuanian if they didn’t release Li, his story would sailor named Simas Kudirka made interbe on the front pages of every newspaper national waves when he jumped off a Soin the world. Once Charles realized he viet ship off the Atlantic coast and, seekwas making no headway with a low key ing asylum, swam to the U.S. Coast Guard approach, he urged Ben Stevenson and cutter to which the Soviet ship was teththe other members of the Houston Ballet ered. The Coast Guard allowed the Soviets board, all still decked out in gala finery to retrieve Kudirka from the Coast Guard

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Media Reviews

from the party, to remain in the consulate, paraphrasing Justice Lewis Brandeis, “Sunshine is the best disinfectant.” The Houston Chronicle and Houston Post reporters, while not fully appreciating all the events taking place in the consulate, told Charles that they could wait no longer and had an obligation to their readers. By early morning, Li’s case was making headlines across the world. By 6:00 a.m. Charles had drawn up a restraining order and writ of habeas corpus and went to meet Judge Seals at the Federal Court House loading dock on Capitol Street. At the meeting, Judge Seals had with him Judge John Singleton, Chief Judge of the Southern District, the U.S. marshal, and Assistant U.S. Attorney Michael O’Connor. He convinced Judge Singleton to grant the restraining order and the writ of habeas corpus and returned to the Chinese Consulate with the U.S. marshal in tow. When Charles returned, he was approached by a “reporter” who identified himself as Charles’ FBI contact. When the agent told Charles that the FBI had the building plans for the consulate and they had every exit covered, Charles knew that Li would not and could not be taken away for an early morning flight. Meanwhile, Li was inside, being told that he had been abandoned by his friends in the United States. Twenty-one hours after the standoff began, the Chinese Consulate asked Li one final time if he would return to China. Li again replied that he would not, and he was finally released. With the legal spectacle over, Li went on to dance with the Houston Ballet until 1995, when he moved to Australia, where he resides today. Charles remains in neardaily contact with Li while continuing his practice at FosterQuan LLP, and today he is one of the preeminent immigration lawyers in the country. For three decades now, Charles and his firm have provided pro bono representation for the artists brought to dance at the Houston Ballet

as well as international talent working with the Houston Symphony Orchestra, DaCamera Society, Alley Theatre, Houston International Festival, Theater Under the Stars and many more. Among his many services to the community, Charles is chair of the Asia Society Texas Center, Chair of the Task Force on Immigration for the Greater Houston Partnership, and Honorary Consul-General to the Kingdom of Thailand. Charles is played in Mao’s Last Dancer by Kyle MacLachlan (of “Desperate Housewives,” “Sex and the City,” “Twin Peaks” and “Blue Velvet” fame). Kyle spent three days in Houston visiting with Charles in preparation for the role, studying Charles’ mannerisms and even ordering a University of Texas class ring to match the one that Charles wore. Charles clearly left an impression on the actor. Recently, during an NBC-TV “Today Show” interview, Kyle described Charles as “an intelligent, well spoken, interesting guy” and added that “he’s a widely recognized expert in his field.” Charles and his wife Lily (herself a highly-accomplished and popular Chinese actress) have two sons, each of whom is nonchalant about their father being one of the key subjects in Mao’s Last Dancer. The children have met plenty of famous people and are more impressed that other people consider their father to be a hero in Li Cunxin’s story. For Charles Foster, being immortalized in film is merely “satisfying.” The rest of us just have to remind him how remarkable it really is. Keri D. Brown is is an associate in Baker Botts L.L.P.’s Private Clients section and associate editor for Legal Trends of The Houston Lawyer. Joy E. Sanders (jsanders@fonglegal.com) practices immigration law with Fong & Associates, L.L.P., and is a member of The Houston Lawyer editorial board. She tweets about law, sustainability and community at http://twitter.com/sandersjoy.

Rainmaking 101 How to Grow Your Client Base & Maximize Your Income By Patrick D. Kelly Published by AuthorHouse 2009 102 pages

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Reviewed by Angela L. Dixon ith an economy that is steadily on the downturn, individuals are seeking ways to make themselves more marketable and productive. Patrick Kelly has written Rainmaking 101, which explains the art of rainmaking and how it can be used to help you stand out from the crowd. As a young lawyer, Kelly wanted to know how to become a partner with his firm. He was told by a senior partner that in order to become one, he must be a rainmaker. Realizing that he did not learn this skill in law school, Kelly set out to not only learn what a rainmaker was, but to become one himself. Kelly does a good job of explaining what rainmaking is in the introduction. His definition stems from what he has observed over the years and his own experiences. Kelly discusses the importance of relationships and first impressions. He also provides tips on how to make yourself memorable to others and how a simple thank you note can make a lasting impression. Kelly stresses that rainmakers must communicate well with others, and he has a chapter dedicated to cocktail chatter. In

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The Houston Lawyer

Media Reviews

this chapter, Kelly gives examples of conversation starters and ideas for conversation topics. Kelly also devotes one of the longer chapters to the importance of making the most of presentations. Whether it is a presentation to a civic group or a professional group, it is an opportunity to build relationships. Kelly addresses such things as what to consider when drafting the message, the importance of knowing the audience, whether or not to use handouts and humor, and how to incorporate audience participation, among other things. He even includes a presentation checklist to get the reader started. Kelly also covers the importance of good manners, sometimes overlooked by people when they are trying to make it to the top. Business etiquette, building healthy habits and effective time management skills all are addressed in subsequent chapters of the book. Kelly gives basic information on business etiquette, but for someone who is unfamiliar, it will be helpful because it covers everything from invitations to formal dinners, and even provides a graphic and explanation of the purpose and location of the place settings. In terms of healthy habits, Kelly discusses the basics–exercise, diet and sleep—but also addresses some hidden benefits that might not be so obvious, but are just as important. Kelly concludes the book by acknowledging that failure is a part of the process of implementing and developing rainmaking skills and encourages the reader to learn from it. This book is a quick read with roughly 100 pages filled with tips and techniques to take your rainmaking skills to the next level. It teaches the basics, so for those well versed in rainmaking techniques, it can be used as a refresher. For those new to the game, there is a wealth of easy, practical marketing tips sure to be helpful in developing a good client base. Angela L. Dixon is a solo practitioner and handles primarily civil matters. She is a 40

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member of The Houston Lawyer editorial board.

Bond Daddy By John P. Bott and Jason L. Fowell Published by iUniverse Incorporated, 2010 248 pages

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Reviewed by Nicole S. Soussan ouston attorney Jason L. Fowell teamed up with licensed securities broker John P. Bott to write Bond Daddy, a quick and enjoyable read that chronicles the tremendous success and terrible failure of men trusted by everyone from government officials to powerful bank owners to play the market and win. Inspired by actual events from a 1970s Houston boiler room operation, Bond Daddy is a particularly riveting read in the wake of the latest financial crisis. In the book, two best friends stumble upon the opportunity of a lifetime at the fictitious Texas brokerage dealing firm HAYNES, OLIVE, GAGE & STRONG. Jack, a college graduate with a strong, sixth sense of the market, and Aaron, a less-educated top-notch salesman who got the job after selling one of the partners a backyard pool, were lured by the Firm’s “get rich quick” promises. The Firm developed rookie brokers like Jack and Andrew by first breaking them down through strict codes of conduct and abusive treatment, and then building them back up until they began to make enormous profits for the Firm and take home large commissions. The partners used the lure of endless luxury to motivate and strong-arm the rookies into pursuing deals relentlessly, without ever questioning what they were told or

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where to place their loyalties. Taught to spend as though the cash “had an expiration date,” the rookies wore the sharpest labels that Neiman Marcus had to offer and were constantly surrounded by the finest liquor, the most beautiful women, and the fastest cars. When they weren’t racing Ferraris on the downtown streets of Houston or placing thousand dollar bets in Las Vegas, the rookie brokers were (sometimes literally) tied to their desks on the trading floor, employing whatever tactics necessary to sell bonds to unsuspecting clients. Morals and ethics had no place at the Firm, and the partners were quick to remind (or to get rid of) anyone who questioned that. With hard work and personal sacrifice, Jack and Aaron quickly became two of the top-selling brokers in their class and received promotions that included more than just new titles. Asked to be a part of the “Zeros,” the boys-turned-men got a taste of the good life, including invitations to attend the lavish and risqué parties thrown after hours at the Firm. To keep up with this lifestyle, they were taught to spend before they saved and were ridiculed if they did not have the latest in fine automobiles. If it all sounds too good to be true, that is because it was. Bond Daddy is a page-turner because the authors create tremendous anticipation of the rookie brokers’ great fall to come. The authors also tangle the reader in the rookies’ web, making the reader root for these two young, ambitious businessmen and their principled friend, Bart, and hope against hope that the three friends will somehow emerge from their lavish but less-thenhonest lifestyle and be alright in the end.

Nicole S. Soussan is a third year law student at Vanderbilt Law School and plans to practice law in Texas. She wrote this review while clerking at Fulbright & Jaworski L.L.P.


LEGAL TRENDS

Massive Fines and Puni-Cows: “Legal Thuggery” Might Now Affect Exemplary Damages

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By Erin Reed n Bennett v. Reynolds, No. 08-0074 (Tex. June 25, 2010), the Texas Supreme Court further clarified the standards for reviewing awards of exemplary damages. This case, which has become known as the “puni-cow” case, arose from Bennett’s conversion of Reynolds’ thirteen head of cattle, which had strayed onto the ranch land owned by Bennett’s corporation. A jury awarded Reynolds approximately $5,000 in actual damages and a total of $1.25 million in punitive damages because the transgression—one in a series of hostilities between the feuding ranchers—was committed with malice. Although the Court agreed that punitive damages were warranted against both the defendant Bennett and his corporation, the Court held that the amount of punitives awarded (a ratio of 47:1 as to Bennett and 188:1 as to the corporation) violated due process and remanded to the court of appeals for remittitur. The Court first noted that even a 4:1 ratio might be pushing the outer limits of constitutionality and that the U.S. Supreme Court has steadily restricted due process standards in this area. The Court then looked to three guideposts governing those due process standards: the reprehensibility of the defendant’s conduct; the ratio of exemplary to actual damages awarded; and the amounts of legislative civil penalties in comparable cases. In analyzing reprehensibility, the most important of the three guideposts, the

Court considered five nonexclusive factors. Bennett’s conduct satisfied the fifth factor—the harm resulted from intentional malice—but it did not cause physical harm (factor 1), endanger the health or safety of others (factor 2), threaten financial ruin (factor 3), or involve repeated thefts (factor 4). The amount of punitives awarded therefore left no room for greater punishment in more egregious cases. The Court accordingly remanded for a determination of a more modest penalty. In dicta, the Court suggested that—although looking to criminal sanctions has little utility in assessing punitives—because no comparable civil statute existed in this instance, pegging punitives to the $10,000 fine for thirddegree felony theft would produce a (perhaps more appropriate) 1.877:1 ratio. Additionally, the Court noted that this case posed a critical threshold question of whether Bennett’s actions beyond the cattle theft itself might factor into the reprehensibility analysis. Because Bennett had engaged in a “scheme of deception” throughout the litigation process aimed to either cover up the theft or taint the outcome at trial, the Court held that his “extra-conversion misdeeds” aimed to worsen the original damage inflicted on Reynolds. Specifically, the Court announced that allegations similar to the following may properly inform a reprehensibility analysis: (1) bribing a witness and/or urging him to lie; (2) threatening bodily harm to a witness, even when the threat goes awry (e.g., is unwittingly delivered to the wrong person); (3) evidence tampering; (4) other “intimidation techniques,” such as filing a separate suit against a key witness; and (5) other “cover-up efforts” (e.g., here, attempting to register Reynolds’ cattle brand as Bennett’s own). Erin Reed practices in the Business Litigation group at Haynes and Boone, LLP in Houston.

Kagan Confirmation Contentiousness Continues Partisan Trend

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By Edward C. Dawson n August 7, 2010, Elena Kagan was sworn in as the 112th justice of the Supreme Court of the United States. She is the fourth female justice and one of three women currently sitting together—the first time in the Court’s history this has happened. Justice Kagan is also the fourth Justice to be confirmed to the Court in the last five years—joining Justices Roberts, Alito, and Sotomayor. The four will likely have a long tenure together on the Court, since all of them are age 60 or under (Justice Kagan herself is only 50), accompanied by Justice Thomas, who despite having served for 18 years is only 62. This new wave of appointments brings a concentrated, relatively rapid turnover in the Court’s composition after a long period of stability. There was no change in Court membership between 1994 and 2005. During that long period, changes in the political culture seem to have altered the basic dynamics of the confirmation process. Whether because of increased partisanship in general, or a growing recognition of the power that courts wield over crucial social issues, between 1994 and 2005 there was an erosion of the norm that a President was entitled to easy confirmation of any qualified nominee. During that time, the change manifested in the confirmation process for nominees

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LEGAL TRENDS

to the federal circuit courts, as qualified nominees of both parties were held up or blocked entirely by the opposing side. Thus, of the pre-1994 Justices, almost all were confirmed by overwhelming majority votes (Scalia 98-0, Kennedy 97-0, Ginsburg 96-3, Breyer 89-7). The new wave, in contrast, was confirmed by narrower, more closely partisan majorities (Chief Justice Roberts 78-22, Justice Alito 58-42, Justice Sotomayor 68-31, Justice Kagan 63-37). Justice Thomas is actually closer to the newer justices in this respect, just as he is in age, because his confirmation was 52-48 and probably the most bitterly contested of any of the currently sitting justices’. As for Justice Kagan’s confirmation, the process was relatively smooth, primarily because the Democrats’ large majority in the Senate basically guaranteed her confirmation. Nonetheless, the process was still contentious. At Justice Kagan’s confirmation hearings before the Senate Judiciary Committee, Republican Senators pressed her on her views and tried to score political points. Senator Sessions, for example, attacked her for a perceived lack of litigation and judicial experience. Other Republicans questioned her about her decision to forbid military recruiters from Harvard Law School’s career center because she believed the military’s “don’t ask don’t tell” policy violated the school’s anti-discrimination policy. Justice Kagan, for her part, handled the confirmation questioning adeptly, and largely without disclosing her views on specific legal doctrines or how she might rule in particular cases. In so doing, she followed a model she had earlier criticized in a 1995 law review article about flaws in the modern confirmation process. In that article, she had praised “the essential rightness — the legitimacy and the desirability — of exploring a Supreme Court nominee’s set of constitutional views and commitments.” As a nominee, she distanced herself from that view, explaining that she had realized it is insufficiently sensitive to 42

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the many interests a nominee must balance when being questioned. Still, she was more forthcoming than many other recent nominees as to her politics and her broad constitutional commitments, confirming that her personal politics are progressive, that she favors a broad reading of the commerce clause, and that she believes originalist analysis is a (though not the only) legitimate means of interpreting the Constitution. While the hearings were anticlimactic, if not uneventful, the confirmation vote was notable because like other recent votes it was basically partisan. Kagan received the fewest affirmative votes for a Democratic President’s nominee in the modern era. Only five Republicans supported her, and only one Democrat voted against. After the vote, Justice Ginsburg publicly criticized the partisan trend in a speech accepting a lifetime award from the ABA, saying: “May the U.S. Senate someday return to the collegial bipartisan spirit that Justice Breyer and I had the good fortune to experience.” Senator Lindsey Graham, one of the few Republicans to support Kagan, similarly expressed the view that the confirmation system is broken, and that it would be desirable to return to the tradition of wide deference to presidential nominees. For now, though, there are no signs this is likely to occur. Instead, even more contentious battles are likely yet to come, particularly when there is a nomination that could seriously shift the political center of the Court. Of the four recent nominations, three (Roberts, Sotomayor, and Kagan) did not

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shift the Court politically much at all. Justice Alito replaced a more liberal Justice from the same party (O’Connor), and even that incremental shift produced major changes in areas such as Second Amendment rights and campaign finance reform. If one of the Court’s four more conservative justices were to leave the Court under the current Administration, if a future Republican president were to replace one of the four more liberal justices, or if the current swing vote, Justice Kennedy, were to leave under a president of either party, the resulting confirmation fight might well surpass in acrimony anything yet seen. This trend may be undesirable, but it is probably also inescapable. As Justice Kagan wrote in her article about confirmations: “It should be no surprise by now that many of the votes a Supreme Court justice casts have little to do with technical legal ability and much to do with conceptions of value.” As this proposition becomes more and more accepted, in an era when “conceptions of value” are especially hotly contested between the parties, it is likely that the confirmation process will stay contentious for at least the near future. Ed Dawson is a partner at Yetter Coleman LLP, where his practice focuses on complex appeals involving commercial and public law.


OFF THE RECORD

Charting a New Path–at

High Speeds By Hannah Sibiski

A

fter twenty years as a practicing criminal defense the winning bike in the Tour de France last year and the other attorney, Ned Barnett took a ride that changed of which is identical to the bike that took second. the course of his daily life. After several years Ned participates in these races individually and through his riding in the MS150, Ned decided to try a comteam, the Gulf Coast Cycling Association (“GCCA”), which is petitive bike race. On May 1, 2010, he raced sponsored by Toyota and others. GCCA teammates enter races competitively for the first time together and develop a team strategy to win in a 65-mile road race – and placed fifteenth as a team – they plan their positions and out of about 100 riders, many of whom were their procedures for the race before the race young enough to be his children rather than ever starts. his competition. Ned was off on a new, highAt 49, Ned often is one of the oldest parspeed adventure. ticipants in a race. Yet he regularly beats 26Training with professional coaches and year-olds. Next year, at 50, Ned will begin racing around the country, Ned has a new racing in the highly competitive over-50 racpassion that fills his early mornings and es. He is training hard to be ready to defend weekends. Ned usually starts training at 4:30 his growing reputation as the rider to beat. each morning, riding his own bike on a set of Ned has even won some money – granted, rollers that allow him to train indoors withnot enough to cover the motel room he used out sacrificing the quality of his training. He between race days – but certainly more than has attended camps with Lance Armstrong’s enough to feed his competitive spirit. In coach Chris Carmichael, and he works with racing, Ned has found a semi-professional trainers who analyze the data from his bike hobby that only looks unrelated to his dayrides – including the speed his bike is movto-day life as a lawyer. The dress codes may After starting his new avocation only four months ago, Ned Barnett is already ing, the rate his heart is working, and the be different, but Ned’s goal is the same – winning competitive bike races. power with which he is peddling – and prowhether in the courtroom or on his bicycle, vide detailed assessments of how he needs to change his trainNed is focused on streaking ahead and leaving the rest of us ing and his racing strategies. And that’s just during the week. eating his dust. Ned spends his weekends racing – and winning. In the mere four months since his first competitive race, Ned has competed Hannah Sibiski practices commercial litigation and appellate law in more than 25 races and also participated in countless charity with Watt Beckworth Thompson & Henneman, L.L.P. She chairs rides. He competes in every kind of bike race there is – from the HBA Appellate Practice Section’s Pro Bono Program in the First long road races of 100 miles or more to shorter criterium and and Fourteenth Courts of Appeals, and she is a member of The time trial races. He rides two bikes, one of which is identical to Houston Lawyer editorial board. thehoustonlawyer.com

September/October 2010

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at the bar

Judicial Investiture

The Hon. Sheri Y. Dean was sworn in as judge of the 309th District Court by the Hon. Doug Warne, judge of the 311th District Court, on September 15, 2010. Her husband, Stephen, held the Bible, while her sons Stephen II, Spencer and Stanton helped with robing.

Judicial Portraits

Portraits of the Hon. Tom F. Coleman and the Hon. Alice Oliver-Parrott, honoring their service on the 151st District Court, were unveiled in a special ceremonoy on September 17, 2010. At left, Tom F. Coleman, III unveils the portrait of his late father, while at right, the Hon. Alice Oliver-Parrott unveils her portrait. Judge Mike Engelhart, current judge of the 151st, presided.

THE MOST! Morgan & Weisbrod, L.L.P.,

is pleased to announce that the following attorneys have become Board Certified in Social Security Disability Law by the National Board of Legal Specialty Certification: Carl Weisbrod, Managing Partner Jennifer L. Fry, Senior Partner Paul Burkhalter, Senior Partner John Driskill, Partner and our newest Partner, Michael T. Kelly Morgan & Weisbrod, L.L.P., now has the MOST Board Certified Attorneys in Social Security Disability Law of any firm in the Nation We are also pleased to announce the association of: Laura Hernandez, Carolyn Shulman, Robert Billingsley and James Skelton When you need Social Security Disability advice, trust the firm with the MOST!

The Houston Lawyer

Helping Disabled Texans for over 30 years Offices in Dallas, Houston and Georgetown

THE MOST Morgan & Weisbrod, L.L.P.

www.morganweisbrod.com

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September/October 2010

thehoustonlawyer.com

1.800.800.6353


HBA-CLE Online The following topics are just some of the more than 115 hours of HBA/CLE Seminars that are available online at CLEonline.com. To receive a 20% discount on HBA programs online, HBA members must call (713) 759-1133 prior to registering.

www.hba.org A Practical Approach to Assisting with Veteran’s Legal Issues Changing Practice for Changing Times: Working from Home Changing Practice for Changing Times: Going Solo Construction Law’s Dirty Dozen: Twelve Things Every Lawyer Should Know Copyright Infringement for the General Practitioner Crimes in Foreign Lands Eminent Domain for the General Practitioner Entertainment Law-Intellectual Property Protection Ethics Issues Updates: E-Discovery, Trial Prep, Advertising, Grievances, Lying & Negotiations Ethics Traps and the Texas Grievance System Family Law for the Non-Family Attorney Firing Without Fear Fundamentals in Real Estate Handling High Profile Cases: Considerations When Dealing with the Media

HIPAA Update: Privacy and Security Regulation in 2010 and Beyond Income Tax for the Solo/Small Firm Attorney Juvenile Adjudication, Disposition and Modification Law Practice Management: Building and Enhancing Client Relationships Lessons from the Courtroom Margin Tax: What Every Lawyer Needs to Know About the New Texas Franchise Tax Mediation - From the Mediator and the Litigant Nuts and Bolts of Texas Criminal Law Off to Slake Their Thirst: The Texas Dram Shop Act Offer of Settlement Under Texas Rule 167 - A Double Edged Sword Persuasive Communication for Lawyers - Both Inside and Outside the Courtroom Post-Judgment Collection Techniques Practicing Law in the IV-D Courts Prosecution and Defense for Healthcare Fraud Search & Seizure Law Update For the 21st Century Attorney

Summary Judgments: Views From the Trial and Appellate Bench Tax Return Preparer’s Penalties: What General Practitioners Need to Know and Why Ten Rules for Great Jury Selection Texas Attorney Grievance Procedures The City of Houston as Plaintiff: Litigation You Never Knew Existed The Equal Protection Clause and the Lasting Meaning of Brown v. Board of Education: From Desegregation Through Affirmative Action Admissions” The Ultimate Settlement Secret: The Advantages of §468B Qualified Settlement Funds for Medicare/ Medicaid Claims U.S. Immigration Law: Qualifying Through Employment & Family Update on Employment Law Update on Texas Juvenile Law in Harris County Voir Dire and the Jury Charge: How to Master Two Essential Trial Skills That Are Often Overlooked What to Do When ICE Comes Calling on Your Client

Seminars are 1.25 - 4.0 hours and many include ethics credit. All seminars are available online 24 hours a day for your convenience.


A Profile

in professionalism

W

JUSTICE KEM THOMPSON FROST Fourteenth Court of Appeals

The Houston Lawyer

hether in the courtroom, at the negotiation table, or working through other challenges in our professional lives, as lawyers and judges we stand on a grand stage in a big arena. We are individually empowered to show by noble deeds, great and small, that we are members of an honorable profession. When we joined the bar, we made a commitment that surpasses a vow of personal integrity and calls us to uphold a sacred honor. Just as what we think and do define us as individuals, our words and actions as lawyers and judges define the character of our profession. Our character as individuals is measured by what we do when no one is watching; the same standard governs our 46

September/October 2010

thehoustonlawyer.com

words and actions as members of the bar. Good or bad, the behavior we model in our professional lives is the behavior by which our entire profession is judged—a weighty responsibility, yes, but also an extraordinary opportunity. As members of the bar, we are empowered not only to practice in a way that justifies the honor, but also to preserve this rich tradition through modeling and mentoring. Telling the next generation of lawyers what to do and how to act is not enough. We must come alongside them and let them see by good example the way to practice law honorably. The greatest legacy we, as members of the legal profession, can leave our communities is a bar whose members understand that how lawyers practice is just as important as what they accomplish.


reinvent your image...

The Houston Bar Association Lawyer Placement Service will assist members by coordinating placement between attorneys and law firms. The service is available to HBA members and provides a convenient process for locating or filling positions. 1. In order to place an ad, attorneys and law firms must complete a registration record. Once registration is complete, your position wanted or available will be registered with the placement service for six months. If at the end of the six-month period you have not found or filled your position, it will be your responsibility to re-register with the service in writing.

brochures websites logos

2. If you are registered, resumes will be sent out under their assigned code numbers. Once a firm has reviewed the resumes, they are to contact the placement office with the numbers they are interested in pursuing. The placement coordinator will then contact the attorney, give him/her some background information on the inquiring firm, and the attorney will then let the coordinator know if he/she wishes personal information to be released to the firm. This process will insure maximum confidentiality and get the information to the firms and attorneys in the most expedient manner. 3. In order to promote the efficiency of the Houston Lawyer Placement Service. PLEASE NOTIFY THE PLACEMENT COORDINATOR OF ANY POSITION FOUND OR FILLED. 4. To reply for a position available, send a letter to HBA, placement coordinator at the Houston Bar Association, 1300 First City Tower, 1001 Fannin Street, Houston, Texas 77002 or e-mail Brooke Eshleman at BrookeE@hba.org. Include the code number and a resume for each position. The resume will be forwarded to the firm or company. Your resume will not be sent to your previous or current employers. PLACEMENT DEADLINES Jan. 1 Jan./Feb. Issue Mar. 1 March/April Issue May 1 May/June Issue July 1 July/August Issue Sept. 1 Sept./Oct. Issue Nov. 1 Nov./Dec. Issue

5084 Full time associate position available. 5+ years experience required. Must have commercial and personal injury background. Competitive compensation package. 5094 PROBATE LAWYER. Sugar Land estate planning/ probate firm with HoustonGalleria office seeking attorney with extensive experience in TX probate and trust administration, Form 706 preparation, estate and gift tax planning. Positions Wanted

2062 Very Experienced Trial Attorney intimately familiar with the mechanics and operation of the Commercial Mortgage Backed Securities (CMBS) industry, including the securitization process of commercial loans and the duties and responsibilities of Mortgage Loan Originators/Depositors, Underwriters of REMIC Trusts, Rating Agencies, Trustees, Servicers and Special Servicers. Looking for in-house position.

2064 Attorney with extensive experience in collections and enforcement of judgments will take cases on a fee-for-service Positions Available or—if meritorious—on a con5076 Boutique Civil Litiga- tingency basis. tion law firm specializing in complex business litigation is 2096 Sr. Attorney / CPA – Relooking for an associate attor- cent large law firm retiree seeks ney with 1-3 years litigation contract work: appellate briefexperience and excellent re- ing, forensic accounting, hidsearch and writing skills. den asset searches, workouts. If you need information about the Lawyer Placement Service, please contact HBA, placement coordinator, at the HBA office, 713-759-1133.

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If you need information about the Lawyer Placement Service, please contact HBA, placement coordinator, at the HBA office, 713-759-1133 September/October 2010

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placement service

PLACEMENT POLICY


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SUBLET INDIVIDUAL OFFICE – AVAILABLE NOW Great Five Star Downtown office-- just became available. Office is decorated by a top Houston professional, located in a Class A building (The Lyric Centre) with adjacent offices surrounded by lawyers and other professionals. The glass-enclosed lobby offers grand views of downtown skyscrapers and outside sculpture. A self-playing grand piano and lunch hour pianist add to the ambiance. The building is located in the heart of the Arts District, Downtown. The space is great for professionals and lawyers with its proximity to downtown locations including federal, state and other courts. Accessibility to interstate and major highways makes its central location second to none. The available office has a well-appointed professional waiting area, complete with artwork and receptionist- all leading to a large, stunning boardroom, which overlooks the Louisiana Street corridor. Amenities include a state-ofthe-art scanner, copier and thehoustonlawyer.com

paneled conference room, eat-in kitchen, advanced phone system answered individually for each attorney. Receptionist included in rent and available for secretarial work. Excellent shared-suite environment since 1991. Call Lynn at 713-977-9600.

Lorance & Thompson, P.C., Uptown/Galleria near Post a well established litigation Oak. Several offices and firm, has a few extra offices Secretarial/Paralegal space that were reserved for expanavailable. Filing space, fax, sion. With the current econcopier, kitchen, conference omy, that isn’t gong to haprooms, internet, reception- pen any time soon. The firm ist, covered parking available would like to sublet them to depending on your needs. a small firm specializing in a Ranging from $800-$950 per non-litigation practice. If inmonth. Call 713-752-8324 terested, please contact Phil for more information. Summers, 713-868-5560. Office Sharing: 2 offices in Greenway Plaza Class A tower available to solos or a small firm. Space will be shared with a 3 lawyer firm practicing in family law, guardianship, wills and trusts, civil litigation, and small business counseling. Contact us at 713-579-9700 or jholman@patelwarren.com

HOUSTON / MUSEUM DISTRICT Newly remodeled Historic Home, minutes from the Court House. On-site Management, receptionist, three conference rooms, kitchen, small library, telephone system, internet access, copier, fax and free parking. Several offices available. Call 713-840-1840.

OFFICE SPACE at 3 Riverway Class “A” Building located off Woodway drive and 610 West Loop. Law firm is primary tenant. Several offices available. On-site management and security guard, attached parking garage for tenants and visitors, conference rooms, receptionist services, kitchen, wired for broadband internet access. Contact Lisa DeWild, 713-209-2934

Executive Office Space Available: ranging from $850-$995 per month. Amenities include: 2 conference rooms; maid and reception services; full kitchen. Heights Boulevard address. Broker/owner.  713-880-4700.

HOUSTON – TANGLEWOOD. Woodway Frost Bank Building. Window office(s) for sublease in beautiful suite furnished with antiques and Oriental rugs. Includes wood-

Woodway/Voss TANGLEWOOD – Office Space Available for Attorney Window office space with furniture for sublease in beautiful suite with lobby, kitchen, conference/supply room, copy room. Excellent environment with five attorneys. Monthly rent includes


GREENWAY PLAZA Two first floor office spaces available, 12X15 and 12X17. Tenant shares suite with 6 attorneys, standard amenities included. Please call Trina at 713-627-1133. Sublease beautiful office space 1402 sq ft—550 Westcott. Call Leigh 713-224-6774. OFFICE SPACE Available immediately one and/or two attorney offices with secretarial area in Montrose with use of conference room, full kitchen, telephone system and high speed Internet connection. Call 713-529-0980.

AV rated out of state firm seeks Houston AV rated commercial litigation attorney to act in “Of Counsel� capacity for long term representation of firm’s Texas corporate clients. Please forward attorney and firm resume to: avlawfirm@hotmail.com. Law Firm located in Houston has rolling Texas Workers’ Compensation Practice and Cases. Firm seeks to have Lawyer experienced in working on Texas Workers Compensation matters and other Tort and Litigation type cases. Interested applicant can have his/ her own practice and work in association with the Firm if desired. Please send resume setting forth your qualifications background and circumstance to us with your salary expectations to Toni.Lister@otbw-law.com

Professional Services

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The Houston Lawyer

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