SML Perspectives | Surmounting the World of Business Regulations

LABOR & EMPLOYMENT:

LITIGATION:

HEALTH CARE:

EĂƟŽŶĂů >ĂďŽƌ ZĞůĂƟŽŶƐ ŽĂƌĚ WŽƐƚƐ ^ŽĐŝĂů DĞĚŝĂ WŽůŝĐLJ dĞŵƉůĂƚĞ

ŝƐĐŽǀĞƌLJ ŝŶ ƚŚĞ ůĞĐƚƌŽŶŝĐ ŐĞ͗ dŝƉƐ ĨŽƌ DĂŶĂŐŝŶŐ Ͳ ŝƐĐŽǀĞƌLJ KďůŝŐĂƟŽŶ

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perspectives SML

VOLUME TWO | 2012

^ŵŝƚŚ DŽŽƌĞ >ĞĂƚŚĞƌǁŽŽĚ WƵďůŝĐĂƟŽŶ

DĂƩĞƌƐ ŽĨ >Ăǁ ĂƐ dŚĞLJ ZĞůĂƚĞ ƚŽ zŽƵ CORPORATE | COMMERCIAL REAL ESTATE | HEALTH CARE LABOR & EMPLOYMENT | LITIGATION

MAKING THE CLIMB ^ƵƌŵŽƵŶƟŶŐ ƚŚĞ tŽƌůĚ ŽĨ ƵƐŝŶĞƐƐ ZĞŐƵůĂƟŽŶƐ ŶƟͲ ƌŝďĞƌLJ ŽŵƉůŝĂŶĐĞ /ƚ͛Ɛ EŽƚ :ƵƐƚ ĨŽƌ ŝŐ͕ DƵůƟͲEĂƟŽŶĂů ŽŵƉĂŶŝĞƐ

ĞǁĂƌĞ ŽĨ ƚŚĞ ĂŶŬƌƵƉƚĐLJ WƌĞĨĞƌĞŶĐĞ ůĂŝŵ dƌĞŵĞŶĚŽƵƐ dĂdž ZĞĚƵĐƟŽŶƐ ĨŽƌ džƉŽƌƚĞƌƐ

When one wrong move could cost you the game

2

A competitor suing to shut you down, a challenge to your IP rights, or a contract dispute with a key partner can destroy more than your company’s goodwill or third-quarter earnings.

When facing commercial litigation, rely on a ¿UP ZLWK WKH UHSXWDWLRQ H[SHULHQFH DQG EHQFK strength to defend all that’s at stake.

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Attorneys at Law

ATLANTA 404.962.1000

CHARLESTON 843.300.6600

CHARLOTTE 704.384.2600

GREENSBORO 336.378.5200

GREENVILLE 864.242.6440

RALEIGH 919.755.8700

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WILMINGTON 910.815.7100

From the Chairman Earlier this year, Smith Moore Leatherwoo Leatherwood od d lawyers participated in some of the most mo ost significant complicated sign g ificant and compl p icated litigation litig gation in the the Southeast: a multi-million dollar contract dispute dispu pute Florida out off th Lehman Bankruptcy; in F lori lo rida da arising ari risi sing ng o ut o thee Le Lehm hman an B ankr an krup uptc tccy; a products liability matter in Georgia in which which the plaintiffs sought hundreds of millions of dollars; doll do llar ars; s; and and a highly hig ighl hly y publicized publ pu blic iciz ized ed and and groundgro roun un nd dbreaking white-collar criminal case in North Norrth nation’s Carolina. We were up against some the natio n’s largest law firms and these matters dragged o on that for many weeks. Nonetheless, we showed th hat litigate our lawyers have the depth and strength to litiga ate time. massive cases in multiple states at the same tim me. among I’m always incredibly proud to be counted amon ng than the lawyers of this firm, but never more so th an about service when wh en they the hey y affirm affirm that tha hatt our our work work iiss ab abou outt se serv rvic icee to clients.

To with handling off be betourr cl ou clie ient ntss. T o be eentrusted ntru nt rust sted ed w ith it h th thee ha hand ndli ling ng o ett the-company litigation financial the-comp pany y litiga g tion or complicated comp plicated financ ial transactions is a tremendous responsibility; respo p nsibilitty; y; one that cannot be undertaken without being bein ng who passionately committed to helping those wh ho stressful have turned to us during extremely stressf ful circumstances. Fulfilling that commitment requires requirres constant vigilance, and an unrelenting dedication dedicatio on to excellence in every detail. I am proud to bee a when part of this firm because that’s what we do wh en shows. we come to work each and every day, and it show ws.

Rob Marcus is Smith Moore Leatherwood’s Chairman. dŚĞ ĨŽĐƵƐ ŽĨ ŚŝƐ ůĞŐĂů ƉƌĂĐƟĐĞ ŝƐ ŽŶ ĐŽŵƉůĞdž ĐŽŵŵĞƌĐŝĂů ĂŶĚ ĂƉƉĞůůĂƚĞ ůŝƟŐĂƟŽŶ͘ ,Ğ ŚĂƐ ƌĞƉƌĞƐĞŶƚĞĚ ŶƵŵĞƌŽƵƐ ĐŽƌƉŽƌĂƟŽŶƐ ĂŶĚ ĮŶĂŶĐŝĂů ŝŶƐƟƚƵƟŽŶƐ ŝŶ ŚŝŐŚ ƉƌŽĮůĞ ĂŶĚ ĐŽŵƉůĞdž ůŝƟŐĂƟŽŶ ŵĂƩĞƌƐ ƚŚƌŽƵŐŚŽƵƚ ƚŚĞ ƐƚĂƚĞ ĂŶĚ ĨĞĚĞƌĂů ĐŽƵƌƚƐ ŝŶ EŽƌƚŚ ĂƌŽůŝŶĂ ĂŶĚ ĞůƐĞǁŚĞƌĞ͘ ,Ğ ŝƐ ĂůƐŽ ǁĞůůͲǀĞƌƐĞĚ ŝŶ ĂůƚĞƌŶĂƟǀĞ ĚŝƐƉƵƚĞ ƌĞƐŽůƵƟŽŶ͕ ŝŶĐůƵĚŝŶŐ ŵĞĚŝĂƟŽŶ ĂŶĚ ĂƌďŝƚƌĂƟŽŶ͘ rob.marcus@smithmoorelaw.com 704.384.2630

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perspectives SML

^ŵŝƚŚ DŽŽƌĞ >ĞĂƚŚĞƌǁŽŽĚ WƵďůŝĐĂƟŽŶ

CON

NAVIGATING THE WORLD OF BUSINESS REGULATIONS

P.11

WƌŝŵĞƌ ŽŶ &Ăŝƌ Ğďƚ ŽůůĞĐƟŽŶ WƌĂĐƟĐĞƐ ĨŽƌ ƌĞĚŝƚŽƌƐ ĂŶĚ ŽŶƐƵŵĞƌ ĚǀŽĐĂƚĞƐ

P.16

ĞǁĂƌĞ ŽĨ ƚŚĞ ĂŶŬƌƵƉƚĐLJ WƌĞĨĞƌĞŶĐĞ ůĂŝŵ

P.20

ŶƟͲ ƌŝďĞƌLJ ŽŵƉůŝĂŶĐĞ /ƚ͛Ɛ EŽƚ :ƵƐƚ ĨŽƌ ŝŐ͕ DƵůƟͲEĂƟŽŶĂů ŽŵƉĂŶŝĞƐ

4

P.24

dƌĞŵĞŶĚŽƵƐ dĂdž ZĞĚƵĐƟŽŶƐ ĨŽƌ džƉŽƌƚĞƌƐ

P.32

ŝƐĐŽǀĞƌLJ ŝŶ ƚŚĞ ůĞĐƚƌŽŶŝĐ ŐĞ

&Ğǁ dŝƉƐ ĨŽƌ DĂŶĂŐŝŶŐ Ͳ ŝƐĐŽǀĞƌLJ KďůŝŐĂƟŽŶƐ

Departments

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&ƌŽŵ ƚŚĞ ŚĂŝƌŵĂŶ

Ɛ ƚŚĞ ĂƐĞ DĂLJ Ğ

WĞƌƐƉĞĐƟǀĞƐ

WƌŽĮůĞ

A letter from Smith Moore Leatherwood’s Chairman

Notable Litigation Matters

Trends in Commercial Real Estate Finance

Alan Duncan

NTENTS VOLUME TWO | 2012

FEATURES

P.10

&ŝŶĞ dƵŶŝŶŐ zŽƵƌ ƵƐŝŶĞƐƐ In these uncertain economic times, few companies are willing to make large financial commitments or go on hiring sprees to grow their businesses. So what can you do to invest in your business that doesn’t involve a huge pile of cash? Reexamine everything.

P.26

ϮϬϭϮ 'ŝŌƐ͗ tŝŶĚŽǁ ŽĨ KƉƉŽƌƚƵŶŝƚLJ This year, a window of opportunity exists for you to make a large gift to your heirs and shelter the gift from the gift tax, future estate tax, and potential generation-skipping transfer (“GST”) tax. bor Relations Act. You may find this policy useful in evaluating your own social media policies

P.28

P.36

/ŶĨŽƌŵĂƟŽŶ ƚŽ KƌŐĂŶŝnjĞ ĨŽƌ zŽƵƌ ĞŶĞĮĐŝĂƌŝĞƐ Keeping your estate planning documents well-organized, and in a place that is known to your heirs, can save your family a signficant amount of time and stress.es

^ƵƉƌĞŵĞ ŽƵƌƚ ůůŽǁƐ ,ĞĂůƚŚ ĂƌĞ ZĞĨŽƌŵ ƚŽ DŽǀĞ &ŽƌǁĂƌĚ Over the past few years, the uncertainty of health care reform has been one of the largest challenges facing our clients. Although the Supreme Court ruling does not answer all questions surrounding the future of health care, it does give some guidance for the future.

P.39

dŚĞ W d, Đƚ ŶŽƚŚĞƌ ƐƉĞĐƚ ŽĨ ,ĞĂůƚŚ ĂƌĞ WĂLJŵĞŶƚ ZĞĨŽƌŵ ƚŚĞ /ŶĚƵƐƚƌLJ ^ŚŽƵůĚŶ͛ƚ /ŐŶŽƌĞ In addition to imposing federal standards on medical malpractice lawsuits, the Protecting Access to Healthcare (PATH) Act repeals the limited exemption from federal antitrust law for the “business of health insurance.”

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Contributors

ŶĚƌĞĂ

ĂƌƐŬĂͲ^ŚĞƉƉĂƌĚ O Of Counsel R Raleigh, N.C. L Litigation aandrea.carska-sheppard@ 9919.55.8767

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All e-mail extensions @smithmoorelaw.com

ůůLJƐŽŶ >ĂďďĂŶ Partner Greensboro, N.C. Health Care allyson.labban@ 336.378.5261

Z ZŝĐŚĂƌĚ &Ğǁ

dĂŵŝ DĐ<ŶĞǁ

P Partner G Greenville, S.C. C Corporate rrichard.few@ 8864.240.2473

Partner Greenville, S.C. Litigation tami.mcknew@ 864.240.2408

ŝůů &ŽƌƐƚŶĞƌ

:ƵƐƟŶ WƵůĞŽ

P Partner R Raleigh, N.C. H Health Care b bill.forstner@ 9919.755.8714

Associate Raleigh, N.C. Health Care justin.puleo@ 919.755.8802

ĂƌƌLJ ,ĞƌƌŝŶ

:ŝůů ZĂƐƉĞƚ

P Partner A Atlanta, Ga. H Health Care b barry.herrin@ 4404.962.1027

Partner Wilmington, N.C. Corporate jill.raspet@ 910.815.7128

ddŽĚ ,LJĐŚĞ

ƌŝĐ ^ŶŝĚĞƌ

P Partner G Greenville, S.C. C Corporate ttod.hyche@ 8864.240.2423

Associate Raleigh, N.C. Litigation eric.snider@ 919.755.8758

D DĂƌƐŚĂůů <ĞŶƚ

dŽďŝŶ tĂƩ

P Partner A Atlanta, Ga. L Litigation m marshall.kent@ 4404.962.1036

Partner Atlanta, Ga. Health Care tobin.watt@ 404.962.1026

Z ZŽď <ŝĚǁĞůů

,ĞĂƚŚĞƌ tŚŝƚĞ

P Partner G Greensboro, N.C. C Corporate rrob.kidwell@ 3336.378.5483

Partner Charlotte, N.C. Litigation heather.white@ 704.384.2635

perspectives SML

^ŵŝƚŚ DŽŽƌĞ >ĞĂƚŚĞƌǁŽŽĚ WƵďůŝĐĂƟŽŶ

ĚŝƚŽƌͲŝŶͲ ŚŝĞĨ Rob Kidwell ƌŽď͘ŬŝĚǁĞůůΛƐŵŝƚŚŵŽŽƌĞůĂǁ͘ĐŽŵ džĞĐƵƟǀĞ ĚŝƚŽƌ :ĞƐƐ ZŽďĞƌƚƐŽŶ ũĞƐƐŝĐĂ͘ƌŽďĞƌƚƐŽŶΛƐŵŝƚŚŵŽŽƌĞůĂǁ͘ĐŽŵ ƌƚ ŝƌĞĐƚŽƌ ĚƌŝĞŶŶĞ ĞŶŶĞƩ ĂĚƌŝĞŶŶĞ͘ďĞŶŶĞƩΛƐŵŝƚŚŵŽŽƌĞůĂǁ͘ĐŽŵ ŽƉLJ ĚŝƚŽƌƐ <ĂƚŚLJ ĂŐǁĞůů ŬĂƚŚLJ͘ďĂŐǁĞůůΛƐŵŝƚŚŵŽŽƌĞůĂǁ͘ĐŽŵ 'ĂLJůĞ DĐ Ăůů ŐĂLJůĞ͘ŵĐĐĂůůΛƐŵŝƚŚŵŽŽƌĞůĂǁ͘ĐŽŵ tĞď ĞǀĞůŽƉŵĞŶƚ 'ĞŽƌŐĞ EĞůƐŽŶ ŐĞŽƌŐĞ͘ŶĞůƐŽŶΛƐŵŝƚŚŵŽŽƌĞůĂǁ͘ĐŽŵ

Yh ^d/KE^͕ KDD Ed^ KZ > dd Z^ dK d, /dKZ͗ :ĞƐƐ ZŽďĞƌƚƐŽŶ͕ džĞĐƵƟǀĞ ĚŝƚŽƌ ũĞƐƐŝĐĂ͘ƌŽďĞƌƚƐŽŶΛƐŵŝƚŚŵŽŽƌĞůĂǁ͘ĐŽŵ Smith Moore Leatherwood LLP ƩŽƌŶĞLJƐ Ăƚ >Ăǁ ϰϯϰ &ĂLJĞƩĞǀŝůůĞ ^ƚƌĞĞƚ͕ ^ƵŝƚĞ ϮϴϬϬ ZĂůĞŝŐŚ͕ E ϮϳϲϬϭ ϵϭϵ͘ϳϱϱ͘ϴϴϭϰ www.smithmoorelaw.com ǁǁǁ͘ƐŵůƉĞƌƐƉĞĐƟǀĞƐ͘ĐŽŵ

ůů ĐŽŶƚĞŶƚƐ Ξ KWzZ/',d ϮϬϭϮ ^ŵŝƚŚ DŽŽƌĞ >ĞĂƚŚĞƌǁŽŽĚ >>W͘ ůů ƌŝŐŚƚƐ ƌĞƐĞƌǀĞĚ͘ EŽ ƉĂƌƚ ŽĨ ƚŚŝƐ ƉƵďůŝĐĂƟŽŶ ŵĂLJ ďĞ ƌĞƉƌŽĚƵĐĞĚ Žƌ ƚƌĂŶƐŵŝƩĞĚ ŝŶ ĂŶLJ ĨŽƌŵ Žƌ ďLJ ĂŶLJ ŵĞĂŶƐ ǁŝƚŚŽƵƚ ǁƌŝƩĞŶ ƉĞƌŵŝƐƐŝŽŶ ĨƌŽŵ ^ŵŝƚŚ DŽŽƌĞ >ĞĂƚŚĞƌǁŽŽĚ >>W͘ dŚĞ ŝŶĨŽƌŵĂƟŽŶ ĐŽŶƚĂŝŶĞĚ ŚĞƌĞŝŶ ƐŚŽƵůĚ ŶŽƚ ďĞ ŝŶƚĞƌƉƌĞƚĞĚ ĂƐ ůĞŐĂů ĂĚǀŝĐĞ ǁŝƚŚ ƌĞƐƉĞĐƚ ƚŽ ƐƉĞĐŝĮĐ ƐŝƚƵĂƟŽŶƐ͘

s e s a C e l b a t o N ds n e f e D ood w r e h ase t C a e n L o i l e l r i oo 3M Smith M posites in $26 ially brought in 20a0g6ainbystWCaryannee , init ers om C The case four of its insur efendant, took e l, n ia tr a d k r C -wee ms an econd d dge denied d seven s, Far and a s

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perspectives 8

What trends are you seeing in FRPPHUFLDO UHDO HVWDWH Ă&#x20AC;QDQFH"

ŝĂŶĂ WĂůĞĐĞŬ

DĂƩ ƵŶŶŝŶŐŚĂŵ

ŚĂƌůŽƩĞ͕ E

Raleigh, NC

Commercial real estate lending moved from flat-lined in 2009 to anemic in 2011, illustrating the prolonged effects of this recession that has plagued the real estate development markets for commercial and industrial activities.

However, so far this year, we have seen an increase in new loan activity, including construction loans. Most of the construction loans have been in the retail sector, and the permanent loans have predominantly been office and industrial building refinances, indicating that financial institutions are getting back into the market.

The casual, ready-to-please lending practices of the early 2000’s have not returned. Banks and insurance companies are approaching these new loans in a measured, careful fashion, cutting no corners in underwriting or in legal due diligence. Some of these cautionary practices reflect changes in the regulatory climate. But there is also a we’vebeen-there-and-learned-from-it attitude that indicates lenders are still smarting from the 2008 crash.

If the current upward trend continues, 2013 should see much more activity.

Diana Palecek focuses her practice on commercial real estate transactions and commercial lending, including workouts, defaults, and foreclosures.

Her experience includes closing and negotiating commercial real estate loans, and negotiating commercial leases from both the landlord and tenant perspectives. She has extensive experience working with major lenders to develop commercial real estate loan documents, policies, loan closing procedures, and training programs. diana.palecek@smithmoorelaw.com 704.384.2609

The past few years have proven the truth of the old adage that the commercial real estate market follows the residential real estate market. Commercial real estate lending was slow to follow residential lending into recession, and has trailed residential lending in recovery.

While private investor-based lending has filled some of the void in the traditional lending market over the past few years, last year was the first year that saw a resurgence in the commercial mortgage backed securities sector, an area where new issuance activity was almost nonexistent in 2009 and 2010.

More importantly, I have seen a number of community banks and small to midsize regional banks reenter the local market with competitive rates and terms in 2012.

That increase in the number of market participants is certainly a good signal for prospective borrowers and developers, and I am hopeful that the trend is indicative of the traditional lending sector’s adjustment to increased regulatory burden and underwriting restrictions.

The market is clearly fragile, and most lenders are still adjusting their portfolios and working out a potential glut of maturing problem loans in 2012 and the next few years.

However, I think the past few years have helped both lenders and developers develop a better sense of the value of common sense “relationship lending” (i.e., developing a portfolio within a trusted lender/borrower relationship, rather than viewing individual loans as commodities), and a better understanding of how to deal with problem loans.

Matt Cunningham represents both borrowers and traditional and non-traditional financial institutions in corporate, asset-based and real estate financing transactions, workout matters, and secured transactions along a broad spectrum of financing structures and collateral. matt.cunningham@smithmoorelaw.com 919.755.8703

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Fine Tuning

Your Business

bbyy R Rob obb Kidwell

I

n these uncertain economic times, few companies are willing to make large financial commitments or go on hiring sprees too grow their heir businesses. But even as experts tell us that economic indicators are up one minute and down the next, the world of commerce merce continues to roll on.

10

Most businesses aren’t big iinvestments; b but they ’ making ki bi h aren’t’ completely l l stagnating i either. i h SSo what h can you do d to invest i iin your business that doesn’t involve a huge pile of cash? Reexamine everything.

Type of Business Entity—Is the structure you started with the structure that makes the most sense for where you are now? Your ability to get financing, liability risks, and your tax consequences might have changed as the environment changed.

Agreements—Operating agreements, supply and/ or distribution agreements, independent contractor agreements, etc. You should scrutinize and improve all of your agreements if at all possible.

Benefits Plans—Life & Disability, Retirement and Health plans all have a huge impact on your bottom line. And with health care in a state of flux, it’s vital to keep abreast of all your options.

IT and Infrastructure Expenditures —Could you save in the long run by doing things differently?

Improve Interdepartmental Relationships—Could better communication create efficiencies, encourage innovation, or improve processes? Do you formally encourage departments to get together on a regular basis? Do you require it?

Marketing—Should you cut back, or do more? Your marketing efforts need to be measured against what your competitors are doing. If they are cutting back, are you being presented with a golden opportunity?

Boost Morale—Reward or incentive programs, recognitions for jobs well done, or sometimes just listening go a long way in making employees more engaged and productive.

Initiatives don’t have to cost a fortune; they just need to be thoughtfully executed.

Build Stronger Relationships—Intangibles can sometimes bring big results. Identifying and cultivating relationships with the customers, partners, or providers that are essential to your business can have a big impact. Reach out, create a social event, send a note of thanks, or invite someone to lunch.

As margins become thinner, the small details become evermore critical. But taking stock of your business now will help you prepare for the economic rebound – which will require yet another adaptation in the way you examine your business (in a good way).

Training —Investing in your workforce can pay dividends in the long run.

Rob Kidwell is a partner in the Greensboro office of Smith Moore Leatherwood. He is an experienced business lawyer focused on advising businesses on structuring, negotiating and documenting a wide array of complex business agreements. rob.kidwell@smithmoorelaw.com | 336.378.5483

DEBT COLLECTION A Primer on Fair Debt Collection Practices for Creditors and Consumer Advocates

by Bill Forstner and Eric Snider

T

hese days, one can hardly open a web browser, turn on the radio, or visit a mailbox without encountering some reminder that we are a nation of debtors. Collectively, the amount of our outstanding balances is mind-boggling. U.S. consumers’ non-real estate indebtedness at the end of 2011 was $2.635 trillion.1 Further, last year approximately 30 million individuals—14 percent of American adults—had debt that was subject to the collections process.2 Some of this debt can be attributed to consumer spending choices or a consumer’s loss of a job. A sizable portion consists of medical costs, an issue upon which The New York Times, the Charlotte Observer, and the Raleigh News & Observer have reported in the last few months.3 Given the recent financial collapse and the lumbering economic recovery, creditors continue to feel intense pressure to collect overdue accounts and debtors have increasing difficulty paying their debts.

To that end, creditors can work on their own behalf to recover money owed to them by consumers or turn to third-party collections groups for help. However, these efforts should be undertaken with deliberation.

1 Fed. Reserve Bank of N.Y., Research & Statistics Grp., Quarterly Rep. on Household Debt & Credit (February 2012), available at http://www.newyorkfed.org/research/national_economy/householdcredit/DistrictReport_Q42011.pdf.

2 Consumer Fin. Prot. Bureau, Fair Debt Collection Practices Act Annual Rep. (March 2012), available at http://files.consumerfinance.gov/f/201203_cfpb_FDCPA_annual_report.pdf.

3 Jessica Silver-Greenberg, Debt Collector Is Faulted for Tough Tactics in Hospitals, N.Y. Times, April 24, 2012 (available at http://www.nytimes.com/2012/04/25/business/debt-collector-is-faulted-for-tough-tactics-in-hospitals.html?_r=2&hp); Joseph Neff, Persistent Collections not Unique to Charlotte Area, Charlotte Observer, April 23, 2012 (available at http://www.charlotteobserver.)

11

This article seeks to outline some of the issues that North Carolina businesses and their attorneys need to consider as they approach issues surrounding collection of overdue consumer debtâ&#x20AC;&#x201D;either directly or through a third party debt collection agency. The article addresses the federal Fair Debt Collection Practices Act and the North Carolina Debt Collection Act, as well as issues of vicarious liability related to the retention of third-party debt collectors.

12

The Legal Frameworks While a panoply of laws address consumer protection and credit reporting, a full accounting of which is beyond the scope of this article, the chief laws concerning consumer debt collection in North Carolina (and among the most commonly cited in litigation) are the federal Fair Debt Collection Practices Act4 (FDCPA), and the North Carolina Debt Collection Act5 (NCDCA). These statutory regimes have much in common, but the scope of federal and state laws differs in significant ways. The FDCPA, for example, generally applies to any person who is in the business of debt collection from a consumer for another person or entity, but generally does not apply to a creditor collecting on its own account.6 The NCDCA, on the other hand, applies to any person engaged in debt collection from a consumer, including a creditor collecting its own accounts.7 Nevertheless, the NCDCA is limited by the â&#x20AC;&#x153;learned professionalâ&#x20AC;? exception in Chapter 75, which excludes professional service activities (e.g., legal or medical services), while the FDCPA has no similar exception.

These statutes are described in more detail below.

4 5 6 7

15 U.S.C. §§1692 et seq.

N.C. Gen. Stat. §§ 75-50 et seq.

15 U.S.C. § 1692a(6).

N.C.G.S. § 75-50(3).

The FDCPA General Applicability. Congress passed the FDCPA in 1977 to â&#x20AC;&#x153;eliminate abusive debt collection practicesâ&#x20AC;? and to protect law-abiding debt collectors from being put at a competitive disadvantage by the sharp practices of rule-breaking debt collectors.8 To achieve these goals, the FDCPA includes a private right of action for consumers, who can recover damages and attorneysâ&#x20AC;&#x2122; fees for violations of the statute9. To complicate matters for those regulated by the Act, the FDCPA is, in essence, a strict liability statute10.

â&#x20AC;&#x153;

If a violation resulted from a ³ERQD ¿GH´ HUURU provided that the defendant can show that it adopted reasonable procedures to DYRLG VXFK HUURUV liability may be avoided.

â&#x20AC;&#x153;

Frustrated consumers who feel harassed have unprecedented access to information about their rights, a willing and able plaintiffsâ&#x20AC;&#x2122; bar to bring their claims, and the ability to file online complaints with the Federal Trade Commission. Steep financial penalties, negative press coverage, and litigation costs are some of the consequences creditors and debt collectors can face if they run afoul of federal and state collections laws.

Maintaining a suit under the FDCPA requires satisfaction of four essential elements: (1) a consumer (â&#x20AC;&#x153;any natural person obligated or allegedly obligated to pay any debtâ&#x20AC;?); (2) a consumer debt (â&#x20AC;&#x153;any obligation â&#x20AC;Ś [incurred] primarily for personal, family or household purposesâ&#x20AC;?); (3) a debt collector (any person using interstate commerce who regularly collects debts)11; and (4) a violation of the FDCPA. Typically two threshold questions determine whether the FDCPA applies, namely was the alleged â&#x20AC;&#x153;debtâ&#x20AC;? for a consumer purpose and was the defendant a â&#x20AC;&#x153;debt collector.â&#x20AC;?

8 15 U.S.C. § 1692(e).

9 15 U.S.C. § 1692k(3).

10 Davis v. TransUnion, LLC, 526 F. Supp. 2d 577, 586 (W.D.N.C. 2007); Bentley v. Great Lakes Collection Bureau, Inc., 6 F.3d 60 (2d Cir. 1993); Russell v.

Equifax, 74 F.3d 30 (2d Cir. 1996).

11 15 U.S.C. § 1692a

With respect to â&#x20AC;&#x153;consumer debt,â&#x20AC;? the Federal Trade Commission has published guidance as to the kinds of obligations that fall within the FDCPA.12 Such debts include, among others, medical bills, car purchases, credit card payments, dishonored checks used for the purchase of goods and services for family, household or personal purposes, and some student loans. Commercial debts, however, are not covered by the Act. Thus, whether a debt was for consumer or commercial purposes is a threshold inquiry for a creditor or collector pursuing a debt and for a consumer advocate evaluating a debtorâ&#x20AC;&#x2122;s FDCPA claim.

Next, all involved must evaluate whether the FDCPA reaches the entity seeking to collect the debt. The FDCPA applies to â&#x20AC;&#x153;debt collectors,â&#x20AC;? i.e., third-parties who regularly collect debts owed to another. Although not initially covered by the FDCPA, the Supreme Court has ruled that lawyers and law firms who â&#x20AC;&#x153;regularlyâ&#x20AC;? engage in attempts to collect debts owed another were â&#x20AC;&#x153;debt collectorsâ&#x20AC;? for purposes of the act13. Creditors working to collect on their own account, on the other hand, are carved out of the FDCPA, unless they erroneously hold themselves out to be debt collectors.14 Additionally, the FDCPA works in concert with other laws regarding consumer debt and credit reporting. When bringing novel FDCPA claims, those representing consumers must examine whether the debt collectorâ&#x20AC;&#x2122;s alleged violations are somehow addressed by other federal statutes or state law and whether certain state law provisions may be preempted. For example, claims based upon reporting debts to consumer reporting agencies or credit bureaus are preempted by federal law.15 Thus, when bringing or facing a claim related to debt collection, all involved should consider how the FDCPA interacts with state law.

See Figure 1.

12 Federal Trade Commissionâ&#x20AC;&#x201D;Statements of General Policy or Interpretation Staff Commentary on the Fair Debt Collection Practices Act, 53 Fed. Reg. 50097-50, 100-02 (1988).

13 Heintz v Jenkins, 514 U.S. 291, 299 (1995).

14 15 U.S.C. § 1692a(6); Davis v. Dillard Natâ&#x20AC;&#x2122;l Bank, No. 1:02CV00546, 2003 U.S. Dist. LEXIS 9420, *11-12 (M.D.N.C. June 4, 2003).

15 See 15 U.S.C. § 1681t(b)(1)(F) (â&#x20AC;&#x153;No requirement or prohibition may be imposed under the laws of any State (1) with respect to any subject matter regulated under . . . (F) section 1681s-2 of this title, relating to the responsibilities of persons who furnish information to consumer reporting agencies . . .â&#x20AC;?).

Of course, given the general prohibition against false, deceptive, and misleading promises, this laundry list is necessarily incomplete. Debt collectors subject to the FDCPA must be careful about any questionable conduct that may “approach the line,” as courts will examine any allegedly improper conduct under a “least sophisticated consumer” standard, which is designed to ensure that the FDCPA protects “all consumers, the gullible as well as the shrewd.”16 Debt collectors also must be careful to make required disclosures to consumers.

These go well beyond the familiar 16 United States v. Nat’l Fin. Servs. Inc., 98 F.3d 131, 136 (4th Cir. 1996) (explaining that the least sophisticated consumer test protects “naive consumers,” and also “prevents liability for bizarre or idiosyncratic interpretations of collection notices by preserving a quotient of reasonableness and presuming a basic level of understanding and willingness to read with care”).

“THIS IS AN ATTEMPT TO COLLECT A DEBT” rider with which most attorneys are familiar. In particular, within five days of its initial communication with a consumer in connection with the collection of any debt, a debt collector must send the consumer a written notice containing: (1) the amount of the debt; (2) the name of the creditor to whom the debt is owed; (3) a statement that the consumer may dispute the debt (or a portion thereof) within 30 days or the debt will be assumed to be valid; (4) a statement that the debt collector will obtain verification of the debt if the consumer disputes the debt writing within 30 days; and (5) a statement that upon the consumer’s request, she will be provided with the name and address of the original creditor.17 These disclosures are sometimes called a “miniMiranda” warning. Failure to provide them can lead to liability under the FDCPA. 17 15 U.S.C. § 1692g.

Damages. A debt collector who violates the FCDPA may be liable for actual damages; statutory damages for each violation not exceeding $1,000; or in the case of a class action, for an amount not to exceed the lesser of $500,000 or one percent of the net worth of the debt collector; and attorneys’ fees.18 In no small part, it appears that the attorneys’ fees provision of the statute helps power litigation. Many law firms in North Carolina and throughout the country specialize in bringing suit under the FDCPA on behalf of consumers, even though attorneys’ fees often will exceed the debt at issue.19 As an example, a recent case in Greensboro resulted in a judgment 18 15 U.S.C. § 1692k.

19 See Zagorski v. Midwest Billing Services, Inc., 128 F.3d 1164, 1167 (7th Cir. 1997) (purpose of this feeshifting provision is to attract competent counsel); Graziano v. Harrison, 950 F.2d 107, 113 (3d Cir. 1991) (in litigation under the FDCPA, an award of attorney fees is mandatory, not discretionary); see also In Re Boddy, 950 F.2d 334 (6th Cir. 1991).

13

Figure 1.

Communications With Debtors Under the FDCPA The FDCPA spells out certain dos and don’ts for debt collectors who contact consumer debtors. Harassment, false statements, and unfair practices are prohibited generally under the act. Among other rules and restrictions, the FDCPA:

t

Restricts the time of day for making phone calls to consumers;

t

Prohibits use of obscene or profane language;

t

Stops a debt collector from contacting a debtor who is known to be represented by legal counsel, unless the debtor’s lawyer fails to respond within a reasonable time;

t

Forbids threats of violence or criminal conduct against anyone; and

t

Forbids harassment through use of repeat telephone calls or allowing a phone to ring repeatedly with the intent to annoy or harass.

t

Bans calls to the debtor’s workplace if the collector knows or should know that the debtor’s employer forbids such contacts;

t

Prevents use of post cards, see-through envelopes, or other stationery which could alert a third party of the debt and collection activities;

of $37,500 in damages, but the collection agency could be held liable for as much as $150,000 in attorneys’ fees.20 While the FDCPA is a strict liability statute, under limited circumstances, a debt collector may minimize or avoid liability for violations that were unintentional. If a violation resulted from a “bona fide” error, provided that the defendant can show that it adopted reasonable procedures to avoid such errors, liability may be avoided.21 The debt collector bears the burden of proving that its procedures were reasonably designed to avoid an error, but be aware that courts may consider the frequency of past violations in this calculus. Finally, another common defense is the statute of limitations, as suits brought for a violation of the FDCPA must be filed within one year of the violation.22

collectors. Again, acts of threats and coercion, harassment, deceptive representation, use of unconscionable means, and certain contacts with thirdparties about the consumer’s debt are prohibited. Even so, certain alleged “unfair acts” will be unavailing where the purported bad conduct falls either under the purview of other federal statutes or outside the NCDCA.26 As noted above, to the extent a plaintiff alleges that a report to credit reporting agencies constitutes a violation of the NCDCA or the North Carolina Unfair and Deceptive Trade Practices Act, such claims should be preempted by the federal Fair Credit Reporting Act (“FCRA”).27

The NCDCA

14

The NCDCA shares many similarities to the FDCPA and seeks to address similar consumer debt collection practices.

However, business counselors and consumer advocates must approach this statute differently because the NCDCA also applies to creditors seeking to recover their own debts.23

The Prima Facie Case. Before a claim for unfair debt collection can be substantiated under the NCDCA, a plaintiff must satisfy three threshold determinations. First, the obligation owed must be a “debt”; second, the one owing the obligation must be a “consumer”; and third, the one trying to collect the obligation must be a “debt collector.”24 Once these requirements are met, a claim for unfair debt collection practices must satisfy the three generalized requirements found in N.C.G.S. § 75-1.1 for all unfair and deceptive trade practice claims: (1) an unfair act (2) in or affecting commerce (3) proximately causing injury to the plaintiff.25 Like the FDCPA, the NCDCA contains laundry lists of prohibitions for debt 20 Russell v. Absolute Collection Serv., No. 1:09CV515 (M.D.N.C. April 14, 2012).

21 15 U.S.C. §1692k(c).

22 15 U.S.C. §1692k(d).

23 N.C.G.S. § 75-50(3).

24 N.C.G.S. § 75-50(1)-(3); Reid v. Ayers, 138 N.C. App. 261, 262-263; 531 S.E.2d 231, 233-234 (2000).

25 Reid at 264-265, 531 S.E.2d at 234 (citing First Atl. Mgmt. Corp. v. Dunlea Realty Co., 131 N.C. App. 242, 252, 507 S.E.2d 56, 63 (1998)).

Moreover, the NCDCA may not apply in certain situations that appear to fall within its scope. At first blush, creditors or debt collectors who have mistakenly sought to collect from the wrong individual would appear to be liable under the NCDCA. After all, a consumer is defined as “any natural person who has incurred a debt or alleged debt for personal, family, household or agricultural purposes.” However, cases interpreting the NCDCA have provided an avenue of escape. For example, a federal district court decision held that the NCDCA would not permit a claim by an individual alleging that the creditor tried to collect from the wrong person because the court determined that the plaintiff was not a “consumer” under the NCDCA.28 26 N.C.G.S. § 75-56(a).

27 See 15 U.S.C. § 1681t(b)(1)(F); see also Ross v.

FDIC, 625 F.3d 808, 813 (4th Cir. 2010), cert. denied, 131 S.Ct. 2991 (2011).

28 Fisher v. Eastern Air Lines, Inc., 517 F. Supp.

672, 673 (M.D.N.C. 1981); see also Jenkins v. Allied Interstate, Inc., No. 5:08-CV-125-DCK, 2009 U.S. Dist. LEXIS 94183, *13 (W.D.N.C. Sept. 28, 2009)

Notably, plaintiffs in these circumstances may be able to pursue other claims in court, but they should be foreclosed from bringing a claim under NCDCA.

Learned

Profession

Exemption.

Because the NCDCA is part of the State’s broader statutory structure to address unfair and deceptive trade practices, North Carolina courts have held that plaintiffs alleging a violation of NCDCA must satisfy the requirements of N.C.G.S. § 75-1.1— including the requirement that defendant’s actions are “in or affecting commerce.” In North Carolina, “commerce” includes “all business activities, however denominated, but does not include professional services rendered by a member of a learned profession (e.g., legal and medical professionals and their businesses).”29 Under this “learned professional” exception, a NCDCA claim against a professional who qualifies for the exemption fails as a matter of law.30 Thus, whenever a professional service provider is involved in the debt itself or in the collection, all involved must assess the effect of this exception on any NCDCA claim.

Damages. In 2009, the damages provision of the NCDCA was amended such that a debt collector who violates the article can be liable for any actual damage sustained by the debtor and civil penalties in the amount of $500 – $4,000, per violation. Damages are cumulative, and both punitive damages and attorneys’ fees can be awarded to the consumer.31

Issues Concerning Vicarious Liability Under traditional agency principles, a business generally is legally responsible for actions of its employees within the scope of their employment under respondeat superior. However, the agency inquiry is (adopting reasoning from Fisher and stating that “to be entitled to protection under the North Carolina statute prohibiting certain acts by debt collectors, the person must have had at least some connection with the underlying debt or alleged debt. Plaintiff does not meet this criteria because, as both the Plaintiff and Defendant acknowledge, the Plaintiff had not actually incurred the debt that the Defendant sought to collect.”).

29 N.C.G.S. § 75-1.1(b).

30 Godfredson v. JBC Legal Grp., P.C., 387 F. Supp. 2d 543, 548-549 (E.D.N.C. 2005); David Lake Cmty. Ass’n v. Feldmann, 138 N.C. App. 292, 297, 530 S.E.2d 865, 869 (2000).

31 N.C.G.S. § 75-56(b), (c); Friday v. United Dominion Realty Trust, Inc., 155 N.C. App. 671, 575 S.E.2d 532 (2003).

less clear when collection is pursued by a third-party independent contractor. The general rule is that a principal is not liable for the torts of an independent contractor which it does not control, so long as the principal has used ordinary care to secure a competent contractor.32 Since a creditor is not directly liable under the FDCPA, its liability typically does not increase based upon the collection efforts of a third-party independent contractor, although cases on this issue are rare.33 Under the NCDCA, a creditor can be liable for collection of its own debt and may face derivative liability for actions of a third-party independent contractor in certain situations. Thus, creditors must use some degree of diligence in selecting and retaining a third-party collection agency.

In the absence of negligence in the selection of a collection agency, the derivative liability inquiry involves a multi-part test evaluating the degree and types of control that the creditor has over the collection agency.34 A court’s evaluation of the vicarious liability question will include review of the written contract between the creditor and collection agency and, if necessary, an evaluation of the business relationship at issue, including the creditor’s direction or authorization of collection activities, payment mechanisms, and general independence. This issue has arisen in the Fourth Circuit; based upon the facts of that case, the court affirmed a judgment holding that a hospital was not vicariously liable for the conduct of its retained collection agency.35 The court held that the hospital “established that it neither controlled nor had the right to control the work of ” the collection agency and, thus, could not be held vicariously liable. Even 32 Charles E. Daye & Mark W. Morris, North Carolina Law of Torts § 23.30 (2d ed. 1999); Market America, Inc. v. Christman-Orth, 135 N.C. App. 143, 152, 520 S.E.2d 570, 577 (1999).

33 Price v. Brock & Scott, PLLC, No. 1:10CV40, 2011 U.S. Dist. LEXIS 38275 (M.D.N.C. Apr. 6, 2011); Bradford v. HSBC Mortg. Corp., 2011 U.S. Dist. LEX¬IS 141658. *20 (E.D. Va. Dec. 8, 2011) (a “creditor cannot incur vicarious liability for FDCPA violations by an independent debt collector that acts on the creditor’s behalf ”).

34 North Carolina Law of Torts § 23.20 (identifying factors and supporting cases); see also Hayes v. Elon College, 224 N.C. 11, 16, 29 S.E.2d 137, 140 (1944) (listing factors identified by the North Carolina Supreme Court).

35 See Judy v. Fid. Nat’l Collections, No. 1:02CV156, 6, 2003 U.S. Dist. LEXIS 27547, *24 (N.D.W.V. Nov. 7, 2003), aff ’d, Judy v. W. Va. Univ. Bd. of Governors, 118 Fed. Appx. 737 (4th Cir. 2004).

if a creditor is successful in avoiding direct liability for actions of its retained collection agency, it should be aware of any rights to indemnity or other contractual remedies if liability results from an error or instruction by the creditor.

Conclusion State and federal laws governing consumer debt collection are complex, providing challenges to parties and counsel seeking to bring and to defend such legal actions. Statutory structures at the federal and state level provide claims for certain individuals based upon certain actions (or inactions) related to certain debts. However, these statutes do not encompass every effort to collect amounts due from individuals. Further, the rights under the two acts are not identical (or even parallel llel in many cases) case ) and several avenues exist xist to limit or avoid liability for such activities, vities, whether taken directly by a creditor or or by a third-party collection agency. Plaintiffs must evaluate all statutes potentially ally at issue before bringing such a claim. m. Similarly, businesses should be deliberate ate when selecting and retaining a

collection agency and when facing a claim arising from efforts at collecting debts from individuals.

This article originally appeared in the June 2012 issue of The Litigator, published by the NCBA’s Litigation Section.

Bill Forstner is a partner in the Raleigh office of Smith Moore Leatherwood, who focuses his practice in the representation of hospitals and other health care providers, including litigation and collection matters. bill.forstner@smithmoorelaw.com 919.755.8714 Eric Snider is a litigation associate in the Raleigh office of Smith Moore Leatherwood, who focuses his practice in resolving business disputes and defending manufacturers in f products liability matters. eric.snider@smithmoorelaw.com 919.755.8758

1155

16

Beware

of the Bankruptcy Preference Claim!

by Marshall Kent

In this era of overbearing government regulations, an unanticipated bankruptcy preference claim remains one of the most frustrating experiences regularly confronted by businesses of all kinds.

Imagine your firm has just completed an extensive, high risk construction project. Your firm just received payment from your customer in exchange for your waiver of lien claims upon final payment, that you signed and submitted last week. You pay downstream subcontractors and suppliers after receiving your retainage, and shortly thereafter learn that the customer has just filed for bankruptcy protection under the United States Bankruptcy Code.

If you never received notice of a bankruptcy preference claim before, notice of a bankruptcy proceeding may mean nothing to you. However, the significance of that proceeding will become abundantly clear if you receive an “official-looking” demand letter from the lawyer for the bankruptcy debtor, or a bankruptcy trustee, demanding pursuant to 11 U.S.C. §547 that your firm return the retainage it was paid, as well as any other monies paid to your firm by the debtor, during the ninety (90) day period preceding the debtor’s bankruptcy filing.

Do not write a check to the debtor or the trustee just yet. It is astonishing how many parties who receive such a preference claim actually remit payment to the demanding debtor or trustee without addressing the merit (or lack of merit) of the preference claim. Moreover, it is not unusual for a Bankruptcy Trustee to issue demands for repayment of alleged preferences, or initiate lawsuits to recover alleged preferences, without assessing the underlying merits of their claims.1 1. Pursuant to 28 U.S.C. § 1409, where the alleged preference claim against a non-insider exceeds $10,950.00, a Chapter 11 debtor or Chapter 7 trustee can file the preference action in the jurisdiction where the bankruptcy proceeding is pending, and serve the unwary creditor with this lawsuit by first class U. S. mail throughout the United States.

17

What is a Preference Claim?

In order to establish such a claim, ÀYH HOHPHQWV must be established:

1 18

2 3

A transfer was made by the debtor to the creditor on or within ninety (90) days before the filing date of the bankruptcy petition or within one year prior to the filing date of the bankruptcy petition, if the creditor was an “insider”. The date of any “transfer” made by check is the date on which the check in issue clears the debtor’s bank, not when the debtor receives it;

The transfer sought to be recovered was made by the debtor from property of the bankruptcy estate to or for the benefit of the creditor;

The transfer was for or on account of an antecedent debt owed by the debtor to the Creditor. This generally means the debt must have been incurred before the transfer or payment in issue was made;

4 5

The transfer was made while the debtor was insolvent. A balance sheet test is used to determine insolvency. Although a presumption exists the debtor was insolvent within ninety (90) days of the bankruptcy, such a presumption is rebuttable, and does not extend beyond ninety (90) days prior to the filing date of the bankruptcy petition;

Finally, the transfer must have enabled the Creditor to receive more than it would receive, if the transfer had not been made, under a Chapter 7 liquidation of the debtor’s bankruptcy estate.2

If and to the extent the Trustee can establish all of these elements, a preference is presumed to have occurred and it becomes the creditor’s burden to prove a defense to a preference claim.

Fortunately, circumstances often negate the presence of one or more elements of a preference claim or give rise to one or more available defenses.

Contractors may be able to use applicable state lien law to defeat the presumption that a preference has occurred. A contractor who carefully monitors and preserves its lien rights should receive payment at a time when the contractor can still file and enforce a lien. In certain states (including North Carolina and Georgia), an argument can be asserted that the customer paid the contractor with funds subject to an equitable lien or “constructive trust” for the benefit of the contractor and its own downstream subcontractors and suppliers. To such an extent, the transfer in issue would not be from property of the bankruptcy estate.3 Moreover, in view of the contractor’s state law lien rights, this payment should not cause the contractor to receive more than it would have received as a secured lien creditor in Chapter 7 liquidation.

terms. This requires an objective determination, requiring the creditor to provide evidence of the payment terms considered normal in the industry in issue.7 (2) The transfer constituted a contemporaneous exchange for new value provided by the creditor, and was thus not on account of an antecedent debt. This defense generally applies to C.O.D. terms, and requires the creditor to objectively prove that the transfer to the creditor equals the value the debtor received, that both parties intended the transfer to be contemporaneous and the exchange was contemporaneous in nature.8 (3) The creditor gave subsequent new value to the debtor in reliance upon the payment(s) received from the debtor in issue. This defense usually applies where the debtor has an open account with the creditor; the creditor receives an alleged preferential payment, and thereafter grants additional unsecured credit to the debtor prior to a bankruptcy filing.

This “subsequent new value” allows the creditor to reduce or eliminate the claimed preference at least to the extent the additional credit remains unpaid at the time of bankruptcy.9

“

Recipients of preference claims should give careful analysis to those claims before addressing the official demands they receive from a claiming bankruptcy trustee.

Similarly, in the case of a supplier, the supplier may have reclamation rights under the uniform commercial code adopted in most states that may afford a supplier either a secured claim or an administrative priority claim if the supplier undertakes appropriate timely measures to preserve those reclamation rights.4 To the extent a supplier is paid during a period where the supplier would have been in a position to assert such rights, an argument can be made that the payment did not cause the supplier to receive more than it would have received in the debtor’s Chapter 7 liquidation, had it not been paid and exercised such reclamation rights.

Given the conditions precedent to establishing a successful preference claim, and the available defenses, contractors and suppliers (as well as any other recipients of preference claims) should give careful analysis to those claims before addressing the official demands they receive from a claiming bankruptcy trustee. Such claims may be settled on favorable terms, or even withdrawn, if a proper approach is taken in negotiations, and the facts are properly presented to the Trustee by a party who understands the “rules of the game.”

“

A number of statutory defenses are available to negate a preference claim.5 The most commonly asserted defenses are as follows: (1) The transfer challenged as a preference was made by the debtor to a creditor in the ordinary course of business.

This is the most frequently asserted defense. To successfully assert this defense, a creditor must show that the debt was incurred in the ordinary course of business or financial dealings between the debtor and creditor, and that the transfer itself occurred in that manner as well. This is a “subjective test”, and will often involve some evaluation of the history of dealings and payments between the debtor and creditor.6 Alternatively, a defending contractor or supplier can establish that the transfer was made according to ordinary business

Marshall Kent is a partner in the Atlanta office of Smith Moore Leatherwood, who focuses his practice in the areas of creditor/ debtor rights, commercial, construction and bankruptcy litigation, and general corporate law. marshall.kent@smithmoorelaw.com 404.962.1036

2.

3.

4.

5.

6.

7.

8.

9.

See 11 U. S. C. § 547(b)(1)–(5).

See 11 U. S. C. § 541(d).

See 11 U. S. C. § 546(c)(1).

See 11 U. S. C. § 547(c)(1)-(9).

See 11 U. S. C. § 547(c)(2)(A).

See 11 U. S. C. § 547(c)(2)(B).

See 11 U. S. C. § 547(c)(1).

See 11 U. S. C. § 547(c)(4).

19

T US T J G, AL NO I N S R B TIO S IT’ FO NA NIE TI- PA UL M M CO

$17, %5,%(5< &203/,$1&(

20

by Rob Kidwell and Andrea Carska-Sheppard

Why You Should Be Concerned You may suspect that only large, international companies have to comply with anti-bribery legislation. But in an age where inexpensive goods, services, and labor from around the world are readily accessible, many businesses have interests abroad, and businesses of all sizes should make themselves aware of anti-bribery laws (or risk the consequences).

The United States has been a leader in combating international bribery. The Foreign Corrupt Practice Act of 1977 (FCPA) is legislation that makes it illegal to bribe foreign officials to obtain business,

a crime punishable by fines and/or imprisonment. You may be surprised that the definition of “foreign official” is broader than it sounds on its face. For example, the U.S. government’s definition of a “foreign official” may include employees of stateowned companies. In countries like China where many businesses are run by the state, it’s easy to become unclear about whether U.S. law will apply to specific relationships or interactions. Businesses in developing countries like Mexico may be partially owned by government officials, and interactions under those circumstances could also put you at risk. Before doing business in a foreign country, it is always a good practice to do due-diligence and research the country’s corruption-related history.

The Law Doesn’t Apply to Gifts, Right?

Under the FCPA, an employee or thirdparty acting on a company’s behalf is prohibited from giving, offering, or promising money or “anything of value,” directly or indirectly, to a foreign official with the intent of creating or maintaining business.

In the United States, it may be easier to make the distinction between a gift and a bribe because of our general understanding of American business culture. Gifts to important customers, key clients, or business partners are often given to show appreciation; not with the expectation of

So, What Exactly Do You Mean by Bribe?

Bribery under the FCPA must include the following five elements: 1.

2.

3.

4.

5.

A payment, offer, authorization or promise to pay money or anything of value; The involvement of a foreign official (including a government official or manager of a state-owned business, international organization official, political party or party official candidate for public office), or any other person, knowing that the payment or promise will be passed on to a foreign official; A corrupt motive (which includes consciousness of wrongdoing); Having the purpose to influence any act or decision of that person; to induce that person to do or omit any action in violation of his lawful duty; to secure an improper advantage; or to induce that person to use his influence to affect an official act or decision; and Assisting in obtaining or retaining business for or with, or directing any business to, any person.

Does the FCPA Apply to My Company?

If you are reading this article, the FCPA likely applies to your company. The FCPA applies to any company that (1) has its principal place of business in the United States or its territories or Commonwealths, or (2) is organized under the laws of a U.S. state. Companies that have securities registered in the U.S. or those that are required to file reports with the Securities and Exchange Commission (SEC) are also subject to the law.

U.S. parent corporations may be held liable for the acts of foreign subsidiaries where they authorized, directed, or controlled activity in question.

Does the FCPA Apply to Me? Again, if you are reading this article, the FCPA likely applies to you individually.

The law applies to U.S. citizens, residents and nationals. FCPA prosecutors have sought severe sentences and fines for individual executives. It is not necessary for an individual to be directly involved in improper conduct; turning a blind eye to wrongful conduct may bring consequences as well.

“

You should keep a careful eye on the activities of thirdparties that you engage on behalf of your business, including agents, distributors, brokers, local business partners, sales licensing and other representatives, consultants, advisors, lawyers and accountants.

Enforcement on the Rise In recent years, enforcement under FCPA has reached historic levels. In 2010, 74 FCPA cases were tried, and the Department of Justice (DOJ) imposed more than $1 billion in criminal penalties, a record high over a single year period. 2011 saw the second-highest number of enforcements since the law began: 48. Thus far, 2012 seems to tracking along last year’s numbers.

Enforcement has been conducted through the DOJ since 2006 for domestic concerns, foreign companies, and nationals; the SEC has been responsible for civil enforcement with respect to issuers of securities since 2010. These agencies also partner with the Federal Bureau of Investigation, and Immigration and Customs Departments to complete investigations. Under the DoddFrank financial reform law, whistleblowers can be rewarded for reporting violations which may also account for some of the increase in enforcements.

Identifying Red Flags While preventing, detecting, and responding to corruption concerns should be a constant priority for your business, there are some specific red flags that should draw extra scrutiny: t

Doing business in a country with a reputation for corruption: Transparency International publishes a Corruption Perception Index that measures perceived levels of public sector corruption in 183 countries and territories around the world.

Afghanistan, Myanmar, North Korea, and Somalia topped the list as the most corrupt in 2011, but you might be surprised at some of the findings overall.

t

Know your industry: Some industries are known to have corruption issues. If your industry falls into this category, you should be especially careful.

t

Rejection of anti-corruption provisions: Avoid doing business with foreign companies that reject provisions in your commercial contracts that prohibit payments to public officials.

“

quid pro quo. In developing countries, the distinction can be less clear, and corporate hospitality in foreign countries, including travel and entertainment, may be interpreted as a bribe under the FCPA.

Prosecutors have been known to start an investigation against a company and use information gathered to build a case against individuals, and vice versa. The FCPA may also hold an individual or company liable for bribes paid by a third-party if the principal had knowledge of the thirdparty’s misconduct. You should keep a careful eye on the activities of third-parties that you engage on behalf of your business, including agents, distributors, brokers, local business partners, sales licensing and other representatives, consultants, advisors, lawyers and accountants.

21

t

t

t

Unusual payment patterns or financial arrangements: Request for payments to multiple bank accounts or to a different party is a warning sign of possible corruption.

Lack of transparency in expenses and accounting records: The better the financial records, the more difficult it is to obscure corrupt dealings.

Recommendation by a Foreign Official: If a foreign official recommends that you do business with a particular company, you should take caution.

Key Elements of a Compliance Program

22

When doing business in a global economy, an anti-bribery compliance program is one measure against the immense costs associated with an anti-bribery investigation. Although the existence of a compliance program will not necessarily absolve a company from criminal liability, federal prosecutors will evaluate a company’s compliance program in determining what charges, if any, to bring against a company for potential FCPA violations. A robust compliance program can also potentially reduce a company’s criminal fine under Federal Sentencing Guidelines. A few key elements of your compliance program should include:

t

A prohibition against bribery, and the establishment of standards and guidelines for transacting business in foreign countries;

t

Policies with regard to g i f t s , e nte r t ai n m e nt , p ol it i c a l c ont r ibut i ons , e tc . ;

t

The due-diligence required when entering into business contracts with third-parties or business partners in other countries;

t

Guidance on how to respond to red flags;

t

A program to educate employees regarding anti-bribery issues and adherence to your compliance program; and

t

Well-defined disciplinary procedures to address violations of anti-corruption laws.

What Other AntiCorruption Laws Do I Need to be Aware of?

Under the U.S. Travel Act, the international travel, phone call, email or wire transfer used to carry out a bribe is considered unlawful activity, rather than the bribe itself. However, unlawful activity under this act can also include bribery under state laws, some of which criminalize commercial bribery whether foreign officials are involved or not. The DOJ may use the Travel Act as an alternate or additional charge in FCPA investigations. investigation

United Kingdom Bribery Act The toughest anti-bribery legislation in the world is the UK Bribery Act of 2010. The UK Bribery Act is further reaching than the FCPA, and penalizes companies without compliance programs. See Figure 1.

Final Remarks FCPA and anticorruption compliance should be an ongoing process initiated before, during, and after the life of any agreement or transaction. An effective compliance program can help protect against bribery risk, and foster a culture of integrity throughout your organization.

In today’s global economy, you can’t be too careful.

Rob Kidwell is a partner in Smith Moore Leatherwood’s Greensboro office. He routinely advises businesses on structuring, negotiating and documenting various complex business agreements including international business transactions, mergers, acquisitions, and entity formations. He has been Selected

by Law & Politics Magazine for inclusion in North Carolina Super Lawyers–Rising Stars Edition, Business/Corporate, 2009, 2012 (336) 378-5483 rob.kidwell@smithmoorelaw.com Andrea Carska-Sheppard is an international trade and business lawyer with Smith Moore Leatherwood’s Raleigh office. She assists companies in international transactions involving contracts, international trade, customs, treaties, regulatory compliance and commercial dispute resolution. She is admitted to practice law in four countries, a rare accomplishment even among international legal practitioners.

(919) 755-8767 andrea.carska-sheppard@smithmoorelaw.com

Figure 1.

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23

e z i l a e R n a C Exporters ns o i t c u d e R ax T s u o d n e . Tax Trem dow on U.S

sing) (but the win o l c e b y a m siness u b r o f s e v i t Few incen

by Richard

HURRY! 24

by Richard Few

T

oday, many U.S. businesses find themselves competing in the “global marketplace.” If your business is currently involved in exporting products abroad or in providing architectural or engineering services to construction projects outside the U.S., you may be able to take advantage of significant tax savings due to the reduction in the federal tax rates on “qualified dividends” which are dividends paid by corporations to individuals.

The tax rate on qualified dividends is currently 15 percent versus the normal 35 percent. This special rate is scheduled to expire at the end of 2012 unless a sunset provision enacted in 2010 is removed. With the economy still recovering, it is possible it could be extended. Whether this low rate exists for the short or longer term, a business meeting certain requirements can establish a company called an “interest change domestic international sales corporation” or “IC-DISC” for its export business and

enjoy a tremendous tax reduction on the income from those export sales.

The statutory authority for IC-DISCs has been in the Internal Revenue Code for decades, but the incentives offered in the past were not useful as the World Trade Organization threatened sanctions against the U.S. for offering them. However, there are no such issues with utilizing the reduced tax on dividends to increase your net export income.

An IC-DISC is a separate legal entity, but it can exist solely on paper - with no offices, equipment or employees. Before considering an IC-DISC, you should determine whether your business has “qualified export income.” The following three requirements must be satisfied for this determination:

(1)

the goods sold must be manufactured, produced, grown or extracted in the U.S. by an entity other than the IC-DISC;

(2)

the export property must be held primarily for sale, lease, consumption or disposition outside the U.S., and

(3)

the export property must contain at least 50 percent of its fair market value attributable to U.S. produced content.

Assuming these requirements are satisfied, the easiest way to take advantage of the tax benefits is to set up the IC-DISC as a “commission DISC.” The IC-DISC would enter into a commission agreement with your business which would pay the ICDISC a tax deductible commission on the export sales. The commission income is tax exempt as long as the IC-DISC distributes the income to its shareholders. If the distribution is a qualified dividend, the shareholders pay federal income tax at the rate of 15 percent versus 35 percent.

25

If your business is set up as a tax pass through entity, such as an S corporation or limited liability company, then the IC-DISC can be owned directly by your business and the reduced rate will apply. If your business is not a tax pass through entity, some or all of the business owners can still set up the IC-DISC with them as owners and enjoy this tax benefit. The IC-DISC tax benefit will not be available to corporate recipients of dividends which are not pass through entities as the 15 percent rate does not apply to them.

The commission payable to IC-DISC is computed on a transaction-by-transaction basis and is the greater of 4 percent of the qualified export receipts or 50 percent of the foreign service taxable income.

The following example demonstrates the commission calculation and the tax savings: ABC Corporation, an S corporation, is owned equally by Sue and Stan. ABC has gross sales of $10,000,000 with $3,000,000

being qualified export income. ABC’s net income is $1,000,000 with $300,000 of net income attributable to the exports. With no IC-DISC, the federal income tax to Sue and Stan will be $350,000 on the ABC net income leaving them with $650,000 of after tax cash available. If ABC set up an IC-DISC, ABC would pay it a Commission of $150,000 under the 50 percent method (the 4 percent of receipts commission would be $120,000). This would reduce ABC’s net income to $850,000 generating federal income taxes to Sue and Stan of $297,500. The $150,000 commission would be distributed with $22,500 of taxes at the 15 percent rate. Therefore, with the ICDISC, the total federal income tax liability is $320,000, a savings of $30,000.

The IC-DISC benefits are available to the extent that the qualified export receipts from the export sales do not exceed $10,000,000 per year. An IC-DISC does have to observe several legal formalities and make certain tax elections in being

established and operated. However, the process involved in setting up the ICDISC entity, preparing the commission agreement for the business, and filing the tax forms is relatively straightforward. If this type of entity could increase your business bottom after taxes, you should consult your legal and tax advisors to learn more about using this structure.

Richard Few is a partner in Smith Moore Leatherwood’s Greenville office and a member of the Tax Committee of South Carolina Chamber of Commerce Board of Directors. His legal practice includes strategic and tax planning and structuring business entities, business sales, acquisitions and reorganizations, private placements of securities, and commercial and public financings. richard.few@smithmoorelaw.com 864.240.2473

26 26

2012 GIFTS: A Window of Opportunity

by Tod Hyche

T

his year, a window of opportunity exists for you to make a large gift to your heirs and shelter the gift from the gift tax, future estate tax, and potential generation-skipping transfer (“GST”) tax. This opportunity is available due to the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act (“Act”), which President Obama signed into law on December 17, 2010. The Act increased the lifetime gift tax exemption (“gift tax exemption”) from $1,000,000 to $5,120,000 in 2012. Consequently, in 2012, you have the ability to make gifts up to $5,120,000 without incurring a gift tax, and, if you are married, you can join with your spouse to make tax-free gifts up to $10,240,000.

This year and last year are the only two years in which the gift tax exemption has been so high. The gift tax exemption was $675,000 in 2001; it increased to $1,000,000 in 2002 and increased again to $5,000,000 in 2011.

Prior to 2011, the gift tax rate had been as high as 55 percent, but the Act reduced the gift tax rate to 35 percent for 2011 and 2012.

Under current law, the gift tax exemption

will revert to $1,000,000 in 2013 with a 55 percent top gift tax rate.

In addition to increasing the gift tax exemption, the Act also increased the estate tax exemption to $5,120,000 in 2012; however, under current law, the estate tax exemption will revert to $1,000,000 in 2013 with a 55 percent top rate. The gift tax exemption and the estate tax exemption are unified, which means that if you make a gift of $1,000,000 this year then at death your estate tax exemption will be reduced by $1,000,000.

Another tax impacted by the Act is the GST tax. Generally, the GST tax applies when property passes to someone who is two or more generations below you. The GST exemption is currently $5,120,000, but under current law will revert to $1,390,000 in 2013 with a 55 percent rate.

If your estate is large enough that it will be subject to the estate tax at your death, and if you are in a position to transfer property without infringing on your ability to

One way to leverage a large gift is to give an asset that can be discounted. Some assets that may be discounted are stock in a closely held corporation, fractional interests in real estate, membership interests in a limited liability company, and limited partner interests in a limited partnership. The lack of control and lack of marketability associated with these assets may result in a discount between 25 percent - 45 percent. Applying a discount to the gift allows you to transfer more property at a lower value. For example, if a limited partnership has a gross value of $7,000,000, and you give a 75 percent limited partner interest, the gift may be valued at $3,412,500 if a 35 percent discount applies instead of the $5,250,000 undiscounted value.

What if you do not own an asset that can be discounted but instead you own marketable securities and real estate? In this case, you may be able to establish a limited partnership to which you contribute your marketable securities and real estate in return for a limited partner interest. However, it is very important that the limited partnership have a valid business purpose in order for the discounts to be respected by the Internal Revenue Service. Much analysis must be undertaken before a limited partnership is established, and the formation and operation of a limited partnership are beyond the scope of this article.

Another way to leverage a large gift is to make a gift of a discounted asset to an irrevocable

trust. Some advantages of an irrevocable trust include protecting the property from (1) claims of creditors; (2) divorce; and (3) a beneficiary who may not be able to manage large amounts of property. Also, if the trust lasts for the beneficiary’s lifetime and the lifetimes of future beneficiaries, which is commonly referred to as a “dynasty trust”, and the transfer to the

“

If your estate will be subject to the estate tax ... consider making a large gift this year ... to maximize the tax savings before this window of opportunity shuts.

“

maintain your lifestyle and level of comfort, making a large gift this year is prudent.

Some advantages of a large gift now include: (1) more property will be removed from your estate, free of gift and estate taxes, than would be removed in future years due to the expected decline in the gift tax and estate tax exemption amounts; (2) appreciation on the gifted property is removed from your estate and this appreciation will bypass the estate tax at your death; and (3) when coupled with the GST tax exemption and a gift to an irrevocable dynasty trust, the property should be exempt from the transfer tax.

trust is exempt from the GST tax, the property in the trust should escape the estate tax and GST tax when the beneficiaries die.

If you live in a state that does not allow dynasty trusts, you may be able to establish the trust in a state such as Delaware that permits dynasty trusts.

An added benefit of the irrevocable trust is that it can be structured in a manner so that you are responsible for paying the income tax on the income of the trust during your life. This type of trust is commonly referred to as a “grantor trust.” Your payment of the income tax is viewed as a tax-free gift from you to the trust, and the trust grows tax-free since its assets are not depleted to pay the income tax.

It should be noted that President Obama has proposed in his fiscal year 2013 revenue proposals to eliminate the benefits of grantor trusts, the use of discounts on certain assets, and the duration of dynasty trusts. If these restricting provisions are enacted, there is the possibility that gifts of discounted assets to dynasty trusts entered into before the

date of enactment may be grandfathered.

Consequently, there is even more incentive for you to make large gifts of discounted assets to an irrevocable dynasty trust this year.

So this all sounds great, but what do the numbers look like? One study reported that a gift of a $1,000,000 asset to a dynasty trust that is exempt from the gift tax and GST tax would have values as follows (assuming no distributions and a 5 percent rate of return after taxes and fees): end of year 20 - $2,650,000; end of year 40 - $7,040,000; end of year 70 - $30,425,000; and end of year 100 - $131,500,000. These numbers would be much greater if you are responsible for the income taxes on the trust during your lifetime. If the $1,000,000 gift is outright instead of to a dynasty trust that is exempt from the gift tax and GST tax, the same2727 study reported that the value would be only $32,875,000 at the end of year 100 assuming a 50 percent transfer tax rate.

If your estate will be subject to the estate tax upon your death, you should seriously consider making a large gift this year to an irrevocable dynasty trust to maximize the tax savings before this window of opportunity shuts.

Tod Hyche is the Partner-in-Charge of Smith Moore Leatherwood’s Greenville office. He is also a South Carolina Supreme Court certified specialist in estate planning and probate law, and a Fellow of the American College of Trust and Estate Counsel (ACTEC). He is currently listed in The Best Lawyers in America for Tax Law, Trusts and Estates, and Law & Politics Magazine for inclusion in South Carolina Super Lawyers for Estate Planning & Probate, Tax. tod.hyche@smithmoorelaw.com 864.240.2423

Information to Organize For Your Beneficiaries

Jill Raspet is a partner in Smith Moore Leatherwoodâ&#x20AC;&#x2122;s Wilmington office. She is a Board Certified Specialist in Estate Planning and Probate Law by the North Carolina State Bar. jill.raspet@smithmoorelaw.com | 910.815.7128

1

CONTACT INFO

Name and contact information for attorney and accountant.

2

28

ESTATE PLANNING 3

ACCOUNT INFO

A listing of the location of all accounts (this includes individual, joint, trust, brokerage, and retirement accounts).

LIFE INSURANCE

Copies of all life insurance policies and the most recent beneficiary designation.

4 5 6 7 8

Information as to the location of your original estate planning documents (make sure you can tell the difference between the original and a copy).

MILITARY

Copies of documents related to any military service.

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Copies of documents related to any divorce.

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9

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INCOME TAX RETURNS

Originals of any vehicle titles.

Location of any safety deposit box and the key.

A listing of any outstanding debts (this includes credit cards, car loans, and mortgages).

Copies of the last 3 years of income tax returns and copies of any gift tax returns ever filed.

A Social Media Policy Template From the National Labor Relations Board

by Barry Herrin

In a series of reports, the General Counsel for the National Labor Relations Board (NLRB) commented on the growing trend among employers of restricting the use of company information in personal social media sites. The emphasis of the NLRB is protecting the ability of workers to exchange information necessary to collective bargaining. However, the broad nature of the pronouncements left many employers, particularly those in industries managing significant amounts of confidential or private information, scratching their collective heads about how to enforce privacy laws without triggering NLRB sanctions.

At last, the NLRB General Counsel prepared a template social medial policy that is legal (in the eyes of the NLRB) under the federal National Labor Relations Act. You may find this policy useful in evaluating your own social media policies. The text of the template policy is reproduced verbatim on the following pages. Any comments we have on the policy are embedded in {Poisson brackets}.

29

SOCIAL MEDIA POLICY At [Employer], we understand that social media can be a fun and rewarding way to share your life and opinions with family, friends and co-workers around the world. However, use of social media also presents certain risks and carries with it certain responsibilities. To assist you in making responsible decisions about your use of social media, we have established these guidelines for appropriate use of social media.

This policy applies to all associates who work for [Employer], or one of its subsidiary companies in the United States ([Employer]).

Managers and supervisors should use the supplemental Social Media Management Guidelines {these guidelines can explain, but not expand the policy; in other words, this would not be the place for you to revive otherwise inappropriate social media prohibitions} for additional guidance in administering the policy.

GUIDELINES 30

In the rapidly expanding world of electronic communication, social media can mean many things. Social media includes all means of communicating or posting information or content of any sort on the Internet, including to your own or someone elseâ&#x20AC;&#x2122;s web log or blog, journal or diary, personal web site, social networking or affinity web site, web bulletin board or a chat room, whether or not associated or affiliated with [Employer], as well as any other form of electronic communication.

The same principles and guidelines found in [Employer] policies and three basic beliefs apply to your activities online.

Ultimately, you are solely responsible for what you post online. Before creating online content, consider some of the risks and rewards that are involved. Keep in mind that any of your conduct that adversely affects your job performance, the performance of fellow associates or otherwise adversely affects members, customers, suppliers, people who work on behalf of [Employer] or [Employerâ&#x20AC;&#x2122;s] legitimate business interests may result in disciplinary action up to and including termination.

Know and follow the rules Carefully read these guidelines, the [Employer] Statement of Ethics Policy, the [Employer] Information Policy and the Discrimination & Harassment Prevention Policy {include any other privacy and security policies in this list}, and ensure your postings are consistent with these policies. Inappropriate postings that may include discriminatory remarks, harassment, and threats of violence or similar inappropriate or unlawful conduct will not be tolerated and may subject you to disciplinary action up to and including termination.

Be respectful Always be fair and courteous to fellow associates, customers, members, suppliers or people who work on behalf of [Employer]. Also, keep in mind that you are more likely to resolve work related complaints by speaking directly with your co-workers or by utilizing our Open Door Policy than by posting complaints to a social media outlet. Nevertheless, if you decide to post complaints or criticism, avoid using statements, photographs, video or audio that reasonably could be viewed as malicious, obscene, threatening or intimidating, that disparage customers, members, associates or suppliers, or that might constitute harassment or bullying. Examples of such conduct might include offensive posts meant to intentionally harm someoneâ&#x20AC;&#x2122;s reputation or posts that could contribute to a hostile work environment on the basis of race, sex, disability, religion or any other status protected by law or company policy.

Be honest and accurate Make sure you are always honest and accurate when posting information or news, and if you make a mistake, correct it quickly. Be open about any previous posts you have altered. Remember that the Internet archives almost everything;

therefore, even deleted postings can be searched. Never post any information or rumors that you know to be false about [Employer], fellow associates, members, customers, suppliers, people working on behalf of [Employer] or competitors.

Post only appropriate and respectful content Maintain the confidentiality of [Employer] trade secrets and private or confidential information. Trades secrets may include information regarding the development of systems, processes, products, know-how and technology. {Patient health and financial information is considered confidential and its release other than for appropriate purposes is prohibited by HIPAA and state laws.} Do not post internal reports, policies, procedures or other internal business-related confidential communications.

Respect financial disclosure laws. It is illegal to communicate or give a “tip” on inside information to others so that they may buy or sell stocks or securities. Such online conduct may also violate the Insider Trading Policy. Do not create a link from your blog, website or other social networking site to a [Employer] website without identifying yourself as a [Employer] associate. {Such links may also violate [Employer]’s information technology policies if they permit unauthorized access to [Employer] computers and systems.} Express only your personal opinions. Never represent yourself as a spokesperson for [Employer]. If [Employer] is a subject of the content you are creating, be clear and open about the fact that you are an associate and make it clear that your views do not represent those of [Employer], fellow associates, members, customers, suppliers or people working on behalf of [Employer]. If you do publish a blog or post online related to the work you do or subjects associated with [Employer], make it clear that you are not speaking on behalf of [Employer]. It is best to include a disclaimer such as “The postings on this site are my own and do not necessarily reflect the views of [Employer].”

Using social media at work Refrain from using social media while on work time or on equipment we provide, unless it is work-related as authorized by your manager or consistent with the Company Equipment Policy. Do not use [Employer] email addresses to register on social networks, blogs or other online tools utilized for personal use.

Retaliation is prohibited [Employer] prohibits taking negative action against any associate for reporting a possible deviation from this policy or for cooperating in an investigation. Any associate who retaliates against another associate for reporting a possible deviation from this policy or for cooperating in an investigation will be subject to disciplinary action, up to and including termination.

Media contacts Associates should not speak to the media on [Employer’s] behalf without contacting the Corporate Affairs Department. All media inquiries should be directed to them.

For more information If you have questions or need further guidance, please contact your HR representative.

Barry Herrin is a partner in Smith Moore Leatherwood’s Atlanta office. His practice is devoted primarily to health care and hospital law and policy, privacy law, operational and governance issues, and health information management issues. He is a Fellow of the American College of Healthcare Executives. (404) 962-1027 | barry.herrin@smithmoorelaw.com

31

DISCOVERY IN THE

ELECTRONIC AGE A FEW TIPS FOR MANAGING E-DISCOVERY OBLIGATIONS

by Heather White

“

32

E

-discovery” is a process that involves gathering, reviewing and producing to opposing counsel electronic data pertaining to a dispute in litigation.

Courts impose sanctions when employers do not take steps to preserve this data once litigation is reasonably anticipated. In addition to monetary fines, sanctions can be devastating to the employer’s case: for example, one sanction is an instruction from judge to jury that an employer’s inability to produce e-data means the jury may presume the data would have been harmful to the employer’s case. >>

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The obligation to preserve data arises when litigation is reasonably anticipated, not merely when a lawsuit is later filed in court. In the employment context it can be difficult to distinguish between ordinary workplace complaints and ones that signal litigation. But HR professionals should be alert to signals and confer with counsel when in doubt.

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Because employment litigation involves discovery of HOHFWURQLFDOO\ VWRUHG LQIRUPDWLRQ PRQLWRU WKH FUHDWLRQ and existence of e-data that are relevant to personnel matters and be ready to preserve them when the possibility of a lawsuit arises.

33

â&#x20AC;&#x153;

When litigation appears possible, follow these basic steps: t

Issue a â&#x20AC;&#x153;litigation holdâ&#x20AC;? letter addressed to the key individuals involved in the matter instructing them to maintain all documents (including e-data) related to the dispute.

t

A generic letter is not enough. Tailor the letter to the type of information you believe the recipient has (e.g., email? financial documents? reports? telephone records?).

t

Follow up. Identify and interview key players to determine all potential sources of electronic data, including laptops and ipads, emails, servers, backup tapes, dvds, cds, external hard drives, smart phones (blackberry, iphone, etc.), and flash drives.

t

Notify the IT manager to suspend electronic data management systems that automatically delete and/or overwrite possibly relevant electronic data.

t

Preserve metadata (computer code).

t

Log your efforts. Good faith, diligent efforts to comply now may save you from sanction later.

Heather White is a Partner in Smith Moore Leatherwoodâ&#x20AC;&#x2122;s Charlotte Office. Heatherâ&#x20AC;&#x2122;s practice focuses primarily on commercial disputes and business litigation. heather.white@smithmoorelaw.com | 704.384.2635

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34

ATTORNEY

ALAN DUNCAN

Longbefore beforeAlan AlanDuncan Duncan defended defended John Long JohnEdwards Edwardsononcharges charges under Federal Campaign Finance law they occasionally found under Federal Campaign finance law they occasionally found themselves on opposing sides of a case. themselves on opposing sides of a case. as jurisdictions. His His as well well as as other other jurisdictions. trial experience includes intellectual trial experience includes intellectual property issues, business business property and and antitrust antitrust issues, and commercial cases, media and commercial cases, media and and communication insurance and and communication law, law, insurance reinsurance disputes, catastrophic injury reinsurance disputes, catastrophic cases, and issues professional injury aviation cases, issues aviation and malpractice actions.

Duncan served professional malpractice alsoactions. as past president of the Carolina Duncan also served as North past president Association of Defense Attorneys andof is of the North Carolina Association aDefense fellow ofAttorneys the American College of Trial and is a fellow of the Duncanwas wasrecently recently named named presidentpresident- Lawyers.

American College of Trial Lawyers.

Duncan elect of of the the North North Carolina Carolina Bar Bar elect the community community Association (NCBA) for 2012-2013.

His commitment commitment to to the Association (NCBA) for 2012-2013. His extends beyond the legal profession.

With more than 15,000 members, the With more than 15,000 members, the extends beyond the legal profession.

Since 2000, Duncan has served on the the North Carolina Bar Association is the North Carolina Bar Association is the Since 2000, Duncan has served on of Education Education state’s largest largest voluntary voluntary organization, organization, Guilford Guilford County County Board Board of state’s chair for for the the which provides provides services, services, such such as as and and has has been been the the board board chair which two-time recipient recipient continuing legal legal education education programs, programs, last last 10 10 years. years. He He is is aa two-time continuing Sydney Sullivan Sullivan to attorneys. attorneys. Last Last year, year, Duncan Duncan of of the the Algernon Algernon Sydney to the Sullivan Sullivan was honored honored as as the the recipient recipient of of the the Award, Award, presented presented through through the was of service service to to Advocate’sAward Awardatatthe theannual annualmeeting meeting Foundation Foundation in in recognition recognition of Advocate’s and service servicetotothe the community. the NCBA NCBA Litigation Litigation Section Section and and others others and community. ofof the also received received also received received the the NCBA’s NCBA’s Citizen Citizen Earlier Earlier this this year, year, Duncan Duncan also also award from from the the Lawyer Award Award in in 2007 2007 for for his his service service the the “Unsung “Unsung Hero” Hero” award Lawyer Joseph M. Bryan Foundation, honoring to the community.

From 2004-2007, to the community. From 2004-2007, Joseph M. Bryan Foundation, honoring Duncanserved servedon onthe theNCBA’s NCBA’sBoard Boardof of his his dedication dedication to to the the community. community.

Duncan Governors and also chaired the NCBA’s Governors and also chaired the NCBA’s challenges of of LitigationSection Sectionand andits its Trial Trial Practice Practice When When asked asked about about the the challenges Litigation balancing the high-profile Edwards case Curriculum Committee. balancing the high-profile Edwards case Curriculum Committee. with duties, Duncan Duncan with his his School School Board Board duties, indicated that he was forced to miss aa Duncan has earned substantial trial Duncan has earned substantial trial indicated that he was forced to miss few construction meetings, but made and appellate experience over his 30and appellate experience over his 30- few construction meetings, but made itit scheduled Guilford Guilford County County year career career with with cases cases in in both both the the to to all all of of the the scheduled year School Board meetings.

He admits to North Carolina state and federal courts, North Carolina state and federal courts, School Board meetings. He admits to Both began began practicing practicing law law in in North North Both Carolina in the early 1980’s, and both Carolina in the early 1980’s, and both would go on to have very distinguished would go on to have very distinguished legalcareers. careers.“John “Johnwas was an an outstanding outstanding legal plaintiffs’ lawyer, ” recalls Duncan. plaintiffs’ lawyer,” recalls Duncan.

While Edwards’ career path ultimately While Edwards’ career path ultimately took him him into into politics, politics, Duncan Duncan has has took been recognized as a leader and mentor been recognized as a leader and mentor within the the legal legal profession profession and and the the within community. community.

not time. notgetting getting much much sleep sleep during during that that time.

“Prior to the Edwards trial, the longest “Prior to the Edwards the longest jury deliberation I had trial, experienced was jury deliberation I had experienced five-and-a-half days,” said Alan. was The five-and-a-half Edwards jury days, spent” said nine Alan. days The Edwards jury spent nine days in deliberation, ultimately finding in deliberation, finding Edwards not guiltyultimately on one count, but Edwards not guilty on one count, but dead-locked on the other five charges. dead-locked on the theknowledge other five that charges.

“You wait with you “You wait with the knowledge that gave the jury the tools necessaryyou to gave jury the theverdict tools you necessary comethe out with believe to is come with the verdict you believenot is right.”out Federal prosecutors decided right. ” Federal prosecutors decided not to retry the case. to retry the case.

With regard to the salacious nature With to the nature of theregard case and the salacious media attention of the case and media saw attention surrounding it, the Duncan first surrounding Duncanit saw hand how it, difficult wasfirst forhand the how difficult it wasfamily. for the entire entire Edwards “JohnEdwards admits family.

“Johna admits making and a lot he of to making lot of to mistakes, mistakes, and responsibility he has taken responsibility has taken for those for those mistakes.

There’s old adage: mistakes.

There’s an old an adage: don’t don’t a by person by their best judge judge a person their best moments; moments; don’t judgebythem their and don’t and judge them theirbyworst worst moments.

Inarguably, Johnsome had moments.

Inarguably, John had some bad moments, but I did not for bad moments, but I did not for a seconda second he knowingly had knowingly believe believe that hethat had and and willfully violated the I defended willfully violated the law.law.

I defended him him on on that that basis. basis.””

When Edwards When asked asked where where he he thinks thinks Edwards will go from here, Duncan will go from here, Duncan replied, replied, “He He’s an an “He still still has has aa story story to to write. write. He’s immensely talented person. ” immensely talented person.”

35

>>> > Supreme Court Allows

Health Care Reform to Move Forward

By Allyson Labban, Justin Puleo, Farris Martini and Jeff Whitley*

O

36

n Thursday, June Ju 28, 2012, the Supreme Court of the United States issued its long-awaited ruling regarding the constitutionality of the th Patient Protection and Affordable Care Act of o 2010 (“PPACA”). Over the uncertainty of health reform past few years, the u has been one of the largest challenges facing our clients. Although the Supreme Court ruling does surrounding the future not answer all questions ques of health care, it does do give some guidance for the future. The decision means that PPACA’s provisions gradually rolling out through 2018. will continue gradu

Legislation O Overview

The overarching goals of the PPACA legislation are to reduce costs, iimprove quality, and expand health care coverage. In attempting to achieve these goals, transitions the fee for service delivery PPACA transit system into a model that promotes integration coordination, links payment to quality health and coordinati outcomes, and expands patient access to insurance coverage.

Timeline of PPACA Provisions Many PPAC PPACA provisions have been in effect since the legislation legislati was enacted in 2010. However, the transformative changes to the health care most trans industry ar are scheduled to roll out over the next three including the Medicaid expansion provision. years, incl Although states will now only waive new federal funding iif they choose not to expand Medicaid, the decision will certainly be a key battleground issue. following is a selection of important dates of The follo implementation affecting health care providers implem through 2015:

2012 2012 Integrated andand coordinated care Integrated coordinated incentives in effect. care incentives.

PPACA allows health care providers to establish PPACA allows health care providers to coordinated delivery systems called “Accountable Care establish coordinated delivery systems called Organizations” (“ACOs”). ACOs that meet or exceed “Accountable Care Organizations” (“ACOs”). quality measures while reducing costs may share in ACOs that meet or exceed quality measures the cost-savings of the Medicare program. The ACO while reducing costs may share in the costincentives have been in effect since January 1, 2012; savings to the Medicare program. The ACO however, the program is ongoing. incentives have been in effect since January 1, 2012; however, the program is ongoing.

Medicare Value-Based Purchasing program Medicare(“MVBP”) Value-Based commences October 1, 2012.

Purchasing (“MVBP”) program October 2012. Medicare The commences MVBP program ties a 1, hospital’s reimbursement to performance on a number of quality measures for specific Hospitals The MVBP programconditions. ties a hospital’s Medicarewill be responsible for increased reportingonon these quality reimbursement to performance a number measures.

Although thereforarespecific potential increases based of quality measures conditions. uponHospitals a hospital’s scores, base operating rates will be will be responsible for DRG increased reduced 1% for Fiscal Year 2013, furthermeasures. reducing to 2% reporting on these quality for Fiscal Year 2017 beyond. increases based Although there and are potential upon a hospital’s scores, base operating DRG rates will be 1% for Fiscal Year 2013, Payments forreduced unnecessary further reducing to 2% for Fiscal Year 2017 hospitalizations decrease and beyond.

beginning October 1, 2012.

Payments foranunnecessary Hospitals exceeding “expected” readmission rate will hospitalizations receive reduced Medicare payments. Hospital decrease readmission rates will be published by the Secretary of beginning Health and HumanOctober Services. 1, 2012.

Hospitals exceeding an “expected” readmission rate will receive reduced Medicare payments.

Hospital readmission rates will be published by the Secretary of Health and Human Services.

2013 2013

Medicaid payments for Medicaid payments for preventative and preventative and primary care primary care increase. increase.

PPACA expands the definition of “other diagnostic, PPACA expands the definition of “other screening, preventative, and rehabilitative services” in diagnostic, screening, preventative, and the Medicaid statute to include a wider range of eligible rehabilitative services” in the Medicaid preventative services. States offering Medicaid coverage statute to include a wider range of eligible with no cost-sharing by patients will receive a one preventative services. States offering percentage point increase in federal matching payments Medicaid coverage with no cost-sharing by for the defined preventative services. Additionally, patients will receive a one percentage point primary care physicians providing primary care services increase in federal matching payments for the will be reimbursed at no less than 100% of the Medicare defined preventative services. Additionally, payment rate for 2013 and 2014. primary care physicians providing primary care services will be reimbursed at no less than 100% ofrequirements the Medicare payment rate for Reporting increase.

2013 and 2014.

Health care providers and organizations will be required toReporting collect and report additional information, including requirements physician performance data and the financial relationship increase. between health entities.

Health care providers and organizations will be required to collect and report additional information, including physician performance data and the financial relationship between health entities.

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2014 Individual insurance mandate begins.

Federal and participating state insurance exchanges open.

Medicaid coverage expands.

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PPACA’s original aim was to incentivize all states to expand Medicaid coverage to all individuals under age 65 with incomes below 133% of the federal poverty line by making all Medicaid funding conditional on a state’s acceptance of the expansion. However, the recent Supreme Court decision prohibits the federal government from removing a state’s entire Medicaid budget for failure to expand Medicaid coverage. Thus, states will now have the option to forego only new federal funding and keep their existing level of Medicaid coverage. Medicaid programs in states opting out of the Medicaid expansion will remain substantially as they are today.

Disproportionate Share Hospital (“DSH”) payments decrease.

Medicare DSH payments will be initially reduced by 75%.

After this reduction, payment increases will be based on a calculation of the uninsured population and the amount of uncompensated care provided. Similarly, Medicaid DSH payments will be reduced based on an assessment by the Secretary of Health and Human Services. For states opting out of the Medicaid expansion, there will theoretically be a greater uninsured population and it remains to be seen how the Secretary will assess this.

Annual caps on the dollar amount payable by insurance plans prohibited.

Implementation of “Pay or Play” employment-based insurance.

Employers with more than 50 employees may choose to offer coverage to employees or pay a penalty and send employees into the state or federal Health Exchanges to acquire insurance. In 2014, the monthly penalty for employers who do not offer coverage will be equal to the number of fulltime employees minus 30 multiplied by onetwelfth of $2,000 for any applicable month.

2015

Medicare payments to certain hospitals for hospital-acquired conditions decrease.

Hospitals in the top 25 percentile of hospital-acquired conditions will receive a 1% reduction in Medicare payments. A report on hospital-acquired conditions will be published by the Secretary of Health and Human Services.

Conclusion By 2014, PPACA should increase access to health care coverage by newly insuring an estimated 34 million Americans over the next decade. The legislation’s long-term success in reducing costs and improving quality remain uncertain. However, the Supreme Court ruling provides some stability for those relying on the law, and health care providers may now proceed with planning for the future with some certainty about the trajectory of health care reform.

You may read the full text of PPACA and a breakdown of all ten titles of the legislation at: http://www.healthcare.gov/law/full/index.html.

Smith Moore Leatherwood is happy to answer any questions health care providers have about how PPACA will impact your organization.

Allyson Labban is a partner in Smith Moore Leatherwood’s Greensboro office and a member of the firm’s health care practice group. Her practice includes representation of health care providers in certificate of need disputes, medical staff matters, malpractice actions, reimbursement appeals, and fraud and abuse investigations. allyson.labban@smithmoorelaw.com | 336.378.5261 Justin Puleo is an associate in Smith Moore Leatherwood’s Raleigh Office. His practice focuses on health care, litigation, and clinical trials and he also counsels health care providers on a wide range of legal matters. justin.puleo@smithmoorelaw.com | 919.755.8802 *Jeff Whitley and Farris Martini were Summer Associates at Smith Moore Leatherwood LLP and are both rising 3L’s at the Duke University School of Law.

THE PATH ACT

Another Aspect of Health Care Payment Reform the Industry Shouldn’t Ignore

by Tami McKnew and Tobin Watt With industry pundits focused on the fate of the Affordable Care Act in the U.S. Supreme Court, the Protecting Access to Healthcare (PATH) Act has been quietly working its way through Congress. In addition to imposing federal standards on medical malpractice lawsuits, the Act repeals the limited exemption from federal antitrust law for the “business of health insurance.”

Since 1945, the McCarran-Ferguson Act has provided a limited exemption for insurers from federal antitrust laws. McCarran-Ferguson does not protect insurers from claims of boycott, intimidation, coercion, bid-rigging, or price fixing. But it does allow insurers to share some important data, such as cost and trending data, with competitors under certain state regulated conditions. That ability ceases with the passage of the PATH Act. The immediate impact of the McCarran-Ferguson repeal will likely be felt by smaller insurance companies that will be unable to access the broad industry data necessary to price new risk. Entry into the insurance market by new companies will likely also be more difficult, as the new entrant will be unable to access industry historical data for underwriting purposes.

It is possible that the changes to state insurance laws mandated by the PATH Act may also make it more difficult for provider networks (whether using the accountable care organization (ACO) model or otherwise) to obtain claims data that would be necessary for them to build risksharing pricing models and generally to compete with insurers for selffunded employer plan business. Provider networks, provider-sponsored health care plans, and HMOs should be aware of these potential changes and how they may affect their strategic and operational goals in this rapidly evolving segment of the health care industry.

Tami McKnew is a partner in Smith Moore Leatherwood’s Greenville office. She concentrates her practice in the areas of antitrust, franchising, and intellectual property. tami.mcknew@smithmoorelaw.com 864.240.2408 Toby Watt is a partner in Smith Moore Leatherwood’s Atlanta office. He has been practicing health care law for more than 20 years, representing hospitals, physician groups and various ancillary providers on a variety of health care matters. tobin.watt@smithmoorelaw.com 404.962.1026

39

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