News Type: Blogs

Despite veto drama during the waning days of the Trump administration, the William (Mac) Thornberry National Defense Authorization Act for Fiscal Year 2021 (NDAA) was enacted into law, and deep within its 1480 pages is a title-coined the Corporate Transparency Act (CTA)-that establishes new and more stringent reporting requirements. This represents but a small set of robust changes to U.S. anti-money laundering legislation that is part of the NDAA.

At its core, the CTA aims to eliminate anonymity of certain beneficial owners of entities (read: corporations, limited liability companies, financial institutions, and funds) formed in any U.S. state or territory or otherwise registered to do business in this country. It does so by commanding that beneficial ownership information be reported, all in an effort to eliminate (or at least minimize) the use of U.S.-incorporated shell companies for purposes of money laundering or terrorist financing schemes. .

Given this rather precise objective, the list of entities exempt from the CTA is a long one, and not every domestic company will need to comply. More on that below.

Reporting Requirements Under the CTA

The CTA mandates so-called “reporting companies,” defined broadly to encompass corporations, limited liability companies, and other similar entities created or registered to do business in the U.S., to submit a report to the Financial Crimes Enforcement Network of the Department of the Treasury. These reports must include the full legal name, date of birth and address (residential or business) of each entity’s beneficial owner, as well as a unique identifying number or identifier to be provided by FinCEN.

In terms of timing, entities formed before the effective date of the CTA have two years to submit their reports to FinCEN, while new companies must make their submissions at the time of formation or registration. Then, going forward, entities are obliged to report any change in beneficial ownership within one year of occurrence.

Information reported pursuant to the CTA is considered nonpublic and must be kept confidential by FinCEN, unless release is necessary under certain circumstances as enumerated in the statute. For example, the Department of the Treasury will have access to beneficial ownership data “for inspection or disclosure to officers and employees … whose official duties require such inspection or disclosure subject to procedures and safeguards” and for tax administration purposes. Likewise, federal agencies along with state, local, or tribal law enforcement agencies may request such information in furtherance of national security, intelligence, or law enforcement activity and for use in criminal or civil investigations.

There is more. So long as they are compliant with certain limited use requirements, requests for beneficial ownership information can be made on behalf of foreign authorities to assist with ongoing investigations. Financial institutions can make similar requests, but only with consent of the reporting company and subject to customer due diligence requirements. And finally, federal regulatory agencies, including federal functional regulators, are entitled to seek beneficial ownership information stored by FinCEN, subject to scope and use limitations contained in the CTA.

Rest assured, within a year FinCEN is expected to promulgate regulations implementing the CTA that should shed more light on these reporting requirements, among other things.

Beneficial Owners

The reporting requirements of the CTA beg the question: who can be deemed an entity’s beneficial owner? The answer as set forth in the law is not entirely straightforward: “an individual who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise (i) exercises substantial control over the entity; or (ii) owns or controls not less than 25% of the ownership interests of the entity.” Interestingly, not mentioned are people receiving substantial economic benefits from the assets of the entity, which language was found in an earlier draft of the CTA.

It is anticipated that FinCEN will include further clarifying information expanding on this somewhat vague definition when it implements its regulations. In the meantime, earlier codified FinCEN regulations (31 C.F.R. § 1010.230(d)) provide a bit of insight to the extent they characterize a beneficial owner as “[a] single individual with significant responsibility to control, manage, or direct a legal entity… including” an executive officer or senior manager or other individual performing similar functions. Of note, expressly carved out of this definition are (1) minor children; (2) individuals acting as nominees, custodians, or agents of another individual; (3) those acting solely as employees of the entity in question and whose control is derived solely from that employment status; (4) individuals whose only interest in the entity is through a right of inheritance; and (5) creditors of the entity, unless such creditor meets certain enumerated criteria.

Exempt Entities

On paper, every business formed or operating in the U.S. is subject to the CTA. However, there are two very important exceptions: (1) foreign establishments not registered to do business here, and (2) certain specified exempted entities-spoiler alert: there are a lot of them, 24 to be exact.

Those specifically exempt from the CTA include, but are not limited to:

  • Entities that are already regulated (including public companies; financial services companies, such as public accounting firms; and public utilities)
  • Entities exercising governmental authority on behalf of the U.S. or any Native American tribe, state, or political subdivision
  • Certain banks, bank holding companies, and federal and state credit unions
  • Investment advisers and their operational investment vehicles
  • Insurance companies and producers authorized by a state
  • Tax exempt political organizations
  • Any entity with a physical office within the U.S. that employs more than 20 employees full-time and has filed federal income tax returns demonstrating more than $5 million in gross receipts or sales in the aggregate
  • Any entity that has been in existence for over one year, is not engaged in active business, not owned directly or indirectly by a foreign person, that has not, in the preceding 12-month period, experienced a change in ownership or sent or received funds greater than $1,000, and does not otherwise hold any kind of asset, including ownership interests in any other corporation, limited liability company, or similar entity
  • Brokers or dealers as defined in the Securities Exchange Act
  • Financial market utilities designated by the Financial Stability Oversight Council
  • Any pooled investment vehicles
  • Any entity or class of entities that the Secretary of the Treasury has determined, by regulation, should be exempt from the reporting requirements of the CTA

Bottom line, a wide swath of companies created or registered to do business in the U.S will not be impacted by the CTA’s reporting mandates.

Violations and Penalties

For entities not exempt from the CTA, the consequences of failing to abide by its requirements are significant. Individuals who willfully provide or attempt to provide false or fraudulent beneficial ownership information or who fail to report information to FinCEN at all will be liable for civil penalties up to $500 per day that the violation continues (up to $10,000), and/or imprisonment for not more than two years. Persons who participate in an unauthorized disclosure or use of the beneficial ownership information are subject to even harsher penalties-$250,000 and not more than five years imprisonment.

Impact of the CTA

Prior to the enactment of the NDAA-and with it the CTA-the U.S. had become the anonymous shell company capital of the world. In response, Congress has sought to flip the switch on these shell companies and add an unprecedented level of corporate transparency by overwhelmingly passing the NDAA in a bipartisan manner. Indeed, so strong was the support of the legislation from both sides of the aisle that then-President Trump’s veto was quickly overridden by both the House of Representatives and Senate.

Now that the CTA is the law, the beneficial ownership reporting requirements imposed on non-exempt entities should go a long way toward cracking down on those who rely on shell companies to launder money and fund criminality, including terrorism, nationwide. That being said and given the broad exemptions, the number of companies actually impacted by the new statute may prove to be far and few between.

This blog post is not offered, and should not be relied on, as legal advice. You should consult an attorney for advice in specific situations.

Early last year, California enacted Senate Bill 824 (codified as section 675.1(b)(1) of the California Insurance Code), which serves to prohibit insurers from canceling or non-renewing policies of residential property insurance placed on homes located in certain ZIP codes for a year after the declaration of a state of emergency related to a California wildfire. The statutory provision also requires the California Insurance Commissioner to issue a bulletin informing insurers of the ZIP codes subject to the moratorium.

This month, Commissioner Ricardo Lara did just that by releasing Bulletin 2020-11 (the “Bulletin”) and a corresponding press release that once again notifies insurers of the one-year moratorium and sets forth the ZIP codes that are off limits in terms of notices of cancellation or non-renewal due to wildfire risk. In this alert, Michelman & Robinson explains how the Bulletin (not to be confused with a similar bulletin the Commissioner sent out last year) affects insurance companies and insureds, alike, and when the moratorium effectively began.

Q. What does the Bulletin provide?

A. Simply put, the Bulletin acts as a notice to insurers explaining that they are precluded from cancelling or non-renewing policies of residential property insurance held by insureds in certain ZIP codes within California for one year. Of note, it is the statutory provision (section 675.1(b)(1) of the California Insurance Code), not the Bulletin, that triggers this prohibition upon the Governor declaring a state of emergency due to wildfire(s).

Q. When does the moratorium begin?

A. It is important to stress that for many insurers, the Bulletin is their first notice of the requirements of the moratorium. Nonetheless, the effective date of the one-year prohibition is the date the Governor declares a wildfire-related state of emergency, not the date of the Bulletin itself. As such, insurers may find themselves in the position of having already issued cancellation or non-renewal notices and now having to retract them.

Q. Who does the Bulletin affect?

A. According to Commissioner Lara, the Bulletin impacts more than 2 million policyholders affected by wildfires. The specific ZIP codes covered by the moratorium, along with the corresponding effective dates (based on the declaration of each state of emergency to date), are listed in the Bulletin.

Q. Under what authority is Commissioner Lara acting?

A. The Bulletin issued by Commissioner Lara comes in the wake of Governor Newsom’s four separate state of emergency declarations made in August and September of 2020, all of which relate to several wildfires that ravaged California. The Commissioner’s action is pursuant to the law (section 675.1 of the California Insurance Code), which requires him to notify insurers of the moratoria that began on the date of each respective state of emergency and end one year later (e.g., in August and September of 2021, depending on the particular wildfire, state of emergency, and ZIP code).

Q. Who should insurers contact for information regarding the Bulletin?

A. The Bulletin directs all insurers with questions to contact Risa Salat-Kolm, an attorney within the enforcement bureau of the California Department of Insurance. She can be reached by email at [email protected]. Of course, carriers can also reach out to the insurance professionals at M&R for advice and counsel.

In the meantime, we will continue monitoring Commissioner Lara’s office for news on this and any future bulletins he may issue down the road.

This blog post is not offered, and should not be relied on, as legal advice. You should consult an attorney for advice in specific situations.

Michelman & Robinson recently posted a blog about two Californians (a medical doctor among them) and three others (one from New Jersey and two Marylanders), all of whom admitted to their part in a conspiracy-in violation of the Eliminating Kickbacks in Recovery Act of 2018 (EKRA)-that involved multiple layers of kickbacks. EKRA enforcement continues with the indictment last month of the Chief Executive Officer of a Costa Mesa-based substance abuse treatment and counseling center.

The latest EKRA action is particularly interesting because it involves what was likely intended to be a safe harbor marketing services agreement between the facility in Costa Mesa and a marketer-an agreement that the government characterizes as a “sham.”

This is the first known criminal charge to test the “personal services arrangements and management contracts” safe harbor of EKRA. According to the Indictment filed on September 16, the Costa Mesa center paid the marketing company a bi-monthly flat fee to bring detox-eligible patients in the door. The Indictment does not specify the terms of the agreement or other factors relevant to the application of the safe harbor. That being said, the contract between the Costa Mesa facility and marketing firm-as described in the Indictment-looks to be consistent (at least on its face) with some of the EKRA safe harbor requirements, though the actions as alleged against the Costa Mesa CEO may serve to undercut the agreement.

For providers and marketers in this space, especially those that have attempted to restructure their marketing contracts in order to comply with EKRA, this most recent EKRA case should be top of mind. Bottom line: if the indictment against the Costa Mesa CEP serves to reduce the scope of personal services arrangements and management contracts otherwise in line with existing safe harbor requirements, those attempting in good faith to comply with EKRA might suddenly find themselves in jeopardy for actions taken before this new wave of enforcement became public.

M&R will continue to monitor this criminal action going forward.

This blog post is not offered, and should not be relied on, as legal advice. You should consult an attorney for advice in specific situations.

Congress enacted the Eliminating Kickbacks in Recovery Act (EKRA) back in October 2018-legislation that prohibits the payment of kickbacks in exchange for patient referrals to substance use treatment providers. Nearly two years later, a handful of men who ran a triple kickback scheme are amongst the first to plead guilty for violating the law.

Two Californians (a medical doctor among them) and three others (one from New Jersey and two Marylanders) have admitted to their part in a conspiracy that involved bribing individuals suffering from substance use disorders to enter into drug rehabilitation centers-including a California facility that was owned and operated by the physician-in exchange for cash.

Three participants in the scheme ran a “marketing company” that entered into contracts with rehab clinics nationwide and maintained a network of recruiters that identified and recruited (read: paid) insured individuals to receive treatment at those facilities. The participating patients received kickbacks from the recruiters (sometimes several thousand dollars’ worth), and the recruiters in turn received kickbacks from the marketing company. The kickback chain continued as the marketing company was paid up to $10,000 per patient by the rehabs.

This is a textbook example of the treatment industry ills that EKRA is meant to combat:  here, multiple layers of  kickbacks were paid all the way down the line from treatment facilities, to marketers, to individual recruiters, and then to patients.

The conspiracy, which has cost health insurers millions of dollars and will likely result in prison time for the wrongdoers, is particularly newsworthy given the lack of known enforcement of EKRA since its enactment, as well as the sophistication of the nationwide “body-brokering” enterprise that led to the criminal charges.

This blog post is not offered, and should not be relied on, as legal advice. You should consult an attorney for advice in specific situations.

The U.S. Supreme Court has delivered great news to the LGBTQ community nationwide. In this week’s landmark decision captioned Bostock v. Clayton County, the high court ruled that federal law-namely, Title VII of the Civil Rights Act of 1964-prohibits employment discrimination against LGBTQ workers. To that point, Justice Neil Gorsuch, writing for the 6-3 majority, stated, “An employer who fires an individual merely for being gay or transgender violates [the law].”

In his opinion, Justice Gorsuch went to great lengths to establish that the text of Title VII-its words alone-bars employment discrimination on the basis of sexual orientation or gender identity. The following passage cuts to the chase:

“In Title VII, Congress outlawed discrimination in the workplace on the basis of race, color, religion, sex, or national origin. Today, we must decide whether an employer can fire someone simply for being homosexual or transgender. The answer is clear. An employer who fires an individual for being homosexual or transgender fires that person for traits or actions it would not have questioned in members of a different sex. Sex plays a necessary and undisguisable role in the decision, exactly what Title VII forbids.”

In fact, the majority agreed that, “It is impossible to discriminate against a person for being homosexual or transgender without discriminating against that individual based on sex.”

By way of example, Justice Gorsuch considered a hypothetical involving an employer having two employees, both of whom were attracted to men. These workers were identical in all respects, other than the fact that one was male and his colleague was female. With that as his premise, Justice Gorsuch explained that if the employer terminated the man simply because he was attracted to other men, the employer would, by definition, be discriminating against the male employee for traits or actions it otherwise tolerated in the female worker. Stated another way, if the employer were to allow female employees to be attracted to men but deny that same right to male counterparts, it would be engaging in sex discrimination by treating men and women differently.

A Somewhat Surprising Outcome

Given the Supreme Court’s conservative makeup, the decision in Bostock may be surprising to some; indeed, Justices Samuel Alito, Brett Kavanaugh, and Clarence Thomas fervently dissented. Nevertheless, Justice Gorsuch (a Trump appointee), joined by Chief Justice John G. Roberts Jr. and Justices Ruth Bader Ginsburg, Stephen G. Breyer, Sonia Sotomayor and Elena Kagan, issued a major victory for LGBTQ rights. Now, the federal law forbidding workplace discrimination on the basis of sexual orientation or gender identity is more aligned with the laws of more liberal states, like California.

That being said, it is important not to overstate the reach and meaning of the opinion in Bostock. Justice Gorsuch confirmed that the decision is to be read narrowly, and in terms of workplace rights, he wrote, “We do not purport to address bathrooms, locker rooms or anything else of the kind . . . Whether other policies and practices might or might not qualify as unlawful discrimination or find justifications under other provisions of Title VII are questions for future cases . . ..”

In addition, it is unclear whether Bostock will entirely ban workplace discrimination on the basis of sexual orientation or gender identity. The reason: the Supreme Court is considering whether employers with religious objections to LGBTQ people should be exempt from anti-discrimination laws.

Be that as it may, gay, bisexual, and transgender individuals have good reason to celebrate, as the Bostock case extends workplace protections to millions of people across the nation. For their part, employers must be mindful of the Supreme Court’s ruling when making personnel decisions.

This blog post is not offered, and should not be relied on, as legal advice. You should consult an attorney for advice in specific situations.

Most lawsuits must be filed within a prescribed period of time, and the deadline for initiating a civil action is known as the statute of limitations. While the statute of limitations varies depending upon the type of claim contemplated in any given matter, as a rule, if it “runs out” prior to the filing of a complaint, the case is no longer valid.

Sometimes, however, the statute of limitations is suspended, or “tolled,” for a while before it begins to run again. There are several different reasons tolling may occur, one of which was triggered in response to the onset of the coronavirus crisis. In fact, on April 6, 2020, the Judicial Council of California adopted Emergency Rule No. 9, which effectively suspended the statute of limitations on all civil cases in California until 90 days after Governor Gavin Newsom lifts the current state of emergency-this in order to protect parties who have causes of action that accrued before or during the COVID-19 pandemic.

Given that many courts statewide are beginning once again to process civil filings, Rule 9 was recently amended for clarification purposes and to specify new start dates for statutes of limitations. Michelman & Robinson explains how this may affect your civil case.

Q. Does Rule 9 only apply to statutes of limitation?

A. No, the amendment states that the emergency rule also applies to “statutes of repose,” which are similar to statutes of limitations, but establish different filing deadlines for certain civil cases, such as lawsuits arising out of defects in construction projects.

Q. What is the net effect of the amendment to Rule 9?

A. Effective immediately, Rule 9 has been amended to toll the statutes of limitation and repose as follows:

  • For causes of action having statutes of limitation or repose that exceed 180 days, the statutes are tolled until October 1, 2020
  • For causes of action having statutes of limitation or repose that are 180 days or less, the statutes are tolled until August 3, 2020

Q. What causes of action does Rule 9 apply to?

A. The rule is broad and applies to all civil causes of action, including special proceedings that are of a civil nature.

Of course, M&R’s litigators are here to answer any questions you may have about statutes of limitations or repose or, more broadly, civil litigation in the wake of COVID-19.

This blog post is not offered, and should not be relied on, as legal advice. You should consult an attorney for advice in specific situations.

Without question, tourism-and by extension, hospitality-has been one of the industries hardest hit by the coronavirus pandemic. This remains the case even as stay-at-home orders begin to be phased out and states gradually reopen for business. Long story short: hotels will continue to feel the economic sting of COVID-19 for the time being as non-essential travel is still discouraged by the Center for Disease Control, if not altogether prohibited in some places by virtue of cross-border restrictions, among other things.

The good news is that, at some point, this too shall pass, and vacationers will once again be checking into hotels, both domestically and internationally. One study recently cited in USA Today suggests that nearly 90% of American travelers hope to be packing their bags for trips by the end of 2021, and search data from Expedia indicates a growing interest in destinations from Hawaii to Orlando. In the meantime, business travel is sure to resume as companies carry on, albeit in a corporate landscape colored by the coronavirus crisis.

A New Experience From Check In to Checkout

Exactly when hotels will see a significant upswing in reservations (be it for leisure or business travel) is hard to pinpoint with precision. What we know is when guests do come back in numbers, the hotel experience will look and feel a lot different than it was back in the good old days (read: January 2020). Hospitality experts expect a range of COVID-19-related modifications to be implemented, including check ins and checkouts to be completed without human contact when possible; temperature checks upon arrival at certain properties; reconfigured lobbies to facilitate social distancing; the use of digital room keys; masked and gloved employees; sanitizing stations at every turn; elevator monitoring to control overcrowding; and housekeeping’s use of electrostatic sprayers and ultraviolet light to ensure pristine guestrooms that will be designated with a seal after cleaning. Whatever precautions any given hotel ultimately introduces, stays at properties large and small will take on an entirely new vibe. This will be among the many legacies of the COVID-19 outbreak.

Beyond the Guest Experience: Potential Legal Exposure

All of the foregoing aside, there are several legal issues that hoteliers must be mindful of as they ramp up operations. As customers return, at whatever pace that may be, hotel owners and operators will need to rebuild their workforces, presumably by recalling furloughed employees-a process that must be handled with care. Likewise, hotel employers are obligated to do what they can to ensure the health and safety of their workers, requiring meaningful workplace policies and protocols. In addition to these personnel matters, those in the hotel space will likely face an onslaught of contractual problems linked to the coronavirus, particularly ones involving large booking and event cancellations.

Surely, the possibility of legal exposure is very real as the pandemic comes under a modicum of control and hotel doors are reopened to employees and guests. Here, Michelman & Robinson answers questions that hoteliers may have about how best to minimize the specter of liability.

Recalling Employees

Q. What should hotel employers be thinking about in terms of recalling employees from furlough to avoid class action or other employment-related claims?

A. Hotels from coast-to-coast have had to furlough or otherwise layoff employees as a result of the hospitality business nationwide coming to a screeching halt. On the plus side, some, if not many, of the affected employees may be subject to recall as occupancy rates recover over time. That being said, hotel employers should consider all of the following when deciding what workers to bring back-this in order to avoid or minimize the risk of litigation:

  • Workers asked to return to their jobs must be selected in a way that is fair, non-discriminatory, and ideally based on identifiable business needs
  • If there are multiple employees in line for an available position, the selection process must be based on non-discriminatory criteria such as tenure-e.g., recalling those with the most seniority first
  • Favoritism when recalling employees must be avoided at all costs and legal counsel should review all hiring (or return to work) decisions
  • Should managerial employees be asked to handle non-managerial duties upon their return to the workplace, they may lose their exempt status; in such an instance, hoteliers must ensure that these employees are properly classified in light of their altered duties so as to prevent misclassification or wage and hour lawsuits
  • Layoffs made due to COVID-19 should not be used as a means to dismiss problematic employees in the absence of reasonable grounds for termination

The WARN Act

Q. How does the WARN Act factor into a hotelier’s decision-making regarding employees furloughed or laid off because of COVID-19?

A. As hotel owners and operators look toward an uptick in occupancy, personnel planning should be addressed with an eye toward the requirements of the federal Worker Adjustment and Retraining Notification (WARN) Act and state Mini-WARN statutes.

The WARN Act requires employers to provide written notice at least 60 calendar days ahead of a mass layoff-one involving 50 full-time employees and at least 33% of the active full-time employees at a single employment site, unless the layoff impacts 500-plus employees, in which case the one-third requirement does not apply.

The details of the WARN Act are plenty, and the amount of notice is subject to certain exceptions. For purposes of this answer, suffice to say that violations of the law can be quite costly. Covered employers that order mass layoffs without following the mandates of the WARN Act may be on the hook for back pay to impacted employees for each day of violation, as well as civil penalties, and the cost of health insurance benefits.

Of critical importance when contemplating the WARN Act as it relates to furloughed employees is this: WARN notification is only required for employees (1) laid-off for more than six months or (2) who have had their hours reduced 50% or more in any six-month period as a result of a mass layoff. Thus, the takeaway for hoteliers is all about timing and numbers. As most furloughs associated with the coronavirus began in mid-March, the WARN Act could be triggered in these cases if furloughed employees fail to be recalled by mid-September (depending, of course, on the total number of workers involved).

Of note, a handful of states, including California, Illinois, and New York, have enacted their own Mini-WARN statutes. As such, hotel employers should always check state law when dealing with the potential of a mass layoff. They should also keep in mind modifications to existing laws given the extraordinary circumstances presented by the COVIC-19 pandemic. For instance, California Governor Gavin Newsom has issued an executive order temporarily suspending the state’s WARN Act notification requirement for qualifying employers, provided certain criteria are met.

All things considered, hotel owners and operators would be wise to consult with legal counsel when staring down the barrel of a potential mass layoff. Depending upon specific circumstances, it may be recommended that hotel management provide a form of WARN notification to minimize the potential for related litigation.

Employee Health and Safety

Q. Regarding employee health and safety, what should be on hoteliers’ radar screens as the risk of COVID-19 persists?

A. This is a particularly difficult area for any employer given the patchwork of federal, state, and local guidelines concerning employee health and safety. It is especially challenging for hotel owners and operators, including those having multiple properties-some in states that have largely opened up for business and others where quarantine requirements are still in place. In such uneven circumstances, it is nearly impossible to implement consistent company-wide health and safety protocols.

One constant is the general duty clause of the Occupational Safety and Health Act (OSHA), which mandates that employers provide their employees with a “workplace free from recognized hazards likely to cause death or serious physical harm.” Prior to the onset of the coronavirus, this obligation was rather straightforward, but how the requirement will be interpreted as a legal standard in the face of a highly contagious virus remains unclear.

What we know is that OSHA, unions, and hotel employees will see the general duty clause as just that, a duty, as well as an aspirational standard requiring hoteliers to use their best efforts to comply. Consequently, hotel management should engage in a top-down review to determine how, and if, they can make their workplaces safer for employees upon their inevitable return. Among things to be considered is whether greater social distancing is possible given the design and operations of an existing property. Toward that end, staggered work hours, or having different teams reporting to work on different days in order to facilitate social distancing, could be a good solution.

On par with social distancing is the need for hoteliers to ensure that their workforces are healthy and not likely to infect others. That means mechanisms should be instituted to have hotel employees’ temperatures taken as they arrive for work, and to have personnel that are coughing or showing other observable symptoms of COVID-19 prevented from entering the workplace. Thankfully, the EEOC has determined that an individual with COVID-19, or symptoms of it, presents a significant risk of substantial harm to others, which justifies limited health inquiries and medical examinations and testing of employees, though employers must maintain all health-related information about an employee’s illness or condition as a confidential medical record. By virtue of this confidentiality requirement, hotel owners and operators must be thoughtful about whom they have asking medical questions and taking down health-related information, and how that data is being stored.

Regarding employee health and safety, one issue unique to the hospitality industry relates to protocols put in place for guests (e.g., the frequency in which guestrooms are cleaned, how food should be delivered, and whether guests will be tested for COVID-19). In other words, employees need to be protected not only from their co-workers, but also from hotel visitors, which may prove to be rather tricky as a practical and operational matter.

Another issue for hoteliers to keep top of mind is what personal protective equipment (PPE), if any, their employees should wear (e.g., masks, gloves, etc.) while on the job. To the extent PPP is necessary, employees will have to be trained in its use and proper disposal. Attention must also be paid to the most routine events, like managing the ingress and egress to a hotel property or, for example, its elevators to prevent congestion. Likewise, to mitigate the chance of another outbreak, it may be essential to limit undue density in a property’s breakrooms or other common areas.

Booking and Event Cancellation

Q. How should hotels approach contractual issues like large booking and event cancellations due to the coronavirus?

A. When it comes to significant room and event cancellations, hotels need to tread lightly, keeping in mind the possibility of PR- and brand-related fallout. The prospect of adverse publicity aside and with regard to contract performance, enforcement rights pertaining to booking and event agreements will largely hinge upon the principles of force majeure.

A force majeure clause operates to excuse performance under an agreement or to extend time of performance when an unforeseeable event-or one that is beyond a party’s control-causes that party to be unable to meet its contractual obligations. Arguably, the coronavirus may well qualify as a triggering event for purposes of a force majeure provision in a hotel contract, but that will not always be the case.

Force majeure language in an agreement must be very detailed, as many courts set the bar quite high and require specific reference to the problematic occurrence (here, a pandemic or virus). Nonetheless, force majeure could be grounds for the cancellation of a large booking or event. So too may the legal doctrines of frustration of purpose and impossibility of performance.

It is worth noting that several lawsuits have been filed over the last month in multiple jurisdictions-California, New York, and Texas included-calling into question the enforceability of force majeure provisions in light of COVID-19. Unfortunately for hotels juggling cancellations and strategizing as to how to respond to them, concrete answers will not be coming anytime soon as these cases will likely outlast the virus.

Beyond force majeure, hotel owners and operators should be aware that a number of class actions are being pursued in California under the Consumer Legal Remedies Act (CLRA) and Unfair Competition Law (UCL). These disputes-mostly related to large-scale events-are at least partly based on the venues’ failure to conspicuously outline cancellation and refund policies.

Checkout Time

In closing, hotel owners and operators must prepare for legal issues that are sure to arise in the wake of the COVID-19 crisis. Whether they stem from employee recall decisions, determinations about mass layoffs, health and safety procedures, guest cancellations, or any number of other complications fueled by the coronavirus, disputes and the associated risk of litigation are always a possibility. Nonetheless, by ramping up operations with eyes wide open and mindful of the items discussed above, hoteliers can certainly help keep exposure to a minimum.

This blog post is not offered, and should not be relied on, as legal advice. You should consult an attorney for advice in specific situations.

This is an update to Michelman & Robinson’s previous report about California Insurance Commissioner Ricardo Lara’s bulletin (Bulletin 2020-3) to insurance companies requiring the return of premiums to businesses and consumers in an effort to provide financial relief during the coronavirus crisis. By way of a new bulletin (Bulletin 2020-4) issued today (May 15, 2020), Commissioner Lara has extended his prior mandate directed at all admitted and non-admitted property and casualty and workers’ compensation carriers doing business in California. M&R explains the scope of Commissioner Lara’s updated directive here.

Q. What is the purpose of the commissioner’s latest bulletin (Bulletin 2020-4)?

A. Today’s bulletin (1) clarifies what is required of insurance carriers under Bulletin 2020-3, issued April 13, 2020, and (2) extends the relevant time period for that previous bulletin.

Q. What did the prior premium-related bulletin (Bulletin 2020-3) call for?

A. By virtue of local and statewide stay-at-home orders that have curtailed policyholders’ personal and commercial activities, the projected risk and loss exposure across a variety of insurance lines have become overstated or misclassified. In response, Commissioner Lara in Bulletin 2020-3 ordered all insurers doing business in California to make an initial partial premium refund for the months of March and April as quickly as possible (but in no event later than August 11, 2020) to certain California policyholders.

Q. What exactly does Commissioner Lara’s new bulletin (Bulletin 2020-4) clarify?

A. Bulletin 2020-4 clarifies that prior Bulletin 2020-3 does not require full, 100% refunds of premiums for the months of March and April. It does, however, compel insurers to provide partial refunds, taking into account only the portions of premiums for the months of March and April where projected loss exposures of certain policies have become misclassified or overstated. Further, Bulletin 2020-3 provided that if the COVID-19 pandemic continued into and beyond May, a subsequent bulletin would be issued to insurers. Commissioner Lara has done just that with Bulletin 2020-4.

Q. What does Bulletin 2020-4 say about extending the time for premium reductions?

A. Consistent with California Governor Gavin Newsom’s May 7 order transitioning California into Stage 2 of the so-called Pandemic Resilience Roadmap-all the while keeping the state’s stay-at-home order in effect-Commissioner Lara’s latest bulletin extends the directive in Bulletin 2020-3, requiring carriers to reduce premium in the affected lines of insurance through May 31, 2020. Remember, Bulletin 2020-3 only contemplated the months of March and April.

Of note, if the stay-at-home order in California continues into June and beyond, the commissioner will issue additional directives to ensure premiums continue to accurately affect policyholders’ exposure to loss.

Q. To put Bulletin 2020-4 in proper context, what were the directives in Bulletin 2020-3?

A. The prior bulletin requires insurers issuing policies in the following lines of insurance to provide affected California policyholders with a notification of the amount of their partial refunds, a check, premium credit, reduction, return of premium, or other appropriate premium adjustment, no later than August 11, 2020:

  • Workers’ compensation
  • Commercial multi-peril
  • Commercial liability
  • Medical malpractice
  • Commercial automobile
  • Private passenger automobile
  • Any other insurance line where the risk of loss has fallen substantially as a result of the COVID-19 pandemic.

In addition, carriers must provide explanations of the basis for the adjustments, including any changes to the classification or exposure basis of affected policyholders.

Q. Do the premium-related bulletins require insurers to report anything to the California Department of Insurance?

A. Yes, affected insurers must report to the CDI no later than June 12, 2020 all actions taken and contemplated future actions to refund partial premium in response to or consistent with the bulletins. The required reporting must now also include information with respect to any premium adjustments for May 2020, in addition to March and April.

The CDI provided a Microsoft Excel workbook, which can be found here, for insurers to use for their reports, which are to be submitted to the Rate Specialist Bureau at [email protected].

This blog post is not offered, and should not be relied on, as legal advice. You should consult an attorney for advice in specific situations.

This week, the U.S. Supreme Court agreed to hear a case of great consequence when it comes to judicial review of IRS guidance that arguably concerns tax collection or assessment. At issue in CIC Services LLC v. Internal Revenue Service is the scope of the Anti-Injunction Act and, more specifically, what constitutes the collection or assessment of taxes for purposes of the statute.

CIC Services LLC is a risk management consulting firm and material advisor to captive insurance companies. Its lawsuit relates to Notice 2016-16 issued by the Treasury Department and IRS, by which the federal government:

  • Identified certain transactions entered into between taxpayers and related captive insurance companies as having the potential for tax avoidance or evasion (micro-captive transactions);
  • Labeled micro-captive transactions as “transactions of interest;” and
  • Subjected micro-transactions to reporting requirements and potential penalties associated with “reportable transactions.”

In a nutshell, Notice 2016-16 served to label micro-captive transactions as potentially abusive tax shelters, much to the chagrin of CIC Services. In response, the company filed its complaint against the IRS in the United States District Court for the Eastern District of Tennessee, seeking to render Notice 2016-16 and its mandates invalid. CIC Services alleged that in issuing the notice, the IRS failed to follow the requisite notice-and-comment rulemaking and congressional review procedure for legislative rules as set forth in the Administrative Procedure Act.

The trial court dismissed CIC Services’ complaint for lack of subject matter jurisdiction, holding that the Anti-Injunction Act divested it of jurisdiction because the lawsuit was “for the purpose of restraining the assessment or collection of any tax.” CIC Services appealed this ruling to the Sixth Circuit, arguing that the Anti-Injunction Act did not prohibit pre-enforcement review of Notice 2016-16 because it is not geared toward tax collection or assessment; rather, the Administrative Procedure Act compels such a review.

For its part, the IRS contended that compelling taxpayers to report on the use of potentially questionable tax shelters (read: micro-captive transactions) is (and was) related to tax collection and therefore protected by the Anti-Injunction Act. The Sixth Circuit agreed, finding that the Anti-Injunction Act barred CIC Services’ litigation.

By way of certiorari, the U.S. Supreme Court has stepped in and is set to hear CIC Services LLC v. Internal Revenue Service during its October 2020 term. Michelman & Robinson will be sure to follow this interesting case and convey the High Court’s decision.

This blog post is not offered, and should not be relied on, as legal advice. You should consult an attorney for advice in specific situations.

You may be hearing the phrase “force majeure” being thrown around quite a bit in response to the upheaval caused by the coronavirus. But what does this archaic phrase mean for you and your real estate contracts? In short, a force majeure clause operates to excuse performance obligations in an agreement or to extend time of performance when an unforeseeable event, or one that is “beyond the contractor’s control,” causes one or more parties to be unable to meet their contractual obligations. Given that the coronavirus may well qualify as a triggering event for purposes of a force majeure clause in one of your contracts, we offer the following information, which is geared toward commercial real estate.

Q. Do force majeure clauses impact commercial real estate contracts?

A. Yes. Nearly all commercial contracts, including most commercial leases, contain some form of force majeure clause. Examples of a force majeure include prevention, delays or stoppages due to strikes, lockouts, labor disputes, terrorist acts, acts of God, governmental actions, inactions or delays, civil commotion, extreme weather, fire or other casualty, and/or other causes beyond the reasonable control of the party obligated to perform.

That being said, even in the event of a force majeure, commercial tenants are typically still on the hook to pay rent to their landlords. Many commercial leases include language stating that force majeure may not be raised as a defense for a tenant’s non-performance of any obligations with regard to the payment of rent. Such carve-outs are extremely advantageous for landlords and-absent other possible defenses (see below)-effectively mean tenants will not be able to circumvent rent altogether-or pay lesser amounts-if something out of their control occurs that results in their landlords being unable to perform their duties under any given commercial lease. Of note, the carve-outs also act to insulate landlords from tenants that refuse to pay rent because of a force majeure that prohibits those tenants from entering or continuing their business operations on leased premises.

Rent aside, force majeure usually excuses landlords and tenants from other performance under their commercial leases, but only for a period equal to the prevention, delay, stoppage or inability to perform. And of course, if a commercial lease does not include the carve-out language referenced above, even a tenant’s rent may be subject to a force majeure clause.

Q. Are force majeure clauses enforceable?

A. Yes, but the analysis is fact-intensive and should be considered on a case-by-case basis. Especially important is the precise language of the force majeure clause at issue. As with all contractual disputes, the terms of the agreement (for our purposes here, a commercial lease) and the intent of the parties control a court’s analysis. Force majeure clauses will only limit damages where circumstances beyond the parties’ control have frustrated their reasonable expectations.

Q. Does the coronavirus pandemic trigger the force majeure clause in your contract?

A. Possibly. Again, the inquiry will turn on the specific language in the force majeure clause at issue coupled (potentially) with the governmental orders in place in the jurisdiction where the contract is to be performed.

Most courts read force majeure clauses narrowly, especially those that use unspecific terminology, catch-all phrasing, or the term “act of God.” In fact, the applicable test does not limit triggering factors to “acts of God,” but focuses on the unforeseen nature of the force majeure event and the ability of parties to a contract to have prevented the circumstance if they acted diligently.

However, some force majeure clauses expressly identify “illness,” “disease,” “epidemic,” “pandemic,” or similar terms in the list of triggering acts. In those instances, it is fairly clear that the coronavirus outbreak would activate the force majeure clause and excuse contract performance.

If your force majeure clause does not contain these illness-related terms, it still may be in play. For example, many force majeure clauses are triggered where governmental decrees, laws, or ordinances render performance untenable. Given the influx of coronavirus-related governmental orders prohibiting gatherings of people-such as the San Francisco Bay Area’s shelter in place order-parties to a contract could reasonably lean on their force majeure provision in these instances. Further to that point, parties in California may even argue that the state government has already declared a force majeure event resulting from the pandemic. On March 12, Governor Gavin Newsom issued Executive Order N-25-20, providing, in part, that “state and local public health officials may, as they deem necessary in the interest of public health, issue guidance limiting or recommending limitations upon attendance at public assemblies, conferences, or other mass events, which could cause the cancellation of such gatherings through no fault or responsibility of the parties involved, thereby constituting a force majeure.”

Big picture: while a force majeure provision may be narrowly construed and, under the laws of some states, such as New York and Texas, only triggered where the clause clearly and expressly includes the contingent event, commercial landlords and tenants should understand that even catch-all language making reference to “calamities” or “causes beyond a party’s reasonable control” may be leveraged to their advantage depending upon the circumstances.

Q. Are there other related contract doctrines available as a result of the coronavirus pandemic?

A. Yes, parties to an agreement might be able to assert the defense of “frustration of purpose” and essentially argue that the stated purpose of the contract is frustrated by a governmental prohibition in response to the virus. The case law, at least in some jurisdictions, includes solid precedent as it concerns frustration of purpose based on a government order.

Impossibility of performance is another potential defense to contract enforcement, though not a terribly effective one. This doctrine is construed quite narrowly and usually applied only where performance is objectively impossible, such as where a “thing” necessary for performance has been destroyed. In theory, a party to a commercial lease could argue that it was prevented from performing due to a shelter in place, quarantine, or an isolation ordinance decreed by executive order, but to the extent commercial buildings remain open to provide minimum basic operations and essential business, it is not likely “impossible” for a tenant or a landlord to perform under their commercial lease. This is especially true as it relates to the payment of rent.

It is important to note that in certain contracts, falsely invoking the defense of force majeure or one of the alternative defenses just listed-whether or not in good faith-can alone constitute a breach of contract leading to more potential problems.

Q. Are there any additional concerns and strategies I should keep in mind?

A. In the commercial real estate context, be proactive with your landlord, tenant, or lender. We all are operating in the same uncertain times and landscape, and virtually every business owner understands the economic hardships we all face-your, landlord, tenant or lender included. For instance, rather than waiting until after a payment is late or missed, proactively reach out to those with whom you do business and discuss the circumstances and your options. To that end, consider negotiating modifications and forbearance agreements, which set forth in writing in advance how the parties intend to deal with the pandemic’s impact on their business relationship.

Businesses should also take a close look at tax and cash flow relief programs available to them from the federal and state governments and their respective agencies. For example, the federal government recently announced that it would give taxpayers a 90-day extension to pay 2019 income taxes due on up to $1M in tax owed, which is meant to cover pass-through entities and many small businesses. Commercial landlords and tenants should research sources of financial and tax relief, and discuss the same with their trusted attorneys, accountants, brokers, and advisers.

Please know that we are here to help you in any way we can. That includes coordination with your insurance and real estate brokers, both of whom should be familiar with existing market conditions.

This blog post is not offered, and should not be relied on, as legal advice. You should consult an attorney for advice in specific situations.