Tag Archives: United States

In Major Ruling, Appeals Court Sharply Narrows Reach Of Insider Trading Law

On December 10, 2014, the U.S. Court of Appeals for the Second Circuit reversed insider trading convictions against two former hedge fund managers, and in the process sharply limited two key doctrines underpinning many recent SEC and Department of Justice insider trading cases. U.S. v. Newman and Chiasson (Nos. 13-1837-cr , Dec. 10, 2014). At the trial in 2013, the government alleged that analysts at hedge funds managed by defendants Todd Newman and Anthony Chiasson had illegally obtained information from insiders at Dell and NVIDIA, which the analysts passed along to Newman and Chiasson, who then traded based on the information. In Wednesday’s eagerly awaited decision, the three judge panel in New York reversed defendants’ convictions, holding that the government should have been required to prove that Newman and Chiasson knew that the original source of the information, the corporate insiders, had disclosed the information improperly and in exchange for a personal benefit. Further, the court held that the government had failed to show that the personal benefit received by the insiders was “consequential” and pecuniary in nature, as opposed merely to a more amorphous benefit such as “friendship.”

The prosecution grew out of a far-reaching investigation of hedge fund insider trading spearheaded by Manhattan U.S. Attorney Preet Bharara. In its 2012 indictment, the U.S. Attorney’s Office alleged that insiders at Dell and NVIDIA tipped a web of analysts, who passed on nonpublic information about upcoming earnings to analysts at the two hedge funds where Newman and Chiasson worked. The analysts passed that information to Newman and Chiasson, without telling them who the source of the information was. Newman and Chiasson then traded in Dell and NVIDIA securities, reaping $4 million and $68 million in profits, respectively.

In reversing the convictions, the appeals court found that there was no evidence that defendants knew they were trading on information obtained from insiders in breach of the insiders’ fiduciary duties. Moreover, the court rejected the government’s theory that, as sophisticated traders, the defendants “must have known” that the information came from corporate insiders who disclosed the inside information in exchange for a personal benefit. Instead, the court found that the government had to prove that the defendants (i) knew that the source breached a fiduciary duty in disclosing the information, and (ii) knew that the source received a personal benefit for providing the information.

Although the court acknowledged that case law concerning tippee liability for insider trading was somewhat muddled, the court also highlighted the “doctrinal novelty” of many of the government’s recent insider trading cases. The court suggested that in its zeal to root out insider trading, the government had failed to properly follow the Supreme Court’s landmark decision in Dirks v. SEC, 463 U.S. 646 (1983), which established many of the contours of modern insider trading law. The court rebuked the government for bringing cases under a theory of what it wished the law was, not based on what a proper reading of Dirks shows the law actually is.

Because the Second Circuit traditionally has had such a major impact on the development of insider trading law that governs both criminal DOJ and civil SEC cases, there is no doubt that the Newman decision will, in cases involving tipper-tippee liability, cause the SEC and DOJ to dial back pursuit of tippees who did not directly interact with the source of the inside information (so-called “remote tippees”). And as the Newman court noted, the government’s insider trading cases in fact have been “increasingly targeted at remote tippees many levels removed from corporate insiders.” Going forward, unless the government has clear evidence that the insider received a measurable benefit (such as a monetary kickback), and that the tippee knew that the insider received such a benefit for providing the information, cases against remote tippees will be much more difficult for the DOJ and SEC to prove.

Moreover, the court’s dramatic narrowing of what can constitute a personal benefit also will make even cases against first-level tippees more difficult. Previously, the SEC and DOJ have argued that a reputational benefit, such as enhancing a social friendship, was enough of a benefit. Under Newman, if the government cannot show that the tipper received “at least a potential gain of a pecuniary or similarly valuable nature,” the personal benefit element will not be met and the tippee cannot be found liable. Thus, for instance, in a case where an insider intentionally tips a casual friend knowing the person will trade, but receives nothing valuable in return, the tippee/trader is not liable.

In sum, although the Newman case is a blow to governmental pursuit of insider trading cases, we should expect that the DOJ and SEC will still continue to pursue them, and that the government will be particularly focused on developing evidence showing that alleged tippers received a valuable personal benefit and that the traders knew of the benefit.

Your Websites Terms Of Service Are Unenforceable

The Law on Electronic Commerce (“the Law“) which has been pending for approval by the Turkish Parliament for the past 3 years has finally been passed on October 23, 2014. However, the Law will enter into force as of May 1, 2015.

The aim of the Law is to harmonize the Turkish e-commerce legislation with the Directive 2000/31/EC of the European Parliament and of the Council on Certain Legal Aspects of Information Society Services, in Particular Electronic Commerce, in the Internal Market (“Directive on Electronic Commerce“).

The Law regulates the procedures and principles on e-commerce. It aims to create a more secure, transparent and accessible e-commerce environment to extend the use of e-commerce in Turkey. The implementation of the Law will be provided by secondary legislations prepared by the Ministry of Customs and Trade.

The Law provides that prior to executing an electronic agreement, the service provider must provide the buyer with detailed information regarding the terms of the electronic agreement, including but not limited to; easy access to up-to-date introductory information, technical steps necessary for formation of an electronic agreement, and information on whether the agreement will be stored by the service provider after the formation of the electronic agreement and whether the buyer will have access to the agreement and for how long such access shall last.

Pursuant to Article 4 of the Law, before the buyer’s payment details are submitted, service providers shall have to ensure that the buyer sees all of the terms of the agreement clearly, including but not limited to the total purchase price with respect to orders placed via electronic media.

The service provider shall also immediately confirm through electronic communication devices that the buyer’s order has been received.

Another obligation of service providers under the Law is that before the order is placed, the service provider shall provide the buyer with appropriate, efficient and accessible technical tools so that the buyer can detect and correct any data which has been entered incorrectly.

In case parties to an e-commerce agreement are not consumers by virtue of Turkish law, they can determine to act contrary to the abovementioned obligations.

However, agreements made through e-mail or similar personal communication devices are exempted from these principles on orders placed through electronic communication devices.

In case of commercial communications, the Law provides that adequate information which clearly procures the commercial communication and the identity of the real person or legal entity that the commercial communication was made on behalf of shall be provided. Moreover, any trade communications promoting discounts, gifts or promotional competitions or games must clearly express its purpose, and any information regarding the participation to such games or competitions must be comprehensive and easy to access.

According to the Law, sending commercial electronic messages is subject to the approval of the receiver. On the other hand, it is worth noting that commercial electronic messages can be sent to merchants and tradesmen without their prior approval.

Service providers and intermediary service providers are liable for the protection and security of personal information acquired within the scope of the Law. Additionally, service providers and intermediary service providers cannot use the aforementioned personal information for any other purpose and cannot disclose such information to third parties.

The Law provides specific punitive measures for wrongful acts against the provisions of the Law. However, the Law fails to provide any measures for any failure of protection of personal information. Although implementation of the Law will be provided by secondary legislations, failure to address such a vital issue is a setback of the Law.

When Requesting The Abatement Of Penalties For Failure To File International Information Returns Can Be A Trap For The Unwary

A letter from the Internal Revenue Service (IRS) threatening to impose substantial (some would say draconian) penalties can be a harrowing experience for any taxpayer or their advisor. A natural reaction would be to send a letter or make a phone call to the IRS requesting that the penalty be either abated or not assessed. Although this letter (as all letters from the IRS) must be taken seriously, a trap for the unwary exists in challenging those penalties prior to receiving the final notice in relation to the information return penalty. Failure to wait may cost a taxpayer the opportunity to request a Collection Due Process (CDP) hearing, generally a very effective forum, and reviewable in a court of law.

What is a CDP Hearing?

A CDP hearing is generally offered by the IRS after the imposition of a tax lien or before the execution of a levy and is held with the IRS Office of Appeals (“Appeals”). If a hearing request is timely and proper, an Appeals Officer will be assigned and a hearing held.

Appeals is quasi-independent and separate from the IRS collection office that is threatening adverse action. As such, the value of presenting your case to this more neutral party cannot be overstated. Appeals will review your case from a new/fresh perspective and listen to your arguments for abatement and/or presentation of alternatives to the adverse collections activity. Although the manner in which a CDP hearing should be prepared for and conducted is beyond the scope of this article, preparation is of the utmost importance and should be much the same as preparing for a trial.

Key to the CDP process is that while the hearing is pending, and until the decision of Appeals in your case becomes final, the IRS should not take any adverse actions relating to the liability being protested. Further, if you disagree with Appeals’ decision you may file a petition to have your case heard in US Tax Court. Generally, these cases take a very long time to sort out and become final, such that adverse actions/enforced collections can begin.

CDP Hearing in the Context of Certain International Information Penalties

Amongst what many consider to be International Information Penalties (IIPs), the penalty that is the most widely known and gets the most attention is the penalty for failing to file a Foreign Bank Account Report (FBAR) aka FinCen Form 114. The FBAR penalty is NOT a penalty that will be afforded the opportunity to request a CDP hearing and, as a result, many are unaware that some of the other IIPs should be afforded the opportunity to request a CDP hearing.

The hearing should be offered prior to the imposition of penalties for failure to file required returns, reporting:

  • The ownership of or transactions with a foreign corporation or partnership;
  • Transactions with foreign trusts;
  • Foreign owned entities engaged in a US trade or business; and
  • Specified foreign assets owned by a US taxpayer.

The Opportunity to Request a CDP Hearing and Obtain Judicial Review may be Lost Forever

The proposed imposition of IIPs is frequently met with panic and an urge to “make them go away” as soon as possible. Where the above IIPs (again excluding the FBAR) are involved, that impulse should be resisted until the final notice that affords the opportunity to request a CDP hearing is received. Importantly, should a penalty abatement be requested prior to that final notice, the IRS will generally take the position that because you had a prior opportunity to contest that penalty, a CDP hearing in relation to that issue is waived forever.

Summary

Knee-jerk reactions when dealing with the IRS are frequently ill-advised but especially so where that reaction can cause one’s client or oneself to be unable to take advantage of an important opportunity to be heard. If the decision is made to wait in order to take advantage of a CDP hearing, it is of critical importance to be certain that: the penalty threatened is one that will indeed qualify for review in a CDP hearing; and that the request is properly and timely filed.

Footnotes

Throughout this article the reader will note that I use “should” as opposed to “will” when it comes to certain IRS actions. I do this because although IRS policy states that certain penalties will be afforded the opportunity to request a CDP hearing, too frequently the IRS (perhaps) mistakenly does not follow its own guidance.

Tax Legislative Outlook For The Lame-Duck Session

There has been plenty of speculation as to what will happen in the 114th US Congress, with the House and Senate both under Republican control and President Barack Obama in his last two years in office. But before the new Congress arrives on Jan. 3, 2015, the old Congress is returning for a post-election, “lame-duck” session.

If one takes at face value all of the statements made by members of Congress and interested parties regarding what they expect (or at least hope) Congress will do in the lame-duck session, the lame-duck session will be a complete 180-degree turn in productivity, with Congress quickly settling disputes and finding common ground on issues and legislation where agreement has previously eluded them.

In this article, we do not seek to reconcile or evaluate all of those suggestions, threats and vows. Rather, this article observes that, rhetoric aside, lame-duck sessions dealing with expiring tax provisions have become the norm and describes how Congress is expected to deal with tax provisions in the lame-duck session, notwithstanding what may be said or hoped.

Three basic principles should be kept in mind. First, there is very little time in the lame-duck session to deal with the issues before Congress. “Must-do” items will necessarily take up most of Congress’ time and attention, leaving little opportunity for congressional leaders to focus on “discretionary” items.

Third, there will be strong resistance to doing exactly what was done in previous years. Particularly in light of the election results and a surly electorate that sees the country on the wrong track, there will be a need to demonstrate that this is not “business as usual.” So, in dealing with the extenders, members will need to show (or at least credibly say) that the results this time were different. Changes need not be big but they have to be symbolic.

A Lot to Do and a Short Time to Do It

Congress must pass a bill continuing to fund the federal government before Dec. 11 and must also deal in the lame-duck session with other expiring (or, in the case of most extenders, expired) provisions of law. Of course, Congress could, assuming the president agreed, pass short-term extensions simply to get them into the next Congress and deal in earnest with spending, taxing and regulatory decisions then. However, statements by Sen. Mitch McConnell and Speaker John Boehner have made clear that Republicans in Congress want to take advantage of their increased numbers in the next Congress to address their own issues and priorities.

If Republican members want to focus on issues of their choosing, they must clear the decks as much as possible in the lame-duck session because they will not be able to emphasize new matters and legislation while dealing with the distractions of, and mixed communications sent by, the postponed, must-do items. So, there will be a strong incentive for both Republicans and Democrats, albeit for different reasons, to deal substantively with the must-do items and not just punt them to the beginning of the next Congress.

Because there will be limited legislative days in November and December to deal with these must-do items, they will take up most of the time available for serious negotiating and legislating. That leaves little time for tax measures that require significant negotiation and technical drafting to reflect the results of those negotiations.

What Can Be Postponed and What Cannot

The extenders that expired at the end of last year must be dealt with in the lame-duck session. They cannot be postponed to the new Congress without seriously delaying the tax filing season. The expiring Internet tax moratorium does not have the same looming tax return preparation concerns, but Congress is unlikely to let it expire for any significant period of time. The handful of tax provisions that expire at the end of this year do not have the same urgency as those that have expired, but it would be strange for Congress to deal with the bulk of the extenders and not address them as well, at least if the expired provisions are extended for more than one year.

Moreover, whatever Congress decides regarding the extenders, the drafting changes to existing law to implement those decisions would be minimal. That makes it possible to include extenders in a final legislative package, even if the decisions are made very late in the lame-duck session.

On the other hand, tax items that proponents hope to have addressed in the lame-duck session, such as the Marketplace Fairness Act, “repatriation” legislation and anti-inversion legislation, do not fall within this cannot-be-postponed category. Further, even if Congress wanted to deal with these issues in the lame-duck session, in contrast to the extenders and Internet tax moratorium, these proposals would require significant technical work once conceptual agreement is obtained. Proponents of these measure should not give up, but they should be realistic in their expectations.

Doing the Same Thing, But Differently

For each expired or expiring tax provision, Congress must decide whether to extend it and for how long. Many of these tax provisions have been extended temporarily several times now, leading to their moniker of “extenders.” Of course, this shared label obscures the differences among the provisions. Some, like the research credit, have existed in a “temporary” state for decades and are otherwise thought of as part of our permanent tax law. Others, like “bonus depreciation” are newer and were initially intended to be only temporary, but appear to have since earned “extender” status.

No one thinks it is a good idea to treat all of these disparate provisions the same way, but each time they have come up for extension, the same-size-fits-all approach has been the path of least resistance. None of these provisions is considered important enough to move on its own (if it had, it would have already) and none has been considered to be clearly unworthy of extension (otherwise it would have been allowed to lapse earlier). Giving them all the same extension date is not ideal either; it is widely acknowledged that for those provisions intended to affect long-term behavior, short-term and retroactive extensions significantly diminish their effectiveness. Nonetheless, when the fate of the extenders is not addressed until the end of the legislative session, it is invariably easier to give them all the same extension date than it is to prioritize among them.

Seeking to break this cycle, the House Ways and Means Committee took a different approach this year, voting to extend only some of the provisions and for those so chosen to make the extensions permanent. The full House ratified this approach, at least for some of the extenders. Meanwhile, the Senate Finance Committee voted to follow the more traditional temporary extension approach. The Senate Finance Committee started with extension of only a subset of extenders, but by the time mark-up was finished, nearly all of the extenders were included.

This has led some to debate whether the approach taken by the House Ways and Means Committee (fewer items, permanent extensions) will prevail over the approach taken by the Senate Finance Committee (nearly all expired and expiring provisions extended for a temporary period). While there is pressure to handle the extenders differently this year, the House approach is not likely to be adopted.

First, the administration has threatened to veto permanent extensions that are not paid for. Second, it is not realistic to expect Congress to be able to reach agreement in December as to which extender goes into which category, even if there were agreement as a conceptual matter. At the same time, however, there will be opposition to the Senate approach, which could be pejoratively characterized as “business as usual.”

A compromise between approaches would seem to be the most logical way to address these conflicting pressures. That would mean making some — if only a few — provisions permanent and letting some — if only a few — provisions expire or remain expired. If permanent extension (even if only for a lucky few) is not possible, then a long-term extension (such as five years) could be touted as a victory, at least politically (although any long-term extension would not have the revenue “baseline” implications as a permanent extension).

Permanent (or sufficiently long-term) extension of even one or two sufficiently symbolic extenders, such as the research credit, could be the means of distinguishing this year from previous years. The hardest aspect of this compromise approach would be deciding which extenders get left on the cutting-room floor. All of the expired and expiring provisions have defenders, and allowing a provision to remain lapsed could be contentious if it is a high-profile one as well. Indeed, some of the provisions that generate the most opposition, such as the production tax credit, also have some of the strongest support.

So, proponents and opponents of extenders should not delay in making their views known. Most extenders will likely get the same temporary extension as in previous years. But a lucky few may get made permanent and an unlucky few may get left behind. Considering the stakes, it makes sense to weigh in if you feel strongly about a particular provision. The odds of any particular extender getting treated differently than its peers may not be great, but it looks very possible that a few will be singled out. You will want your provision to be singled out for the right reason.

Sweat The Small Stuff When Licensing Oracle Software

Enterprise-level software solutions often entail complex licensing challenges. Many of the thorniest questions often center on how to license software in virtualized environments, especially if the goal is to use something less than the full processing power of the hosting infrastructure. IBM licensees should be familiar with Big Blue’s requirement (in most cases) to deploy its IBM License Metric Tool (ILMT) in order to track the usage of products licensed on a sub-capacity basis. However, IBM certainly is not alone in the marketplace in forcing its customers to jump through hoops to use its products in cost-effective ways. Oracle’s requirements in this area can be equally daunting, depending on the hardware where the Oracle solutions are to be deployed.

Oracle allows its licensees to us “Hard Partitioning” to limit the number of software licenses required for a server or a cluster of servers. However, while Hard Partitioning may mean different things to different IT administrators, it means a set of specific requirements for Oracle, all of which must be carefully controlled in order to avoid unpleasant licensing surprises:

  • You must use Oracle-approved technologies to hard-partition your servers. Those technologies currently include the following:
    • Dynamic System Domains (DSD) — enabled by Dynamic Reconfiguration (DR),
    • Solaris Zones (also known as Solaris Containers, capped Zones/Containers only),
    • LPAR (adds DLPAR with AIX 5.2),
    • Micro-Partitions (capped partitions only),
    • vPar,
    • nPar,
    • Integrity Virtual Machine (capped partitions only),
    • Secure Resource Partitions (capped partitions only),
    • Fujitsu’s PPAR, and
    • Oracle VM Server (provided additional requirements are satisfied)
  • If the software is to be deployed on certain Oracle Engineered Systems, then the licensee needs to use Oracle VM Server and Oracle Enterprise Manager (OEM) to set up and report on “Trusted Partitions” where the software will be running. OEM can be deployed in either “Connected” or “Disconnected” mode: in the former, OEM reports on software usage directly to My Oracle Support, while in the latter the licensee is required to generate quarterly usage reports and to retain those reports for at least two years.
  • In every case where OVM is to be used as a Hard Partitioning technology, it is necessary to disable live migration of VMs and otherwise to follow Oracle’s technical instructions to allocate vCPU resources.

Businesses planning to license Oracle software on a sub-capacity basis need to review all of the requirements against current and compatible technologies deployed in their environments in order to determine whether the administrative costs associated with setting-up and maintaining those software deployments will make sense in the long run.

Missouri Court Finds That “Ineffective” Reservation Of Rights Letters May Support Bad Faith Recovery Even In The Absence Of Coverage

All too often, instead of sending reservation of rights letters that unambiguously inform the insured of the insurer’s coverage position, insurers send longwinded, generic letters with a cursory discussion of the claim’s facts, minimal (if any) coverage analysis, extensive policy quotations, and boilerplate reservation language.  When presented with this type of ambiguous and vague insurer “reservation of rights,” many courts conclude that the insurer fails to properly preserve some or all of its coverage defenses.  See, e.g., Royal Ins. Co. v. Process Design Assocs., Inc., 582 N.E.2d 1234, 1240, 1242 (Ill. App. Ct. 1991) (“[b]ased on the equivocal nature of Royal’s [reservation of rights] letter, we find that Royal did not reserve all its rights and defenses, particularly its professional liability defense”).  See also Hoover v. Maxum Indem. Co., 730 S.E.2d 413 (Ga. 2012) (reservation of rights was invalid because it failed to “unambiguously inform [the insured] that [the insurer] intended to pursue a defense based on untimely notice of the claim”).  Recently, a Missouri Court of Appeals found that an insurer’s “ineffective” reservation of rights estopped the insurer from using a court’s finding of no coverage to avoid a bad faith judgment.

In Advantage Bldgs. & Exteriors, Inc. v. Mid-Continent Cas. Co., the Missouri Court of Appeals affirmed the lower court’s bad faith judgment against an insurer on the basis that, among other things, the insurer failed to provide a “proper and effective” reservation of rights letter.  Case No. WD76880, 2014 Mo. App. LEXIS 975, at *13-15 (Mo. Ct. App. Sept. 2, 2014).  In that case, the insured, Advantage, was sued in a construction defect case and tendered the claim to its insurer, Mid-Continent, which had sold it primary and umbrella CGL policies.  Mid-Continent sent letters to Advantage asserting that it was reserving its rights and that it would “promptly” inform Advantage of its coverage analysis.  Mid-Continent, however, failed to inform Advantage of its internal conclusion that there was no coverage and subsequently ignored Advantage’s demands for coverage.  Advantage was ultimately found liable in the underlying construction defect case.  In the coverage litigation, the trial court confirmed that Advantage’s claim was not covered but nonetheless returned a bad faith judgment against Mid-Continent.  Mid-Continent appealed.

On appeal, Mid-Continent claimed that there was no basis for the bad faith judgment because it defended Advantage under a reservation of rights while investigating a claim that the court ultimately determined was not covered.  The Missouri Court of Appeals disagreed.  Mid-Continent’s “reservation of rights” letters “did not constitute an effective reservation of rights.”  The letters “only vaguely informed the insured” of Mid-Continent’s investigation, coverage analysis and reservation of rights.  Also, while the letters “generally discussed the nature of the underlying lawsuit and set forth various provisions of Advantage’s general liability policy[,]” they did not “clearly and unambiguously explain[] how those provisions were relevant to Advantage’s position or how they potentially related to coverage issues.”  Mid-Continent also failed to promptly advise Advantage of its coverage analysis after concluding there was no coverage.  The court explained,

Defending an action with knowledge of non-coverage under a policy of liability insurance without a proper and effective reservation of rights in place will preclude the insurer from later denying liability due to non-coverage.  [cites]  Here, Mid-Continent’s purported “reservation of rights” notification was not timely or clear, nor did it fully and unambiguously inform the insured of the insurance company’s position as to coverage.  Thus, regardless of the court’s January 2012 declaratory judgment ruling that the policy language did not explicitly cover the claims …, because Mid-Continent failed to effect a proper reservation of rights, it was prohibited from asserting only limited coverage for the claim.  Therefore, Mid-Continent was estopped to deny coverage for the claim to the extent of its policy limits.  Consequently, the circuit court did not err in submitting the bad faith claim to the jury despite its declaratory judgment to the effect that the policy language did not expressly provide coverage.

Id. (emphasis in the original).  Therefore, the bad faith judgment against Mid-Continent was affirmed.

The Advantage Bldgs. & Exteriors, Inc. v. Mid-Continent Cas. Co. case is a significant win for policyholders in supporting the principal that a bad faith judgment can be rendered even if the claim itself is found to not be covered.

Limitations On Credit Bidding Under Fisker And Its Progeny: A Trend Or An Aberration?

Section 363(k) of the Bankruptcy Code (the “Code”) provides that a secured creditor may “credit bid,” or bid at the sale of its collateral and then offset the purchase price at closing by the value of the outstanding claim secured by the collateral being purchased. The right of a secured creditor to credit bid, however, is not absolute, and may be modified or denied by the court “for cause.” Recent cases might appear to indicate that there is an emerging trend toward broadening the definition of “for cause” by limiting a secured creditor’s right to credit bid based upon policy considerations, such as a desire to foster a competitive bidding environment or to avoid chilled bidding. However, these cases may not be as significant a departure from existing case law as was first believed.

In the first of these cases, In re Fisker Auto. Holdings, Inc., No. 13-13087-KG, 2014 Bankr. LEXIS 230, (Bankr. D. Del. Jan. 17, 2014), the U.S. Bankruptcy Court for the District of Delaware capped a senior secured creditor’s right to credit bid for cause where no bidding would occur if the creditor were allowed to bid its full secured amount. In Fisker, Hybrid Tech Holdings, LLC (“Hybrid”) purchased an outstanding $168.5 million debt for $25 million to become the senior secured lender to Fisker Automotive Holdings, Inc. (the “Fisker Debtors”). Hybrid sought to purchase substantially all of the Fisker Debtors’ assets, and the Fisker Debtors proposed a private sale under section 363 of the Code just 24 business days after the bankruptcy filing. The Unsecured Creditors Committee (the “Committee”) opposed the sale motion and, in particular, opposed Hybrid’s right to credit bid. The Committee argued that if Hybrid’s credit bidding were capped at $25 million, there would be a strong likelihood that there would be an auction that could create material value for the estate. If Hybrid’s bid was not capped, there would be no realistic possibility of an auction. The court agreed, stating “bidding [would] not only be chilled without the cap; bidding [would] be frozen.” However, the court also pointed to the unfair, hurried process insisted upon by Hybrid and highlighted the fact that there was a portion of the assets being sold in which Hybrid did not have a perfected lien, and another portion in which there was a dispute as to whether Hybrid held a perfected lien. Based upon all of these considerations, the court ultimately determined that cause existed to cap Hybrid’s right to credit bid at $25 million. Given the additional reasons cited by the court, the opinion cannot be read to find “cause” would exist merely because the size of the secured creditor’s claim would chill other bidders.

In April, the U.S. Bankruptcy Court for the Eastern District of Virginia followed Fisker’s lead by capping a secured creditor’s right to credit bid. In In re Free Lance-Star Publishing Co., No. 14-30315-KRH, 2014 Bankr. LEXIS 1611, (Bankr. E.D. Va. Apr. 14, 2014), the Free Lance-Star Publishing Company and William Douglas Properties, LLC (collectively, the “Free Lance Debtors”) were a family-owned publishing, newspaper, radio and communications company, and a related entity that were parties to a $50 million loan secured by certain assets of the Free Lance Debtors, but not by “tower assets” that were associated with the Free Lance Debtors’ radio broadcasting company. The company that initially made the $50 million loan sold its secured debt to DSP Acquisition LLC (“DSP”), which bought the debt as part of a “loan-to-own” strategy, whereby it intended to push the Free Lance Debtors into bankruptcy and then acquire the company by credit bidding its secured claim. DSP asserted a right to credit bid up to approximately $39 million; however, this amount included liens on the Free Lance Debtors’ tower assets, despite DSP not having valid, properly perfected liens on, or security interests in, those assets. Other potential buyers were confused by what assets DSP had liens on and were reluctant to participate in the sale process because of DSP’s potential credit bid. Consequently, the court held that it was necessary to limit DSP’s ability to credit bid to the value of those assets on which DSP had properly perfected liens based upon DSP’s overzealous conduct, lack of valid liens in all the assets being sold, and the court’s goal of fostering “a fair and robust sale.”

Finally, the newest decision in which the court capped the amount of a secured creditor’s credit bid is In re RML Development, dba Pinetree Place Apartments dba Raintree Apartments, No. 13-29244 (Bankr. W.D. Tenn. July 10, 2014). In this case, SPCP Group III CNI 1, LLC (“Silverpoint”) asserted a valid first mortgage security interest in two apartment complexes owned by RML Development (“RML”), and intended to credit bid its claim. Silverpoint calculated its claim at $2,543,579.65, while RML admitted that the claim was worth $2,354,759.55. Section 363(k) specifies that a creditor may credit bid only “an allowed claim” as defined by section 502(a) of the Code. A filed proof of claim is deemed allowed until a timely objection is filed, after which there must be a hearing and determination by the court. Since RML objected to the amount of Silverpoint’s claim, the court limited Silverpoint’s credit bid to $2,354,759.55, or the amount that RML had admitted. This was important because there were numerous pending allegations connected to a Ponzi scheme in which RML may have been involved. Because of this, the court stated that it “[could not] turn a blind eye to these allegations and blindly ignore objections to claims.”

These decisions are noteworthy for secured creditors or distressed-debt traders who use the purchase of distressed debt as an acquisition strategy, as well as competing bidders and creditor constituents participating in section 363 sales. Credit bidding by secured creditors in section 363 sales is commonplace, but these three cases serve as a reminder that the right to credit bid is not absolute, and can be limited by the Bankruptcy Court “for cause.” Though much of the discussion surrounding Fisker, Free Lance-Star and RML Development focuses on the policy considerations that influenced the courts’ decisions, it is important to note that these recent decisions each involved a dispute as to the validity or extent of the creditors’ claims. Consequently, these decisions should not be read as allowing credit bidding to be capped solely to avoid bid chilling.

How Liable are You for Fraudulent Credit Card Charges?

The theft of millions of customers’ credit and debit card data from Target, Neiman Marcus and other retailers last holiday season was a wake-up call for consumers who underestimated their vulnerability to credit and debit card fraud. While you can — and should — take steps to limit your exposure to potential fraudsters, experts believe massive data breaches are likely to continue happening.

Fortunately, federal laws can help limit your potential liability stemming from unauthorized charges.

Different Liability Limits for Different Card Types
In the case of credit cards, federal law says you are not responsible for fraudulent charges exceeding $50. If you report your card lost or stolen before any unauthorized purchases are made, or if your account number but not your actual card is stolen, you are not liable for any amount. In addition, check to see if your credit card provider has a “zero liability” policy protecting you from all fraudulent purchases.

The law is different for debit cards. You are not accountable if you report your card lost or stolen before any fraudulent activity occurs. If you report the card missing within two days of its disappearance, you limit your responsibility to $50. Your loss caps at $500 if you inform your bank after two days but within 60 calendar days after your statement mailing date.

Otherwise, beyond those 60 days, your liability is unlimited, which would include the full amount taken from your debit account and any money linked to it. It is strongly in your interest to pay close attention to your statements to avoid this worst-case scenario.

Vigilance is your Best Defense
Maintaining the security of your personal information is mostly a matter of taking common sense precautions. You can also request a free credit report from each of the three major credit bureaus (Equifax, Experian and TransUnion) once per year.

Additionally, for a fee, financial institutions, credit reporting agencies and third-party companies offer various levels of credit monitoring and protection services. For information on consumer protection laws and tips for safeguarding your account data, visit the Federal Trade Commission’s website.

Be Proactive
Consumer-friendly laws and credit card issuer policies can help you mitigate your losses, so long as you remain mindful of your accounts. In the end, there is no substitute for monitoring your account statements on a regular basis, including on any inactive accounts. Immediately notify your bank or credit card company of any discrepancies, because the sooner you act, the better your chance to limit the financial liabilities. For any questions, contact Adam Pechin at [email protected] or call him at .

State Attorney General Enforces Federal Statute: Something New or Déjà Vu?

Washington AG Bob Ferguson recently announced that he had filed a “first of its kind” lawsuit against a private company and its chief executive for violations of the 2010 Restore Online Shoppers’ Confidence Act (ROSCA). AG Ferguson alleges that Internet Order, LLC, violated ROSCA’s limitations on “negative option” product purchase plans. While this action is a significant “first” under ROSCA, the more general idea that a State AG can sue a private entity to enforce a federal statute is something we have seen before.

During our country’s bicentennial year, the Hart-Scott-Rodino Act created authority for State AGs to bring civil suits to enforce certain provisions of the federal antitrust laws. [Note: As counsel to the Senate Subcommittee on Antitrust and Monopoly from 1971 to 1977, our own StateAGMonitor editor, Bernard Nash, was responsible for drafting the Hart-Scott-Rodino Act and executing the legislative strategy that overcame two filibusters prior to enactment.] Under Hart-Scott-Rodino, State AGs are authorized to seek treble damages as well as costs and attorney’s fees. State AGs are still exercising their authority under Hart-Scott-Rodino. In 2011 and 2012, 33 State AGs filed suits against Apple, Inc. and e-book publishers for alleged price-fixing. The Southern District of New York rejected Apple’s challenge to state standing. See In re Elec. Books Antitrust Litig., 88 Fed. R. Serv. 3d 618 (S.D.N.Y. 2014).

From Congress’ perspective, state enforcement is palatable across political camps as it mixes increased industry oversight with increased federalism. There are other examples of the joint federal-state enforcement model:

  • The Dodd-Frank Act created a new federal regulator, the Consumer Financial Protection Bureau (CFPB), to oversee a wide range of financial activity including auto lending, student loans, mortgage servicing, and other financial services. Dodd-Frank also provided authority for State AGs to investigate and sue consumer finance companies for unfair or deceptive activity, or for violations of rules promulgated by the CFPB. Connecticut, Florida, Illinois, Mississippi, and New York recently initiated lawsuits against a diverse range of defendants.
  • The 2008 Consumer Product Safety Improvement Act permits State AGs to sue companies that sell, manufacture, or distribute unsafe or defective consumer products that “may affect such State or its residents.”
  • The 2009 Health Information Technology for Economic and Clinical Health Act gives State AGs the power to bring civil actions in federal court where they have “reason to believe that an interest of one or more of the residents of that State has been or is threatened or adversely affected” by a violation of federal health privacy requirements contained in the Health Insurance Portability and Accountability Act.
  • The Children’s Online Privacy Protection Act (COPPA) provides for state enforcement where the AG “has reason to believe that an interest of the residents of that State has been or is threatened” by a website operator or online service provider who has violated substantive COPPA provisions. State AGs may seek injunctive relief along with damages and restitution on behalf of state residents.

In addition, there are enforcement agreements between federal agencies and various State AGs. For example, the U.S. Department of Labor and the New York AG’s Labor Bureau formed a partnership agreement to allow cooperation in enforcing federal wage and hour laws. Likewise, the National Association of Attorneys General and the U.S. Equal Employment Opportunity Commission signed a memorandum of understanding outlining their intent to maintain joint enforcement operations under federal and state employment discrimination laws.

The Washington AG’s ROSCA lawsuit serves as an important reminder: Businesses conducting federal compliance planning must recognize and take into account State AG authority under an array of important federal statutes with potent remedies