Indemnification in Contracts: What if Both Parties Are at Fault?

In my over 20 years as an attorney, I have consistently found that indemnification clauses in contracts are among the most negotiated and sensitive contractual issues. I have also found that the law as it applies to indemnification is often misunderstood. On our website, we have discussed whether an indemnification agreement requires the party being looked to for indemnification to actually be “guilty” of some omission or wrongdoing. This article focuses on what happens if both parties are at fault – what if both parties have contributed to the situation which now potentially triggers a duty of indemnification?

Let’s start out with a simple example of some indemnification language so that we are all on the same page. “Contractor shall indemnify Company and shall hold Company harmless for any costs, fees, damages, and liabilities incurred by Company because of any claim, suit, or allegation against Contractor.”

Next, let’s look at some common dispute scenarios:

• Scenario A. Plaintiff is only suing Company, with the only allegations being that Contractor engaged in wrongful actions or inactions, and that Company is legally responsible (vicariously liable) for Contractor’s wrongful actions or inactions. While it may seem counter-intuitive to not also sue the party alleged to be directly responsible, this does happen, and there are many reasons why it might – some of which make perfect sense.

• Scenario B. Plaintiff is suing both Contractor and Company, alleging that Contractor directly engaged in wrongful conduct, and that Company is also responsible for Contractors wrongful actions or inactions. This is typically referred to as “vicarious liability” – where one party is alleged to be legally responsible for the actions or inactions of another party.

• Scenario C. Plaintiff is suing both Contractor and Company, alleging that both directly engaged in some sort of wrongful conduct (negligence, breach of contract, misuse of intellectual property, etc.).

The key difference in these Scenarios for purposes of this article is whether the Company is also alleged to have directly engaged in wrongful actions or inactions, independent of whatever Contractor supposedly did wrong.

Here’s what you need to know. In some jurisdictions, if Company has directly engaged in its own, independent wrongful conduct which contributes to the damages Company is suffering (potentially including pre-litigation attorneys’ fees), Company may not be able to enforce an otherwise valid indemnification clause against Contractor. Let’s put this in context with a real-world example and then apply that to the Scenarios above.

Company is hired to provide comprehensive I.T. services to Hospital. Company hires Contractor to assist in upgrading Hospital’s cyber-security and data protection, and that contract contains an agreement by Contractor to indemnify (reimburse) Company for any damages Company incurs because of claims regarding Contractor’s work. It is alleged that due to poor work, a significant data breach occurred, resulting in private healthcare information and patient billing information being revealed.

In Scenario A, Company can likely require Contractor to indemnify it for the damages Company suffers in relation to the security breach claims. Company has done nothing directly wrong, but it (arguably) hired the wrong sub-contractor for the job.

In Scenario B, Company can likely require indemnification from Contractor, similar to Scenario A.

Scenario C is where Company may run into trouble. Let’s say that the evidence shows that 90% of the fault for the data breach lies with Contractor, and 10% of the fault lies with Company for its actions or inactions (independent of Contractor’s actions or inactions). Common sense may indicate that Company can require Contractor to indemnify it to the extent that it suffers damages due to Contractor’s poor work, but that may not be true – Company may not be able to obtain any indemnification at all.

In some jurisdictions, and depending on the exact language of the indemnification clause, Company would not be able to require any indemnification at all from Contractor if Company was also independently at fault for the data breach, even if Company’s wrongful actions or inactions were a drop in the bucket compared to what Contractor did wrong.

The exact wording of an indemnification clause is incredibly important for many reasons, obviously including the one discussed above. Whether you’re having a contract drafted up, analyzing one already in place, or (unfortunately) having to deal with a claim involving indemnification, make sure your attorney is well-versed in these issues.

McGrath & Spielberger, PLLC provides legal services in Florida, Georgia, North Carolina, Ohio, South Carolina, and Tennessee, as well as in some Federal courts. The Firm offers full scale representation, as well as limited scope services, as appropriate for the situation. Please be advised that the content on this website is not legal advice, but rather informational, and no attorney-client relationship is formed without the express agreement of this law firm. Thank you.

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North Carolina Premises Liability Law: What Are Your Responsibilities as a Landowner?

When someone visits your property – whether as a social guest or a repairman - there is always a chance that an injury could result. As a landowner, you may not know the extent of your potential liability when someone becomes injured on your property. 

Some states, such as Florida, apply different standards of care on the part of the landowner depending on the classification of the injury person (invitee, licensee, or trespasser). Up until 1998, North Carolina courts did so as well. Now, North Carolina applies the same standard of care of landowners to all lawful visitors – landowners must exercise reasonable care in not exposing lawful visitors to dangerous conditions and must warn of any hidden dangers on the property. “Reasonable care” may mean cleaning up a spill on the floor or just maintaining the property in general.

In order to recover damages from a landowner, the visitor must prove that the landowner negligently caused the condition or failed to remedy the condition after the landowner knew or should have known of the condition’s existence. With regards to hidden dangers, a landowner is required to give an adequate warning of the danger’s existence – this could mean a natural condition (ex/ a hill) or an artificial condition (ex/ a swimming pool).

It is important to remember that the above standard of care is for lawful visitors. For unlawful visitors, a landowner’s duty is only to refrain from willfully harming the trespasser. However, there is a particular doctrine – the attractive nuisance doctrine – that allows a landowner to be held liable for injuries sustained by children who trespass on the landowner’s property if the dangerous condition was one likely to attract children.

Common types of premises liability lawsuits include:

1. “Slip and Fall” – these cases commonly occur on commercial properties, such as a restaurant or grocery store. There are several issues that can arise in these cases – How long was the dangerous condition (i.e., the spill or liquid) present? Was a warning present (i.e., one of those yellow “Caution” signs)?
2. Property Defects – these cases can involve injuries resulting from a broken railing or broken stairs.
3. Dog Bites – a landowner may be liable for any injuries that his or her dog causes if the dog had shown dangerous tendencies in the past and the landowner (and dog owner) had knowledge of these tendencies at the time of the injury. 

 

 

 

There are certain situations in which a landowner may defensibly raise the doctrine of contributory negligence, which bars recovery by the injured party if they are partially at fault. This could mean that the visitor did not properly look where they were going or failed to act reasonably at time they became injured. Imagine a visitor going downstairs to your basement without turning the lights on and then tripping on the stairs.

This article was written by Attorney Kelly Frecker of McGrath & Spielberger PLLC. If you need legal help from an attorney near you, contact our law firm.

Florida Residential Landlord Rights and Responsibilities: What You Need to Know Before You Buy That Investment Property

Landlord/tenant laws cover rights and responsibilities each tenant and landlord has in their specific state. Because Florida is one of the best states in the country to invest in property, you may be considering buying an investment property. Before you do, you should understand Florida rental laws and consider certain aspects to better protect yourself and your investment, especially in the time of COVID-19.

I’m worried about damage to my property. What can I do to better protect myself and my investment?

So, you are concerned that your prospective tenant may cause damage beyond normal wear and tear. Or maybe you have concerns about your tenant’s financial situation. Luckily, there is no statutory cap on a security deposit amount in Florida and you are able to charge the deposit at your own discretion. Typically, Florida landlords charge the equivalent of a month’s rent. However, if you have concerns about your property or your tenant, you can charge more than that. While there is no limit, landlords will likely charge no more than two months’ rent. You should understand that charging an excessive security deposit may turn away prospective tenants so just be prepared for that.

What repairs am I required by law to make and what repairs can I hold the tenant responsible for?

You are legally required to keep the property “livable.” Under the doctrine of implied warranty of habitability, a landlord must maintain the structure of the building (stairs, ceiling, floors, etc. safety), provide hot/cold water, provide trash receptacles, exterminate bugs and rodents, etc. Therefore, maintenance and repair of any of those would be required.

On the other side, there are other repairs that you would not be required to fix by law, such as leaky faucets, grimy grout, and squeaky cabinet doors. Your obligations versus your tenant’s obligation to make these minor repairs should be addressed in the lease. I’ve commonly seen leases that require the tenant to pay for minor repairs and specify the price minimum for what constitutes as a 'major' repair. This means that, if the cost of a repair is less than the minimum amount of the major repair, you can require the tenant to make and pay for the repair.

The AC broke in my property. Do I have to repair or replace it?

Surprisingly, Florida law does not require landlords to provide or repair air conditioning. Rather, landlords are required, by statute, to provide functioning heat during the winter. However, most landlords do provide other appliances outside of just heat, such as air conditioner, ovens, refrigerators, etc. Therefore, the only instance in which you as a landlord would be responsible for repairs to additional appliances is if those repairs were included in the lease.

My tenant is claiming that I failed to repair a hazardous condition and is now threatening to withhold rent. Is this allowable?

Yes, however, the tenant must meet strict requirements. Under the previously mentioned doctrine of implied warranty of habitability, the landlord is required by law to make sure that the property is free of any hazardous or dangerous conditions. If you fail to repair the condition, the tenant has the option to either: (1) remain in the property and withhold rent until you fix the condition; or (2) move out and terminate the lease.

If the tenant seeks to remain in the property and withhold rent, the tenant:

•    Must provide notice – the tenant must provide written notice to you of their intent to withhold rent at least 7 days before the rent is due. They may either hand deliver it or send the notice by certified mail. If mailed, the notice must be sent at least 12 days before the rent is due. After receiving the notice, you have 7 days to make repairs;
•    Must be current in rental payments;
•    Has the right to withhold all future payments - as long as the tenant follows the correct procedure, they have the right to withhold all future rental payments until the repair is completed.

The tenant told me that they’re moving out of the property but the lease doesn’t end for months. What are my options?

The tenant is “breaking” the lease, which is when a fixed-term lease is terminated before the end date without paying the remainder of the rent due. Some states require a landlord to mitigate their damages by finding a new tenant. However, Florida does not require this. A landlord has 3 options: (1) find a new tenant; (2) do nothing and collect rent from your tenant as it becomes due; or (3) invoke right to liquidated damages.

(1)    Find a new tenant - So, this is something you could do but are not obligated to do. However, if you have a good relationship with your tenant, you could try to have them provide you with a replacement tenant.

(2)    Collect the rent as it becomes due - This is basic contract law. Your tenant cannot just agree to do something and then change their mind without having some consequences. Unless there is an early termination clause in your lease (see below), the tenant will be required to continue to pay rent until a new tenant is found or the lease period ends.

(3)    Invoke the early termination clause – Some leases include an early termination fee (aka liquidated damages clause). This fee is normally about two months' rent and your tenant will need to give you at least 60 days’ notice that they will be terminating the lease early.

The lease with my tenant ended. How do I return the security deposit? What if there was damage to my property?

This is probably the most common issue among landlords and tenants after the lease ends. While the tenant wants their money back, you also want to get your property back in good condition. You have two options: (1) return the tenant’s security deposit in full; or (2) deduct damages from the tenant’s security deposit and return the remaining balance.

(1)    Returning the Security Deposit in Full - Your property was given back in great condition and you don’t need to deduct from the deposit. Therefore, you must return the full amount within 15 days from the lease termination.

(2)    Deduct Damages From the Security Deposit and Return the Remaining Balance - If there was damage to your property and you intend to deduct from the tenant’s security deposit, you have 30 days from the lease termination to notify the tenant in writing of your intent to keep part of the deposit.

•    If you fail to provide this notice in writing within the 30 days, you forfeit your right to keep ANY part of the deposit.
•    Additionally, statutorily, you must strictly adhere to the following or risk losing your right to withhold a portion of the deposit:

o    Send the written notice by certified mail to the address you have on file. It is not your responsibility to ask the tenant for a forwarding address.
o    You must state your intention to keep a portion of the deposit and the reasons why
o     Inform the tenant that they have 15 days from receipt of the letter to contest the deduction in writing
o    If the tenant does not object – you must deduct and return the remainder of the deposit to the tenant within 30 days of your initial letter
o    If tenant does object - you can seek judicial remedies

I heard something about attorneys’ fees being a big deal in landlord/tenant matters. What’s the deal with that and do I need to be concerned as a landlord?

The landlord-tenant statute makes the award of attorneys’ fees discretionary in some instances, such as in actions to enforce rental agreement provisions and actions of possession; while in other instances, the award of attorneys’ fees are mandatory, such as actions to recover a security deposit or prohibited practices.

See the following applicable sections and notice the language contained therein (i.e., “may” versus “entitled”/”shall be”):

Section 83.48 – Attorneys fees.

In any civil action brought to enforce the provisions of the rental agreement or this part, the party in whose favor a judgment or decree has been rendered may recover reasonable attorney fees and court costs from the non-prevailing party. The right to attorney fees in this section may not be waived in a lease agreement. However, attorney fees may not be awarded under this section in a claim for personal injury damages based on a breach of duty under s. 83.51.

 

Section 83.49 - Deposit money or advance rent; duty of landlord and tenant.

(3)(c) If either party institutes an action in a court of competent jurisdiction to adjudicate the party’s right to the security deposit, the prevailing party is entitled to receive his or her court costs plus a reasonable fee for his or her attorney. The court shall advance the cause on the calendar.

 

Section 83.59 - Right of action for possession.

(4) The prevailing party is entitled to have judgment for costs and execution therefore.

Section 83.625 - Power to award possession and enter money judgment.

The prevailing party in the action may also be awarded attorney’s fees and costs.

Section 83.67 - Prohibited practices.

(6) A landlord who violates any provision of this section shall be liable to the tenant for actual and consequential damages or 3 months’ rent, whichever is greater, and costs, including attorney’s fees.

This article was written by Attorney Kelly Frecker of McGrath & Spielberger PLLC. If you need legal help with contracts, real estate and business laws, contact our law firm.

Comparison of Subchapter K v. Subchapter S

Both Subchapter K and S of the Internal Revenue Code (IRC) are pass-through tax structures in which the members of the entity are taxed for the entity's income, gains, losses, and expenses on their individual tax returns. That is where the similarities end. 

 

There are several differences discussed below that make Subchapter K seem more taxpayer friendly than Subchapter S. Much of the popularity of the LLC is attributable to the fact that LLCs offer limited liability to all investors combined with the more flexible partnership tax regime. In some situations, however, the goals of the business owners may be better achieved with an S corporation.

Subchapter S places very strict restrictions on the ownership and capital structure for S corporations.  S corporations are limited to 100 shareholders (although members of a "family," broadly defined, are counted as one shareholder), and they may not have more than one class of stock.  Additionally, all shareholders much be individual U.S. citizens or residents and other corporations or partnerships cannot be shareholders of the company.  Anyone can be a member or partner of an entity taxed under Subchapter K.

Partnerships and LLCs taxed under Subchapter K may make special allocations of income and deduction items, while shareholders of an S corporation must include corporate income and loss on a pro rata share basis.  Thus, partners/members may agree to share certain income or deductions disproportionately, and the agreement will be respected for tax purposes if it reflects their economic business deal.  Additionally, in most cases, partnerships and LLCs taxed under Subchapter K, can distribute appreciated property in kind without immediate recognition of taxable gain.

In a business with only a few owners, an S corporation may be the entity of choice because the flexibility of Subchapter K is not needed.  S corporations are often used by owners that prefer to conduct their business as a state law corporation instead of a partnership or limited liability company because they are more comfortable with the corporate governance structure.  S corporations are also often used by service providers to minimize their exposure to employment taxes.  S corporations are not viable options in many situations - a business with foreign investors would not be able to make the S corporation election because foreign investors are not permissible S corporation shareholders.  Additionally, many institutional investors (e.g., tax-exempt pension funds and charitable organizations) are discouraged by the tax system from investing in any type of active business that is operated as a pass-through entity.  Venture capital funds, which provide a large source of capital for start-up companies, appear to be more comfortable using the familiar C corporation capitalized with several classes of stock, a structure not available in an S corporation.

For a complete analysis of the tax implications of C Corporations, Partnerships, and S Corporations click here for the Joint Committee on Taxation's publication entitled "Choice of Business Entity: Present Law and Data Relating to C Corporations, Partnerships, and S Corporations."

McGrath and Spielberger, PLLC assists clients with all sorts of tax matters, both federal and state (including but not limited to North Carolina and South Carolina). Click here to contact an attorney about your tax matter.

S-Corp Tax Election for LLC

S-Corp Tax Election: Is it Right for Your Limited Liability Company?

As an attorney who happens to have an MBA and some specific tax law knowledge, and one who advises businesses on both day to day issues and tax matters, I know that if you’ve chosen (or will choose) an LLC as your business structure, it’s likely due to some combination of the liability protection an LLC offers, the operations and internal organization flexibility it allows, and the tax advantages which can accompany it. One of those tax advantages of an LLC can be the election to be taxed as an “S-corp.”

Keep in mind that, as we’ve previously discussed, one does not really “form an S-corp.” – this a tax classification, not a type of business organization. Once a corporation is formed, the shareholders can unanimously elect to “become” an S-corporation by filing Form 2253 with the IRS. The resulting S-corp. is a corporation that’s status is governed by Subchapter S of the Internal Revenue Code. If no election is made, then the corporation defaults to a “C-corporation” for tax purposes and is governed by Subchapter C of the Internal Revenue Code.

The traditional C-corporation’s net income is subject to a double tax at the entity level and individual level, while partnerships, LLC’s, sole proprietorships and S-corporations enjoy a pass-through status for income earned by the business. However, partnerships and sole proprietorships typically do not provide the limited liability protection desired by most small business owners. Based on these combined factors, the LLC with an S-corp. tax election is often a wise choice for business owners.

The IRS automatically treats any LLC with two or more members as a partnership and any sole member LLC as an entity disregarded as separate from its owner for federal income tax purposes. Either default treatment will provide pass through benefits to the owners of the LLC, while providing the limited liability protection. However, an LLC is allowed to make an election to be treated as an S-corporation for federal income tax purposes.

Why would an LLC want to choose to be taxed as an S-corp. rather than a partnership? There are numerous reasons for an LLC to choose to be taxed as an S-corp., including being able to pay wages and salaries to owners (which are taxed similar to wages paid to non-owner employees) but also allowing owners to be paid distributions / profits and the LLC not being federally taxed on those monies. Most experts state that the election to be taxed as an S-corp. allows the avoidance of “double taxation” as to the distributions / profit distributions. While the greatest tax benefits are typically by being an S-corp. which pays a higher proportion of monies to owners as distributions, owners who do work for the company are supposed to be paid a “reasonable salary” so that at least some payroll taxes are being paid for that individual and his/her work.

In addition to the impact that a parent – subsidiary LLC relationship can have on the possibility of selecting S-corp. tax status (see further down), an S-corp. election does allow less flexibility as far as distributions paid to owners. Typically, distributions paid to an owner must be proportional with that person’s ownership share; in other words, if Sally owns 60% of the LLC and John owns 40%, Sally should be receiving 60% of the distributions (but their salaries need not match up that same way).

If you are an existing LLC which is considering changing its tax classification, please keep in mind that, according to the IRS, an entity usually can only make such a change once every five (5) years. Be aware that some states do not recognize the S-corp. status / election and business income could be subject to double taxation at the state level.

If an LLC elects to be treated as an S-corp. for tax purposes, the LLC must comply with the same rigid ownership requirements applicable to qualifying for S-corporation tax status. This becomes an issue for the parent-subsidiary LLC relationship, as a subsidiary LLC that is wholly owned by the parent LLC cannot make the S-corp. election. One must be careful to avoid committing this error in electing tax treatment for any subsidiary LLC’s.

This is merely a starting point for a discussion of these issues, and the devil is certainly in the details as far as both the law and taxes. If you need advice regarding a tax situation, a distressed mortgage loan, or something similar, please don’t hesitate to request a consultation with a business lawyer. The tax consequences of forming a business and electing tax treatment can be complicated and it is always best to contact a tax professional to address your specific situation.

Wedding Bell Blues: Contractual Considerations for Weddings and Events in a COVID-19 World – Part 3

As an attorney who routinely drafts and analyzes business contracts and a bride during the COVID-19 pandemic, I knew that there were several contractual aspects I would need to consider when entering into countless contracts with the vast array of people and vendors involved in planning a wedding, especially during a global pandemic.

While it appears that the initial “panic” of the COVID-19 pandemic has gradually decreased and many 2020 weddings have been rescheduled, the health concerns with regard to mass gatherings are still very much present and will not be going away any time soon. Whether you’re in the beginning stages of planning like myself, or attempting to navigate the contracts you entered into months ago, below are some considerations and legal concepts you may find helpful.

Refund of Deposits

Most service contracts have a deposit or fee due at booking in order to hold the date for your event. Typically, these deposits are non-refundable. Well, what if the contract wasn’t performed due to force majeure or impracticability/frustration of purpose, can I get my deposit back? It will depend on the circumstances, but maybe not. Global pandemic or not, these initial deposits are usually just to hold that date – thereby, causing the servicer (caterer, photographer, wedding planner, etc.) to turn away other events for the same date, i.e., business for them – so that part of the contract has already been ‘performed.’ 

Previously in this series Part 1 & Part 2

Wedding Bell Blues: Contractual Considerations for Weddings and Events in a COVID-19 World – Part 2

 As an attorney who routinely drafts and analyzes business contracts and a bride during the COVID-19 pandemic, I knew that there were several contractual aspects I would need to consider when entering into countless contracts with the vast array of people and vendors involved in planning a wedding, especially during a global pandemic.

While it appears that the initial “panic” of the COVID-19 pandemic has gradually decreased and many 2020 weddings have been rescheduled, the health concerns with regard to mass gatherings are still very much present and will not be going away any time soon. Whether you’re in the beginning stages of planning like myself, or attempting to navigate the contracts you entered into months ago, below are some considerations and legal concepts you may find helpful.

Impracticability + Frustration of Purpose

Regardless of whether your contract includes a force majeure clause or not, general contract principles will still apply. The doctrine of impracticability refers to an unforeseeable event or incident that could not have been anticipated which makes performance under the contract unreasonable and difficult. North Carolina courts apply this doctrine in cases where a party’s performance is rendered practically impossible by law and thus the party is unable to fulfill its obligations under the contract. This defense could apply in a situation in which an event or wedding was to originally be held during a government closure order due to COVID-19.
The frustration of purpose doctrine refers to when the unforeseeable event or incident undercuts the prime purpose of the contract and may be applied even if a party’s performance isn’t necessarily impossible. An example in the event context would be your catering contract during a government order limiting mass gatherings – obviously, the order frustrates the purpose of your catering contract and thus the defense may excuse your performance.
It’s important to note that these defenses will usually not apply where the event is reasonably foreseeable.

Wells Fargo Creates Fake Foreclosure Sale Date for NC Property

Wells Fargo Creates Fake Foreclosure Sale Date for NC Property

As an attorney who represents many homeowners and other mortgage loan borrowers in mortgage relief, mortgage dispute, and foreclosure cases, I deal with some fairly unusual situations. This current case with Wells Fargo, in which I had a foreclosure hearing this week, well let’s just say that if we were hosting a tournament of outrageous cases, WF would get at least a #2 seed for this case (since March Madness is going on right now). The fact that it might not get a top rated seed just shows how stiff the competition is as far as bad acts by these mortgage lenders and loan  servicers. 

We asked for a deed in lieu of foreclosure (DIL), and the facts match up pretty nicely for that outcome; the property value is bit higher than the unpaid balance of the loan (UPB), and the property value is approximately equal to the UPB plus the late fees, costs, etc. which have accumulated. These clients – a married couple in Charlotte – suffered downturns in their small businesses and one of them suffered major medical problems, requiring surgery and a lengthy recovery.

Some mortgage loan holders, or the investors which control these loans behind the scenes, have a 60 day cutoff for applying for a deed in lieu; in other words, if there is a foreclosure sale date already scheduled within 60 days, the loan servicer (on behalf of the loan note holder) will not even consider the DIL request. In this case, there was no foreclosure sale date set, but WF had put a sale date in its computer, a date less than 60 days away. The local law firm handling the case confirmed that there was no sale date, but Wells Fargo responded by basically saying “Because we entered a sale date into our computers, we can’t/won’t process the DIL request.”

 Just a year ago we had the National Mortgage Settlement, requiring WF to pay over $5 billion due to illegal mortgage and foreclosure activities, and yet it still acts in this manner. I mean, when a $5 billion penalty isn’t enough to get you to change your ways, something is really wrong.

Let us think about this – there literally was no foreclosure sale date – but because some muttonhead at WF had entered one into the computer, Wells Fargo pretended as if the property was scheduled for sale and refused to help these homeowners. What the hell is going on in our world, when a random computer entry – creating a false, pretend foreclosure sale date – is the dominant factor when even the substitute trustee law firm hired by WF itself confirms there is no sale date?! This is mind-boggling, dismaying, pathetic, shameful, baffling, bewildering, discouraging, perplexing, troubling, and every other synonym which comes to mind. Of course, Wells Fargo is no stranger to fraudulent activities.

The result of this? Well, now there is a foreclosure sale date, since WF refused to consider a DIL due to the fake foreclosure sale date and related 60 day deadline. (The sale date is not the fake date WF put into its system.) Ironically, since the actual, real sale date is more than 60 days away, maybe now Wells will at least consider the request? I mean, the only reason for the refusal was the fake sale date being within 60 days of the DIL request, so now that that obstacle has been removed . . . ? We shall see what happens.

Unfortunately, this is not the only case I have with Wells Fargo right now where it is just making stuff up. More to follow, as always. 

Wedding Bell Blues: Contractual Considerations for Weddings and Events in a COVID-19 World – Part 1

As an attorney who routinely drafts and analyzes business contracts and a bride during the COVID-19 pandemic, I knew that there were several contractual aspects I would need to consider when entering into countless contracts with the vast array of people and vendors involved in planning a wedding, especially during a global pandemic.

While it appears that the initial “panic” of the COVID-19 pandemic has gradually decreased and many 2020 weddings have been rescheduled, the health concerns with regard to mass gatherings are still very much present and will not be going away any time soon. Whether you’re in the beginning stages of planning like myself, or attempting to navigate the contracts you entered into months ago, below are some considerations and legal concepts you may find helpful.

Force Majeure

Service contracts typically have stated procedures or policy for when an event is cancelled or interfered with. The cancellation policy may reference “Acts of God,” which is commonly referred to as a “force majeure” clause. These clauses, if invoked, may relieve one or both parties from being penalized for breaching the contract based upon nonperformance due to a disruption caused by an unpredictable event.

While courts can enforce these clauses, they will treat each clause different as no two clauses are the same. Each clause differs in what triggers the clause (i.e., the event, incident, and/or catastrophe) and the parties’ available options if the clause is triggered (i.e., right to cancel the contract, ability to reschedule event, etc.). Common triggering events included in these clauses are Acts of God, government action or regulation, natural disasters, and terrorism. Okay, so a global pandemic would be considered an “Act of God,” right? Maybe. Maybe not. 

 

So what can you do? If you are currently engaged in the negotiation stage of your contract, you can insist on the clause including language specific to COVID-19, such as “pandemic” or “public health crisis” in the chance that there is another ‘wave’ of infection. Regarding your options after the clause is triggered, you and the other party should discuss what can be done should you need to cancel your original wedding or event date. Rather than provide the option for either party to cancel the contract altogether, it would be advantageous to, instead, suggest that the clause provide for the rescheduling of the event within a specified period of the original event date, like six months or a year.

In the absence of a force majeure clause or the language that specifically suggests COVID-19 concerns, you may have still have some defenses to your contract obligations under the doctrines of impracticability and frustration of purpose.  

 

💬 We hope you enjoyed the first post of this three part series by Attorney Kelly Frecker. Return to our blog next Wednesday for part two.

Top 5 Reasons to Change Your Will

Below we list the top five reasons to update your legal will, or at least consider changes. If you are unsure about will or estate planning process, you can consult with one of our law firm's experienced attorneys to help.

1. You don’t have a will. (So having one would be a change!)


2. Your marital status has changed. (Do you really still want your ex getting all your stuff?)


3. You have moved to a new state. (It’s possible that not every part of your New York will would be enforceable once you get old & cranky, move to Florida, start playing golf 5 times a week and eat dinner at 4:30 p.m.)


4. Your family has grown. (I’m mainly referring to having a child, not the 25 pounds you may have packed on.)


5. You don’t like your family any longer. (Unfortunately, ill will – pun intended - within families is one of the primary motivators for will changes.)

McGrath & Spielberger, PLLC provides will services in North Carolina, South Carolina, Georgia, Florida, Tennessee and Ohio: McGrathSpielberger.com.

How To Dissolve a Corporation in North Carolina?

As an attorney who routinely handles business law related questions this situation is not unusual. Most businesses have a life cycle and it's good to know how to legally dissolve a corporation which has decided to end its operations.

North Carolina has laws specific to this question. In its most basic form, the corporation needs to vote to dissolve and then file the proper documents with the North Carolina Secretary of State's office. The process is slightly different if you have issued shares or have not issued shares, and if you have a board of directors or not. There are a number of other things a corporation has to do as well. Keep in mind, also, that there are other ways and methods by which a corporation can become dissolved, such as by court order.

A partial excerpt of the relevant section of the North Carolina General Statutes, Chapter 55 Article 14, Part 1, is pasted further below; while not exciting, it's a must-read for anyone considering corporate dissolution or already in the process of dissolving a corporation.

The Small Business Administration has issued a guide that will also assist you in dissolving a corporation. It is not specific to a particular state, but is generally helpful. It is recommended that you procure the services of an attorney in order to assist you with this process.

If you have a need for business law advice or services in North Carolina, South Carolina, Florida, Georgia, or Tennessee, please feel free to contact our office for assistance.

Article 14.

Dissolution.

Part 1.  Voluntary Dissolution.

§ 55‑14‑01. Dissolution by incorporators or directors.

(a)      The board of directors or, if the corporation has no directors, a majority of the incorporators of a corporation that has not issued shares may dissolve the corporation by delivering to the Secretary of State for filing articles of dissolution that set forth:

          (1)      The name of the corporation;

          (1a)    The names and addresses of its officers, if any;

          (1b)    The names and addresses of its directors, if any, or if none, the names and addresses of its incorporators;

          (2)      The date of its incorporation;

          (3)      That none of the corporation's shares has been issued;

          (4)      That no debt of the corporation remains unpaid;

          (5)      Reserved for future codification purposes; and

          (6)      That a majority of the incorporators or the board of directors authorized the dissolution.

(b)      A corporation is dissolved upon the effective date of its articles of dissolution. (1955, c. 1371, s. 1; 1959, c. 1316, s. 261/2; 1989, c. 265, s. 1; 1989 (Reg. Sess., 1990), c. 1024, s. 12.19.)

§ 55‑14‑02.  Dissolution by board of directors and shareholders.

(a)      A corporation's board of directors may propose dissolution for submission to the shareholders.

(b)      The following requirements shall be met for a proposal to dissolve to be adopted:

          (1)      The board of directors shall recommend to the shareholders that the proposal to dissolve be approved unless one of the following circumstances exist, in which event the board of directors shall communicate the basis for not recommending approval of the proposal to dissolve to the shareholders at the time it submits the proposal to dissolve to the shareholders:

                    a.     The board of directors determines that, because of conflict of interest or other special circumstances, it should not make a recommendation that the shareholders approve the proposal to dissolve.

                    b.     G.S. 55‑8‑26 applies.

          (2)      The shareholders entitled to vote must approve the proposal to dissolve as provided in subsection (e).

(c)      The board of directors may condition its submission of the proposal for dissolution on any basis.

(d)      The corporation shall notify each shareholder, whether or not entitled to vote, of the proposed shareholders' meeting in accordance with G.S. 55‑7‑05. The notice must also state that the purpose, or one of the purposes, of the meeting is to consider dissolving the corporation.

(e)      Unless the articles of incorporation, a bylaw adopted by the shareholders, or the board of directors (acting pursuant to subsection (c)) require a greater vote or a vote by voting groups, the proposal to dissolve to be adopted must be approved by a majority of all the votes entitled to be cast on that proposal.  (1901, c. 2, s. 34; Rev., s. 1195; C.S., s. 1182; 1941, c. 195; G.S., s. 55‑121; 1951, c. 1005, s. 4; 1955, c. 1371, s. 1; 1989, c. 265, s. 1; 2013‑153, s. 14.)

§ 55‑14‑03. Articles of dissolution.

(a)      At any time after dissolution is authorized pursuant to G.S. 55‑14‑02, the corporation may dissolve by delivering to the Secretary of State for filing articles of dissolution setting forth:

          (1)      The name of the corporation;

          (1a)    The names and addresses of its officers;

          (1b)    The names and addresses of its directors;

          (2)      The date dissolution was authorized;

          (3)      A statement that shareholder approval was obtained as required by this Chapter.

          (4)      Repealed by Session Laws 1991, c. 645, s. 10(c).

(b)      A corporation is dissolved upon the effective date of its articles of dissolution.

(c)      For purposes of this Chapter, a dissolved corporation is a corporation whose articles of dissolution have become effective and includes a successor entity to which the remaining assets of the corporation are transferred subject to its liabilities for purposes of a liquidation. (1901, c. 2, s. 34; Rev., s. 1195; C.S., s. 1182; 1941, c. 195; G.S., s. 55‑121; 1951, c. 1005, s. 4; 1955, c. 1371, s. 1; 1989, c. 265, s. 1; 1991, c. 645, s. 10(c); 2005‑268, s. 31.)

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Congrats, You’ve Inherited a Mess

By Jason McGrath

You’ve just inherited the family home, where you’ve not lived for many years, after the unfortunate but inevitable passing of your last living parent. You know there is a mortgage loan for the property. You have many questions, which may generally be summarized “What are my options, how does this work, and what happens now?” The primary focus of this article is to explore the legal and practical factors which play key roles when heirs attempt to deal with the mortgage loan and the mortgage loan servicer.

A Commonplace Scenario

Dad passed years ago, and Mom inherited his interests in the family home. Mom just passed away, and Daughter has inherited all interests in the family home, although she has not lived there for 20 years. Mom was debt free except for the mortgage loan on the family home. Daughter knows of the existence of the mortgage loan, with an associated lien on the family home, but she doesn’t know much more and doesn’t have any specialized knowledge or experience with mortgage loans, deeds of trust, or similar issues. Daughter never wanted to be the executor, so Cousin Sally is performing that role.

Daughter finds a mortgage loan statement from Questionable Loan Servicing, LLC. It appears that Mom had not paid the mortgage for the last few months before her death; the loan statement lists the account as delinquent to the tune of $5,000.00, with an overall unpaid balance of $225,000.00. A week later, Daughter calls Questionable Loan Servicing, LLC, who won’t speak to her without Mom’s authorization. The fact that Mom isn’t alive to give that permission doesn’t seem to have the impact it should with Questionable’s customer service representative. However, good news! Since Daughter says she inherited the house, she must be the Executor; if the Executor provides certain formal documents, Questionable will speak to the Executor about the mortgage loan status, options, and any other relevant issues. “No, I’m not Executor, but I’ve been told by the attorney that I own the property and should be able to deal with the mortgage loan.”

Questionable’s earnest and well-intentioned customer service representative promises to look into the situation and send written information which will clarify if and how Daughter may be able to deal with the mortgage loan and get access to the loan account. Daughter confirms her own mailing address and says she’ll wait for the documents. Three weeks later, Daughter finds five different letters from Questionable, all sent to the family home; they are:

1. a letter to Mom which says that $232,500.00 is now due and that the matter has been referred to an attorney to initiate foreclosure proceedings;
2. a letter to Mom which says that Questionable may be able to assist with foreclosure-avoidance options;
3. a letter to Daughter which says Questionable cannot talk to her until she provides proper legal authorization;
4. a letter to the Executor which says that the Executor should provide Questionable with Mom’s death certificate, a copy of the trust (but there was no trust!), and the property deed which shows who the new owner is (but there is no such deed!); and
5. a letter to Mom’s Estate which reminds everyone that the loan has a “due upon conveyance” clause, and that if ownership of the home is transferred without the mortgage loan note-holder’s permission, the loan could be accelerated and be called due in full.

Daughter, now completely discouraged, begins to slowly knock her head against the nearest wall and contemplates opening another bottle of Mom’s scotch. What can she do? What should she do? Will they ever talk to her? Can they foreclose? Does she need to refinance? Does she really own the home? Can they sue her over the unpaid mortgage? What a mess.

Heirs Interacting with the Mortgage Loan Servicer

It’s almost impossible to figure any of this out if the mortgage loan servicer won’t provide information and recognize you as the owner, or at least as an individual authorized to have access to the loan account, so getting that access almost always needs to be the first step. Here is the most relevant part of the Code of Federal Regulations on the issue of a mortgage loan servicer’s duties in such scenarios:

(a) Reasonable policies and procedures. A servicer shall maintain policies and procedures that are reasonably designed to achieve the objectives set forth in paragraph (b) of this section.

(b) Objectives. (1) Accessing and providing timely and accurate information. The policies and procedures required by paragraph (a) of this section shall be reasonably designed to ensure that the servicer can:

(vi) Upon notification of the death of a borrower, promptly identify and facilitate communication with the successor in interest of the deceased borrower with respect to the property secured by the deceased borrower’s mortgage loan.

The Consumer Financial Protection Bureau (the “CFPB”) has defined “successor in interest” in this context to mean “the spouse, child, or heir of a deceased borrower or other party with an interest in the property.” The CFPB requires loan servicers to follow the requirements as explained in the above-referenced CFR, and has formally observed that the existence of and compliance with such policies and procedures in scenarios involving transfer of ownership due to death is important to “reduce the number of unnecessary defaults and foreclosures….”
Congrats

The same CFPB bulletin provides practical examples of actions the loan servicer should take to be in compliance, thus also providing successors in interest like Daughter insight into what can be done from the other side of the equation. In summary, Daughter should at a minimum provide a copy of the death certificate, any and all documents which evidence her as the heir / new owner (no, in North Carolina this would not include a deed in her name, which shouldn’t exist), and even copies of the CFR and CFPB items cited herein.

Daughter needs to be persistent, be patient (to a certain extent), to maintain good documentation, and to try to make sure the loan servicer’s various departments are appropriately communicating with each other and with external parties (such as any substitute trustee and/or law firm retained to handle a foreclosure of the family home). If the loan servicer fails to effectively cooperate, Daughter should consider filing a complaint with the CFPB and perhaps the North Carolina Commissioner of Banks. The bureaucratic roadblocks are often formidably Byzantine, and I can personally vouch for some of the horror stories which arise from dealing with loan servicers.

Does the Heir, as new Owner, Need to be “Approved” by the Creditor in Order to Avoid Foreclosure?

Most people don’t realize that mortgage loan agreements and/or deeds of trust often have a “due upon conveyance” clause (often called a “due on sale” clause, with such description being an incomplete one). These contractual clauses, in essence, allow the creditor to call the mortgage loan due if ownership of the associated real property is conveyed to someone else without creditor’s permission. There are good and understandable reasons for such clauses. However, for your typical residential property, these clauses are not enforceable when the conveyance occurred due to death of the previous owner and the resulting conveyance was to a relative. In our scenario, the creditor cannot call the loan due and/or foreclose merely because Daughter is now the owner, with the creditor not having approved her ownership.

Independent of any due on conveyance clause, the heir’s ownership of the property does not in any way need to be approved by the mortgage loan creditor or anyone else in relation to the loan or the deed of trust. The rights to own real property and to pass it down to subsequent generations are very strongly protected ones.

Must the Heir Pay the Mortgage Loan?

In our scenario, Daughter may wonder if, merely by becoming the owner, she has now somehow become obligated to pay the mortgage loan. The answer is no, but barring some other agreement, if the loan isn’t paid in accordance with the contractual loan terms, the creditor can accelerate the loan and foreclose via the deed of trust just as if Mom was still alive and still the owner. Unfortunately, mortgage loan agreements typically don’t contain any type of “grace period” which allows for missed payments during times of confusion and transition such as the death of the borrower.

So the bad news is that the loan does need to be paid if Daughter wants to keep the property. However, unless Daughter has formally agreed to become personally liable for the loan, the creditor cannot pursue  her personally for money or any other damages if the loan is not paid as agreed.

One somewhat miscellaneous factor to consider is that a foreclosure case may contain the Daughter as a respondent, and if a foreclosure occurred it is at least possible that her credit report (arguably incorrectly / illegally) would reflect a “foreclosure.”

Can the Heir Refinance or Modify the Loan? Can the Heir Sell the Property or Otherwise Dispose of it?

Although most people seem to think of refinancing as just restructuring the loan, of course a refinance is an entirely new loan, even if it’s with the same lender. By contrast, a modification is an amendment of the current loan terms. Refinances are treated very differently as compared to modifications in the context of inherited properties.

In our scenario, the mortgage loan is delinquent and a foreclosure case appears to be in the works. Daughter’s right to refinance the family home is not restricted due to the mortgage loan being delinquent, and even the existence of a foreclosure case would not restrict said rights. She, as owner of the property, is free to refinance the property by seeking a new loan which would pay off the pre-existing loan and result in the pre-existing deed of trust being canceled. This new loan would presumably have Daughter as the borrower and the fact that she inherited the property would be of little to no relevance.

With regard to modifying the loan Mom had on the property, yes, Daughter can try to negotiate a modification of the same. In almost every instance in which Daughter seeks a modification of the loan, the creditor will require her to personally become an obligor on the loan in exchange for offering modification terms. We might normally say the creditor would require her to “assume” the loan, but word choice matters in this context, as explained in a following section.

Daughter can sell the property whether the loan is current or not, but the loan will need to be paid off as part of the sale (barring some other agreement). Daughter also has the power to enter into other types of transactions, such as a discounted payoff (“DPO”) of the loan which allows her to own the property free and clear, or a deedin-lieu (“DIL”) of foreclosure which transfers ownership of the property to the mortgage loan creditor. In some instances, Daughter may not bother negotiating a DIL, as the primary advantage of that resolution compared to a foreclosure is usually the waiver of the creditor’s right to seek damages from the borrower, something Daughter would not need to worry about as long as she had not formally agreed to become personally obligated on the loan.

Of course, any real property-related transaction an heir considers entering into must take into account whether there is a risk of the real property being pulled into the estate to be liquidated to obtain cash to pay creditors besides the mortgage loan creditor. In our example scenario, Mom has no other creditors and thus Daughter is not concerned with this issue.

Should the Heir Agree to Become Personally Obligated on the Mortgage Loan?

Obviously, what someone in Daughter’s situation “should” do depends on many factors. Let’s assume Daughter wants to maintain ownership of the family home. If she can reinstate the loan directly, typically by paying the entire amount the servicer quotes for reinstatement, she will then avoid having to consider a modification and the personal liability on the loan which would likely be required. She would then have the benefits of ownership without some of the potential negatives of having a mortgage loan.

If Daughter needs to modify the loan and the creditor will allow that without requiring her to become personally obligated on the loan, great -- but there is almost no chance of that happening. The creditor will almost certainly require her to become personally obligated in exchange for that modification.

I have been involved in cases in which the creditor would not commit to a loan modification before the heir agreed to become personally obligated. In other words, the loan servicer said “If Daughter formally agrees to become personally obligated on the loan, we will then *consider* a modification.” My response included indignant laughter and (with client’s approval) a professional commentary similar in theme to “When pigs fly.” Under almost no circumstances would I advise a client to become personally obligated on a loan unless that came along with a guaranteed outcome which suited the client’s wants and needs.

Does the Creditor have to Evaluate the Heir’s Ability to Repay the Loan?>

In general, mortgage lenders are required to evaluate someone’s ability to repay (“ATR”) the loan in determining whether to allow that person to assume the mortgage loan, similar to the evaluation a loan applicant would be put through when seeking a loan to purchase real property. However, because many new owner heirs have traditionally failed such evaluations, and at least certain aspects of the federal government wanted to change that, the CFPB has formally distinguished an heir becoming obligated on the mortgage loan versus an assumption of the loan by someone in a different scenario. Heirs who come to own real property due to death of the previous owner and then seek to modify a loan are not subject to the ATR rule.

If Daughter wanted to modify the loan, and Questionable Loan Servicing, LLC (acting on behalf of the loan note-holder) wanted her to become obligated as a borrower on the loan in exchange for modified loan terms and the loan being considered back in good standing, the ATR rule need not be considered and need not serve as an obstacle. Daughter would not be “assuming” the loan for purposes of the ATR rule, although what she would be doing very much looks, sounds, and smells like an assumption and would be considered one in almost any other context.

Best Practices for Heirs (and their Representatives)

Heirs should act assertively and persistently when dealing with mortgage loan servicers and other creditor-side entities instead of passively waiting for the servicer to guide the heir forward. The more information the heir can obtain about the status of the mortgage loan and related options, and the more quickly the heir can obtain this information, the better-positioned the heir is to make decisions. If the overall circumstances indicate that the heir can’t afford the loan (perhaps even as potentially modified or refinanced) and/or if the heir doesn’t want to keep the property, it may be best to sell it “now” – before making payments toward the loan or at least before a delinquency eats further away at any equity.

Jason McGrath of Charlotte is licensed in three states, and his law firm McGrath and Spielberger, PLLC focuses on real property and business law matters in the Carolinas.


Published by the Real Property Section of the North Carolina Bar Association  •  May 2018  •  www.ncbar.org

Arbitration versus Mediation

Although arbitration and mediation can both resolve lawsuits, they are quite different and it is important for parties to lawsuits to understand how each procedure works. In this video, Attorney Jason McGrath – who has been a trial lawyer for over 19 years and has been involved in mediations and arbitrations – explains the difference between the two.


Follow this link to watch the video on YouTube, https://youtu.be/psEknpr5jXM

We hope you have enjoyed this informative video from McGrath & Spielberger PLLC. Our highly skilled and experienced business and contract lawyers are here to help when you need legal assistance. If you are facing a lawsuit, please fill out our confidential client intake form for legal assistance.

 

Schedule your legal consultation with Attorney Jason A. McGrath today!

Commercial Leases in South Carolina Amid the Covid-19 Coronavirus Pandemic

At McGrath and Spielberger, PLLC, we represent many local and regional clients who own and operate many different types of businesses, including restaurants, gyms, retail stores, and other commercial businesses, throughout North Carolina, South Carolina, Florida, Georgia, Ohio and Tennessee. We are obviously hearing a lot from our clients right now regarding their issues and concerns in relation to the Covid-19 coronavirus pandemic. Overwhelmingly, most client inquiries relate to commercial leases in which our clients are tenants. Their main questions typically revolve around their requirement to pay rent and whether they can be held in default and/or evicted during the pandemic.

This article will focus on the answers to these question in relation to commercial leases in South Carolina specifically, but a lot of what is discussed may also apply in other states. As of now, without an explicit agreement with the landlord under the lease regarding payment of rent during this pandemic, there are “simple” answers and “practical” answers that either now exist or that will eventually reveal themselves. Please also note that the answers to the above questions are fluid and may be affected by forthcoming government relief programs and bailouts.

Do I have to pay rent?

Simple Answer: Yes.

Practical Answer: Still yes unless some sort of law is passed allowing commercial tenants to stop paying rent for a period of time, unless your landlord has specifically told you your rent will be abated, or unless your lease agreement has an applicable Force Majeure clause or other clause which would relieve your obligation to pay rent (Click here for a brief summary of what a Force  Majeure clause is). As of now, there have been no Federal or state orders issued or laws passed that currently allow tenants to stop paying rent or requiring landlords to provide any type of rent relief.

Can I be held in default and/or evicted during the Covid-19 coronavirus pandemic?

Simple Answers: Held in default, yes. Evicted, probably not for the immediate future.

Practical Answer: Again, still yes for default. As far eviction goes, though, when you can or will actually be evicted or ruled by a court to be in default is somewhat up in the air and it likely won’t be before May 1, 2020. On March 18, 2020, the South Carolina Supreme Court issued an order stating, in part, “. . . that all evictions currently ordered and scheduled statewide shall be rescheduled for a date not earlier than May 1, 2020.”  While this order does not specifically differentiate between commercial and residential leases, the lack of such differentiation bolsters an argument that the order applies to all leases, both commercial and residential. And despite some public perceptions to the contrary, the order does not state in any way whatsoever that tenants in commercial leases are excused from paying rent, that landlords cannot add late fees, penalties and interest to late or unpaid rent payments, or that landlords can’t hold tenants in default or file to evict them for not paying rent or otherwise violating their leases. It simply means that virtually no eviction hearings will be heard in court prior to May 1, 2020. It should also be noted that South Carolina law does not necessarily require a landlord to file an eviction action to remove a tenant – in some cases “self-help” evictions are allowed. However, they are rarely utilized because they pose many risks to and are wrought with pitfalls for landlords trying to utilize them. So, practically, if you fail to pay your rent or otherwise violate the terms of your lease, you are unlikely to be physically evicted or ejected from your leased space prior to May 1, 2020, and probably much later due to the backup of cases that will result from the order. But you can still be in default of your lease and may be liable for past due rent, penalties, late fees, interest and other damages suffered by your landlord due to your failure to pay rent or comply with other provisions of your lease.

So, if you cannot pay your rent due to the Covid-19 coronavirus pandemic, or for any other reason, we highly recommend you first discuss it with an attorney. It may be that approaching your landlord and reaching an agreement that works for both of you is the best approach, or it may be that your specific situation requires more complex and/or drastic steps. If you are located in one of the jurisdictions in which McGrath and Spielberger has licensed attorneys, please contact us and we would be happy to assist you analyze your situation and form a plan that will allow your business to survive during these unprecedented times. You can click here, email us at info@mcgrathspielberger.com, or call us at 800.481.2180.

McGrath and Spielberger, PLLC handles business law, contract law and commercial lease matters every day, and has lawyers who are licensed to practice in FL, GA, NC, OH, SC, and TN (if you are unsure as to what jurisdiction applies to your legal matter, we can help make that determination).

Coronavirus, Force Majeure, and Your Business Contract – Will the Charlotte Hornets and Other NBA Players Be Paid?

The coronavirus (more formally known as COVID-19) is now impacting every part of life. In our last blog post, we discussed general issues on how coronavirus might impact your business contract, and pointed out that the effects of this disease are impacting whether people are getting paid. The NBA just suspended its games for the immediate future - what about NBA players while the National Basketball Association’s games are suspended? Are Mr. Michael Jordan and the Charlotte Hornets obligated to pay players like Devonte Graham, Terry Rozier, Dwayne Bacon, and PJ Washington? Must the Warriors provide contractual wages to Steph Curry? Let’s explore how we might find the answers.

What contract controls the relationship between the National Basketball Association and its teams like the Boston Celtics on the one side and players like Kemba Walker on the other? The relationship between the NBA, the teams, and the players is generally governed by contract law, and specifically a business contract almost 600 pages long titled the “Collective Bargaining Agreement” (the “CBA”).

What key part of the CBA might largely control what happens in these coronavirus-induced circumstances? What immediately comes to mind is whether there is a “Force Majeure” clause somewhere in those many pages of fine legal verbiage. Click here for a brief recap of what a Force Majeure clause is; in essence, some unusual, significant condition beyond the control of a contractual party which interferes with that party’s ability to perform duties under the contract. Yep, on page 467 is “Section 5: Termination by NBA/Force Majeure”.

Is something like COVID-19 addressed in the CBA under the Force Majeure clause? Notably, the list of Force Majeure items in the NBA’s contract with the National Basketball Players Association [sic] does include “epidemics”. That term is not defined specifically in the CBA, which means we’d typically look to the standard definition, perhaps influenced by what definitions relevant courts of law have accepted over time. “Epidemic: a disease affecting many persons at the same time, and spreading from person to person in a locality where the disease is not permanently prevalent.” Very few reasonable minds would disagree that coronavirus is an epidemic in the United States right now (and in Canada to a certain extent, let’s not forget the reigning NBA champion Toronto Raptors).

You should also know that the Collective Bargaining Agreement – which, again, is a business contract - allows the NBA to terminate that contract after a Force Majeure event.

So does coronavirus mean that the NBA doesn’t have to pay the players while games are suspended? There may be an epic battle over that very question.  The CBA specifically states that if a Force Majeure event (like coronavirus – an “epidemic”) occurs and causes teams not to be able to play one or more games, and those games are not made up, each player who was part of that team shall have his overall compensation for that season reduced by 1.08%. (In the contract it’s actually expressed as a fraction – 1/92.6th, based on an agreement that for this purpose a season is made up of 92.6 games.)

Interestingly, this part of the CBA specifically states that neither the NBA nor the Players Association must terminate the contract even if it has the right to do so, including as to the NBA’s right to cancel the CBA due to this Force Majeure event. However, there is not similar language which specifically addresses whether the NBA has the option to reduce compensation to the players under a Force Majeure circumstance. Thus we are left with language mentioned in the previous paragraph (and in the CBA itself, the previous page) which says that the players’ compensation “shall” be reduced.

If I was arguing for non-payment, I’d argue that the contract doesn’t allow the teams to pay the players in these circumstances even if the teams wanted to. The players, presumably, would argue that a contractual party always has the right not to enforce one of its rights, and thus the teams could of course pay the players if they so choose. Also, there are certainly other aspects of this 598-page contract, governed by New York and/or Federal law, which influence these legalities, and this article is not attempting to engage in a detailed analysis of this issue and is not attempting to interpret or comment on New York law.

This NBA stuff is interesting, but what about my business? Can your lawyers help my company deal with contract issues? Yes, that’s what we do. We explore, we troubleshoot, we diagnose, we advise, we repair, we resolve, we combat, whichever is appropriate. If you want help and the subject matter and the jurisdiction (which state, etc.) match up with those of our Firm, reach out to us and ask for a consultation; one way to do so is by clicking here. Good luck and keep yourself – and your business – safe!

McGrath and Spielberger, PLLC handles business law and contract law matters every day, and has lawyers who are licensed to practice in FL, GA, NC, OH, SC, and TN (if you are unsure as to what jurisdiction applies to your legal matter, we can help make that determination).

Coronavirus, Force Majeure, and Your Business Contract Explained

Coronavirus (more formally known as COVID-19) is now impacting every part of life. Let’s start figuring out if and how it impacts your business law contract, initially by asking and answering these fundamental questions that are being posed. 

1.     Practically, how might the coronavirus impact my business agreement?
2.     How could something like the coronavirus be covered in my business law contract?
3.     Are we talking about “Acts of God?”
4.     How do I know if the “Force Majeure” principle applies to my business agreements?
5.     What do I do if my business’ rights or duties are significantly impacted by COVID-19?
6.     Can your lawyers help my company deal with this now and make improvements for the future?

  Practically, how might the coronavirus impact my business agreement? You’re probably paying for a product or service, or being paid for a product or service – or both being paid and paying. Supply chains are interrupted, resources are interfered with, money is short. This pandemic is devastating across the entire spectrum of the commercial world in addition to our personal worlds. You may suddenly not be able to fulfill your normal contractual duties to supply, not be able to pay, or not be getting paid.

How could something like the coronavirus be covered in my business law contract? Probably by way of what is usually called a “Force Majeure” clause. This type of provision, found in most well-drafted business law agreements, typically excuses a contractual party from performing its duties, in part or in whole, for a temporary time without being in breach of the contract, if the non-performance is due to the Force Majeure cause / event.

Are we talking about “Acts of God?” Yes, no, and/or maybe. (Great lawyer answer, right? In all seriousness, in some ways the answer to this question somewhat depends on one’s religious beliefs.) “Back in the day” Force Majeure contractual clauses were often referred to as “Acts of God” clauses. Now, many contracts which have Force Majeure clauses include in the list of possible events/causes the words “acts of God”. For example, you might be excused from performing your duties to the extent that you cannot reasonably perform them due to “hurricanes, labor strikes, power outages, acts of God…,” etc. But Force Majeure clauses, as you can see, typically include many more events/causes than “acts of God” alone.

How do I know if the “Force Majeure” principle applies - or could apply - to my business agreements? Could the Force Majeure principle apply to your contracts? If the contract has such a clause, then yes. The answer can somewhat be ‘yes’ even if you don’t have such a clause, but that’s a sub-topic for a different article. Does this principle apply to your business contract? If it has a Force Majeure clause and if there are Force Majeure type causes/events interfering with the performance of the contract, then yes it likely applies. (Please understand we aren’t saying that the clause applies in your exact situation, which is not known to us, and please understand we aren’t giving legal analysis about any specific situation – each specific situation depends on an analysis of the specific facts involved.)

What do I do if my business’ rights or duties are significantly impacted by COVID-19? For one thing, find out if there is a Force Majeure contract clause which may apply. If there is, ask a lawyer to analyze your situation. Even if there isn’t, ask a lawyer to analyze your situation. Practically, it also makes sense to consider communicating with your contractual partners to alert them to the challenging circumstances, whether those circumstances may cause you to be unable to perform or you fear that they may cause another party to fail to perform, or both, and see what cooperative measures can be agreed upon, or at least level-set expectations and confirm present-day realities.

Can your lawyers help my company deal with this now and make improvements for the future? That’s what we do. We explore, we troubleshoot, we diagnose, we advise, we repair, we resolve, we combat – whatever the situation calls for. If you want help and the subject matter and the jurisdiction (which state, etc.) match up with those of our Firm, reach out to us and ask for a consultation; one way to do so is by clicking here. Good luck and keep yourself – and your business – safe!

McGrath and Spielberger, PLLC handles business law and contract law matters every day, and has lawyers who are licensed to practice in FL, GA, NC, OH, SC, and TN (if you are unsure as to what jurisdiction applies to your legal matter, we can help make that determination).