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6 MILLION REASONS NOT TO
USE AN INVOLUNTARY BANKRUPTCY TO SETTLE A GRUDGE
Protecting your rights is smart, but being overly aggressive is bad
business. That is the lesson that a creditor recently learned after
filing an involuntary bankruptcy petition against an account debtor.
Pursuant to section 303 of the United States Bankruptcy code a single
creditor holding an unsecured claim of more than $11,625 can file an
involuntary bankruptcy petition against a debtor, provided that the
claim is not contingent or subject to a bona fide dispute and further
provided that the debtor has less than 12 creditors. If the debtor has
12 or more creditors, than 3 qualified creditors are needed to file an
involuntary.
Involuntary petitions against debtors are attractive to creditors
because they trigger bankruptcy law protections, such as: 1) The
automatic stay that ends the race to the court house; 2) The right to
recover preferential transfers; 3) The right to recover fraudulent
transfers; and 4) The debtor's right to cherry pick executory contracts.
However, as one creditor just learned the hard way, filing an
involuntary petition can be a very expensive mistake. Pursuant to
Section 303(i) the court can award legal fees and costs if the debtors
succeeds in having the involuntary petition dismissed. Further, if the
court finds that the case was filed in bad faith it can also award
punitive damages and damages for losses for which the involuntary was
the proximate cause.
In the case of John Richard Holmes Building Company, the debtor
recently recovered over $6,000,000 in proximate cause damages and
punitive damages from a creditor who was found to have filed the
involuntary bankruptcy in bad faith.
Protect your rights, but don't use an involuntary to "settle a grudge."
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EPA ENFORCEMENT HAS
SIGNIFICANTLY INCREASED
The U.S. Environmental Protection Agency's enforcement this year was
the highest in over a decade. The EPA negotiated 47 administrative
penalty settlements and 22 judicial settlements totaling $4.3 million.
Further, EPA required the expenditure of over $203 million by violators
of environmental laws to come into compliance, which is more than
double the $88 million of compliance work required in 2001.
EPA's criminal enforcement was also up significantly in 2002, with 21
convictions with a total of 10 years of incarceration, 28 years of
probation and fines of $3.4 million. Among those cases was the
conviction and sentencing of a New Hampshire apartment manager for
violating federal lead paint disclosure laws after the death from lead
paint exposure of a two year old.
EPA has also increased what it calls "Supplemental Environmental
Projects" (SEPs). SEPs allow violators to use administrative penalty
funds to focus on the management of public health issues such as indoor
air pollution, asthma and childhood lead poisoning in the communities
where the violations took place. The largest SEP in 2002 was an
agreement by Waste Management of Massachusetts, a Boston trash hauler,
to spend $1.4 million to install diesel particle traps on 200 Boston
school buses and purchase low-sulfur diesel fuel for the buses. The
case stemmed from Clean Air Act violations, specifically, illegal
releases of ozone-depleting pollutants into the air by improperly
crushing discarded refrigerators and air conditioners.
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ARBITRATION CLAUSES IN
EMPLOYMENT CONTRACTS
The Federal Arbitration Act requires courts to enforce clauses in
commercial contracts that require arbitration of disputes. The U.S.
Supreme Court has ruled that transportation workers engaged in
interstate commerce are exempt from the Act. For other types of
workers, the effect of the Supreme Court ruling was to reaffirm the
enforceability of mandatory arbitration provisions in agreements
entered into by workers engaged in interstate commerce.
Interstate Commerce Requirement
The Act's requirement that workers be engaged in interstate commerce is
not especially difficult to meet, given the interconnectedness of the
economy. When a nurse at a hospital tried to avoid binding arbitration
of her wrongful discharge claim by arguing that her employment
agreement had no impact on interstate commerce, the argument failed.
The court pointed out that the nurse's employment depended on the
constant use of supplies purchased from other states and that the
hospital treated many out-of-state patients. More often than not,
similar connections can be made between most jobs and the flow of
interstate commerce, especially for large employers.
Level Playing Field
To say that employers and employees generally may bind themselves to
arbitration is not to say that there is no judicial oversight. In the
time since the Supreme Court cleared the way for mandatory arbitration,
courts have been occupied with creating a level playing field when
employers make the signing of an arbitration agreement a condition of
employment. If its terms weigh too heavily in favor of the employer,
the agreement, or at least the offending part, may be ruled invalid.
Finding that an arbitration agreement was "utterly lacking in the
rudiments of evenhandedness," one federal court refused to enforce an
agreement that allowed only the employer to choose the panel from which
an arbitrator would be selected. Supposedly the parties were to achieve
a fair result by using an alternate strike method to arrive at one
arbitrator, but, given that the whole pool was selected by the employer
with no constraints, "an impartial decision maker would be a surprising
result." It may be possible to avoid this particular defect by stating
in the agreement that the parties will use an arbitration service that
takes measures to find an unbiased arbitrator having no potential
conflicts of interest.
Paying the Costs
Splitting the costs of arbitration evenly between the parties may seem
reasonable on its face, but some courts have invalidated such clauses
as being too burdensome for individual employees. Aside from
considering the respective abilities of the parties to pay what can
sometimes be substantial up-front costs for arbitration, there is a
concern that the prospect of shouldering those costs has a "chilling
effect" on employees' rights to have their grievances heard.
Alternative approaches include payment of all costs by the employer,
waiver of the employee's share on a case-by-case basis if it is beyond
the employee's means, or capping an employee's share at the level of
costs that would be incurred in court.
To Arbitrate or Not?
Even before an arbitration clause is agreed to, and perhaps later
scrutinized by a court, the parties need to consider some distinctions
between mandatory arbitration and litigation. Since it is easier to
request arbitration than to file a formal complaint in court, use of
arbitration may mean an increase in disputes to be resolved. A decision
maker in arbitration, if he or she is familiar with the industry in
question, could understand complex issues better than a jury would. In
arbitration, the dispute itself and the terms of any award frequently
are kept confidential, affording the parties more privacy than a trial
in open court. Finally, some of the same features that make arbitration
a simpler and more streamlined approach, like limited fact-finding and
having no right to appeal, could weigh in one party's favor and against
the other, depending on the circumstances of the case.
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EMPLOYMENT LAW GUIDEBOOK
The U.S. Department of Labor has published a guidebook to provide
businesses with general information on the laws and regulations that
the Department enforces. The guidebook describes the statutes most
commonly applicable to businesses and explains how to obtain assistance
from the Department for complying with them.
The authority of the Department of Labor extends to many statutes, but
the following are several that affect most employers: Employee
Retirement Income Security Act (ERISA); Occupational Safety and Health
Act (OSHA); Fair Labor Standards Act (FLSA); and Family and Medical
Leave Act (FMLA).
The Employment Law Guide: Laws, Regulations and Technical Assistance
Services can be accessed on the Internet at:
http://www.dol.gov/asp/pragrams/guide.htm
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FEDERAL ADVERTISING
GUIDELINES FOR BUSINESSES
The Federal Trade Commission Act prohibits advertising that is
untruthful, deceptive, or unfair, and it requires advertisers to have
evidence to back up their claims. There are also other federal laws
applicable to advertisements for specific types of products and state
laws that apply to ads running in particular states.
Unfairness
An advertisement is unfair if it causes "consumer injury." The Federal
Trade Commission (FTC) uses a three-part test to determine if a
consumer injury has occurred or is likely to occur as the result of an
advertisement: (1) the injury must be "substantial"; (2) the injury
must not be outweighed by any offsetting consumer benefits; and (3) the
injury must be one that consumers could not reasonably have avoided. An
injury may be substantial because of monetary harm or unwarranted
health and safety risks. More subjective effects, such as offending the
tastes or opinions of consumers, generally will not constitute a
substantial injury. The FTC will also consider whether a challenged
practice violates established public policies and whether the conduct
is immoral, unethical, oppressive, or unscrupulous in deciding whether
it is unfair.
The Act recognizes that, in general, the government expects the
marketplace to be self-correcting, with informed consumers making
purchasing decisions without regulatory intervention. The FTC may step
in, however, when sellers use practices that distort free market
decisions, such as by withholding critical information from consumers
or pitching questionable products to highly susceptible and vulnerable
classes of purchasers such as the terminally ill.
Deception
An ad is deceptive if it contains a statement or omits information that
is material and is likely to mislead consumers. Information is material
if it is important to a consumer's decision to buy or use a product.
Examples include representations about a product's performance,
features, safety, price, or effectiveness.
The FTC will scrutinize an ad for deceptiveness from the point of view
of the typical consumer who sees it. The focus is on the whole context
of an ad, rather than whether certain words are used. Sometimes what an
ad does not say is most important. If the ad is for a collection of
books, it is deceptive to withhold from consumers the fact that they
will receive only abridged versions of the books. An ad that says "this
product prevents colds" and one that says "this product kills germs
that cause colds" both claim to prevent colds, but the first claim is
expressed, and the second is implied. The FTC expects an advertiser to
be able to back up both types of claims with proof and to have such
proof before an ad runs.
Backing It Up
Substantiation of a claim in an ad means that there must be a
reasonable basis for the claim in the form of objective evidence. The
kind and amount of evidence depend on the claim, but at the very least
the advertiser must have the level of evidence it purports to have. If
the ad boasts that "two out of three doctors" recommend a product, the
advertiser must be able to produce a reliable survey to prove the
claim. For more general representations, the required level of proof is
determined by factors such as what experts in the field think is
necessary. Health and safety claims, in particular, must be supported
by competent and reliable scientific evidence. As flattering as they
may be, testimonials from satisfied customers usually are insufficient
to substantiate a claim requiring objective evaluation.
Comparative Ads
The policy of the FTC actually is to encourage the naming of or
reference to competitors, so long as there is clarity and such
disclosure as may be needed to avoid deception of the consumer. Even
ads that disparage the competition are permitted if they are truthful
and not deceptive. The FTC requires neither less nor more
substantiation for comparative ads than for other advertising.
Enforcement
The FTC marshals its resources in order to pay closest attention to ads
that make claims about health or safety ("Acme water filters remove
harmful chemicals from tap water"), and ads that make claims that
consumers would have difficulty checking out for themselves ("ABC
hairspray is safe for the ozone"). The FTC also concentrates on
national rather than regional or local advertising, patterns of
deception rather than isolated disputes, and cases that pose the
greatest threats of widespread economic injury.
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BAIT-AND-SWITCH CREDIT
CARD OFFER
In a variation on the typical "bait-and-switch" scheme, a bank made a
promotional offer of a "no annual fee" credit card, then changed the
terms mid-year to require such a fee. A credit card holder sued the
bank under the federal Truth in Lending Act (TILA). She alleged a
violation of the requirement in TILA that an issuer of a credit card
disclose the terms of the card accurately and without misleading
statements. A federal court allowed the lawsuit to continue.
Both the advertisement soliciting customers for the credit card and the
card holder agreement stated that no annual fee would be charged, but
the agreement also stated more generally that the bank had the right to
change any of the terms at any time. The bank maintained that the
latter provision gave it the right to impose an annual fee whenever it
wanted.
In ruling for the credit card holder, the court found that a reasonable
consumer was entitled to assume that the issuer of the credit card
would refrain from imposing an annual fee for at least one year. Given
the apparent intent of the bank to begin an annual fee after the "bait"
had been taken, the statement of "no annual fee" was misleading and in
violation of TILA. If the bank had wished to reserve the right to
impose an annual fee later, notwithstanding the "no annual fee"
solicitation, further clarification would have been necessary to comply
with TILA.
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CASES
OF INTEREST
* Connecticut Supreme Court Drops "Plain Meaning Rule." Courchesne.
* Connecticut Legislature Passes Bill Requiring Plain Meaning Rule --
Stay Tuned.
* Arbitration Award of $5 Million as Punitive Damages Under CUTPA
Upheld, MedvalUSA Health Program. V. Memberworks, Inc.
NEWS
* We have moved into our new offices at 100 Pearl Street in Hartford.
Thank you to Rosemary, Mike and the good people at the commercial
division of Amodio Moving.
* Congratulations to our Associate, Karen Damboise and her husband Troy
on the birth of their second daughter, Rachel.
* Myles Alderman has been appointed to the Human Rights Commission for
the Town of West Hartford.
* Linda W. Alderman has been elected Vice-Chairman of the Environment
and Conservation Commission of the Town of West Hartford.
* Congratulations to the Alderman & Alderman Giants, for placing
third in the regular season during the inaugural season of the West
Hartford Little League.
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