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Can Your Practice Afford to Pay $1,500,000 for HIPPA Violations?

Kathleen Quiroz and Jerry B. Cohen — Wed, 20 Jan 2010 17:00:43 GMT

If you have not recently performed an audit of your compliance with the HIPAA Privacy and Security Rules, now would be the time to do so. Several changes to HIPAA made by the Health Information Technology for Economic and Clinical Health Act (the “HITECH Act”) in February, 2009, now have been conformed by federal regulations issued by the Department of Health and Human Services (“HHS”) on October 30, 2009. Certain of these changes merit close scrutiny, especially those impacting HIPAA enforcement, fines and defenses.

HIPAA Enforcement Provisions
On October 30, 2009, HHS issued an Interim Final Rule to conform the enforcement regulations promulgated under HIPAA to the statutory revisions made by the HITECH Act. These changes strengthen the civil money penalty authority of HHS by (i) establishing categories of violations that reflect increasing levels of culpability; (ii) significantly increasing the civil money penalties that may be assessed by HHS; and (iii) abolishing or modifying affirmative defenses available to physicians and other covered entities.

New Civil Money Penalties Scheme
Prior to the HITECH Act, a medical practice that violated HIPAA was subject to a maximum civil money penalty of $100 per violation, with an annual cap of $25,000 for identical violations occurring during the same calendar year. HIPAA, as amended by the HITECH Act and conformed by the Interim Final Rule, now provides for a four-tiered civil money penalties scheme. Under the new penalties scheme, the maximum civil money penalties for violations occurring on or after February 18, 2009, range from a minimum penalty of $100 per violation to a maximum penalty at least $50,000 per violation based upon the level of culpability associated with such violations, with an annual cap of $1,500,000 for identical violations occurring during the same calendar year.

Tier One
Under this new scheme, a medical practice is subject to a minimum penalty of $100 per violation if it violates a provision of HIPAA and (i) did not know of its violation and (ii) would not have discovered its violation even if it had exercised “reasonable diligence.” These violations remain subject to a maximum penalty of $50,000 per violation and are subject to the cap of $1,500,000 for violations of the identical provision of HIPAA in the same calendar year. For purposes of the HIPAA enforcement rules, reasonable diligence means that the medical practice undertook the business care and prudence expected from a person seeking to satisfy a legal requirement under similar circumstances.

Tier Two
Also under the new penalties scheme, if a medical practice violates a provision of HIPAA and that violation is due to circumstances that would make it unreasonable for the practice, despite the exercise of ordinary business care and prudence, to comply (defined in the HITECH Act as “reasonable cause”), the practice will be subject to a minimum penalty of $1,000 per violation. Again, these violations remain subject to a maximum penalty of $50,000 per violation and the cap of $1,500,000 for violations of the identical provision of HIPAA in the same calendar year.

Tiers Three and Four
If a medical practice violates a provision of HIPAA and that violation is shown to have arisen from a conscious, intentional failure or reckless indifference to the obligation to comply (defined in the HITECH Act as “willful neglect”), the penalties that may be assessed against the practice will vary depending on whether the practice corrected the violation within a prescribed 30 day period. The 30 day period begins on the first date the practice knew, or would have known by exercising reasonable diligence, that the violation occurred. If a practice corrects a violation due to willful neglect within this 30-day period, it will face a minimum penalty of $10,000 per violation, again up to a maximum penalty of $50,000 per violation. If the practice does not correct the violation within the 30-day period, it will face a minimum penalty of at least $50,000 per violation. In either case, the cap of $1,500,000 for violations of the identical provision of HIPAA in the same calendar year applies.

Affirmative Defenses
Recent changes to HIPAA have not only significantly increased the civil money penalties that may be assessed by HHS, they also have abolished or modified the affirmative defenses available to covered entities. One such important change involves the affirmative defense of “lack of knowledge.” Prior to the HITECH Act, HHS could not impose civil money penalties on a medical practice if the practice could establish that it did not know (and, by exercising “reasonable diligence,” would not have known) that it violated HIPAA. For violations occurring on or after February 18, 2009, this affirmative defense is no longer available to medical practices. Therefore, a violation that once may have been shielded from penalty by this defense now may be the subject of a tier one penalty as previously described.

Effective Date of Changes to HIPAA Enforcement Rules
The new four-tiered civil money penalties scheme applies to violations that occur on or after February 18, 2009. The Interim Final Rule issued by HHS on October 30, 2009, “grandfathers” violations that occurred prior to February 18, 2009. Those violations will continue to be subject to a maximum penalty of $100 per violation, subject to a cap of $25,000 for identical violations occurring in the same calendar year. For violations that occur both prior to and after February 18, 2009, HHS will treat the violations that occurred before February 18 under the old penalty scheme and will treat the violations that occurred after February 18 under the new penalty scheme. The same treatment will apply to the abolition and modification of the affirmative defenses available under HIPPA. Those changes will apply only to violations occurring on or after February 18, 2009.

HIPAA Compliance Audit
The changes discussed in this article are but a few of the numerous changes made to HIPAA by the HITECH Act. If you have not recently performed an audit of your compliance with the HIPAA Privacy and Security Rules, as amended by the HITECH Act, it is extremely important that you do so, especially in light of the significant penalties that may now be assessed against medical practices for violations of HIPAA.

Jerry B. Cohen and Kathleen Quiroz are Shareholders with Oppenheimer, Blend, Harrison and Tate, Inc. - a top ranked Health Care law firm in San Antonio and Kerrville. Collectively, they have served Corporate and Health Care clients for 39 years and have been recognized by their peers in the legal industry as leading attorneys at both the local and national level. You can reach the Health Care Practice of Oppenheimer, Blend, Harrison and Tate, Inc. at 210.224.2000.

Will vs Revocable Living Trust - Which is Right for You?

Martin I. Roos — Wed, 20 Jan 2010 16:45:00 GMT

As an estate planning attorney I often get asked the difference between a Will and a revocable living trust. A Will is a testamentary document that takes effect at your death. A Will must be probated. Probate is the process of submitting your Will to a court for recognition as a valid instrument and appointing a party (normally an Executor) to carry out the terms of the Will. A revocable trust is created during your lifetime. Assets that are transferred to the revocable trust during your lifetime do not go through probate, but rather the trust instrument itself controls their disposition. A corollary question is whether probate should be avoided.

Texas is one of the easiest and least costly states to probate a Will. Texas has a probate procedure called “independent administration,” which means your Executor (the person you name in your Will to administer and distribute your estate upon your death) only has to file the original Will for probate and file an inventory with the Probate Court detailing your probate assets as of date of death. Creating a living trust merely to avoid probate should not be the motivating factor in deciding between a Will and a revocable trust as your primary estate planning instrument. One or the other does not allow you to avoid any greater amount of the estate tax. A revocable trust also does not provide you any asset protection during your lifetime. If it did, we would all create such a trust and never worry about paying debts again (falls in the adage if it sounds too good to be true, then it is).

In my practice I use the revocable trust as opposed to a Will if a person has out-of-state property that would be subject to probate in the non-Texas state, if a person is concerned about privacy (assets in a revocable trust are not subject to probate so do not become part of the public record), or if a person is concerned about future incapacitation (it is much easier to administer the property of an incapacitated person as the trustee of a trust than as an agent under a statutory power of attorney). The passing of a celebrity like Michael Jackson and the problems facing his estate highlight the need for each of us to have a properly, well-thought out, estate plan.

The first step is creating proper estate planning documents. These documents include a Will (or revocable living trust), and the various lifetime instruments (statutory powers of attorney, medical power of attorney, and living will) that allows you to name agents to make financial and medical decisions for you should you become unable to do so for yourself during your lifetime. Additional planning may be needed given the size of a person’s potential estate and classification of assets.

Marty Roos is a shareholder with Oppenheimer, Blend, Harrison and Tate, Inc. He also serves as the firm’s Chief Operating Office and Practice Group Leader for Estate Planning & Probate. Marty is Board Certified in Estate Planning & Probate by the Texas Board of Legal Specialization. He has also been recognized, for the past six years, as a Texas Super Lawyer. Marty can be reached at 210.224.2000 or mroos@obht.com

Finding Solutions to the Credit Crunch

Lindsay A. Martin — Fri, 15 Jan 2010 22:46:00 GMT

As the credit crunch puts the squeeze on lenders, lenders look for more capital – a search that sometimes puts borrowers’ businesses and estate plans at risk.

Businesses and entrepreneurs need cash to be successful, but in times of a credit crunch, it is hard to get. Current economic conditions force lenders to tighten credit requirements, and borrowers face stricter underwriting requirements. As a result, lenders increasingly look to secure loans with any property a borrower might have ownership in, whether that property is the subject of the loan or not. Limited partnerships, family ranches, and other assets, are being used as collateral for wholly unrelated loans. But having a partnership pledge property for an unrelated loan can potentially break the entity for both tax-planning and business purposes. With no way to provide collateral without compromising the integrity of their entities, some borrowers just don’t go forward with otherwise sound transactions. Attorneys at Oppenheimer, Blend, Harrison and Tate, Inc. have been working with lenders and borrowers to find solutions to the liquidity crisis.

“The effect of the current lending climate is to chill deals and reduce business transactions,” says Marty Roos, the Estate Planning Practice Group Leader at Oppenheimer Blend.

Roos says that in recent months clients have come to him to review transactions in which lending institutions have requested pledges of collateral for unrelated loans. For example, one client was asked to put up a multi-million dollar ranch for an existing revolving line of credit used to operate a business. But that ranch was in a family limited partnership, and the partnership was not a party to the loan agreement. The question, says Roos, is “How does a business entity effectively get used as collateral for a personal loan to start another venture?”

Under both Texas law and the Internal Revenue Code, loans to an entity should be used to further the interests of that entity. So, if a client owns an interest in an investment partnership, pledging the partnership for a personal loan risks invalidating the partnership for both federal tax purposes and state business law. “When both the lender and the borrower are unaware that such a transaction jeopardizes a tax-planning business structure, it’s a lose-lose situation”, says Laura Mason, a shareholder in the Corporate division of Oppenheimer Blend.

Awareness, she says, is the first part of developing a solution that both satisfies the underwriter and retains the legitimacy of the borrower’s business and estate planning. Mason went on to say “From there, it takes careful planning to structure the transaction to preserve the integrity of the borrower’s entity, and provide collateral to the lender.”

In recent months, Mason and Roos have worked with national lenders and mutual clients to develop a way out of this maze of competing needs and requirements. By having the borrower pay a fee to the entity for the right to encumber particular property as collateral, he or she can use the property of an entity for a personal loan. Moreover, Mason says that if done properly, the pledge of a specific asset in a partnership for a fee may only have a negligible effect on the fair market value of the entity. The fee agreement strategy can work between entities, too, she says, allowing one business to use the property of another to get liquidity.

The end result is liquidity for the client, adequate security for the lender, and preservation of a business or estate plan. “The last thing we want to see is for planning to come undone because a client or the lender was unaware that there was a problem,” says Roos. “People need cash for deals. You just need to know there’s a right way to get it, and a wrong way.”

___________________________________________________________________________________________________

Lindsay A. Martin is an Associate in the Estate Planning & Probate practice of Oppenheimer, Blend, Harrison and Tate, Inc. He has been recognized as a Texas Rising Star and one of San Antonio's Best Lawyers. Lindsay can be reached at 210.224.2000 or lmartin@obht.com

Firm Thwarts Efforts to Close Historic Downtown Hotel

Mark R. Murphy — Tue, 01 Dec 2009 22:26:00 GMT

In 2008, the owners of the Riverwalk Plaza hotel in San Antonio received notice their loan had been transferred to a new “servicer,” the company supposedly entitled to handle and enforce their loan. The owners knew almost immediately after they signed the note that their original lender had sold their loan. They also knew their loan had been shipped off to Wall Street, chopped up into pieces and sold to investors.

They weren't too concerned because, as long as they continued making their payments, there was never any trouble. Even when they would receive another letter, requesting they send their payments to a new servicer, they complied and never heard a complaint.

The ownership group, La Villita Motor Inns, J.V., had a large balloon payment of nearly $6 million coming due on the note in September 2008. As they had done before in these situations, they turned to the financing industry that had always been so eager to refinance in similar situations.

This was the worst possible timing. Lehman Brothers collapsed in September 2007 and, only one month later, "U.S. credit markets for most real estate lending became almost frozen," according to the Dec. 1, 2007 issue of the National Real Estate Investor. La Villita couldn't get anyone to return their calls, much less get anyone to loan $6 million, even on a hotel appraised for $13 million located on the Riverwalk.

The owners continued to make its monthly payments, and notified the servicer it was struggling to come up with the $6 million balloon payment. The servicer acknowledged this was a very difficult time for its borrowers, and agreed to work with them to figure out a way to have the loan repaid without foreclosure.

Then in late 2008, La Villita received notification a new servicer called ORIX claimed to have taken over the loan. The owners called ORIX's representative, who said the firm would also work with La Villita and that that it had no interest in foreclosing on the hotel.

La Villita contacted ORIX repeatedly over the next few months in an attempt to work out an arrangement, all the while continuing to make its monthly principal and interest payments. In April 2009, Irfan Valla, the director of operations for La Villita, asked ORIX for a final payoff statement to help the owners in their refinancing efforts. The ORIX representative said she could not provide it, but that she would contact another servicer on the loan to get it.

The next day, ORIX sent La Villita a foreclosure notice. Valla and the owners were stunned. They were now in a fight to save their hotel.

Hotel Mortgage Troubles

Unlike home mortgages, which usually stretch out over 30 years, mortgages on hotels commonly require the loan to be fully repaid in 5 to 10 years. When the credit is flowing freely, as it was in the 1990s, even a large balloon payment was no problem. Hotel owners simply refinanced with one of the many banks, mortgage firms or refinancing companies eager to lend. That loan in turn would typically require repayment in full in 5 to 10 years, and the cycle started over again.

Until 2007, when the credit markets collapsed and no one would lend. Hotels, which relied heavily on refinancing, have been particularly hard hit. UC Berkeley economist Kenneth Rosen estimates that as many as 1 in 5 U.S. hotel loans may default through 2010. Reference Calculated Risk Finance and Economics (Oct. 7, 2009 LA Times)

A record of more than $150 billion of loans bundled into commercial-mortgage-backed securities, or CMBS, will come due between now and 2012. (WSJ, New Rules Ease the Restructuring of CMBS Loan, Sept. 17, 2009).

In a study for The Wall Street Journal, Trepp LLC, which tracks the commercial real-estate market, found that, as of Sept. 17, 528 commercial mortgage-backed security (or CMBS) loans valued at $4.7 billion weren't able to refinance when they matured. About 75% of these loans were backed by properties that were more than enough cash to pay their loans.

All this came at the worst possible time for Valla and the others with La Villita. Their situation also sheds some light on the complicated financial invention that spawned so much of the recent economic meltdown -- the mortgage-backed security.

The La Villita Loan

The day the La Villita group took out the $8.4 million loan in 1998, their original lender, Amresco Capital, L.P., sold the loan to a bank called LaSalle National Bank. Like a lot of other loans that had mortgages as collateral in the late 1990s, the La Villita loan was shipped to Wall Street to be "securitized."

What this meant is that a Wall Street firm, such as Goldman Sachs or Merrill Lynch, would take a series of loans and make securities, or financial products that investors could buy and sell. The investor that buys the security doesn't own the loans themselves -- the Wall Street firms typically create a trust to do that -- but the investor owns the right to receive payment if and when the borrowers repay.

Booming is simply an insufficient word to describe the securitization industry in the early 2000s. The volume of pooled mortgages currently stands at about $7.5 trillion. About $5 trillion of that is securitized or guaranteed by GSEs or government agencies, the remaining $2.5 trillion pooled by private mortgage conduits. [wikipedia]

In comparison, the entire U.S. gross domestic product in 2008 was just over $14 trillion.

How it Works

In order to make MBSs, several loans are packaged up into a group. The group then is chopped up into different layers which are sold off as securities like stocks and bonds.

The securities are differentiated by the amount of risk. In every group of loans – called tranches in the industry – there are some that are high risk and some that are low risk. The amount of risk is reflected in a form of letter grade – A grade bonds have less risk than B grade bonds, which in turn have less risk than C grade bonds, and so on.

The risk stems from the probability that the borrowers in any given loan pool will replay their loans. If all the borrowers in a pool repay their loans in full, then all the bondholders get paid. If some of the borrowers don’t repay their loans however – and the pool suffers a loss as a result – the lowest rated bonds suffer that loss. On the flip side, the highest-rated bonds are the first to be repaid. In effect, the unrated bonds are the last to be paid and the first to suffer any loss. So why would any rational investor want to buy unrated bonds?

First, because they are relatively cheap. Unrated bonds can go for pennies on the dollar, which while the purchase price of high rated bonds may only allow for modest returns.

But the bigger reason is because, if anyone is going to make a killing from owning MBSs, it’s the unrated bondholders. In effect, the safer MBSs are like a cookie jar. When the jar gets filled up, all the remaining cookies go to the unrated bondholders.

This also brings us to the other way the junk bond holders make money off these loans – getting paid to service the loans themselves.

The owners of the lowest-rated bonds are usually given the right to name the special servicer, a sort of collection agency that gets involved when the borrower won't or can't repay. And these owners usually name themselves to be the collection agencies, which means they also make a fee from servicing the loans.

All of this works terrifically when the borrowers are repaying the loans. When the borrowers run into trouble however, the complexity of the transactions make it very difficult to unwind everything. We’ve heard a lot lately about banks stuck with “toxic assets,” frequently referring to MBSs that are made up of non-paying loans.

But what about the flip-side? What about a borrower, caught up in the worst credit freeze in a generation, stuck with a servicer he never agreed to, a servicer that wants nothing more than to take his property?

Being a borrower on a MBS loan is a little like playing roulette – you might get lucky, you might not. But at least at roulette, you can get up and walk away from the table. If borrowers get stuck with a servicer who is greedy, incompetent or just plain mean, they have no choice whatsoever. They play by the servicer’s rules, or else.

ORIX

The La Villita mortgage was part of a pool serviced by ORIX Capital Markets, part of Dallas-based ORIX USA. With a reported $4 billion in assets, ORIX USA is a subsidiary of the ORIX Corporation, a publicly traded company headquartered in Tokyo which estimates its 2009 net profits will be 30 billion yen, or around $327 million. The company has many financial and banking companies, as well as a Japanese baseball team, the Orix Buffaloes.

When it comes to collecting debts, Orix doesn’t fool around. A few years ago, it adopted the slogan “Just Pay,” and even sold “Just Pay” clothing on its website. "[ORIX] offers a distinctive line of 'Just Pay' attire reflecting [ORIX's] proud determination to recover, for the benefit of the lender/bondholders, everything that is owed, by all who owe it" the website read at the time. (ORIX has removed the clothing and the slogan from its website.)

In 2004, a CMBS ratings agency called Fitch lowered ORIX’s rating for "aggressive litigation." According to the Commercial Mortgage Alert newsletter, the agency stated that ORIX had 27 percent of its loans under litigation. The five other major special servicers each had less than 6 percent.

“ORIX has a reputation in the industry for being very difficult to deal with,” says Ann Hambly, a Dallas-based refinancing consultant. “In my opinion, that reputation is well-deserved.”

In fact, La Villita sought help from Hambly soon after receiving notice that ORIX was taking over its loan. Once she found out ORIX was involved, she told Valla she couldn’t help. “I can help my clients with most servicers, who want to figure out a way to help borrowers who want to keep paying,” she said. “ORIX’s is much tougher to negotiate with and does not always listen to reason”. Hambly’s firm CMBS borrowers with restructures, and yet she would not take on a client with ORIX as the servicer.

Mark Murphy, La Villita’s trial lawyer, says ORIX was in no mood to compromise in the litigation either. “We tried and tried to work something out with them, but ORIX’s response was essentially, ‘We’ll see you in court,’” he said. “They really left us no choice but to fight as hard as we could to save the hotel.”

La Villita Fights to Save the Hotel

Once they received the foreclosure notice, Valla and the other owners felt they had no choice but to seek legal help. "We tried everything else, and nothing would convince ORIX to work with us," Valla said. "When the choice is either to fight, or to sit back and lose your hotel, that choice is pretty easy to make."

La Villita filed suit to stop the foreclosure. But it also included in the suit ORIX's refusal to provide payoff statements and its refusal to provide any confirmation it was actually the company entitled to enforce the note and demand payment.

"We had been asking for final payoff statements for months, and ORIX wouldn't give them to us," Valla said. "They would send what they called ‘preliminary’ payoff statements, which they said gave them the right to charge us more default fees, penalties and attorneys fees. We really needed the final payoffs to give us any chance at refinancing."

Murphy also included in the suit ORIX's refusal to provide confirmation of its status as servicer. "Put yourself in our clients’ shoes,” he says. “Some company they have never heard of demands they pay $7 million, including $1 million in bogus fees and penalties, just in order to keep their hotel. I don't think it's too much to ask to get something that shows they are the company we should be paying.”

In the suit, ORIX simply filed its own claims against La Villita, seeking $7 million and the hotel.

The Trial

The trial took place in before state district court Judge Barbara Nellermoe. After a four-day trial, it was clear she was not happy with ORIX.

“I certainly think that ORIX . . . doesn’t play fair and they haven’t been playing fair with this note,” she said. “This has been a case from hell and there has been hell to pay, that’s for sure.”

She gave La Villita 18 months to repay the note, and ruled it was not required to pay the more than $1 million in additional fees ORIX demanded. She decided ORIX had failed to prove it was even entitled to enforce the note. Not only did ORIX get nothing, but it was ordered to pay over $150,000 in attorneys’ fees to La Villita.

When the judge announced her decision, the courtroom, packed with hotel employees and owners from other hotels facing their own upcoming financing problems, erupted in cheers. “That was a great feeling,” said Murphy. Reese Harrison, a lawyer who tried the case with Murphy, agreed. “It felt great that these guys could keep their hotel they had worked so hard for.”

ORIX has appealed.

________________________________________________________________

Mark R. Murphy is an Associate with the firm’s Litigation practice. Mark can be reached at 210.224.2000 or mmurphy@obht.com

Planning to Leave Your Group Practice or Terminate a Physician Employee? Then Plan on Issuing the Patient Notices Required by the Texas Medical Board

Kathleen Quiroz and Jerry B. Cohen — Mon, 02 Nov 2009 16:42:00 GMT

Most physicians know that they are required to notify their patients and the Texas Medical Board if they retire or sell their medical practice. Often, however, our clients are surprised when we inform them of the notices a physician must give to patients and the Medical Board if the physician is terminated or chooses to leave his or her medical practice.

Notices to Patients
When a physician leaves a medical practice, Rule 165.5 of the Medical Board Rules requires the physician to ensure that their patients receive reasonable notification and are given the opportunity to obtain copies of their medical records or arrange for the transfer of their records to another physician. More specifically, the Medical Board Rules require the departing physician to:

Publish notice in the newspaper of greatest general circulation in each county in which the physician practices or practiced and in a local newspaper that serves the immediate practice area;
Place written notice in the physician’s office; and
Send letters to patients seen by the physician in the last two years.

The notice posted in the physician’s office must be placed in a conspicuous location in or on the façade of the physician’s office. Such notices must be posted at least 30 days prior to the physician’s departure and must remain until the date of the physician’s departure.

If the departing physician’s Employment Agreement includes a non-competition covenant, the agreement should include a provision which requires the employer to provide the physician with a list of the patients seen by the physician in the last year. Notwithstanding such a provision, unless the employer has contractually agreed to provide the notices required by Rule 165.5, the employer must give the departing physician a list of the patients seen by the physician in the last two years.

The Medical Board Rules do not specify the exact language that must be included in any of the notices required by the Rules; however, at a minimum, Rule 165.5 requires that such notices (i) inform patients of the date on which the physician intends to leave the practice and (ii) offer patients the opportunity to obtain a copy of their medical records or have their records transferred.

If the departing physician’s Employment Agreement includes a non-solicitation covenant which prevents the physician from soliciting his or her patients, notices given by the physician pursuant to Rule 165.5 must be carefully drafted to comply with the requirements mandated by the Rule165.5 without violating the physician’s non-solicitation covenant. The same applies with respect to any other restrictive covenant included in the Employment Agreement.

The Medical Board Rules do not require the employer of a departing physician to give patients any of the notices required by Rule 165.5. Often, however, physician groups that want control over the content of such notices will include a provision in their Employment Agreements which gives them the right to send the notices. If a physician’s Employment Agreement includes such a provision, the agreement should require the employer to provide the notices required by Rule 165.5 by the deadline established by that Rule. The agreement should also specify which of the parties will bear the financial responsibility for publishing notices in the required newspaper(s) and mailing the patient notification letters. Typically, if the employer has control over the content of such notices, the employer bears the associated expenses.

Notices to Medical Board
When a physician leaves a medical practice, the Medical Board Rules require the physician to notify the Medical Board within 30 days of his or her change of address. This notice should be faxed to the Customer Information Center of the Medical Board at 512.463.9416. Although a physician has up to 30 days to notify the Board of a change of address, we recommend that the departing physician notify the Board as soon as possible.

The Medical Board Rules also require a physician to submit to the Board within 30 days from the date of his or her departure a copy of the notices given by the physician pursuant to Rule 165.5. To satisfy this requirement, a physician should send a letter to the Board enclosing a copy of the notice published in the required newspaper(s), the sign posted in the physician’s office, and the letter mailed to his or her patients. The letter should specify who has custodianship of the medical records and how such records may be obtained. The letter should be faxed to the Investigations Section of the Medical Board at 512.305.7123.

If a physician’s Employment Agreement includes a provision which gives his or her employer the right to send the patient notices required by Rule 165.5, the physician will still need to submit samples of those notices to the Medical Board within 30 days of his or her departure. A departing physician should obtain a copy of such notices from his or her employer before the physician leaves the practice.

Prohibition of Interference
Rule 165.5 of the Medical Board Rules prohibits the physicians remaining in the practice from preventing the departing physician from posting in his or her office the notice required by Rule 165.5. The remaining physicians and the physician group are also prohibited from withholding information from a departing physician that is necessary for the physician to provide the notices required by Rule 165.5 (e.g., the physician’s patient list).

Sanctions
A person who violates Rule 165.5 is subject to criminal penalties under the Medical Practice Act. Violations of Rule 165.5 may also result in the imposition of sanctions by the Medical Board. The failure to provide the required notices may also result in a claim of patient abandonment.

Jerry B. Cohen and Kathleen Quiroz are Shareholders with Oppenheimer, Blend, Harrison and Tate, Inc. - a top ranked Health Care law firm in San Antonio and Kerrville. Collectively, they have served Corporate and Health Care clients for 39 years and have been recognized by their peers in the legal industry as leading attorneys at both the local and national level. You can reach the Health Care Practice of Oppenheimer, Blend, Harrison and Tate, Inc. at 210.224.2000.

Physician Ranking by Health Plans

Kathleen Quiroz and Jerry B. Cohen — Tue, 01 Sep 2009 20:37:00 GMT

More commonly, health benefit plans and other organizations are seeking to measure treatment, outcomes and other indicia of quality in an effort to rank or otherwise measure physician performance for the benefit of patients, payors and other consumers. This prospect has caused some degree of concern within the physician community as questions have been raised regarding what might be the nature of these measurements and how they might be used.

As of September 1, 2009, a new Texas law will go into effect that addresses physician rankings by health benefit plan issuers. Under this law, by January 1, 2010, all programs that provide ratings or rankings of physician performance must comply with new statutory guidelines that aim to ensure the fairness, consistency, and efficiency of these programs. The new statute is fairly straightforward and easy to understand. It separates the duties owed by health plan benefit issuers, by physicians, and by the Texas Department of Insurance and specifies how the new rule applies to each of them.

HEALTH BENEFIT PLAN
A health benefit plan issuer (a “health plan”) is defined as anyone authorized to provide health insurance or health benefits in Texas. The new law prohibits health plans from rankings physicians, classifying physicians into tiers based on performance, or publishing physician-specific information that includes rankings or tiers of a physician’s performance unless the health plan follows the statutory guidelines. There are three basic requirements that any ranking program must satisfy.

First, the standards used must conform to nationally recognized standards and guidelines, such as those proscribed by the National Quality Forum and the AQA Alliance. If an acceptable standard is unavailable from such an organization, the health plan may look to other sources, such as the National Committee on Quality Assurance and other similar organizations. The Texas Department of Insurance is responsible for adopting rules to ensure that health plans comply with these standards and guidelines as set out by the national organizations.

Second, the standards and measurements that the health plan chooses to use must be disclosed to every affected physician before the evaluation period begins.

Finally, each affected physician must be given, before publication, an opportunity to dispute the ranking or classification through a proceeding that has due process protections. Specifically, the health plan must notify the physician of the proposed ranking or classification in writing at least forty-five days before the rank is made public. The health plan also must disclose to the physician the information and methods it used to reach its final decision.

If the physician properly requests a reconsideration proceeding, within thirty days of the request notice, the health plan must provide a fair reconsideration hearing either by telephone or in person. At the hearing, the physician can provide additional information to the decision-maker, have a representative present, and submit a written statement. Finally, the health plan must provide the physician with a written communication of the outcome of the reconsideration proceeding prior to publication of the rating or rank. Again, the written decision must give specific reasons outlining how the final conclusion was reached.

PHYSICIANS
Physicians also have a duty under the new statute. The duty can best be described as a duty to not interfere. Physicians are prohibited from forcing patients to agree not to rank the physician or participate in surveys regarding the physician. A violation by a physician is grounds for disciplinary action by the Texas Medical Board.

WHY DOES THIS MATTER?
The new law should be good for health plans, physicians and consumers. Previously, there was no standardization of ratings and rankings criteria, physicians did not know when or how they would be evaluated and, when rankings were published, there was no clear protections provided for physicians to dispute the rank. The new statute should provide better protection for physicians throughout this process.

The statute also should benefit health plans as it provides guidelines for any rating or ranking program they may implement and it prohibits physicians from intentionally interfering with these programs.

The new statute also should help the consumer. Without uniform standards, rankings and ratings can be meaningless. With clearer and more uniform standards, consumers should be able to better understand and use the resulting data in making healthcare decisions.

SO EVERYTHING IS FIXED . . . RIGHT?
While perhaps a dramatic improvement from before, the new statute leaves some unanswered questions. For example, the statute permits health plans to draw standards from multiple national resources and, if none provide adequate guidelines, the Insurance Commissioner is to decide the validity of a guideline or standard. Thus, the statute leaves a lot of flexibility for a health plan to choose its source for guidelines, resulting in standards that may not be as uniform as hoped. Further, the statute does not specify who or what organization is to be the decision making authority in the reconsideration hearing proceeding.

Despite these potential problems, the statute provides a useful starting point for changing the way physicians-ranking programs are conducted. For physicians and health plans alike, the most important thing is to start educating themselves on the requirements, how they apply, and what rights are afforded under the statute should a problem arise.

Medical Office Leases - Negotiating Key Issues

Shelley P. Morkovsky, Kathleen Quiroz and Jerry B. Cohen — Wed, 01 Jul 2009 20:41:00 GMT

“An ounce of prevention is worth a pound of cure” – a phrase applicable in the practice of medicine and also in the practice of commercial real estate law. Having a commercial lease that properly suits your business is a key factor in the “health” of your medical practice. Therefore, before you enter into a lease for medical office space, you should carefully review and evaluate the terms of the lease and negotiate key deal points. If the broker or your prospective landlord tells you that the terms of the lease are not negotiable, do not be dissuaded. In the current real estate recession, you may have more leverage to negotiate desirable concessions or at least those that are deal breakers for you or your practice.

Limitations on Personal Liability
To limit personal liability, it is preferable that the tenant under a lease be a business entity (such as a professional association, limited partnership or limited liability company) rather than an individual. Leases typically identify the landlord and tenant on the front page and/or the introductory paragraph of the lease. If your professional association or other business entity will be the tenant under a proposed lease, make sure that each such provision properly identifies your entity as the tenant. Also, check the tenant’s signature block at the end of the lease. That signature block should include the name of the entity which will serve as the tenant and should designate the title (e.g., president) of the individual who will sign the lease on behalf of that entity. A defective signature block may give your landlord an opportunity to argue that the physician who signed the lease intended to incur personal liability.

If the named tenant is a business entity, the landlord will often require a personal guaranty from the physician or physicians who own that entity. If your prospective landlord demands such personal guarantees, you should consider negotiating limitations to those guarantees. For example, you may want to ask that each guaranty be limited to the guarantor’s percentage of ownership interest in the entity that will serve as the tenant under the lease. You may also want to attempt to limit the personal liability of the guarantors by negotiating the removal of any provisions calling for the joint and several liability of the guarantors. Under Texas law, a commercial landlord is required to mitigate damages from a defaulted lease. Thus, you might also want to ask that the personal guaranty be limited to a certain amount, such as six months base rent plus any arrearages, which would reasonably compensate the landlord for time spent securing a replacement tenant. Further, regardless of any other limitations you might negotiate, any guaranty required by your prospective landlord should be conditional upon the guarantor receiving notice that a default has occurred.

Common Operating Expenses
As a tenant, you want absolute clarity regarding all monetary obligations. Such clarity is not always possible when the landlord provides a mere estimate of what the “additional rent” (i.e., the tenant’s share of the operating expenses) will be. A landlord typically “passes through” to its tenants all of the landlord’s expenses for operating the entire building. Operating expenses can include items such as the landlord’s costs of insurance, taxes, electricity, and maintenance of common areas. There can be hidden traps for the unwary in this part of the lease. Pay attention to how your share of the operating expenses will be calculated. For example, if the lease states that your share of operating expenses will be your square footage divided by the total occupied square footage in the building, and you occupy 10% of a building which has 50% of its space filled, then you must reimburse the landlord for 20% of its operating expenses. This outcome can be prevented by insisting that the calculation be based on your portion of the leasable space in the building, whether or not the rest of the building is occupied.

You should also evaluate the items included in the list of operating expenses that will be passed through to you under the lease. Certain items should be carved out of common operating expenses, such as costs of a capital nature, amounts reimbursed by other tenants, and items not related to the operation of the entire building, such as broker fees paid by the landlord in connection with individual leases.

Restrictions on Use of Premises
Leases for medical office space often prohibit the tenant from providing in the leased premises certain medical and/or ancillary services such as clinical laboratory services and diagnostic imaging services. If your practice provides, or intends to provide, any of the services prohibited by your landlord, your lease must be revised (before the lease is signed) to permit your practice to provide the respective services in the leased premises.

Opportunity to Cure Defaults
Most leases contain both monetary obligations, such as the obligation to pay base rent, and non-monetary obligations, such as the obligations to maintain and repair the premises. Leases also typically define what constitutes a default of the lease and what remedies are available to the landlord in the event of a default by the tenant. Especially with respect to defaults of the non-monetary obligations established by the lease, it is not always readily apparent to the tenant when the landlord has deemed such a default to have occurred. Therefore, if your proposed lease states otherwise, it should be revised to provide that a failure to pay or perform will not constitute an event of default until the tenant has received notice of the failure and has had a reasonable period of time to “cure” such failure by making the payment or tendering performance.

Exit Strategy
A lease will include a provision which defines the duration, or term, of the lease. Agreeing to a long-term lease may get you a cheaper rental rate; however, before you sign a long-term lease, you should consider what will happen if you need to terminate the lease early (for example, if your medical practice fails to thrive in the leased premises or if your practice thrives so much that expansion becomes necessary). A straightforward exit strategy is a provision which would permit you to cancel the lease at some point in time (e.g., at the two year anniversary) if you are not in default under the agreement or upon the provision of prior written notice to the landlord (e.g., upon 60 or 90 day’s prior written notice). Another option would be to shorten the initial term of the lease but add renewal options exercisable by you that provide for a predetermined rental rate or a then-current market rate for the renewal term.

Most standard leases prohibit the tenant from assigning its rights or obligations under the lease and from subleasing part or all of the leased premises. If your proposed lease includes these standard prohibitions, or if it does not address your right to assign the agreement or sublease the leased premises, you should attempt to negotiate for the right to assign the lease (where a new tenant would “step into your shoes” under the same lease) or sublease the space (where a new contract would be entered into between your entity, as tenant, and a subtenant for all or part of the space). Either of these rights may limit your liability in the event you are forced to break the lease. At a minimum, you should attempt to negotiate for the right to assign the lease or sublet the space with the consent of the landlord, which consent shall not be unreasonably withheld.

Final Thoughts
This article is not meant to be an exhaustive list of all the issues that should be addressed when reviewing a proposed lease. Each lease will differ in its terms, and each physician practice will have its own tolerance for risk and its own unique needs and preferences. It is always prudent to enlist the help of an experienced real estate attorney before signing any lease or other contract pertaining to commercial real estate. You should be able to avoid many lease-related headaches by paying close attention to the terms of your next lease at the outset and negotiating those terms to suit your business with the help of an experienced commercial real estate attorney.

_________________________________________________________________________
Jerry B. Cohen and Kathleen Quiroz are Shareholders with Oppenheimer, Blend, Harrison and Tate, Inc. - a top ranked Health Care law firm in San Antonio and Kerrville. Collectively, they have served Corporate and Health Care clients for 38 years and have been recognized by their peers in the legal industry as leading attorneys at both the local and national level. Additional contributions in the development of the above article were made by Shelley P. Morkovsky an Associate in the Firm’s Real Estate practice group. Shelley is Certified by the Texas Board of Legal Specialization in Commercial Real Estate Law. You can reach the Health Care and Real Estate Practice Groups of Oppenheimer, Blend, Harrison and Tate, Inc. at 210.224.2000.

Stimulus Includes Money for Physicians

Kathleen Quiroz and Jerry B. Cohen — Fri, 03 Apr 2009 20:44:00 GMT

On February 27, 2009, President Obama signed the American Recovery and Reinvestment Act (“ARRA”), or stimulus package, into law. Included within ARRA is the Health Information Technology for Economic and Clinical Health Act, or HITECH, which is intended to play a transformative role in the use of technology in healthcare. Currently, it is estimated that approximately 14 percent of American physicians use some form of electronic health records (“EHR”). HITECH is designed to provide an infrastructure and financial incentives and disincentives to have EHR systems in use by more than 90 percent of American physicians by 2014, with the belief that savings will be achieved through the reduction of adverse events and the elimination of errors and duplication.

Meaningful Use of Certified EHR
To be eligible for the Medicare incentives provided in HITECH, a physician must be able to demonstrate his or her “meaningful use” of a “certified EHR” system. HITECH provides that “meaningful use” must be demonstrated to the satisfaction of the Secretary of the Department of Health and Human Services. While meaningful use will require the use of a system that includes the electronic prescribing of drugs, the remaining detail of what will constitute “meaningful use” will be clarified in regulations that are anticipated by the end of this year.

HITECH further defines “certified EHR technology” as a qualified electronic health record that is certified as meeting standards to be adopted by the HIT Policy Committee and the HIT Standards Committee, both of which are created and granted authority by HITECH. At this time, HITECH requires that a certified EHR be connected in a manner that provides for the electronic exchange of health information to improve the quality of health care, such as promoting the coordination of care. The initial standards also will address privacy and security issues, the nationwide health information technology infrastructure, the use of EHR to improve quality and technologies to collect patient demographic data and to address the needs of vulnerable populations. The precise standards and other requirements for certified EHR will be clarified in regulations that again are anticipated by the end of this year.

The Carrot – Medicare Incentives
HITECH creates a series of financial incentives through the Medicare program for physicians (other than hospital based physicians) to promote the adoption and meaningful use of certified EHR technology. The amount of the financial incentive available will equal 75 percent of a physician’s “estimated allowed charges” for the payment year in question, subject to the following caps:

First payment year - $15,000 (or $18,000 if the first payment year is 2011 or 2012)
Second payment year - $12,000
Third payment year - $8,000
Fourth payment year - $4,000
Fifth payment year - $2,000

While the details of what will be included in “allowed charges” will follow in regulations, physicians demonstrating meaningful use of a certified EHR system will be eligible for incentive payments through the Medicare program beginning as early as 2011. From the schedule above, it is clear that there is more money available to physicians the earlier they become meaningful users of certified EHR. However, no incentives will be available at all if the first payment year is after 2014 and, regardless of when the first payment year occurs, no payments will be made at all in years after 2016.

The Stick – Medicare Fee Schedule Reductions
HITECH imposes financial penalties on eligible physicians who are not meaningful users of a certified EHR system in 2015 or thereafter. Specifically, if an eligible physician is not a meaningful EHR user by 2015, the Medicare fee schedule amount for that eligible physician will be reduced as follows:

1 percent in 2015
2 percent in 2016
3 percent in 2017 and thereafter

Also, if fewer than 75 percent of all eligible physicians are meaningful EHR users by 2018, the fee schedule may be reduced by an additional 1 percent per year, up to a 5 percent reduction. Finally, HITECH anticipates that hardship exceptions may be adopted by regulation, such as for physicians in rural areas.

Alternative Incentives Through Medicaid Program
HITECH also includes alternative incentives for professionals with specific percentages of patients receiving medical assistance or meeting a definition of “needy.” These incentives may not exceed 85 percent of the net allowable costs for certified EHR technology and associated support and training. These incentives are capped at $25,000 in the first year and $10,000 per year in the second and subsequent years, with no payments to be made for more than 5 years or after 2021. In addition to these later compliance dates, the incentives through the Medicaid program also are available to a broader group of providers, including dentists, certified nurse midwives, nurse practitioners and certain physician assistants. However, professionals seeking incentives through the Medicaid program must waive their right to receive the Medicare incentives and must demonstrate that a certain patient volume is receiving medical assistance.

What Do We Do For Now??
While awaiting the regulatory detail for these incentive programs, physicians should assess their EHR needs and begin budgeting for the EHR adoption process. Physicians with existing EHR systems should contact their vendors to determine how the vendors plan to provide upgrades or patches that might be required to comply with the requirements of a “certified” system and should budget the costs associated with future upgrades and training.

Physicians planning to purchase an EHR system in the short term should either include in their contracts with vendors provisions requiring the vendor to provide necessary upgrades and patches or should consider deferring their purchases until the requirements for “certified” EHR systems are finalized. Ultimately, all physicians and physician groups will need to begin budgeting not only for the financial costs of acquiring or upgrading an EHR system but for the personnel time and expense for EHR conversion and training. Again, the sooner this process begins, the more likely a physician will be able to satisfy the 2011 timeline to receive the maximum available incentive payments under HITECH.

Physician Non-Compete Covenants

Kathleen Quiroz and Jerry B. Cohen — Sun, 01 Feb 2009 21:47:00 GMT

Non-compete covenants entered into in the context of an employment agreement purport to restrict the right of an employee (including physician owners and non-owners employed by a physician practice) to compete with his or her former practice after termination of the employment relationship. Given the complex legal and often emotional issues surrounding non-compete covenants, we frequently receive calls from physician practices or individual physicians regarding non-compete covenants. Should our group require one? Should I sign one? Are these things even enforceable?

The benefits of non-compete covenants for group practices are fairly obvious. No physician group likes the idea of investing time and money in recruiting and training a physician only to have that physician leave the group, take his or her patients and become the competition. Likewise, the concerns of the individual physician are equally obvious. No physician in a group likes the idea of building a practice, developing referral sources and nurturing a patient base only to be forced, upon leaving the group, to relocate his or her practice outside of a defined restricted territory that could be so distant from his or her prior practice location that the physician’s referral sources and patient base may be unlikely to follow.

The General Rule
As a general rule, a non-compete covenant, if correctly structured and reasonable in its terms, is enforceable, even against a physician. Group practices and other employers should understand, however, that non-compete covenants are tightly regulated and the specific prohibitions imposed on an employee’s ability to work must fit within a statutory framework, as interpreted from time to time by state courts.

Statutory Framework
The Texas Business and Commerce Code contains provisions dealing generally with all non-compete covenants and specifically with those applicable to physicians. Under the general statutory provisions, non-compete covenants, regardless of whether in an employment agreement or other type of contract, are deemed to be enforceable only if its terms satisfy all of the following requirements:

(a) The non-compete covenant is ancillary to or part of an otherwise enforceable agreement;

(b) The non-compete covenant does not impose unreasonable restraints as to the time or duration of the restrictions, the geographic area within which the restrictions apply, and the type or scope of the activity to be restricted; and

(c) The non-compete covenant does not impose a greater restraint than is necessary to protect the goodwill or other business interest of the employer or other promisee.

Judicial Clarification
Prior to 2006, non-compete covenants set forth in employment agreements were difficult to enforce because many courts found that they were not ancillary to or part of an otherwise enforceable agreement. Because of the “at-will” nature of most Texas employment relationships, courts were apt to find that employment agreements did not qualify as “an otherwise enforceable agreement” since employers could avoid their obligations by terminating the “at-will” employment relationship at any time.

In 2006, the Texas Supreme Court reexamined this issue and held that an employer’s non-monetary future promises or obligations within an employment agreement could provide the basis for “an otherwise enforceable agreement” if the employer actually follows through on the stated obligations or other promise. Even after this decision, however, the non-monetary consideration to be provided by the employer to the employee, such as additional training or access to confidential information, must be related to the employer’s interest in restraining the employee. Therefore, for example, an employer could assert the need for a non-compete covenant following termination to protect its interest in its confidential information that was provided to the departing physician during his or her tenure.

Statutory Framework Applicable to Physician Covenants
In addition to the generally applicable statutory requirements described above, Texas law further provides that a non-compete covenant applicable to a physician is enforceable only if its terms satisfy the following additional requirements:

(a) The non-compete covenant (i) must not deny the physician access to a list of his or her patients seen or treated within one year of termination, (ii) must allow access to the medical records of such physician’s patients upon authorization of the patient and payment of a reasonable copying fee, and (iii) must not require that a patient list or medical records be provided in a non-typical format, except by mutual consent of the parties to the contract;

(b) The non-compete covenant must allow the physician an opportunity to buy-out of the covenant at a reasonable price; and

(c) The non-compete covenant must not prohibit the physician from providing continuing care and treatment to a specific patient during an acute illness, even after the contract or employment has been terminated.

Judicial Reformation
Under Texas law, if a non-compete covenant is ancillary to an employment agreement, the party seeking to enforce the covenant (e.g., the employer) has the burden of establishing that the covenant meets the criteria discussed above. However, the failure of a non-compete covenant to satisfy one or more of these criteria does not necessarily mean that the covenant will be unenforceable. Instead, under Texas law, a court is permitted to reform or revise a non-compete covenant that is found to be unreasonable as to its duration, its geographic scope or its scope of restrained activity, or that otherwise imposes a greater restraint than is necessary to protect the goodwill or other business interest of the employer. In these cases, the court may itself modify the covenant as necessary to make the offending provision reasonable and then enforce the non-compete covenant as judicially revised.

Wait A Minute . . . Don’t Forget Stark Law
Having satisfied all of the requirements of state law reviewed above, physicians and physician groups need to consider whether the federal physician self-referral prohibitions commonly known as the Stark law might prohibit the use of a non-compete covenant at all. The federal regulations interpreting the Stark law include a specific exception for payments made by a hospital to a physician or physician group in connection with a recruiting agreement entered into with a new physician or the group hiring that physician. This exception recognizes the benefit of recruiting agreements in attracting physicians to potentially underserved areas but requires, among other things, that the physician remain in the area to which he or she was recruited as a condition of receiving payment under the recruiting agreement.

Given the regulatory requirement under the Stark law that physicians entering recruiting agreements with hospitals remain in the hospital’s geographic area for a specified period of time, the regulations establishing this Stark law exception prohibit a physician practice from imposing “restrictions that unreasonably restrict [a] recruited physician’s ability to practice medicine in the geographic area served by the hospital.” Thus, notwithstanding state law, if a physician is a party to or the subject of a recruiting agreement with a hospital, that physician may not be subject to a non-compete covenant for the period during which the physician is required to remain in that hospital’s geographic service area.

Final Thoughts
Given the complex state statutes, the overlay of judicial interpretation and the perhaps unexpected intrusion of the Stark laws and regulations, it seems no wonder that physician non-compete covenants continue to be the subject of so much inquiry. Ultimately, any non-compete covenant must satisfy the federal and state legal requirements described above. However, to be truly effective, a non-compete covenant also must both protect the business interests of the group practice as well as address the individual professional and personal concerns of the employed physician.

2008 Digest of Selected Mass Tort Bankruptcy Opinions

Debra L. Innocenti — Sat, 01 Nov 2008 21:44:00 GMT

A number of key opinions were issued this year, converging around the jurisdictional reach of a §524(g) injunction, preemption of insurance policy anti-assignment provisions, and the limitations of the power of Rule 9019 to override statutory requirements of the Bankruptcy Code.

Classification
In re Congoleum Corporation et al., United States Bankruptcy Court, District of New Jersey, Case No. 03-51524 (June 5, 2008) (J. Kathryn C. Ferguson)

The bankruptcy court held that the creation and differing treatment of two subclasses of asbestos claimants in the debtors’ joint plan of reorganization violated §§1129 and 524(g) of the Bankruptcy Code. One subclass consisted of all asbestos claimants who gave up in an omnibus settlement agreement (or never had) rights under certain pre-petition settlement agreements. In contrast, the other subclass claimants had the option to have their rights to payment determined through a continued adversary proceeding that would, in effect, entitle them to a chance for greater recovery. The bankruptcy court held that in addition to complying with the classification provisions of the Bankruptcy Code, the plan must also comply with the overlay of §524(g), which required that the plan value all present and future similar claims in substantially the same manner. The only proper criterion for differing between the pre-judgment claims was disease level. Moreover, the bankruptcy court held that an omnibus settlement agreement with the asbestos constituents that could meet “the very low threshold of Rule 9019” did not permit non-compliance with §§524(g) and 1129.

Impairment
Ad Hoc Committee of Asbestos Personal Injury Claimants and Jose Angel Valdez v. Dana Corp. (In re Dana Corp.), Civil Action No. 08-1037, 08-1038, Bankr. Case No. 06-10354 (S.D.N.Y. Sept. 30, 2008)

The district court affirmed the bankruptcy court’s holding that asbestos claims reinstated against one reorganized debtor with limited assets did not impair such claims where the asbestos claimants had no pre-petition rights against the other affiliated debtors.

Insurer Standing
Hartford Accident & Indemnity Co. v. Global Indus. Tech. Inc., Civil Action No. 07-1749, Bankr. Case No. 02-21626 (W.D. Pa. Jul 25, 2008); Hartford Accident & Indemnity Co. v. North Am. Refractories Cos. et al., Civ. Action No. 07-1750, Bankr. Case No. 02-20198 (W.D. Pa. July 25, 2008)

See Rhonda D. Orin, Denials of Insurance Company Standing: Two More Cases Join the Lengthening List, ABI Committee News: Mass Torts Committee, Vol 6: No. 4 (November 5, 2008).

In re Quigley Company Inc., 391 B.R. 695 (Bankr. S.D.N.Y. 2008) (J. Stuart M. Bernstein)

In an attempt to assist the parties resolving confirmation discovery disputes, the bankruptcy court issued a memorandum decision outlining the considerations governing the asbestos insurers’ standing to participate in confirmation. The bankruptcy court stated that the insurers were parties in interest and had the right to challenge the parts of the plan that directly implicated their rights and interests. The insurers could not, however, object to the plan based on how it affects the rights of third parties, even if those objections might provide grounds to defeat confirmation. The insurers’ discovery demands had to reflect such limitations.

Non-Debtor Section 362(a) Injunctions
W.R. Grace & Co., et al. v. Chakarian et al. (In re W.R. Grace & Co., et al.), 386 B.R. 17 (Bankr. D. Del. 2008) (J. Judith K. Fitzgerald)

The bankruptcy court held that it had the subject matter jurisdiction to consider whether to expand a preliminary injunction to include actions against railroad companies for exposure to the debtors’ former vermiculite mining operations. The bankruptcy court also held that the debtors met the requirements under §105(a) to expand the automatic stay to protect the non-debtor parties. The railroad company had asserted three avenues of indemnification that would directly impact the debtors’ estates if the tort actions were allowed to proceed, including contractual indemnification as well as insurance indemnification and separate insurance paid for by the debtors. Such indemnification went beyond the indirect common law theories that had missed the jurisdictional threshold in Pacor Inc. v. Higgins, 743 F.2d 984, 994 (3d Cir. 1984). In Pacor, the intervention of another lawsuit was required before the defendants would have indemnity claims against the debtor.

The debtor also met both factors of the “unusual circumstances” test under §105(a). First, the debtors’ indemnification agreements with the railroad company caused them to share “an identity of interest such that a suit against the nondebtor is essentially a suit against the debtor.” The agreements also posed an adverse impact on the debtors’ estates, as the railroad company could assert in excess of 1,000 indemnification claims against the debtors. Additionally, allowing the tort actions to proceed would require the debtors to defend the railroad company while, at the same time, defend their own products and business operations, in essence, the very claims the debtors filed bankruptcy to stop. These same reasons also established the traditional, non-bankruptcy standards for injunctive relief.

Non-Debtor Section 524(g) Injunctions
Johns-Manville Corporation et al. v. Chubb Indemnity Insurance Company, et al. (In re Johns-Manville Corporation), 517 F.3d 52 (2nd Cir. Feb. 15, 2008)

The Second Circuit Court of Appeals held that the bankruptcy court was without subject matter jurisdiction to enjoin claims against certain insurers that were not limited by the terms and scope of the debtor’s insurance coverage, did not seek recovery from the debtor’s insurance proceeds, and alleged independent misconduct by the insurers.

The debtor reached a settlement with its primary insurers, which was predicated upon the bankruptcy court issuing an injunction that barred asbestos-related suits against the debtor’s settling insurers and channeled such claims to the asbestos trust. The 1986 order confirming the debtor’s plan provided for such an injunction. Subsequently, various plaintiffs sued the settling insurers under statutory and common law theories, both of which centered on allegations that the insurers suppressed information about asbestos hazards and propagated fraudulent defenses to frustrate asbestos claimants’ rights. The settling insurers moved the bankruptcy court to enjoin those actions, and during mediation reached a series of settlement agreements providing for entry of an order clarifying that 1986 confirmation order prohibited such suits and for the insurers to contribute additional funds to the asbestos trust. The bankruptcy court approved the settlement agreements and entered the clarifying order, finding that the insurers learned virtually everything they knew about asbestos from their relationship with the debtor and that the claims against the insurers were based on actions or omissions that necessarily “arise out of” and were “related to” the debtor’s insurance policies. The district court in large part agreed.

The Second Circuit Court of Appeals disagreed. It held that a bankruptcy court only has subject matter jurisdiction to enjoin third-party, non-debtor claims that directly affect the res of the bankruptcy estate. Here, the plaintiffs sought recoveries separate and apart from the debtor’s insurance proceeds. The bankruptcy court’s factual determinations—that the insurers learned virtually everything they knew about asbestos from the debtors and that the lawsuits against the insurers “inescapably” related to the insurers’ relationship with the debtor—were only part of the liability equation. If the debtor owes a duty to the plaintiffs independent of its contractual obligations to indemnify those injured by the tortuous conduct of the debtors, then the fact that it arises from a common nucleus of operative facts is of little significance. The claims then are not derivative, have no effect on the res, and, therefore, are outside the limits of the bankruptcy court’s jurisdiction.

In re Congoleum Corporation et al., Case No. 03-51524 (Bankr. D.N.J. June 5, 2008) (J. Kathryn C. Ferguson)

The bankruptcy court held that an omnibus settlement agreement could not cure the bankruptcy court’s lack of subject matter jurisdiction to issue non-debtor releases in the debtors’ joint plan. The provisions in question exculpated the debtors’ officers and directors and issued §524(g) injunctions for the benefit of non-debtor parties, including the future claims representative, members of the asbestos committee, and the bondholder committee. The court found the exculpation provisions were not appropriate for summary judgment (which was how the objections were considered), as the plan proponents would have to lay a factual foundation to justify the relief required. The bankruptcy court also noted that the fact that the parties worked hard to craft a consensual plan was not in itself enough justification. The bankruptcy court found the non-debtor §524(g) injunctions outside the scope of In re Combustion Engineering, Inc., 391 F.3d 190 (3d Cir. 2004), which made the plan unconfirmable as a matter of law.

In re Federal-Mogul Global, Inc., T&N Limted et al., 2008 WL 4493519 (Bankr. D. Del. Sept. 30, 2008) (J. Judith K. Fitzgerald)

The debtors, asbestos committee, and future claims representative negotiated a comprehensive settlement of certain non-debtor parties’ claims and plan objections, which consisted of two alternative arrangements. The first arrangement contemplated the non-debtor parties contributing $756 million to the asbestos trust, withdrawing their claims against the debtors, and receiving a §524(g) injunction, and the second arrangement contemplated the non-debtor parties making a smaller $140 million contribution without receiving an injunction.

The plan proponents argued that the requirements of §524(g) were met, as one non-debtor party’s liability arose by reason of ownership and management of a predecessor-in-interest and involvement in a transaction changing the corporate structure of a predecessor-in-interest of the debtors.

The bankruptcy court disagreed, holding that the alleged predecessor was an unincorporated division whose derivative liabilities now ran to the non-debtor party by reason of a contractual indemnity agreement contained in an asset purchase agreement. The non-debtor party did not own or manage a predecessor in interest of the Debtors and was not party to a transaction that changed the predecessor’s corporate structure. The bankruptcy court held that the plan proponents also failed to satisfy §524(g)’s requirement that the non-debtor party’s liability was alleged to arise “by reason of” the relationship. Instead, the bankruptcy court found that it was alleged to be liable by reason of its own conduct. Similarly, the second non-debtor party failed to overcome §524(g)’s hurdles, as its liabilities arose from contractual obligations to the first non-debtor party.

Quigley Co. Inc. v. Coleman et al. (In re Quigley), 2008 WL 2097016 (Bankr. S.D.N.Y. May 15, 2008) (J. Stuart M. Bernstein)

The bankruptcy court held that a §524(g) injunction was broad enough to enjoin asbestos claimants from bringing certain direct claims against the debtor’s parent, a non-debtor party. The bankruptcy court had entered a preliminary injunction on the petition date enjoining all asbestos-related litigation against the debtor’s parent, and the injunction was later amended to provide the narrower relief of a §524(g) injunction. Certain asbestos claimants sought to sue the parent for its direct liability under Restatement (Second) of Torts §400, which imposes a manufacturer’s liability on an entity that places its name on a product manufactured by another. The claimants argued that the third requirement of §524(g)—whether the parent’s liability arose “by reason of” its ownership or management of the debtor—could not be met. Specifically, they contended that third-party protection is limited to derivative claims that arise from the debtor’s conduct and the third party’s connection to or affiliation with the debtor. Conversely, where the third-party’s liability is based on its own conduct, §524(g) does not apply. The bankruptcy court disagreed, reasoning that the use of the parent’s name and logo paled in comparison to the wrongful conduct required to impose alter-ego liability, but that the claimants’ interpretation of §524(g) would exclude manufacturer’s liability and include veil piercing claims—a result that did not make sense. Instead, the bankruptcy court found that the parent’s name and logo would not have been used by the debtor but for the parent’s affiliation. Accordingly, the third requirement of §524(g) was met.

Preemption of Insurance Policy Anti-Assignment Provisions
In re Federal-Mogul Global, Inc., T&N Limted et al., 385 B.R. 560 (Bankr. D. Del. March 19, 2008) (J. Judith K. Fitzgerald)

Plan proponents and certain objecting insurers filed a joint motion for the bankruptcy court to determine whether assignment of asbestos insurance policies to a §524(g) trust is valid and enforceable, notwithstanding anti-assignment or consent-to-assignment provisions in the policies or applicable state law. The bankruptcy court held that the insurance policies were property of the estate within the meaning of §541, even if the policy had not matured, had no cash value, or was otherwise contingent. In turn, §1123(a) expressly preempted any non-bankruptcy rights that would interfere with the implementation of a chapter 11 plan. The bankruptcy court also held that the anti-assignment provisions only applied to assignments before liability; once an event occurred that gave rise to the insurer’s liability under the policy, the policy itself could be assigned.

The bankruptcy court disagreed with the insurers’ alternative argument that the asbestos policies were executory contracts and thus subject to §365. The bankruptcy court held that although the terms and conditions of the policies might still be in effect for the periods covered by the policies, the executory period ended when the last effective date of the policies had passed.

(This opinion was appealed by the objecting insurers to the district court and is set to be argued on November 12, 2008.)

In re Congoleum Corporation, et al., 2008 WL 4186899 (Bankr. D.N.J. Sept. 2, 2008) (J. Kathryn C. Ferguson)

The bankruptcy court held in favor of the plan proponents that the anti-assignment provisions in the debtors’ insurance policies were preempted by federal bankruptcy law and that the plan did not impermissibly alter the insurers’ rights under the policies. The joint plan proposed to transfer all asbestos insurance policies to the plan trust. The insurers whose policies contained an anti-assignment clause objected to that treatment, arguing that In re Combustion Engineering, Inc., 391 F.3d 190 (3d Cir. 2004) was not controlling on the preemption issue, as it focused on the inclusion of the policies in the bankruptcy estate under §541 and not the transfer of policies to a plan trust. The bankruptcy court held that such argument miscast the holding of Combustion Engineering, as the plan at issue provided for the policies to be transferred to an asbestos trust, which could be accomplished through §1123(a)(5) and not merely §541. Moreover, the bankruptcy court found that general preemption principals and the express language of §1123(a) (“[n]otwithstanding any other applicable nonbankruptcy law”) provides for preemption of state law restrictions on transferring the policies.

The bankruptcy court also held that the insurers’ various rights (e.g., to cooperation from the Debtors, to control defense of claims, to object to asbestos claims) were not impermissibly altered. The insurers argued that the joint plan violated their rights by giving the plan trustee the sole authority to litigate and settle claims against the plan trust. The bankruptcy court, however, agreed with the plan proponents that the plan trust would be bound by the cooperation clause and consent-to-settle provisions of the insurance contracts to the same extent as the debtors, and that it was the province of the state court in any coverage action to determine if the plan trust failed to fulfill those obligations and thus provided the insurers with a defense to coverage.

The bankruptcy court held that certain rights of the insurers such as controlling the defense of and objecting to asbestos claims were necessarily curtailed by §524(g), which requires a uniform system of claims valuation and similar treatment of similar present and future claims. Additionally, the bankruptcy court’s jurisdictional limitations would prohibit the insurer’s ability to object to the asbestos tort claims under §502.

(This opinion was appealed by the objecting insurers to the district court and is set to be argued on December 12, 2008.)

___________________________________________________________________________________

Debra L. Innocenti is an Associate in the Creditors' Rights & Bankruptcy practice of Oppenheimer, Blend, Harrison and Tate, Inc. She has been recognized as a Texas Rising Star and one of San Antonio's Best Lawyers. Debra can be reached at 210.224.2000 or dinnocenti@obht.com

Texas Franchise Tax - The Revamped Version

Kathleen Quiroz and Jerry B. Cohen — Wed, 08 Oct 2008 20:50:00 GMT

For many physician practices, 2007 was a confusing and potentially costly year as a result of the implementation of the revised Texas Franchise Tax, commonly known as the Margin Tax. Like most Texas businesses, physician practices and other healthcare providers recently have filed their first state franchise tax return under the new Margin Tax, and we are now able to survey the impact of this new tax.

Closing the “Loophole”
In prior years, physician practices and other healthcare organizations that were organized as professional associations or limited partnerships were not subject to the Franchise Tax. The Texas legislature, seeking to close this perceived “loophole” whereby some businesses were subject to tax and others were not simply based upon their form of legal organization, revamped the Franchise Tax with the new Margin Tax. Among other things, these changes made the Franchise Tax applicable to nearly all business entities organized or transacting business in Texas. Therefore, as of January 1, 2007, physician practices organized as professional associations became subject to the Franchise Tax for the first time.

As a general rule, any form of legal entity that provides its owners with a statutory liability shield now will be subject to the Franchise Tax. In fact, the only business organizations that remain free of the Franchise Tax are sole proprietorships, general partnerships directly owned by individual natural persons, tax exempt organizations, and certain trusts and estates of natural persons.

Calculating the Margin
At its most basic level, the Margin Tax is a tax on the difference, or margin, between a business’ revenue (adjusted for certain statutory exclusions) minus an amount calculated by one of three alternative statutory deductions or reductions. The three alternative deductions or reductions against revenue permitted by the Margin Tax are (i) a deduction for cost of goods sold, (ii) a deduction for the cost of employee compensation and benefits, or (iii) a simple multiplication of adjusted revenue by 70 percent. An entity’s taxable “margin” is the difference between its adjusted revenue and whichever of the three alternative deductions or reductions results in the lowest margin. Since physician practices typically have little if any costs of goods sold, most practices and other healthcare providers rely upon the compensation deduction or the 70% of revenue calculation.

Limits on the Compensation Deduction
Unlike the federal income tax system, where only “unreasonable” compensation cannot be deducted, the Margin Tax caps the compensation portion of the compensation and benefits deduction at a fixed $300,000 per individual. This $300,000 cap includes any cash compensation, including both W-2 income and distributive income from partnerships, limited liability companies, and S Corporations. Therefore, physician practices with highly compensated physicians or other employees may not be able to deduct the full amount of the compensation paid to such individuals. However, there is no similar cap on the benefits component of this deduction and, therefore, the full cost of employee benefits provided by a physician practice or other healthcare organization should be deductible.

Adjusting Revenue
Physician practices and other healthcare providers have been provided with certain advantages in the new Margin Tax provisions of the Franchise Tax. Primarily, when calculating the “revenue” of the organization, healthcare providers and healthcare institutions may exclude all revenues received from Medicare, Medicaid, CHIP, workers’ compensation and TRICARE as well as the actual costs for providing uncompensated care. Further, for beneficiaries enrolled in Medicare Part C or similar replacement products, revenues received for services provided to these beneficiaries from the private payers providing the Medicare and other replacement products can be excluded from revenue as well. Finally, co-payments and deductibles received pursuant to one of the above government healthcare programs, or pursuant to supplemental insurance for enrollees in one of the above programs, also may be excluded from revenue.

The amount of revenues excluded depends upon whether the organization is a “Healthcare Provider” or a “Healthcare Institution” under the Margin Tax. Healthcare Providers, including physician practices, may exclude 100 percent of the revenues received from the above sources. Healthcare Institutions, including hospitals and other facilities, may exclude 50 percent of the revenues received from the above sources.

The (Almost) Final Calculation
Therefore, to calculate the taxable margin of a typical physician practice or healthcare provider, the organization will (1) start with a determination of its total revenue, (2) exclude either 50 percent or 100 percent, as appropriate, of the revenues received from the government payers and replacement products as noted above, and (3) then either deduct the appropriate compensation and benefit amounts, or multiply the remainder by 70 percent. Again, the organization’s taxable margin will be the result of whichever of the deduction or reduction calculations generates the smaller margin.

Tax Rate and Small Business Exceptions
In general, the Margin Tax rate is 1 percent of an entity’s taxable margin. However, there are several exemptions and rate reductions for small businesses that should be of assistance to many smaller physician practices and other small businesses in the healthcare industry. First, no tax at all is owed by any physician practice or other business whose total revenue, net of the exclusions described above, is $300,000 or less. Similarly, no tax at all is owed by any entity whose calculated Margin Tax due is $1,000 or less. For physician practices and other businesses with total revenues, again net of exclusions, of $900,000 or less, certain tax rate reductions ranging from 20 percent to 80 percent of standard rate may be available. Finally, physician practices and other businesses with $10,000,000 or less in total revenues, again net of exclusions, may elect the “E-Z computation,” under which a reduced tax rate of 0.575 percent is imposed against total gross revenues.

Tiered Structures
One final issue that concerned many in the healthcare industry was the impact of the Margin Tax on tiered structures. A common example of a tiered structure for physician practices is a general partnership in which all of the partners are professional associations each owned by an individual physician. For some time, practitioners were concerned that the margin tax would apply to the organization’s revenue at the lower (general partnership) level and then again when paid or distributed to the upper (professional association) level. In such a situation, it was possible that the same dollar of revenue would be taxed twice. Fortunately, the Margin Tax statute was clarified to provide that revenue received as distributive income from a taxable partnership (such as a general partnership owned by professional associations) or subchapter S corporation would be excluded from the taxable margin of the upper tier, or recipient, entity.

The Dust Settles
Just over one year into this new tax regime, it is clear that, for many entities in the healthcare industry, the Margin Tax presents a challenging new reality. However, for physician practices and other healthcare organizations that receive significant revenues from government payers, and for those smaller practices or businesses that find themselves excluded from taxation, this new reality may not be as painful as once feared.

What Makes Them Tick and What Makes Them Blow Up

Bruce M. Mitchell — Wed, 20 Aug 2008 21:39:00 GMT

I. IMPORTANCE OF BUY SELL AGREEMENTS.

1. Buy Sell Agreements in General. A Buy Sell Agreement is a contract among the owners of a business, including a husband and wife in a community property state such as Texas, which commonly provides for the purchase or sale of ownership in the business under certain circumstances, such as death, disability, insolvency, divorce, withdrawal or expulsion of one of the parties. Buy Sell Agreements have become increasingly sophisticated contractual instruments and often incorporate voting agreements and other contractual governance provisions, succession and family business planning provisions, income and estate tax planning concepts, and dispute resolution procedures. As private equity investors began to invest in emerging businesses, they employed Buy Sell Agreements to limit the independence of management, control future sales of equity, define an exit strategy, set financial goals, and impose a system of rewards and penalties on the founders/managers of the business for achieving or failing to achieve those goals. Once used primarily to control the ownership of stock in small closely-held or family-owned corporations, so that ownership was preserved within the group or family, Buy Sell Agreements are now used in every industry, with every form of entity, and with a level of sophistication unheard of a decade ago.

2. Buy Sell Agreements for Family Businesses. One of the primary uses of Buy Sell Agreements is to establish a succession plan for family businesses, which still account for a high proportion of all businesses in the United States. Of those family businesses which are not sold by the founders, approximately two-thirds fail in transition of management to children. One often quoted study of family businesses from 1924-1984 reveals that 80% have ceased to exist. Of the 20% which still exist, 13% are still in the family, 5% were sold to outsiders, and 2% went public and are no longer controlled by the family. M.F.R. Kets de Vries, "The Dynamics of Family Controlled Firms: The Good News and the Bad News," Organizational Dynamics, p. 59-71 (1993). There are many reasons why it is difficult to transition family businesses to successive generations, including changes in market conditions, costs, consumer tastes, personnel, etc., but the most important reason may be lack of early, effective, and properly-executed business succession planning.

3. Buy Sell Agreements for Business Succession Planning. The first step in establishing a viable business succession plan is for a business owner to consider his or her own financial situation. If the business owner does not have sufficient personal assets apart from the business to retire, then he or she cannot retire unless the business is sold. Although this appears obvious, it is not unusual for a business owner (and the owner’s children) to ignore this reality until the owner is at the brink of retirement and options are limited. Assuming that the business owner is financially prepared for retirement, the owner should develop a written business succession plan that addresses the transfer of the management, control and ownership of his or her business. This plan should address a number of important elements, including:

A. As discussed above, planning his or her retirement, including evaluating whether he or she will have sufficient income.

B. Planning for a fluid succession of management after his or her retirement;

C. Planning the ownership transfer of the business to children, employees, or third parties.

Family business owners may be reluctant to give up control during their lifetimes: often, their success in business has come from maintaining tight control over operations and management decisions. First generation entrepreuners, in particular, have difficulty giving up control. The business owner should make the critical decisions involving ownership and management well in advance of retirement, in order to address the expectations of others (family members, employees, investors, bankers, etc.), minimize management instability, and anticipate business contingencies. The business owner should also communicate his or her decision to his family and key employees.

4. Motivating the Business Owner. It is often difficult to motivate business owners to start the business succession planning process. In order to overcome this reluctance, it is important to highlight the positive things that can happen for the owner, his business and his family through good planning. Good planning starts sooner rather than later and the more time the business owner has to plan and to modify and adapt his plan, the better the plan will be for him and for the business.

5. Transfer of Ownership of Business is Distinct from Transfer of Management of Business. The decision of who will own a business is often totally separate from the decision of who will manage the business. The best manager is often an employee rather than an owner or family member. Even if the business is to be managed by family members after the owner=s retirement or death, all family members may not be involved in management and those who are may have different responsibilities and authority.

A. Transfer of Ownership. A key decision is who will succeed to the ownership of the business. The usual transferees are family members, employees or third parties through a sale transaction.

B. Lifetime Transfer of Ownership or Testamentary Transfer. If the owner=s exit strategy is to sell the business to a third party during his or her lifetime, the owner should carefully consider and plan the sale of the business, including positioning the business so as to maximize its value as of the date of the anticipated sale.

C. Testamentary Transfers. If the transfer is at death, the owner must decide whether the ownership interests in the business will be bequeathed only to active family members or equally to all family members, and whether, in the later case, the active family members should have control over the business pursuant to a Buy-Sell Agreement. If the transfer is at death, the owner should be sure that proper estate planning has been completed prior to death so as to minimize any estate taxes.

6. Estate Tax Planning. The business owner has the opportunity to achieve enormous estate tax savings with proper estate planning, using such tools as gifts or sales to shift future appreciation. Shifting a substantial part of the future growth in value can result in enormous estate tax savings.

II. COMMON TRIGGERING EVENTS.

1. Death. Most Buy-Sell Agreements are primarily intended to cover the death of an owner. A mandatory purchase requirement is often imposed, in order to generate liquidity to the deceased owner’s family. Otherwise, the deceased owner’s family may not receive any income from the business, unless they are employed by the business, the business is sold, or the business declares dividends or distributors (which is highly unlikely).

2. Disability. The Buy-Sell Agreement also often addresses disability, since if an owner is disabled he may not be receiving an income from the business. Also, the remaining owners may desire a buy-out so that they are not in the position of working in the business to support the financial needs of the disabled owner, being pressured to declare a dividend, or be subject to criticism for taking to much in compensation. Often the most difficult issue to address is how disability is determined. Common alternatives include a physician examination, reliance upon a definition of disability in a disability insurance policy, and providing for a specific number of continuous days of absence from work. If an owner is no longer able to work, his family may desire a buy-out in order to generate liquidity for support needs. The remaining owners may likewise desire a buy-out to occur in order to prevent “meddling” by the disabled owner’s spouse. The key point in a disability triggering provision is the procedure for determining when disability occurs. Various alternatives include: (1) examination by a group of physicians, (2) reliance upon a definition of disability in disability insurance policy, (3) decision solely in the discretion of the board of directors, and (4) mechanical objective standards, including items such as the specific number of days of absence from work or reduction in performance levels.

3. Termination of Employment. Termination of employment, whether by reason of retirement or otherwise, often is a triggering event under a Buy-Sell Agreement. Specifically, the Buy-Sell Agreement should address permanent retirement, voluntary termination of employment by the company and by the employee, unilateral termination by the employee, and involuntary termination of the employee with or without cause.

The remaining owners will often not want a non-employed owner to keep his interest, particularly if the non-employed owner lost his employment “for cause.” Forced sales are often the subject of disagreement, particularly if the forced sale is a result of a termination “for cause.” Often, the terminated employee/owner claims that the termination was for the purpose of acquiring his ownership at a favorable price to the acquirers. Consequently, a well-drafted Buy-Sell Agreement that is not punitive is critical in this area, where litigation is common. The recent trend in cases generally supports a forced sale upon termination of employment, assuming it does not constitute a forfeiture, E.g., Ryan v. J. Walter Thompson Co., 453 F.2d 444 (2d Cir.), cert. denied 406 U.S. 907 (1971). The sale is generally not deemed to be a forfeiture if the price was reasonable when set and if the parties acted in good faith. See In Re Estate of Borchard, 74 Misc. 2d 376, 346 N.Y.S.2d 620 (Sup. Ct. 1973). Forced sales following discharge without cause will face strict judicial scrutiny, particularly if the purchase price is below-market. See Horne v. Drachman, 247 Ga. 802, 280 S.E.2d 338 (1981); Note, Exercising Options to Repurchase Employee-Held Stock: A Question of Good Faith, 68 YALE L.J. 773 (1959).The agreement should specifically state whether purchase rights will be created upon voluntary termination of employment, involuntary discharge with cause, or involuntary discharge without cause. For each, the manner of sale should be specified. For example, the parties may want to give the corporation an option to acquire shares of a shareholder who is discharged with cause (a "bad boy" provision), but to require repurchase (giving some protection to the discharged employee) in the event of a discharge without cause. Beware that if an employee must resell his or her stock when employment terminates, and if that restriction was in effect from the time that the shareholder purchased his stock, the stock will likely be treated as section 83 property. If a shareholder enters into competition with the corporation, typically the corporation will be given an option to purchase that shareholder's shares. Typically, a right of first refusal is given first to the corporation, and if it chooses not to exercise it, to the remaining shareholders on a proportionate basis.

4. Conflicts of Interest. If an owner enters into competition with the company, files a lawsuit against the company, or otherwise is in an adversarial relationship with the company, the Buy-Sell Agreement customarily provides that the company and the other owners will be given an option to purchase the adversarial owner’s shares.

5. Rights of First Refusal. Most Buy-Sell Agreements provide for a right of first refusal in favor of the company which prohibits sales to third parties unless the interests are first offered for sale to the company and the other owners (on a proportionate basis).

6. Transfer Incident to Divorce. The owners will almost never want a divorced spouse to become an owner. The Buy-Sell Agreement commonly addresses transfers incident to divorce. Otherwise, general restrictions on sales and transfers may not apply to transfers incident to divorce in a community property state. Typically, the Buy-Sell Agreement will give the divorced owner the right to acquire any interests awarded to the divorced spouse. If that owner does not exercise his or her option, the company and remaining owners will be given the option to acquire such shares within a certain period of time from the date of the transfer. The price under a buy-sell agreement will not necessarily be recognized as the value of the owner’s interest in the company upon divorce. See Keith v. Keith, 763 S.W.2d 950 (Tex. App. - Fort Worth 1989, no writ); Geesbreght v. Geesbreght, 570 S.W.2d 427 (Tex. App. - Dallas 1983, no writ); Finn v. Finn, 658 S.W.2d 735 (Tex. App. - Dallas 1983, no writ).c.

7. Tag-Along; Drag Along Rights. The Buy-Sell Agreement may prevent a controlling owner from selling his stock to a third party unless the buyer purchases minority owners= stock at the same price (“tag along”), or may allow a controlling owner to sell his shares to the third party and compel the sale of the minority owners= stock (“drag along”). Under Texas law, controlling shareholders have fiduciary duties to minority shareholders. A tag-along provision may protect the minority shareholder by requiring the majority shareholders to sell their interests together with the minority shareholder's interest, as long as the per share purchase price is the same for the majority and minority shareholders. See Glass v. Glass, 321 S.E.2d 69 (Va. 1984) (controlling shareholder is not required to see that minority shareholders get to sell their stock at the same price and controlling shareholders may negotiate in their own interest); Treadway Cos., Inc. v. Care Corp., 638 F.2d 357 (2d Cir. 1980); Hazen, Transfer of Corporate Control and Duties of Controlling Shareholders, 125 U. PENN. L.R. 1023 (1977); Andrews, Stockholders' Right to Equal Opportunity in the Sale of Shares, 78 HARV. L. REV. 505 (1965).

8. Permitted Transfers; Gifts. Buy-Sell Agreements sometimes permit gifts to family members. This facilitates lifetime transfers for estate planning purposes. If gifts are permitted to family members, the donees are generally required to become parties to the agreement and are subject to the same limitations on transfer as the donor.

9. Use Of Independent Trustee and Enforcement of Buy-Sell Agreement. Many Buy Sell Agreements employ trustees to insure that the terms of the Buy-Sell Agreement are performed by all parties. The trustee may be designated as the beneficiary of any life insurance policies used to fund the agreement and may also hold the stock certificates executed in a form such that they may be transferred.

10. Manner Of Sale--Mandatory Or Optional. The parties must decide whether the sale upon the occurrence of each triggering event should be mandatory, optional (a put right), or optional with the entity (a call right). This decision depends upon the personal preferences of the parties, but may affect the estate tax valuation of a decedent interest. Be very careful with using mandatory purchases with cross-purchase arrangements. If, for whatever reason, the purchasing shareholders would prefer at that time to use a corporate redemption, constructive dividends may result. To avoid that potential problem, consider giving the shareholders the first right to purchase the shares, giving the corporation the second right to purchase the shares, and finally, if the corporation does not purchase the shares, requiring that the individual shareholders purchase the shares.

III. IMPORTANT CONTRACTUAL PROVISIONS

1. Written Agreement. If the Buy-Sell Agreement qualifies as a shareholder agreement under applicable law, It must be in writing signed by all shareholders and made known to the corporation. It is most commonly signed by the corporation as well as the shareholders.

2. Term. Unless the Buy-Sell Agreement provides otherwise, it is valid for ten years in the case of a corporation. It is the intent of most parties to Buy-Sell Agreements that the term of the agreement be longer than ten years, so it is important that the term be specified in the agreement.

3. Legend on Stock Certificates. The Buy-Sell Agreement must require that all stock certificates and other certificated securities have a conspicuous note that the shares are subject to the agreement. This legend must include the following:

“These shares are subject to the provisions of a shareholders= agreement that may provide for management of the corporation in a manner different that in other corporations and may subject a shareholder to certain obligations or liabilities not otherwise imposed on shareholders in other corporations.”

Any purchaser of shares who, at the time of purchase, did not have knowledge of the existence of a shareholders= agreement may be entitled to rescission of the purchase. A purchaser is deemed to have knowledge of the existence of the agreement if its existence is noted on the certificate.

4. Signatures by Spouses. If the shareholders intend that the Buy-Sell Agreement bind their spouses, the spouses should also be parties to the agreement. This is sometimes overlooked and more often simply avoided because of a reluctance to involve the spouse in Abusiness matters.@ In a community property state, unless the stock is clearly identified as separate property, the failure to include the spouse as a party can have disastrous consequences and can involve the corporation in bitter divorce proceedings. If the spouse is asked to be a party to the Buy-Sell Agreement and the spouse=s community property rights and interests become subject to the agreement, it is important to provide for the spouse to have separate legal counsel review the agreement on the spouse=s behalf. Otherwise, the spouse may claim that he or she was never advised of the contents of the agreement, was just told to “sign it,” and was fraudulently induced to sign the agreement. The professional who prepared the Buy-Sell Agreement may then be subject to a claim that the professional had a conflict of interest because the professional represented both husband and wife, was deemed to be representing the community, or did not clearly advised the spouse that the professional did not represent the spouse. Further, the professional may be subject to a claim by the shareholder or the corporation (if the professional was representing both, as often happens) for failure to address conflict of interest issues with the spouse or to insure that the Buy-Sell Agreement is specifically enforceable against the spouse.

5. Voting Agreements; Voting Trusts. Voting Agreements and Voting Trusts are sometimes included as part of a Buy-Sell Agreement. Voting Agreements and Voting Trusts are governed by a separate provision of the law from shareholder agreements and are required to have specific provisions included in them. They generally provide for the manner in which shares are to be voted under various circumstances. If they are included in a Buy-Sell Agreement, it is important that the statutory requirements be met, including a separate legend on the corporation=s stock certificates addressing them.

6. Enforceability; Arbitration. The Buy-Sell Agreement should provide for the manner in which it may be enforced. First, it is important that the Buy-Sell Agreement provide for injunctive relief in the event of any attempt to violate the terms of the Buy-Sell Agreement, such as an attempt to transfer shares in violation of share transfer restrictions. Second, it is often advisable to provide for arbitration of any dispute, in order to expedite resolution of the dispute and limit costs and because the terms of the Buy-Sell Agreement and relationship of the shareholders may be confidential.

IV. VALUATION METHODS COMMONLY USED IN BUY-SELL AGREEMENTS.

1. Importance of Agreement on a Valuation Method. The Buy-Sell Agreement should include a fair and flexible valuation method for many reasons, including the following:

A. It determines the amount to be received by a selling shareholder;

B. It prevents or resolves disputes; and

C. It is a basis for fixing an estate tax value of the stock (agreements containing mandatory buy-sell provisions do not necessarily fix the estate tax value of a deceased shareholder's shares: the price established in the agreement is only one of the valuation factors the IRS considers. Note that the estate must be obligated to sell and the price must be fixed or determinable by a formula. A purchase option by the corporation or surviving shareholders to acquire the estate's stock may also qualify as an "obligation to sell")

2. Alternative Valuation Methods.

A. Agreed/ Fixed Price. Using a fixed price is dangerous, since it will not address an increase or decrease in value after the agreement is initially executed. It is quite common for fixed price agreements to provide that the price is reset annually or on some other periodic basis; however, this rarely happens as a practical matter.

B. Book Value. Book value rarely reflects fair market value because it ignores the corporation's earning potential. Furthermore, book value does not even reflect true asset value because of depreciation.

C. Capitalization of Earnings. Another common valuation method is a capitalization of earnings. The value is obtained by multiplying the corporate earnings by a capitalization factor. Capitalization of earnings may yield unreasonable values for close corporations because expenses, such as salaries and payment of personal expenses, are often determined for personal tax planning purposes rather than business needs of the corporation.

D. Appraisal. Appraisals are generally considered the fairest method of valuation, although they are also considered the most expensive. One advantage to the appraisal method for estate tax purposes is that it allows the estate to argue for appropriate minority and marketability discounts.

E. Formula Based on Future Earnings. A formula based on expected future earnings (earn out) may be used, although it has several disadvantages, including not bringing closure on the issue, engendering disputes over how earnings are calculated (the fairness of owner compensation, etc.) and how the business was managed, and not having a valuation that can be used for estate tax purposes.

F. Push Pull Method. A push pull provision allows any shareholder to require that the other shareholder or shareholders buy his interest or sell him their interests at a price he sets. The push pull generally favors the shareholder with the deepest pocket and the shareholder who is in control of or most knowledgeable about the business.

V. COMMON FUNDING METHODS.

1. Sinking Funds. The corporation or shareholders may make a business decision to use corporate assets or to set aside a sinking fund. The sinking fund method may be required if one or more shareholders are uninsurable, or if premiums would be prohibitively excessive due to the age or health of certain shareholders. There may be limits on the ability of the corporation to use sinking funds to purchase stock in the event the corporation does not have a surplus or is insolvent.

2. Life Insurance; Redemption.

A. Use of Corporate Funds. A corporate purchase agreement permits the use of corporate funds to purchase the stock or to pay premiums on life insurance policies purchased by the corporation for the purpose of funding the agreement. The insurance premiums are nondeductible.

B. Tax Brackets. If the shareholders are in a higher federal income tax bracket than the corporation, the shareholders under a cross-purchase agreement will need more pre-tax dollars in order to pay the premiums, even if the amount of the premiums can be distributed to the shareholder as salary and be deducted by the corporation as reasonable compensation.

C. Funding by Corporation. The corporate purchase agreement keeps the funding arrangements within the control of the corporation, so that each stockholder need not rely on the other stockholders' ability to accumulate the necessary funds with which to purchase the stock or to pay insurance premiums on policies on the lives of other stockholders.

D. Dividend Treatment. Very detailed requirements must be satisfied in order for a corporate redemption to avoid being treated as taxable dividends rather than as a sale or exchange which may avoid any income tax to selling shareholders because of the step-up in basis at death. The deceased shareholder may not be able to satisfy those requirements if other family members also own stock in the corporation under the attribution rules.

E. Simplification of Insurance Program. If the corporate purchase agreement is to be funded with insurance, the corporation needs insurance policies equal only to the number of stockholders participating in the corporate purchase agreement.

F. Increase in Corporate Value. If the corporation's purchase is funded by insurance, the insurance policies constitute a corporate asset and this may increase the value of the stock owned by each stockholder for federal estate tax purposes (and may be considered in determining the purchase price for the shares of a deceased shareholder=s stock).

G. Surplus and Solvency. State law may prevent the corporation from redeeming shares because of its need to comply with surplus, solvency, and other requirements.

3. Life Insurance; Cross-Purchase Agreement.

A. Increase in Cost Basis. Under a cross-purchase agreement, each purchasing shareholder receives an increased cost basis in the shares purchased from the selling shareholder. This factor is not critical if the purchasing shareholders intend to hold their stock until their respective deaths, but it may be critical if the purchasing shareholders intend to sell their shares during their lifetimes.

B. No Corporate Creditors. Proceeds of insurance received by stockholders are removed from claims of corporation's creditors.

C. Funding Availability. Cross-purchase funding is available where a corporate deficit or inability to create a surplus precludes a redemption.

D. Insurance Premiums Are Paid with After-Tax Dollars. Shareholders pay for insurance premiums on policies to fund the cross- purchase agreement with after-tax individual rate dollars, out of their personal incomes. Assuming the shareholders' salaries can be increased and still remain reasonable compensation deductible by the corporation, the shareholders' income tax rates should be compared with that of the corporation to determine the lowest after-tax cost of paying insurance premiums.

E. Cross Purchase Plan Can Avoid Adding Values Subject to Estate Tax. Under typical buy-sell agreement provisions, at the death of a shareholder, his or her stock will be purchased by the corporation or by the surviving shareholders. This arrangement may have various substantial disadvantages. First, as each shareholder dies, increased funding will be required, because he or she will own a greater interest in the corporation. Second, each surviving shareholder would own a greater value in the corporation, and the successively greater values will be subject to estate tax.

F. Split Dollar. Split-dollar life insurance may be used under a cross-purchase agreement to assist the shareholders in acquiring insurance on the lives of the other shareholders at a lower aggregate after-tax cost than if the shareholders each merely acquired insurance on the lives of the other shareholders on their own. Under the typical split-dollar arrangement, the corporation pays the portion of the annual premium equal to the annual increase in the cash surrender value of the policy, and the employee pays the balance, if any, of each year's premium. Upon the insured's death, the corporation recovers the full amount of the premiums it paid, and the insured's beneficiary receives the balance of the proceeds.

4. ESOP=s.

A. Qualified Plans. ESOP=s are qualified retirement plans that have as their primary objective the acquisition of corporate stock to be held for providing retirement benefits for corporate employees. ESOP=s can provide a market for stock of a shareholder who wishes to sell but has not outside market and contributions to an ESOP are currently deductible.

B. Employee ownership. Eventually employees of the company will own a significant interest in the company and have substantial voting power.

VI. DISABILITY PLANNING AND SALARY CONTINUATION PLANS.

The family business owner may wish to have a formal disability plan, to facilitate the deductibility of disability payments from the business to the disabled donor. Salary continuation plans allow for disability payments while minimizing risk of being treated as unreasonable compensation. The business owner should coordinate the business=s salary continuation plan with its disability policy (for example, make sure that policy does not provide that benefits will be reduced to the extent the company has salary continuation plan; coordinate payment obligations with funding availability under policy being careful to maintain policy as “informal” funding vehicle). The present value of company's obligation to pay salary continuation right for life expectancy should be considered in valuing stock of company--which can create sizable valuation adjustment. A salary continuation plan assures cash flow for the lives of the business owner and spouse without having to retain the company's ownership to assure that result. The salary continuation right probably is included in the employee's estate if he or she predeceases the spouse. The interest should qualify for the marital deduction as long as no portion of the payments are payable to anyone other than the surviving spouse. The salary continuation right should not be included in the estate of the second spouse to die as long as the right does not pass to anyone after the deaths of both spouses. Payments must constitute reasonable compensation to be deductible to the company for federal income tax purposes. Unfunded deferred compensation is generally not taxable to the employee for federal income taxes until paid. For employment tax purposes, deferred compensation is generally taxable at the earlier of the time the services are rendered, or the right to deferred compensation becomes nonforfeitable.

VII. MISUSE OF BUY SELL AGREEMENTS

1. Treating a Buy Sell Agreement as Static. A Buy Sell Agreement is an organic document that must be reviewed and, if necessary, revised on a regular basis during the life of the business. All businesses experience change, and even the most carefully drafted Buy Sell Agreement cannot anticipate every circumstance that may arise. In particular, Buy Sell Agreements that provide for a fixed value of the business or provide that the owners will meet periodically to set a fixed value for the business are potential traps if not reviewed and updated regularly. The risk of an unintended consequence, such as an obligation to purchase another owner’s interest for far more (or less) than its actual worth, is very real if the Buy Sell Agreement is treated as a static document. In such a situation, the only thing worse than not having a Buy Sell Agreement is having a Buy Sell Agreement that causes the wrong result.

2. Leaving the Difficult Decisions for Later. During the process of preparing a Buy Sell Agreement, it is important to consider all of the issues that may arise in the course of the life of the business, and not just those that are easy to resolve or that do not require difficult decisions. If, for example, management succession is an issue for the business, a Buy Sell Agreement that skirts this issue but provides for the purchase of the majority owner’s interest upon his death or disability could postpone a decision on management succession until the person best able to make it is dead or incapacitated.

3. Ignoring Spouses or Other Invested Parties. It is common to see Buy Sell Agreements that provide for the purchase of the community property interest of an owner’s spouse that are not signed by the spouse (or that is signed by the spouse without legal representation). Too often, there is reluctance to confront the issue with the spouse directly, either because the issue of divorce is too difficult to raise with the spouse or because the valuation of the spouse’s interest is unfair. As noted above in this outline, having a Buy Sell Agreement with a punitive buy out provision that is signed by a spouse under duress is one of those situations where it is worse to have the Agreement than to not have it: it is not enforceable and shows a bad intent. Similarly, having a Buy Sell Agreement that is intended to address the interests of other parties, including children and key employees, that they are either unaware of or that they do not understand, can cause surprise, frustration and anger when finally known to them, often at a critical time for the business. A business owner should seriously consider the merits of including provisions in a Buy Sell Agreement that he or she is unwilling to discuss with his or her spouse or other invested parties during the planning stage, but is willing to have them discover when there is a crisis, such as upon the business owner’s death.

4. Not Integrating Buy Sell Agreement with Corporate Governance Documents. It is critical to have a qualified professional review the organizational and governance documents of the business as well as relevant law to determine if the intended terms of the Buy Sell Agreement are in conflict with such documents or are void or voidable under the law. For example, a Buy Sell Agreement that provides for the purchase of a physician’s interest in a professional association by a non-physician is illegal. If the Certificate of Formation of a corporation provides that the shareholders have preemptive rights, a Buy Sell Agreement that ignores this provision may be unenforceable. The Buy Sell Agreement must be integrated with the organizational and governance documents of the business.

VIII. TAX PLANNING TECHNIQUES IN CONNECTION WITH THE BUY SELL AGREEMENT.

1. How to Reduce Taxes. The business owner, perhaps more than any other type of client, may be able to achieve enormous estate tax savings with proper estate planning. Central to these savings programs would be gifts or sales or "opportunity transfers" to shift future appreciation. The REAL estate tax problem is not the large amount of estate taxes that will be payable on the current value of the business, but the estate taxes that will be payable on the future growth of the business--with compounding. For example, a business worth $1,000,000 currently that is growing at 12% per year would grow to approximately $9.6 million in 20 years. Shifting a substantial part of that future growth can result in enormous estate tax savings. GRATs may be a particularly appealing method of shifting a substantial part of the future growth without making large current taxable gifts.

Motivating business owners to start the business succession planning process can be very difficult. The most important element of all of the steps in the business succession planning process is to act.

2. Use of Estate Planning Techniques. Typical bypass trust/marital deduction planning techniques should be used (to defer estate taxes until second spouse's death and to take advantage of both spouses' exemption equivalent amounts). Leave flexibility for allocating business interests to either the bypass trust or marital deduction share. If a business interest is ultimately left to only certain family members, consider whether that bequest will be made at first spouse's death or at second spouse's death. If at first spouse's death, consider how to fund estate taxes at first spouse's death. If at second spouse's death, consider using separate QTIP trust for the business interest.

3. Valuation Discount for Partnership Interest. The IRS often argues that partnerships should be ignored for estate and gift tax valuation purposes because they have no non-tax business purpose and have no economic substance. Section 2703 provides that restrictions on the right to sell or use transferred property should be ignored for valuation purposes unless the restrictions meet a safe harbor test. The IRS has tried to argue that ''2703 may restrict the availability for discounts of limited partnership interests. Several courts have rejected the IRS's position, reasoning that the transferred interest is a partnership interest rather than partnership assets, so ''2703 should not apply to ignore inherent restrictions on the use of the underlying partnership assets. Several cases have applied section 2036 to transfers of limited partnership interests where the donor-parent retained total control of the partnership activities, and where much of the partnership income was distributed to the donor. Factors suggesting the application of section 2036 include ignoring partnership formalities, parent continuing to enjoy all the benefits of partnership assets, commingling of partnership and personal funds, depositing partnership income in personal account, using partnership checking account as personal account, using residence in partnership without paying rent, and if relationship to assets remains the same after assets are transferred to the partnership. Estate of Schauerhammer v. Comm'r, T.C. Memo 1997-242; Estate of Reichardt v. Comm'r, 114 T.C. 144 (March 1, 2000); see Estate of Strangi v. Comm'r, 115 T.C. No. 35 (Nov. 30, 2000) ('' 2036 raised too late to be considered by court but court invited scrutiny of future partnerships under '' 2036). The IRS argues that a gift arises on creation of a family limited partnership if the assets contributed by parent to the partnership exceed the value of the partnership interests received by parent. Several courts have rejected this argument.

The amounts of discounts allowed in the reported cases have varied dramatically.

IX. USE OF BUY SELL AGREEMENTS BY PRIVATE EQUITY INVESTORS.

Private equity investors employ Buy Sell Agreements for several purposes, including:

(a) limiting the independence of management;

(b) controlling future sales of equity;

(c) defining an exit strategy;

(d) setting financial goals and imposing a system of rewards and penalties for achieving or failing to achieve those goals.

1. Limiting the Independence of Management. Private equity investors routinely request to participate in major business decisions, often requiring the business to obtain their consent to any major expenditures, borrowings, contractual commitments, acquisitions, sales or restructuring as well as any issuance of additional ownership interests (although it is non uncommon for a pool of ownership interests to be set aside for employees as a performance incentive). They are often guaranteed one or more seats on the Board of Directors or Managers and may have the right to take control of the Board in the event the business does not meet predetermined performance goals. They use a Buy Sell Agreement to insure that they have these rights contractually, including in the Buy Sell Agreement voting provisions that guarantee their voting rights, rights of first refusal, anti-dilution and vesting provisions that guarantee their equity position, and "triggers" that allow them to take control should the business stumble. They will often include similar provisions in the entity's governance documents to cover all bases.

2. Controlling Future Sales of Equity. Private equity investors expect to control future sales of equity in order to minimize dilution to them. They may also wish to direct future rounds of equity financing to themselves or other private equity investors they desire to cultivate. Although it is not uncommon for a pool of ownership interests to be set aside to be used by management as a performance incentive for employees, the size of this pool is usually relatively small. Various tools are used by the private equity investors to maintain their control over future sales of equity, including employing a Buy Sell Agreement to provide for anti-dilution, preemptive rights, rights of first refusal, conversion rights (e.g., non-voting to voting or preferred to common), the issuance of options or warrants (which are evidenced by a separate instrument), and "claw back" rights.

3. Defining an Exit Strategy and Setting Financial Goals. Private equity investors commonly make an investment with a specific exit strategy in mind. The exit strategy may be to sell the business, merge, or undertake a public offering, and usually is intended to be achieved within a relatively short period of time. A Buy Sell Agreement may be used to insure that this exit strategy is implemented, by giving employee/owners specific goals to achieve and rewarding or penalizing them for achieving or not achieving those goals. Rewards may include the issuance of additional ownership, the removal of restrictions on management, conversion of debt to equity or preferred stock to common stock, and so forth. Penalties may be the loss of ownership or the right to acquire ownership, the loss of control over management decisions, or additional dilution. The Buy Sell Agreement is used as a tool to achieve the desired goals and implement the exit strategy of the private equity investor.

XII. CONCLUSION.

A well drafted and comprehensive Buy Sell Agreement is critical to any business, and should address the purchase and sale of ownership under various circumstances, business and succession planning, particularly in the context of a family owned business, retirement and estate planning, and dispute resolution procedures. It should tick like a dependable watch, be checked regularly, and be properly maintained. It should never blow up.

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Bruce M. Mitchell is the firm’s Chief Executive Officer and a Shareholder in its Corporate & Securities practice. He has been recognized as one of the Best Lawyers in America, a Texas Super Lawyer and one of San Antonio's Best Lawyers. Bruce can be reached at 210.224.2000 or bmitchell@obht.com

Can Construction Liens Die an Early Death?

Charles A. Japhet — Fri, 01 Feb 2008 22:08:00 GMT

Time Deadlines in the Enforcement or Removal of Liens

One of the biggest aggravations a general contractor or owner faces in the construction of a project comes if they receive a dreaded lien notice in the mail. Often, this is the first indication that a valued subcontractor or trusted general contractor may be in financial straits that can affect the progress and timely completion of a project. Texas law is clear on the time deadlines involved in dealing with lien claims. It is equally clear that it is imperative for the lien claimant to come to a resolution or timely file a lawsuit to protect its lien rights.

In most cases, when a letter notifying a property owner and/or the general contractor for a project is received, those parties have ample time to protect themselves by withholding funds from payments to lower tier contractors. Chapter 53.056 of the Texas Property Code requires that written notice of any unpaid balance be sent to the general contractor by at least “the 15th day of the second month following each month in which all or part of the claimant’s labor was performed or material delivered.” In laymen’s terms, this means the notice must be given on the fifteenth of the month which is approximately six weeks after the end of the month in which the work was done. This same notice must be given to the owner by the fifteenth day of the next month (approximately ten weeks after the end of the month when the work was done). Thus, on a thirty day billing cycle, if a payment is not quickly received, a general contractor should expect a notice letter. The owner’s notice lets the owner know, a month later, of the dispute between the subcontractor and the general contractor. The notice letter serves to alert the owner of potential problems with his general contractor and to allow it to protect itself by retaining the funds claimed until there is a resolution.

As many are aware, if the parties do not solve the issue after receipt of a notice letter, the next step is the filing of an affidavit claiming a mechanic’s and materialman’s lien on the property for the project. Under Texas Property Code Section 53.052, for commercial projects, the deadline for this filing is the 15th day of the fourth month “after the day on which the indebtedness accrues” and for residential projects this deadline is the 15th day of the third month “after the day on which the indebtedness accrues.” Under Property Code Section 53.053, “indebtedness accrues” typically on the last day of the month when labor was performed or material was furnished under the contract or agreement between the parties or on the last day of the month in which such a contract was terminated. Finally, notwithstanding the required “15th of the month” filings, under Property Code Section 53.101, to trap funds held by an owner, the claimant must file his lien affidavit within thirty days of the completion of the project

If you are the owner or general contractor of a project on which a claimant has filed a lien affidavit, the questions then arises as to what you are to do once such a claim is received? At that point, under Texas Property Code Section 53.084, an owner or general contractor is typically only liable for the ten percent retainage which is required to be held until thirty days after completion and for “trapping” any funds due to be paid after the notice letter has been received from a claimant. If the owner fails to hold onto these funds, the owner is personally liable and the project property is subject to the lien claim up to the amount of the money which should have been withheld. However, if the owner has properly withheld funds and the lien claimant persists in failing to release the lien affidavit filing, there are two distinct options – one proactive and aggressive and the other a waiting game.

The proactive option involves the owner (or any other party opposing the filing of a lien) either filing a bond to discharge the lien under Property Code Section 53.171 and/or filing an action under the terms of Property Code Section 53.160 to have the lien claim summarily removed. The bond filing simply removes the real estate lien and allows the claimant to pursue the matter as a personal civil matter against the owner. In the summary removal action, the innocent party, who has otherwise complied with all provisions of the law, is provided a process whereby it can have an invalid mechanic’s lien removed relatively early. At the hearing on such a matter, it is the lien claimant who bears the burden of proving that it timely furnished all notices and timely filed all lien claims. The party opposing the lien filing bears the burden of showing that it withheld all required monies after receipt of any notices. The court is required to “promptly” rule on whether the lien claimed in the lien affidavit should be removed. The claimant does have the option of having this order stayed but only if the lien claimant posts a bond for the attorneys’ fees and costs likely to incurred by in any future proceedings. Additionally, it is important to note that if a lien claim by a subcontractor does proceed to a lawsuit, the lien foreclosure action must be defended at the expense of the general contractor.

The waiting game option is available to those who are not actively seeking to sell the property in question. This takes advantage of the fact that the time period for bringing an action to foreclose on non-residential property that is the subject of any lien filing claiming a mechanic’s or materialman’s lien is the later of two years after the deadline for filing a lien affidavit or “one year after completion, termination, or abandonment of the work under the original contract.” For residential property, both limitation periods above are reduced to one year.

“Time is of the essence” is not just a term to be used in the purchase and sale of real property. Lien claimants, general contractors and owners must be fully aware of the deadlines by which they can assert their rights to protect themselves under the law. Ultimately, the law requires timely resolutions to protect real property from encumbrances which can mar titles in years to come. An aggressive, informed action by a party who has complied with the law is the best means of protection.

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Charles A. Japhet is a shareholder in the Real Estate practice group of Oppenheimer, Blend, Harrison and Tate, Inc. He has extensive experience in commercial and residential real estate transactions and litigation. He may be reached at 210.224.2000 or via email at cjaphet@obht.com.

The purpose of this article is solely informative. The material contained herein should not be in any manner considered legal advice. This communication does not create an attorney-client relationship. Legal advice is rendered only by consulting with an attorney.

Warranty? What Warranty? - Implied Warranties in Texas

Charles A. Japhet — Tue, 01 Jan 2008 22:11:00 GMT

Many contractors or tradesmen think that they can avoid or limit any warranty they may be liable for by simply not addressing warranties in their contracts. Actually, just the opposite is true. Under Texas law, the best way to limit warranty liability is by expressly dealing with the issue in a written contract.

While there are a number of implied warranties recognized under the law, in contractor/subcontractor relations, the following implied warranties are most commonly at issue:

the implied warranty of good and workmanlike performance;
the implied warranty of merchantability; and
the implied warranty of fitness for an intended purpose.

Texas courts have found that these warranties are included in any contract between the parties whenever necessary to ensure that the parties receive that for which they bargained. It is the quality and finish of the end product of the contract for goods or services that determines whether there has been a breach of warranty.

Prior to 1968, Texas courts recognized the doctrine of caveat emptor, or “let the buyer beware,” in most new construction cases. Since that time, courts have recognized that builders and contractors should impliedly warrant that their work has been constructed in a good, workmanlike manner. The Texas Supreme Court has held that in order to establish a breach of the implied warranty of good and workmanlike construction, the contractor must fail to construct a building or home in a manner generally considered proficient by those capable of judging such work. The implied warranty of good and workmanlike construction extends only to those defects that are unknown to the buyer, it does not include those defects, even if substantial, known or expressly disclosed to the buyer.

Texas law also recognizes the implied warranties of merchantability and fitness for a particular purpose in Section 2.314 of the Texas Business and Commerce Code. That Section provides that “a warranty that the goods shall be merchantable is implied in a contract for their sale if the seller is a merchant with respect to goods of that kind.” Guidelines for determining whether an item is “merchantable” are included in that Section. Typically, however, for a breach of this warranty, the goods in question must have a defect at the time they left the builder or manufacturer which renders them unusable in the expected course of business.

This is closely akin to the implied warranty of fitness for a particular purpose which is discussed in Texas Business and Commerce Code Section 2.315 where it provides that this implied warranty exists:

[w]here the seller at the time of contracting has reason to know any particular purpose for which the goods are required and that the buyer is relying on the seller’s skill or judgment to select or furnish suitable goods, there is, unless excluded or modified, under the next section an implied warranty that the goods shall be fit for such purpose.

Avoiding the imposition of the implied warranties under contract is important because there is a four year statute of limitations governing such implied warranties. This time period may be extended in some circumstances if the defect is not discoverable until well-after completion. The real world effect of this is that a contractor may be liable for a defect many, many years after completion. Thus, dealing with these issues in contract discussions is extremely important.

The implied warranty of merchantability can be disclaimed by use of the term “merchantability” in a disclaimer which is conspicuous. The implied warranty of fitness for a particular purpose can be disclaimed by general language so long as it is also a conspicuous disclaimer. In both these situations, Texas Business and Commerce Code Section 2.316(c) may also allow the disclaimer of implied warranties in the following ways:

by using expressions such as “as is”, “with all faults” or other language which in common understanding calls the buyer’s attention to the exclusion of warranties and makes plain that there is no implied warranty; and
when the buyer before entering into the contract has examined the goods or the sample or model as fully as he desired or has refused to examine the goods … [where such examination] ought in the circumstances to have revealed to him [the defect];
… by course of dealing or course of performance or usage of trade.

Reliance on items 2 and 3 above should only be made as a last resort when the contractual language is insufficient. In every case, crafting a clear contract expressly dealing with (or disclaiming) warranty issues is the better course.

The parties may avoid application of the implied warranty of good and workmanlike construction when the parties’ agreement provides for the manner, performance or quality of the desired construction. This requirement can be accomplished by inclusion of the appropriate language which may be as simple as, “[Builder] warrants its product against failure due to defective workmanship or materials for a [time period] from completion date. [Builder’s] liability shall be limited to the written warranties specified herein.”

While implied warranties are important in keeping business transactions above-board and protecting purchasers from unscrupulous dealings, the better course, in all circumstances, is to deal with warranty issues directly and to freely discuss them prior to contract. It is always better for parties to a contract to decide the terms of their agreement than to have to endure a costly fight over it later and have a group of strangers decide the possible future of a business.
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Charles A. Japhet is a shareholder in the Real Estate practice group of Oppenheimer, Blend, Harrison and Tate, Inc. He has extensive experience in commercial and residential real estate transactions and litigation. He may be reached at 210.224.2000 or via email at cjaphet@obht.com.

Limiting Liability By Following Retainage Law

Charles A. Japhet — Sat, 01 Dec 2007 22:22:00 GMT

One of the most commonly misunderstood aspects of construction contracts is why it is necessary to keep retainage from payments to contractors. Most contractors see this as a method for the owner to deny them money that has already been earned. Many owners see it as a nuisance – and agree with the contractors that it is a denial of money already earned.

However, when the owner pays the contractor all money earned, without withholding retainage, the owner exposes himself to a great deal of liability. Owners, or general contractors acting for owners, who enter into contracts for construction must realize the benefits and necessity of keeping ten percent of moneys earned by subcontractors.

“Retainage” is defined by Texas statute as the “amount representing part of a contract payment that is not required to be paid to the claimant within the month following the month in which labor is performed, material is furnished, or specially fabricated material is delivered.” Withholding retainage is a matter that is statutorily mandated. Texas Property Code Section 53.101 states:

“During the progress of work under an original contract for which a mechanic’s lien may be claimed and for 30 days after the work is completed, the owner SHALL retain:

10 percent of the contract price of the work to the owner; or
10 percent of the value of the work, measured by the proportion that the work done bears to the work to be done, using the contract price or, if there is no contract price, using the reasonable value of the completed work. ”

The use of the word SHALL makes retention mandatory. Failure to retain funds exposes the owner to the possibility that he will have to pay the amount of the retained funds twice – once to the contractor from which he should have retained funds and once to a lien claimant who files a lien on the property after not getting paid. To clarify matters, it is not just the general contractor or a subcontractor who may be legally liable to satisfy a lien claimant. Rather, it is the owner who may be ultimately liable to the claimant.

The limitations on liability and protections given to an owner who follows the requirement to withhold retainage are also provided by statute. Section 53.084 specifically provides an owner is not liable for any amount paid to the original contractor as long as he has properly withheld required funds.

This protection is somewhat tempered once an owner receives a “fund trapping” notice. A “fund trapping” notice is a notice sent by a subcontractor, within proper time limits, prior to filing a lien affidavit, in which the subcontractor is required to notify a property owner of his claim and to notify the property owner to withhold funds from the contractor who is claimed to be delinquent. Upon receipt of such notice, the owner is required to withhold funds from that contractor or subcontractor until the claim is otherwise paid or settled. Failure to do so will subject the owner’s property to a lien and could subject the owner to personal liability. The owner’s remedy here is simply - withhold paying whatever the disputed amount might be. If the disputed amount is in excess of what is owed to the contractor or subcontractor being paid, and the owner has properly withheld retainage, the owner is protected.

The lesson to be learned is that typically an owner contracting for improvements can protect himself from being liable for any amount above his contract amount simply by following Texas law. Withholding retainage limits any claim to the amount retained and withholding further payment after receipt of a fund trapping notice will almost always prevent liability above what the contractor was owed. When entering into contract negotiations and when making progress payments during construction, the question of whether or not to withhold retainage should never be an issue – it must be mandatory.
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Charles A. Japhet is a shareholder in the Real Estate practice group of Oppenheimer, Blend, Harrison and Tate, Inc. He has extensive experience in commercial and residential real estate transactions and litigation. He may be reached at 210.224.2000 or via email at cjaphet@obht.com.

Katy David Receives 2010 Nolan Fellows Award

maria — Mon, 25 Jan 2010 19:43:15 GMT

The American Bar Association Section of Taxation announced the recipients of its 2010 Nolan Fellowships which were awarded during a luncheon at the sections Midyear Meeting in San Antonio on January 23, 2010. Katy David, an Associate in the Tax section of Oppenheimer, Blend, Harrison and Tate, Inc., was one of six attorneys to receive the national Outstanding Young Tax Lawyer award.

Nolan Fellows are young tax lawyers who are actively involved in the ABA Tax Section and have demonstrated leadership qualities. David, who is the only attorney selected from the State of Texas, was recently certified by the Texas Board of Legal Specialization in Tax Law. For the past six years she has also been named a Texas Rising Star by Law & Politics and the publishers of Texas Monthly magazine.

Stanley Blend, Chairman of the Board and Practice Group Leader for the firm’s Tax practice, stated “The American Bar Association Section of Taxation is the largest professional association of tax lawyers, with more than 23,000 members nationwide. For Katy to be one of six selected from the entire U.S. is a prestigious honor and a clear reflection of her leadership skills and passion for the profession she represents”.

Firm Serves Its Sixteenth Year In United Way Days of Caring Project

admin — Wed, 13 Jan 2010 17:12:11 GMT

For the past sixteen (16) years, Team Oppenheimer Blend has been stepping up to lend a hand to the United Way as they host their “Days of Caring” initiative. The annual city-wide project helps connect nonprofit agencies with local businesses that are willing to devote a day to helping the nonprofit complete special projects.

Days of Caring 2009 was held this past October and team members from Oppenheimer, Blend, Harrison and Tate, Inc. were there ready to roll-up their sleeves and assist this year’s charity of choice - the Bexar County Detention Ministries, which serves and ministers to formerly incarcerated individuals. Their mission is to offer clients the opportunity to further their education and gain financial independence by becoming gainfully employed. They also assist with such tasks as Texas identification, birth certificates, food, clothing, and transportation for employment.

This year’s project consisted of organizing the agencies "Clothes Closet", which is used to provide clients with business attire, winter apparel, children’s clothing and household goods. In true volunteer spirit, and in the firm’s usual team format, a great effort was put forth - leaving the agency with a boutique style facility ready to showcase the many donations received from kind hearted San Antonians. Leading the team’s effort once again was Gloria Borrego along with Ruth Bush, Melanie Kenworthy, Ada Gordon, Sabrina Lewis, Alice Serna and Thelma Perales.

The firm is proud to be a long time supporter of the Day’s Of Caring initiative. We are equally proud and grateful to the Oppenheimer Blend team members who gave up a day to lend a hand to help support someone in need.

For further information please contact our Marketing Department at 210.224.2000.

Firm’s Litigation Team Sees Continued Growth in 2009

admin — Wed, 13 Jan 2010 17:07:28 GMT

During the summer of 2009 Oppenheimer Blend made a move to increase the size of its litigation team by hiring David Ortega as a Shareholder-Elect. The move, which was the result of the firm’s desire to broaden the scope of its litigation expertise, was followed up by two additional Litigation hires. The team expansion, which took place in the last quarter of 2009, included Forrest “Teo” Seger, III - a first year Associate and Elsa Garza -a paralegal with twenty-seven (27) years of legal experience. The firm is pleased to have both Teo and Elsa join its legal team.

Forrest ‘Teo’ M. Seger, III
In its continued commitment to providing top-notch legal services to its clients, Oppenheimer Blend is pleased to announce that Forrest ‘Teo’ Seger, III has joined the firm as an Associate in its Litigation Practice Group. Teo was a participant in the firm’s 2008 Summer Associate Program.

A native of Skidmore, Texas, Teo received his JD from the University of Texas School of Law in 2009. Prior to law school, Teo attended Texas Lutheran University where he received a degree in Political Science.

“While I really like the close-knit family feel of OBHT, the quality of client service was the biggest draw for me,” said Seger. “Teo’s attitude and attention to detail make him a great addition to our firm, and we’re excited to have him onboard,” added Ray Battaglia, head of the firm’s controversy section.

In his spare time, Teo enjoys watching UT football (which he admits he takes too seriously) and spending time on his family’s ranch in Skidmore.

Elsa Garza
Elsa was born, raised and educated in San Antonio. She began her legal career as a receptionist for Hope, Henderson, Hohman, Georges and quickly became the firm bookkeeper, legal assistant and office manager. She continued her career with various San Antonio law firms and solo practioners.

Elsa has always been drawn to litigation. When asked what attracted her most she stated, “I consider going to trial the icing on the cake. But being able to take a case from beginning to end is where you gain the greatest sense of accomplishment.”

She has been married for 28 years and has two children, Joseph Anthony who attends San Antonio College and Sara Elizabeth who is a sophomore at Providence Catholic. Elsa and her husband, Otto, volunteer for Central Catholic and Providence by running the concessions for the athletic events.

In her spare time Elsa serves on the Board of Directors of the Bexar County Women’s Bar Association as the legal assistant director and historian. She is quick to point out that she does have outside interests not related to law. Elsa has always been fascinated by sign language, first taking classes while at college, and hopes to one day earn her certification for sign language interpretation.

For further information, please contact the firm’s Marketing Department at 210.224.2000.

Five Firm Attorneys Named Legal Rising Stars

admin — Wed, 13 Jan 2010 17:02:19 GMT

Five firm attorneys have been selected as San Antonio “Legal Rising Stars” in the December 2009 issue of Scene in S.A. Monthly magazine

The magazine's “Legal Rising Stars" have all been licensed fewer than ten years and represent the best and the brightest up-and-comers in the San Antonio legal community. Nominations for this year's list were only accepted from attorneys who have been practicing for more than 15 years.

OBHT attorneys selected for the honor include:

Debra L. Innocenti
Lauren P. McLaughlin
Lindsay A. Martin
Laura C. Mason
Edward A. Niland, II

This is the fourth year for Laura Mason and the second year for Edward Niland to be honored as a “Legal Rising Star.”

Oppenheimer, Blend, Harrison and Tate, Inc., is a regional business law firm founded in 1969 and is based in San Antonio, Texas. The firm services clients nationally and internationally through a wide range of practice areas including creditors’ rights and bankruptcy, corporate and securities law, business litigation, tax law, real estate transactions, health care law, labor and employment law, and estate planning and probate law.

For more information, please contact the firm's Marketing Department at 210.224.2000.

Mason Named One of SA’s Forty Under 40

admin — Wed, 13 Jan 2010 17:00:50 GMT

Laura C. Mason, a shareholder in the Corporate & Securities practice group of Oppenheimer, Blend, Harrison and Tate, Inc. has been selected as one of San Antonio’s Forty Under 40 for 2009. The annual awards program which is produced by the San Antonio Business Journal recognizes the next generation of young leaders and innovators, such as Mason, who have already made their mark professionally and in the community.

Mason is recognized as a leader among her peers. In 2009, Mason was named for the seventh consecutive year as a Texas Rising Star by Law & Politics and the publishers of Texas Monthly magazine. She also received the Outstanding Young Lawyer Award from the San Antonio Young Lawyers Association, in addition to being honored by Scene in SA Monthly magazine for the fourth time as a Rising Star in the Best Lawyers in SA program. In 2006, Mason received the prestigious Belva Lockwood Outstanding Young Lawyer award from the Bexar County Women’s Bar Foundation.

Mason joined the Firm in 2002. Her corporate practice includes representing start-up and closely held businesses, forming and restructuring of various corporate entities, advising clients with respect to the state and federal tax consequences of business operations and entity selections, and representing companies and individuals in corporate transactions, including asset purchases and sales, mergers, and acquisitions.

When asked about Mason’s most recent accomplishment David Oppenheimer, the firm’s Corporate & Securities practice leader stated: “We are proud of the recognition she has received and couldn’t agree with it more”.

For further information on the firm please contact our Marketing Department at 210.224.2000.

Remembering Our Firm’s Founder, Jesse H. Oppenheimer

admin — Wed, 13 Jan 2010 16:59:40 GMT

After having passed on October 9, 2009, the firm stops to reflect on the outstanding contributions made by its founder to the legal profession and to the San Antonio and South Texas community.

It was in 1969 that Jesse co-founded Oppenheimer, Rosenberg & Kelleher, Inc. – San Antonio’s first practice specific law firm. Known today as Oppenheimer, Blend, Harrison and Tate, Inc., the firm continues to uphold the ethics and beliefs that Jesse founded the original firm upon.

A passionate advocate for human rights and social justice, Jesse was a prolific writer of “letters to the editor,” often published in many national and local periodicals. Within his law firm, attorneys and staff were subjected daily with articles from a wide variety of publications, all “edited” by Jesse with an accompanying handwritten commentary designed to correct what Jesse perceived to be educational lapses of the individual recipient as to the particular subject matter.

Jesse firmly believed every person should give back to their community. Together with his wife, Sue, he established the Jesse H. and Susan R. Oppenheimer Foundation which dispensed generous gifts to a wide range of charities and funded scholarship programs for students at Alamo Community College.

Jesse proudly served his community on the Boards of the Marion Koogler McNay Art Museum (as well as President of that organization); the Robert B. Green Hospital; Santa Rosa Children’s Hospital; the Symphony Society of San Antonio (past President and Chairman); the United Way; the Bexar County Mental Health Association; Children’s Service Bureau; Ursuline Academy; and Saint Mary’s Hall. Jesse was most proud of his idea for and creation of a tax exempt organization which became the Argyle Club designed to support the Southwest Foundation for Biomedical Research.

Jesse had a scholarly grasp of American Foreign Policy and was deeply concerned with the moral responsibility of the United States in an ever changing and inter-dependent world. He served as a Trustee of the Woodrow Wilson International Center of Scholars for 7 years, and on the World Affairs Council of San Antonio.

He was an avid rancher, hunter and outdoorsman. He was a founder and Trustee of the Southwestern Cattle Raisers Foundation (now the Cattle Raisers Museum in Fort Worth). Many of his happiest times were spent on weekends in South Texas with his many friends, and especially his grandsons. It was a special privilege to be included in one of his hunting or fishing ventures and the always interesting and entertaining people he brought together.

We thank Jesse for the impact he had upon each employee of our firm - for his strong leadership, friendship and ability to create positive change in the world around him. He shall forever hold a place in our hearts.

For further information please contact the firm's Marketing Department at 210.224.2000.

Tate Recognized as OBHT American Hero

admin — Tue, 12 Jan 2010 00:06:25 GMT

As we continue our series, “A SALUTE TO OUR VETERANS,” Oppenheimer, Blend, Harrison & Tate, Inc. would like to recognize John H. Tate, II, a shareholder in our firm’s Creditors’ Rights and Bankruptcy Section.

John was born an “Army Brat” at Ft. Bliss, Texas (El Paso) on January 14, 1943, where his father, Charles W. Tate (then a Captain in the Veterinary Corp.), was stationed with a Cavalry Unit. Shortly after John’s birth, his father departed for service and served throughout World War II with the famous “Merrill’s Marauders.” His father’s duties were to provide veterinary services to a large herd of mules used to pack supplies and troops through the jungles of Burma and into China.

As a youngster, John traveled with his family through various Army assignments until his father’s untimely death in 1954. John’s mother returned to Texas to be near family, and settled in San Antonio, Texas.

John attended high school in San Antonio, Texas, and upon graduation obtained an appointment to the United States Military Academy which he entered in July of 1960. John graduated from West Point in June 1964, and then attended the Infantry School and Ranger and Airborne Training in Fall 1964.

John’s initial assignment (1964-1967) was with the Berlin Brigade in then occupied West Berlin. As an Infantry Platoon Leader, John conducted night patrols into East Berlin and lead convoys through the land access routes from West Berlin through East Germany. In addition, every fourth month (relieving the Soviet Guard Troops) he was officer-in-charge of the guard unit at Spandau Prison for the then remaining World War II Nazi Nuremberg war crimes prisoners, including Rudolph Hess, Albert Speer, and Baldur Von Schirach. John later became the Aide De Camp to the United States Commander of Berlin and met regularly with Mayor Willy Brandt and other Berlin authorities. During this time of tension in Berlin, John’s duties as Aide-de-Camp included assisting the U.S. Commander in hosting many dignitaries who visited West Berlin, including Queen Elizabeth and Prince Phillip, Vice-President Hubert Humphrey, comedian Milton Berle, actor Douglas Fairbanks, Jr., and many other politicians and dignitaries.

In June 1967, John was reassigned briefly to the Presidio in San Francisco, California. John then attended and was the honor graduate of the Aerial Reconnaissance School at Fort Holabird, Maryland, following which he was assigned to the First Brigade, Fifth Mechanized Infantry at Ft. Carson, Colorado. In July of 1968, John’s Brigade transferred en masse to Quang Tri Province, Vietnam, where they were attached to the 3rd Marine Division. John served in combat operations in the Republic of Vietnam from July 1968 until September 1969. While in Vietnam, he was awarded various Vietnamese decorations, as well as a Bronze Star and Air Medal. John returned from Vietnam in early September 1969 and was discharged from active duty.

John entered the University of Texas, School of Law, in September 1965, and graduated in 1972, when he joined the Firm as an associate attorney. John’s entire legal career has been with OBHT.

Since his discharge from the Army, John has remained interested and active in both military and West Point affairs. He and a group of Vietnam Veterans of all ranks and services raised money for and established the Vietnam Veterans Memorial in San Antonio, Texas. In addition, John serves on the Board of Directors and is Vice President of the West Point Society of South Texas, and was recently elected to a three year term as the South Central States Regional Advisor to the Board of Trustees of the West Point Association of Graduates.

For further information about the firm please contact the firm's Marketing Department at 210.224.2000.

Building Leaders Who Make A Difference

admin — Mon, 11 Jan 2010 23:36:54 GMT

Leadership development is a key component to business success because it works to address current and future needs of an organization. Knowing the importance of this fact Oppenheimer, Blend, Harrison and Tate, Inc. annually selects team members to participate in two well known community leadership development programs in order to heighten their leadership skills and business savvy.

W. Richey Wyatt, a shareholder in the firm’s Corporate and Securities Practice Group, is a member of the 2009 class of Leadership San Antonio, and Edward A. (Ean) Niland, an associate in the firm’s Corporate & Securities and Health Care Law Practice Groups, is a member of the 2009 class of Leadership Lab.

The Leadership San Antonio program is jointly sponsored by the Greater San Antonio Chamber of Commerce and the San Antonio Hispanic Chamber of Commerce. The highly selective program is in its thirty-fourth year and gives participants an in-depth understanding of the promises and challenges facing San Antonio.

The Leadership Lab program is celebrating its tenth anniversary in San Antonio. The program is sponsored by the North San Antonio Chamber of Commerce. Over a nine month period participants are offered leadership development and work-force preparedness training using the most current thinking, research and best practices in leadership development focusing on five core elements including: professional performance, leadership, management, community service and self-awareness.

The firm has a long history of participation with both programs. Martin I. Roos, the leader of the firm’s Estate Planning & Probate Practice Group, and Debra Innocenti, an associate in the firm’s Creditor’s Rights & Bankruptcy Practice Group, are both Leadership San Antonio graduates. Additionally, Debra has participated as a member of the Steering Committee for two subsequent Leadership San Antonio classes. James M. (Jim) McNeel, the leader of the firm’s Trust & Estate Litigation Group, Mark M. Murphy, an associate in the firm’s Litigation Practice Group, and Maria Barrett, the firm’s Marketing Director, are all graduates of the Leadership Lab program. Maria has also served as the Chair-Elect and Chair of two subsequent Leadership Lab classes.

Building strong leaders who in turn inspire others to reach new heights is what it is all about and pleased to do our part to support our team members and our city.

For further information please contact the firm’s Marketing Department at 210.224.2000.

Bentley Selected as Director of Human Resources

admin — Wed, 06 Jan 2010 18:22:27 GMT

In a move that continues to reflect the growth being experienced by Oppenheimer, Blend, Harrison and Tate, Inc., Barbara Bentley is selected as Director of Human Resources. Bentley, who is a Certified Senior Professional in Human Resources, has over 18 years of progressive HR experience, including 10 years in a leadership role.

Having been employed by The Capital Group Companies and USAA, Bentley is skilled in Change Management, Internal Talent Mobility, Performance Management, Alternative Dispute Resolution and Coaching Leaders. “Barbara brings a wealth of knowledge to our firm” stated Bruce Mitchell – Chief Executive Officer for Oppenheimer Blend. “We have seen a steady amount of growth over the last few years and hiring a highly skilled Director of HR is one of several key management moves we have made to establish a strong infrastructure to support our client and employee needs” added Mitchell.

The firm had previously announced a number of leadership promotions within the last year, including appointing Marty Roos as Chief Operating Officer, Sharon McCullough as Director of Administration, Kathleen Quiroz as Practice Group Leader for Health Care and James McNeel as Practice Group Leader for the newly formed Trust & Estates Litigation group.

Bentley received her Bachelor of Arts in Business Administration from Western Washington University and her Masters of Business Administration from Our Lady of the Lake University. In addition to being certified as a Senior Professional in Human Resources, Bentley is also trained in Chorda Collaboration Skills and Advanced Mediation.

For further information about the firm please contact the firm's Marketing Department at 210.224.2000.

Efforts to Close Historic Hotel Thwarted by Oppenheimer Blend

admin — Mon, 04 Jan 2010 15:55:42 GMT

Two of the firm’s litigators - Mark Murphy and Reese Harrison Jr. score a big victory for hotel client in La Villita Motor Inns, J.V. v. ORIX Capital Markets, LLC. In the trial, the firm represented the owner of the historic Riverwalk Plaza hotel -- located across the street from the Bexar County Courthouse.

ORIX claimed that the firm's client owed over $7 million on a loan that had been packaged with other loans and sold off as mortgage-backed securities. It also claimed it was entitled, on behalf of the note's owners, to enforce the note and to foreclose on the hotel.

After a four-day trial, the Court found that ORIX was not entitled to enforce the loan. It also ruled that the firm's client did not owe over $1 million in penalties and default fees. The Court also awarded the firm's client over $100,000 in attorneys' fees.

ORIX has appealed the judgment.

For further information please contact the firm’s Marketing Department at 210.224.2000.

Firm Celebrates First Anniversary in Texas Hill Country

admin — Mon, 04 Jan 2010 15:54:36 GMT

Oppenheimer, Blend, Harrison and Tate marked the first anniversary of operations in Kerrville, Texas, in May of 2009. Since opening its doors at 222 Sidney Baker South one year ago the firm has gathered new clients, new friends, and new insights.

Over the past year, clients of the firm from Kerrville have included individuals, businesses, banks, physicians, landowners, and charities. They turned to the firm for its expertise in estate planning, corporate law, charitable giving, trust and estates litigation, and health care law. The firm’s multidisciplinary approach has brought efficiencies and a depth of expertise that our Hill Country clients value as a means to their success.

Providing unsurpassed legal services means understanding our clients, in terms of both their needs and their goals. Our clients are shaped by their community. That’s why over the past year the firm and its individual attorneys have contributed time and effort to the success not only of our clients, but also the success of Kerrville as a whole.

As a member of the Kerrville Chamber of Commerce, the firm supports the city’s continued economic development and commercial growth. The 2009-2010 season of the Kerrville Performing Arts Society is the second in which the firm has been a Silver Sponsor, and this season it will help to bring composer Marvin Hamlisch to town in March of 2010. Last year’s sponsorship of Drumline! brought excitement and enrichment to the Kerrville performing arts calendar.

Individual attorneys are also involved in community causes that advance and enrich lives in Kerrville. Tax attorney Katy David sits on the Board of Directors of the Kerrville chapter of Big Brothers Big Sisters of South Texas, and helps guide that organization in its continued service to the children and adults who are brought together under its guidance. The Central Kerrville Development Corporation counts estate planning lawyer Lindsay Martin as a member of its Board. He sits on a task force seeking to complete funding for the Pavilion and Promenade project that will help revitalize downtown. Trust and estates litigation specialist Jim McNeel is active in the Kerr County Bar Association, bringing his deep and varied legal experience as a resource to the local attorney association.

The firm celebrated its one year anniversary with a gathering of friends and clients at The Museum of Western Art. A law firm is only as successful as its clients, and their ability to succeed is dependent on an understanding of the issues and laws that shape their endeavors. The lawyers at Oppenheimer, Blend, Harrison and Tate are honored to be the trusted legal advisors of our Kerrville clients, and gratified by the acceptance of the Hill Country community.

For further information please contact the firm’s Marketing Department at 210.224.2000.

OBHT Honors City's Health Care Heroes

admin — Mon, 04 Jan 2010 15:53:42 GMT

Every day, people throughout San Antonio’s health care industry are working to make San Antonio a better, and healthier, place to live. Some of these people strive to make health care more available, others strive to make the delivery of health care more efficient, and still others strive to discover new treatments and cures that will improve and save lives. For the attorneys in our firm’s Health Law Practice Group, it is an honor and a privilege to lend our part to their efforts.

In recognition of the contributions made to our community by these dedicated individuals and organizations, Oppenheimer, Blend, Harrison and Tate, Inc. was a proud sponsor of the 2009 Health Care Heroes awards. Coordinated by the San Antonio Business Journal, Health Care Heroes is an annual awards program that seeks to recognize outstanding achievement in and dedication to the various aspects of our city’s health care industry. Nominations for these awards were sought through notices published in the San Antonio Business Journal as well as on its web site. Nominees from the prior year were considered as well.

The winners of this year’s Health Care Heroes were selected by a panel of judges headed by San Antonio Business Journal publisher Kent Krauss and were honored at a reception held at the McNay Art Museum on May 13. The reception presented the winners, their families, colleagues and event sponsors the chance to mix, mingle and celebrate. The reception also featured an award presentation program that included a brief video biography of each award recipient, and their remarkable contributions to San Antonio’s health care industry.

Those honored as Health Care Heroes for 2009, and the categories in which they each were recognized, were:

Health Care Advocates

Deb Wells, Director of Managed Markets, National Accounts, for Bio Scrip Inc.
Vicki Perkins, Chief Government Relations Officer, Christus Santa Rosa Health Care

Community Outreach

Southwest Texas Regional Advisory Council, an organization facilitating the operation of a comprehensive trauma care system
Pediatric Mobile Unit of Christus Santa Rosa Health Care, an organization providing mobile pediatric health care services to children who might not otherwise have access to the health care services they need

Health Care Innovator

Bradley Prestidge, M.D., Founder, President, Chief Executive Officer and Medical Director of the Texas Cancer Clinic
Mary Beth Fisk, Vice President of Development and Tissue Services, Director of the Texas Cord Blood Bank and Executive Director of the South Texas Blood and Tissue Center Foundation
Brain and Stroke Network of Baptist Health System and the Department of Neurology at UT HealthScienceCenter at San Antonio

Biomedical Research

Tyler Curiel, M.D., Executive Director of Cancer Therapy and Research Center at UT Health Science Center at San Antonio
Jeffrey Kahl, Senior Director of Research and Development, Azaya Therapeutics

Outstanding Physicians

Steven Wolf, M.D., Vice Chairman of Research, Surgery Department, UT Health Science Center at San Antonio, Burn Surgeon, Brooke Army Medical Center, Director of Pediatric Burn Program, University Hospital
Roger Lyons, M.D., President of Cancer Care Centers of South Texas

Health Care Provider (Non-Physician)

Peggy Francis, Nurse Practitioner, Urology San Antonio, Director of the Center for Urinary Control and Co-Director of the Center for Female Sexual Medicine
Amelie Ramirez, Director of the Institute for Health Promotion Research, UT HealthScienceCenter at San Antonio

Administrative Excellence

William Henrich, M.D., President of UT HealthScienceCenter at San Antonio
Gina Mangold, Chief Operating Officer of South Texas Accelerated Research Therapeutics

Lifetime Achievement

Richard Holt, M.D., Professor, Department of Otolaryngology-Head and Neck Surgery and The Center for Medical Humanities and Ethics, UT HealthScienceCenter at San Antonio
Robert Jacobs, M.D., Founder, Medical Director and Principal Investigator, Biogenics Research Institute

Oppenheimer, Blend, Harrison and Tate, Inc. is grateful for the opportunity to sponsor this year’s Health Care Heroes. We congratulate this year’s winners and applaud them for their selfless dedication to improving the quality of life in our community and of our citizens. We look forward to great things from each of them and wish them all continued success.

For further information please contact the firm’s Marketing Department at 210.224.2000.

Texas Super Lawyers 2009

sabrina — Fri, 18 Sep 2009 22:52:00 GMT

Congratulations to eleven of our attorneys for being selected by Law & Politics and the publishers of Texas Monthly magazine as 2009 Texas Super Lawyers. This year marks the seventh year for the annual listing of the “Top Lawyers in Texas.” Our attorneys making this year’s list include Ray Battaglia, Stanley Blend, Taylor Boone, Elizabeth Copeland, Diana Geis, Reese Harrison, Jr., Bruce Mitchell, David Oppenheimer, Marty Roos, David Stanush, and John Tate. This is a great honor for each of these individuals as only 5% of all Texas lawyers are selected to appear on the list from over 65,000 ballots. The selection process is a combination of peer votes and selection by a blue ribbon panel.

An added congratulation goes out to Ray Battaglia and David Stanush, who were not only selected as Texas Super Lawyers, but were also named as one of the Top 50 Lawyers in the Central and West Region by Law & Politics and the publishers of Texas Monthly magazine.

Ray heads the Firm’s Bankruptcy Practice Group and is a member of the Firm’s Executive Committee. Ray is Board Certified in Business Bankruptcy Law by the Texas Board of Legal Specialization. Ray and the Firm’s Bankruptcy Practice Group represented future asbestos claimants in a four-year long effort that resulted in confirmation of a bankruptcy plan that will result in the formation of a $1 Billion trust for current and future asbestos claimants.

David is a Shareholder in our Firm’s Estate Planning Practice Group. David is Board Certified in Estate Planning and Probate Law by the Texas Board of Legal Specialization and is a Fellow in the American College of Trust and Estate Counsel. In addition, David is a Certified Public Accountant and currently sits on the Board of Directors of the Texas Society of Certified Public accountants. He is frequent lecturer in the Estate Planning and Estate Administration area.

This year marks the sixth year in a row that Ray has been named among the Top 50 lawyers in this region. According to Texas Monthly magazine, this 6-peat is quite an accomplishment. This year is David’s first time to being named among the Top 50 lawyers in this region. To be named one of the Top 50 is more than being one of the top 50 vote getters. The selection process is a combination of peer review and selection by a blue ribbon panel for professional excellence and character. We congratulate Ray and David on receiving the respect and recognition by his peers.

As a Firm, we are very proud of all of these individuals for this accomplishment.

For further information please contact the firm’s Marketing Department at 210.224.2000.

Ten of Our Nation's Best Are Right Here

sabrina — Thu, 17 Sep 2009 22:47:00 GMT

Ten of the firm’s attorneys were named to the 2010 edition of Best Lawyers® in America - the oldest and most respected peer-review publication in the legal profession. The firm also ranked for the second year in a row as San Antonio’s #1 Health Care Practice.

First published in 1983, Best Lawyers is based on an exhaustive annual peer-review survey. More than 24,126 leading U.S. attorneys cast more than 2.8 million votes on the legal abilities of other lawyers in the same or related specialties. Because of the rigorous and transparent methodology used by Best Lawyers, inclusion is considered a singular honor. Corporate Counsel magazine has called Best Lawyers “the most respected referral list of attorneys in practice.” Steven Naifeh, Managing Editor of Best Lawyers, says, “We continue to believe – as we have for the last 26 years – that recognition by one’s peers is the most meaningful form of recognition in the legal profession.”

Two of the firm’s shareholders – Stanley Blend and John H. Tate, II – have been named to the list annually for more than 25 years. Reese Harrison, Jr. has been selected for more than 20 years while Ray Battaglia, Taylor Boone, and David Oppenheimer have made the list more than 10 times. The firm’s CEO, Bruce Mitchell, Kathleen Quiroz – practice group leader for Oppenheimer Blend’s Health Care practice, Elizabeth Copeland and David Stanush were also named to the 2010 list.

For further information about the firm please contact our Marketing Department at 210.224.2000.

Some of the Brightest in the Bunch

sabrina — Wed, 16 Sep 2009 22:43:00 GMT

Eighteen attorneys with Oppenheimer, Blend, Harrison and Tate, Inc. (OBHT) were named by Scene in SA Monthly magazine as “San Antonio’s Best Lawyers” for 2009. The selection process, which is peer based, polled 6,000 of San Antonio’s most experienced attorneys to determine who they deemed as the City’s finest legal talent. Six (600) hundred nominations were received in 64 areas of law.

Fifty-percent of the firm’s attorneys made the 2009 list. “It’s a clear indication of the amount of legal talent the firm possess.” stated Bruce Mitchell, Chief Executive Officer for OBHT. “Since opening our doors 40 years ago we have hired attorneys who specialize in various areas of business law. In doing so our knowledge base runs deep instead of broad as is typically seen in firms who hire general practitioners.” Mitchell added. The firm’s Chairman of the Board, Stanley Blend, Ray Battaglia – the firm’s Controversy Group Leader, Marty Roos – Chief Operating Officer, and Elizabeth Copeland – a shareholder in the firm’s Tax practice have each made the list annually since the program’s inception six years ago.

For further information about the firm please contact our Marketing Department at 210.224.2000.

TexasBarCLE Business Bankruptcy 101 Course

sabrina — Fri, 26 Feb 2010 05:00:00 GMT

As part of the TexasBarCLE Business Bankruptcy 101 Course, Chip Sugg will be participating in a panel discussion explaining the claims process, avoidance litigation, and motions for relief from the stay.

Estate Tax Confusion

sabrina — Fri, 26 Feb 2010 05:00:00 GMT

Marty Roos will appear on The Living Show to discuss the current law and what it means.

Health Law Updates: Hot Topics and Cold Hard Facts

maria — Mon, 08 Feb 2010 05:00:00 GMT

A panel discussion featuring the Health Law Practice Group of Oppenheimer, Blend, Harrison and Tate, Inc. Join us as these four attorneys discuss hot topics and cold hard facts in health care law, including an overview of important developments in the past year. The panelists will address the impact those changes may have on physicians and physician groups in the future. Isn't it time you had a better handle on the issues that will have an effect on the practice of medicine in 2010 and beyond?

Succession Planning

sabrina — Sun, 24 Jan 2010 05:00:00 GMT

This seminar will discuss succession planning issues for closely-held businesses, including the considerations involved in transitioning a business from one generation to the next, estate planning issues, and key employee issues. This seminar will also address succession planning tools that may be used in a variety of circumstances, depending on the type of business entity involved.

Objectives:

To discuss transitioning a business to the next generation.
To discuss estate planning issues implicated by succession planning.

The method of presentation is group-live instruction and the program level is intermediate. There are no prerequisites for this course nor is there any advanced preparation required.

What Happens in Vegas Doesn't Necessarily Stay in Vegas: Real-World Strategies for 'Sin City' Situations"

sabrina — Tue, 19 Jan 2010 05:00:00 GMT

This course will explore tax issues related to situations associated with Las Vegas but that also arise in the "real" world. How can taxpayers with gambling/gaming/lottery winnings minimize their income tax liability? What tax-planning issues arise with marriage and divorce? For dealers (and others) who fail to report cash tips, what penalties are imposed on underreporters or non-filers, and what remedies are available to them? What tax concerns should victims of identity theft have? Husband goes to Vegas--does the innocent spouse have any relief? Only a city like Las Vegas could bring together this wide variety of topics, but practitioners who don't know the rules of the game could be gambling with their clients' money!

Objectives:

Develop skills to recognize “hidden” tax issues that arise in various business and personal situations.
Learn strategies for addressing these issues.
Improve understanding of the policy and procedures that are common to a wide-ranging number of provisions of the Internal Revenue Code.

The method of presentation is group-live instruction and the program level is basic. There are no prerequisites for this course nor is there any advanced preparation required.

Estate Tax Confusion: What Professionals and Clients Should Know

sabrina — Tue, 19 Jan 2010 05:00:00 GMT

The Federal Estate Tax and Generation-Skipping Transfer Tax were both repealed for one year effective January 1, 2010, and replaced with new rules limiting basis step-up on property transferred at death. What exactly are the new basis rules? How are clients to respond given that their estate plans are based on repealed laws? What is the chance of a retroactive reinstatement of the estate tax in 2010? What are the potential risks and benefits of planning under this new regime? What else happened in 2009? This seminar is in two parts, the first highlighting case law, rulings, and regulatory changes over 2009. The second part will address estate tax repeal and its repercussions -- or, if Congress has acted to reform estate taxation by the date of the seminar, estate planning concepts under effective law will be discussed.

Probate and Estate Planning: A Toolbox for Accountants

sabrina — Tue, 19 Jan 2010 05:00:00 GMT

This seminar will cover basic estate planning techniques and issues including testamentary dispositions, incompetency and incapacity, children and their needs, life insurance usage, retirement and employee benefits, charitable giving, value shifting and reducing, and protective planning. It will also examine the probate and estate administration process, and discuss alternatives to probate. Come gain an understanding of what's available to, and how best to advise, your clients with respect to their estate planning and probate needs.

Objectives:
• To understand the basic estate planning tools available.
• To learn about the probate and estate administration process.

The method of presentation is group-live instruction and the program level is intermediate. There are no prerequisites for this course nor is there any advanced preparation required.

Firm Serves Its Sixteenth Year In Days of Caring Project

admin — Wed, 13 Jan 2010 06:00:00 GMT

Days of Caring 2009 was held this past October and team members from Oppenheimer, Blend, Harrison and Tate, Inc. were there ready to roll-up their sleeves and assist this year’s charity of choice - the Bexar County Detention Ministries, which serves and ministers to formerly incarcerated individuals. Their mission is to offer clients the opportunity to further their education and gain financial independence by becoming gainfully employed. They also assist with such tasks as Texas identification, birth certificates, food, clothing, and transportation for employment.

This year’s project consisted of organizing the agencies "Clothes Closet", which is used to provide clients with business attire, winter apparel, children’s clothing and household goods. In true volunteer spirit, and in the firm’s usual team format, a great effort was put forth - leaving the agency with a boutique style facility ready to showcase the many donations received from kind hearted San Antonians. Leading the team’s effort once again was Gloria Borrego along with Ruth Bush, Melanie Kenworthy, Ada Gordon, Sabrina Lewis, Alice Serna and Thelma Perales.

The firm is proud to be a long time supporter of the Day’s Of Caring initiative. We are equally proud and grateful to the Oppenheimer Blend team members who gave up a day to lend a hand to help support someone in need.

For further information please contact our Director of Marketing, Maria T. Barrett, at 210.224.2000.