Lien on me?

Originally published by David Coale.

The Fifth Court granted mandamus relief in a proceeding related to the removal of a mechanic’s lien in In re J&S Utilities, No. 05-20-00696-CV (Nov. 24, 2020) (mem. op.), holding as follows:

Abuse of discretion. “[T]he statute allows for an evidentiary hearing regardless of whether claimant elected to file a response. Although the trial court may have had the option of disregarding J&S Utilities’ response under its local rules, the trial court did not have the right to make a determination on submission and forfeit J&S Utilities’ right to an evidentiary hearing. For these reasons, we conclude the trial court abused its discretion by denying J&S Utilities an evidentiary hearing.” (citation omitted).

Inadequate remedy. “The legislature provided for J&S Utilities’ due process rights by the statutory procedure that was enacted, but which the trial court denied to J&S Utilities and which cannot be cured by a subsequent appeal. Mandamus relief, however, will preserve J&S Utilities’ statutory right to an evidentiary hearing on the summary motion.”

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Case Addressing Open Space Valuation of Property with Cattle Grazing & Quarry Activity

Originally published by Tiffany Dowell.

 

A recent case from the Ft. Worth Court of Appeals, Hood County Appraisal District v. Mandy Ann Management Ltd., discusses whether property used for grazing cattle on which a quarry is present qualifies for open space tax valuation.

TAMU AgriLife photo by Steve Byrns

Background

Mandy Ann Management Ltd. (“Mandy”) owns 679 acres in Hood County.  The property was purchased by Mandy’s owner, Michael Arnold, in 2006 and he transferred the ownership to Mandy in 2016.  The property is shaped like an upside down L.    Mandy’s property is surrounded to the north and west by ranches.  Mandy’s property is used to graze cattle, and it is also home to a quarry.  Since 2006, the 75-acre quarry has been valued as commercial, while the remaining 604 acres was valued as open space agricultural land by the Hood County Appraisal District (“CAD”).

Since 2006, Jim Coleman has kept 40 cows on Mandy’s property from late summer to December.  The cattle are managed on a rotation scheduled between Jim’s property and Mandy’s.  The cows roam the entire 679 acres as the only fence is the perimeter fence enclosing the entire property.  Arnold testified that the cattle roamed where they pleased, and that sometimes the cattle would cross into the commercial quarry and he would have to shoo them away.  During this time, Jim testified that he made improvements to the property related to keeping cattle such as maintaining cattle guards, placing a stock tank and stock ponds on the 239 acres at issue, and smoothing some of the native pasture on the 239 acres that were disturbed by mining activities prior to 2006.  Jim testified that his cattle did graze on the 239 acres and use the stock ponds located there, and that Jim fed hay to supplement grazing while the cattle were on Mandy’s land.

After a dispute between Arnold and the CAD in 2010 over mis-delivery of a tax statement, the owner claimed the relationship deteriorated and there were continual issues between Arnold and the CAD regarding attempts to strip him of open space valuation for several years on different properties.

After this property was transferred into Mandy’s name in 2016,  the CAD determined that the 239 acres should be valued as commercial land, rather than open space for the tax years 2017-2018, and imposed more than $50,000 in rollback taxes because of the change in use due to the rock quarry.   The CAD witness testified that the fence was down for approximately 400 yards along the street and determined that Mandy did not meet the intensity requirements for the county.

Mandy protested this decision to the Appraisal Review Board, which sided with the CAD.  Mandy then filed a lawsuit challenging the CAD’s classification of the land as commercial.  A jury trial was held, and the jury unanimously found that the land should have been appraised as qualified open-space land in 2017 and 2018, which eliminated the rollback taxes imposed by the CAD.  The CAD appealed this decision, arguing there was not legally and factually sufficient evidence to support the jury’s verdict.

Appellate Court Opinion

The appellate court affirmed.  [Read full opinion here.]

The court addressed two issues on appeal.  First, was the land “currently devoted to principally agricultural use?”  Second, did the property support agricultural use to “the degree of intensity generally accepted in the area?”

Keep in mind, the court is tasked with determining whether the evidence is legally and factually sufficient to support the jury’s verdict.  The court does not address how it would rule on the evidence if given a blank slate, but whether there was at least a scintilla of evidence to support the jury’s finding for Mandy.

Currently Devoted to Principally Agricultural Use

Applicable law:

The “principal” use of land is defined as “the more important use in comparison with other uses.”  See Tarrant Appraisal Dist. v. Moore, 845 S.W.2d 820 (Tex. 1993).  Per the Comptroller’s Appraisal Manual (“Manual”), which governs county appraisal districts, leaving land idle in conjunction with normal livestock rotation procedures is considered an agricultural use.  The Manual also requires land to be “currently devoted” to agricultural use as of January 1 of the tax year, but if the use is not evidenced on January 1, “the chief appraiser should grant productivity valuation if the owner can show evidence of the intent to put the land into agricultural use and agricultural use will be the primary use for the bulk of the calendar year covered by the application.”  The Manual also states that if the property owner is ranching several tracts as a unit, the CAD is to consider the “entire agricultural operation as a unit, not separately, with respect to the activities on an individual parcel.”

Discussion: 

The court stated that the jury could have found the land was principally devoted to agricultural use.  The jurors could have believed Arnold when he testified the land was used as it always had been and the only change had been the name of the entity holding ownership. Additionally, evidence of fencing, forage, and number of cows was presented that a jury could have relied upon to conclude the principal use of the property was grazing cattle.

With regard to fencing, Arnold and Jim both testified that the property was fenced all the way around.  Although the CAD claimed there was 400 yards of the fence down along the street, they  offered no photographic evidence to show this.  Thus, the jury could have believed the testimony of Arnold and Jim and rejected that of Eatherly.

Additionally, both Jim and Morrison testified that the entire property was used for raising cattle, again, evidence that a jury could reasonably rely upon.  The CAD senior appraiser testified that when he was evaluating property for open space valuation “I want to see cows,” and he never saw cows on the 239 acres.  This was disputed by Jim, Morrison, and Arnold, all of whom testified cattle were on the 239 acres.

Lastly, although Jim’s cows were not on the property on January 1, they were present for several months as part of a normal livestock rotation, which the jury could have found to satisfy the principal use requirement.

Degree of Intensity

Applicable law:

The Manual states that in determining the degree of intensity typical for the area, the CAD should consider what the owner puts into the enterprise in time, labor, equipment, management and capital, and notes that an operation will not be disqualified simply because it differs from the typical operation.  The manual notes that raising beef cattle requires fences, proper management for long-term forage, enough animal units to match the carrying capacity, and a herd management procedure to get animals to market.

Discussion:

Arnold noted that he had not used the property any differently in 2017-2018 than he always had, and that Jim had always run the same number of cattle. In addition to Jim’s testimony regarding his use of the property, Mandy also called a neighboring landowner, S.M. Morrison, as a witness.  Morrison testified that he currently had 52 cows on his 520 acres, but typically preferred to run around 40 head.  He used his 520 acres of native grass and rotated his cattle to an improved pasture and supplemented with hay, like Jim did. Morrison testified that he saw cattle grazing on Mandy’s property when driving by, estimating that he had seen as many as 20 at a time from the road.  He did admit that it was more common to see a truck traveling to the quarry than to see cattle and said he may have seen 100 trucks a day but never saw 100 head of cattle.

The CAD relied on testimony of Mr. Eatherly, their senior appraiser.  Eatherly, who the court noted has no degrees in animal science, agriculture, or mining, testified that cattle are rotated to the area to make sure they do not overgraze the land and rotation typically is every few months in the area.  He disputed the testimony of Jim and Morrison who claimed that 8 months on improved pasture and 4 months on native grass was normal.

The CAD sets the intensity level for cattle in Hood County at 15 acres per 1,000 pound animal on native pasture. (This would be approximately 40 cows for a 605 acre property). A 2017 email between Eatherly and the TAMU AgriLife Extension agent indicated that the agent believed the proper degree of intensity for the county should be 1 cow to 17-25 acres. (This would be 24-35 cows for a 605 acre property).

The court held that the jury could have reasonably found that Jim’s use for cattle met the degree of intensity typical in the area.  The email from the County Extension Agent certainly provided evidence of this, along with various photos showing the forage and cattle on the property and the testimony of Jim and Morrison.

Conclusion

The court stated as follows, “The jury had the opportunity to assess the witnesses’ credibility and evaluate the rest of the evidence and could have decided that the District had vindictively pursued stripping the open-space designation from Arnold ever since the dispute arose regarding the late penalty.  The jury likewise could have discounted Morrison’s testimony – you may see a hundred trucks – as hyperbole and to disbelieve Eatherly’s testimony that he wanted to see cows but had never seen any on the 239 acres.  Accordingly, based on the record before us, and the applicable standards of review, we conclude the evidence is legally and factually sufficient to support the jury’s verdict, and we overrule both of the District’s issues.

Takeaways

This case is a good reminder of the standards applicable when appraisal districts are evaluating whether property qualifies for open space valuation.  Additionally, every time I read a case involving these issues, it makes me think about the importance of landowners and ag producers knowing the degree of intensity rules for their county and ensuring they are met.  Because each CAD has different standards, taking time to research the standards like stocking rights are critical for landowners and ag producers. Additionally, having good records to prove that these standards are met–such as the number of cattle on the property and the length of time–can be useful for landowners in proving their assertions related to open space valuation.

 

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Firing Algorithms Test the General Data Protection Regulation

Originally published by Peggy Keene.

Uber Faces High-Profile Lawsuit: GDPR Article 22 and Algorithms for Terminations

The use of algorithms to make decisions has become increasingly prevalent in today’s fast-paced, technology-driven world.  From ranking a user’s visibility on social media platforms to calculating grades on tests, the use of these automated processes and formulas have become commonplace, although they often remain behind-the-scenes.  This might change, however, with a recent lawsuit brought under Article 22 of the European’s Union’s General Data Protection Regulation (“GDPR”) against Uber.

GDPR Article 22 and Algorithms

Article 22 of the GDPR states that subjects have a right to not be subject to a “decision based solely on automated processing, including profiling, which produces legal effects” that significantly affects the said subject.  In this case, over a thousand Uber drivers are claiming that they were unfairly terminated by Uber, which used an automated algorithm to do so, and when the terminated drivers requested the reasoning behind their terminations, Uber refused to provide such information.  As a result, the terminated drivers are suing, claiming that, under the GDPR, companies must provide legal grounds when they use such methods, and that they must give drivers the ability to object to the automated decision, which Uber has not done.

Currently, the lawsuit has been brought by drivers in England that have been terminated by Uber, but privacy experts note that, if the British drivers succeed, this would provide legal precedent for all European Union drivers that were terminated under similar circumstances.  Currently, the British drivers are being represented by the App Drivers & Couriers Union (ACDU), which is bringing the suit, claiming that over 1000 British drivers have been wrongly fired and that they were denied their right to an appeal.  Moreover, the British drivers note that Uber’s decision to fire them significantly impacts their lives, as required under Article 22, because the termination of their Uber jobs results in an automatic notification to the Transport for London (“TfL”) board, which has the right to terminate their operating licenses.  Normally, when a case comes up before the TfL for review, drivers typically have fourteen days to defend themselves.  In these cases, the drivers have said that Uber’s unwillingness to provide them with the details behind their termination has made it impossible for the drivers to adequately defend themselves in front of the TfL.  As a result, the plaintiffs are bringing suit against Uber in the Netherlands because that is where Uber’s data resides.

Uber Lawsuit Brings Biggest Challenge Under GDPR Article 22 for Algorithm Use in Firings

Many drivers report that they had simply received an electronic notification that they had been terminated and were simply told to contact customer service if they had issues.  Upon contacting customer service, many drivers were told by Uber that they had engaged in “fraudulent activities,” but beyond that, Uber declined to provide any further information.  Many drivers report that, even when they obtained legal representation, Uber still declined to provide further details, citing their in-house security protocols and stating that giving any further information would compromise the company’s own security.  Many of the terminated drivers claim that they had been driving for Uber for years and had near-perfect ratings before they were terminated.

In response, Uber has stated that they have always been transparent about their practices and that the drivers are wrong in assuming that their terminations came as a result of the use of automated-data algorithms.  Instead, Uber claims that each terminated driver’s record was reviewed manually before termination.  And while many of the drivers were told by Uber that Uber had its own specialized team that was specifically dedicated to dealing with that issue, the affected drivers have never been contacted by the team nor Uber despite the drivers’ repeated requests.  Without going into further detail, some counsel for the fired Uber drivers have stated that they know “for sure” that Uber is using automated algorithms when it came to deciding which drivers to terminate for fraud, and that they are seeing similar types of actions everywhere, not just in England.  Overall, privacy experts agree that this legal challenge is the most high-profile and biggest challenge brought under Article 22 of the GDPR to date.

Key Takeaways About GDPR’s Article 22 and Algorithms

Terminated drivers are bringing a high-profile lawsuit against Uber, claiming that Uber violated Article 22 of the GDPR by using automated algorithms to fire drivers, and when the drivers requested explanation for their terminations, Uber declined to provide further detail which further violates the GDPR.  Privacy counsel should follow this lawsuit because:

• it is the first major test of Article 22 of the GDPR which states that subjects cannot be subject to a decision based solely on automated processing, including profiling, which produces legal effects that significantly affects said subjects;

• it could open Uber up to a massive class-action lawsuit; and

• it has major ramifications on what kind of personal data companies may still have to provide under the GDPR, even if it concerns employment and not simply terms of use.

For more insights on data privacy, see our IP Litigation and Industry Focused Legal Solutions pages.

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OSHA – Celebrating 50 Years Of Workplace Safety And Health

Originally published by Morrow & Sheppard LLP.

On December 29, 1970, President Richard Nixon signed the Occupational Safety and Health Act (“OSHA”) in response to an obvious need to protect U.S. workers’ lives. This year marks OSHA’s 50th anniversary since its enactment. While OSHA’s impact has played a major impact on U.S. workers’ safety and health, there is still a long way to go for employers providing jobs within the United States’…

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Why Internal Links Are Important For Law Firm Websites

Originally published by Ariana Ochoa.

Every law firm website contains internal links, but why are they often ignored? One of the simplest things you can do to improve the health of your law firm website and its overall performance in search rankings is internal link building. Internal linking is a marketing power move that is often underrated, largely because it is misunderstood. If you have been neglecting the inclusion of internal and external hyperlinks in your website content, follow the guide below for best practices on internal linking that can make a huge difference in the success of your online legal marketing.

The post Why Internal Links Are Important For Law Firm Websites appeared first on Stacey E. Burke, P.C..

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Acknowledging Native Land

Originally published by Heather Holmes.

Image Credit: Image by Arek Socha from Pixabay

As members of the local legal community, we are committed to recognizing and addressing the systemic injustices that exist for many of those we serve. We are dedicated, as always — even during the pandemic — to providing open and equal access to justice for all. Helping remove the structural barriers that prevent many individuals from receiving the services and information they need to pursue personal justice is part of that mission.

One of the most fundamental obstructions to justice and to a fuller appreciation of and respect for others – particularly Native people — is a lack of recognition for the very land on which we walk. Native American Heritage Month, which comes to a close at the end November, is the perfect time to start a new journey of understanding, to embrace equity, grow in gratitude for the land we all occupy, and honor the Indigenous people who steward it.

Previously on this blog, we have applauded the efforts of organizations like the American Bar Association, whose Implicit Bias Initiative is designed, in part, to educate and inform the legal community about cultural and structural barriers that impact the delivery of legal services for many people, especially those at the margins.  Today, in a continuation of such a laudable effort, we offer the following additional resources. The organizations linked below explore how we can all work toward achieving an affirming, inclusive, and equitable social ecosystem for all people, and, in particular, those who are native to the North and South American continents.

We conclude the list with a link to a tool that will help you identify, learn about, and acknowledge the Native people whose land we occupy. For example, the land on which the Harris County Law Library sits is home to a number of Indigenous nations, including the Karankawa, Coahuiltecan, Atakapa-Ishak, and the Sana. Enter your address to find the names of the Indigenous people who once tended the land you now occupy. Learning about the culture, language, and heritage of these people is a recommended first step to dismantling systemic injustice against Indigenous communities. We hope the resources provided here help in that effort.

• Embracing Equity

• Reclaiming Native Truth

• Center for Racial Justice in Education – See:  A Racial Justice Guide to Thanksgiving

• U.S. Department of Arts and Culture: Honoring Native Land – A Guide and Call to Acknowledgment

• Native Governance – Indigenous Land Acknowledgment

• Amnesty International –Activism Skills: Land and Territory Acknowledgment

• Native Land – Mapping tool for identifying Indigenous people who tended the land you occupy

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Why COVID-19 Has Created a Thriving Environment for Business Fraud

Originally published by Cris Feldman.

When it comes to running a business, there are many different ways mishaps can happen that can cause operations to come to a screeching halt. One of these ways is through business fraud. While fraud can impact a company at any time, the ongoing COVID-19 pandemic has created a thriving environment for business fraud to occur. Understanding the different factors that can contribute to a potential fraud scheme can help businesses stay protected.

Factors That Contribute to COVID-19 Business Fraud

As the coronavirus pandemic rages on, so does the concern surrounding the potential for fraud to occur. In fact, there have already been various instances of coronavirus-related fraud scams involving fake treatments for COVID-19, as well as fundraising for charities that don’t even exist. While these fraud scams primarily affect individuals, just as many scams have worked to defraud businesses, investors, and many others within a corporate infrastructure. This is because business fraud has quickly become a thriving industry amidst the pandemic, as it creates a rare confluence of factors that produce a fraud-friendly atmosphere.

Fraud is one of the most common ways a business can lose money. Fraud refers to the knowing misrepresentation of the truth or concealment of a material fact in order to induce another to their detriment. Fraud is an intentional act, where the person or persons committing the fraud knows their actions are being made with no supporting factual basis.

Some of the factors that contribute to business fraud amidst COVID-19 include:

More Difficult Times

According to an article by Fortune, fraud experts claim that instances of corporate fraud grow from three different elements: pressure, opportunity, and rationalization. Because a poor performing economy creates pressure, businesses can easily run short on cash or be unable to meet financial expectations. While financial pressures during the pandemic have been heaviest in the energy and oil and gas sector, financial industry, and for industrial businesses, any business can become subject to fraud.

Poor Oversight

Opportunities for business fraud widen when people know that they aren’t being watched. According to the Association of Certified Fraud Examiners (ACFE), some financially stressed businesses have had to cut anti-fraud staff and budgets amid the pandemic. Additionally, with countless numbers of employees now working from home, oversight and security may not be as secure as they were when the workforce was operating in a fully functioning office. In fact, many of ACFE members claim reporting, detecting, and investigating fraud claims has become much more challenging during the pandemic because of this.

While it might be easy to assume that the reason oversight is much more prevalent during COVID-19 is because there is not access to the same technology as there would be in an office – this isn’t the case. The main issue with oversight is that it’s much more difficult for fraud examiners to travel and interview people face-to-face.

Easy Access to Money

When the Paycheck Protection Program (PPP) was announced as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), it was seen as a necessary and effective way for business owners to collect vital funding. While this is true in many cases, the PPP also created a rich environment for fraud. In fact, more than a half-trillion dollars were loaned out to small businesses in the spring and summer months with very little verification of applicant information. This created a means for large chains – like Ruth’s Chris Steakhouse and Shake Shack – to obtain loans through the PPP that most believed should be distributed to affected small businesses.

Protecting Houston Businesses From Fraud

Fraud can happen to a business at any time and unfortunately, the COVID-19 pandemic has only made these instances much more attainable for scammers. When fraud happens to a business, it can have a detrimental effect on its reputation and ability to maintain operations. In order to mitigate your company’s exposure, it’s best to consult with an experienced Houston business fraud attorney. If you suspect your business has been a victim of fraud, the attorneys at Feldman & Feldman are equipped to investigate your claim. Contact us today for more information on how we can best assist your business.

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The Leadership and Management Styles of Dolly Parton

Originally published by Greg Lambert.

As with everyone else in the world, the pandemic destroyed my morning routine. My thirty-minute drive to the office is literally just rolling out of bed and putting up a green screen in front of the computer at the foot of my bed. It took me a long time to find another process of finding time for myself, and not just jumping straight into work, or begin doom scrolling social media. And again, like many of you, that meant getting out of the house and going for a walk around my neighborhood. It was in that walk this week that I ran out of my normal podcast episodes and began scanning something that I would hope would be interesting to fill the next hour or so.

One of the podcasts that I listen to during times like this is from one of my fellow Houstonians, Brené Brown, and her Unlocking Us podcast. It was the 19th most popular podcast, so it’s not exactly a hidden gem that I uncovered, and it’s not the first time I’ve listened either. There’s a great episode from a few weeks ago about the TV show Ted Lasso that was great and made me binge all ten episodes with my wife that same day. But this week’s episode was with Dolly Parton, and that’s just a must listen in my book. I was expecting Brené to talk with Dolly about her typical topics of shame, empathy, vulnerability, and courage. But, it was the unexpected business advice that Dolly lays out in the interview that caught my attention. Since this week is Thanksgiving here in the US, I thought I’d take a personal privilege with the blog and share this with you.

Dolly Parton runs a multi-million dollar organization and a brand that is practically priceless. She has a great personality and presents herself as just a nice person. And, to all accounts, she is. But, you don’t get to where she is in life and in business by being soft in business. She mentions that there have been a number of people over the years who have mistaken her kindness for softness, and she’s called them out on that.

Here are a few takeaways from Brené’s interview on management and leadership from Dolly Parton:

As a Leader, What Pisses You Off?
People not being on time. It shows a lack of respect, not just for the leadership, but for everyone else who is affected by it.

Employees are hired to get the job done. If someone can’t do what they said they would do, or get it done when they said it would be done, then there’s a problem. You’re being paid to do a job, and if you don’t take it seriously, or you think you can get a better job, then go somewhere else.

Being a Leader
As a leader, it is important to know when it is your responsibility to be the one who lets someone go (after all, you have managers of departments for a reason.) It is important to be honest and sincere. It is okay to be empathetic toward the person who is being let go. In fact, when you don’t find yourself feeling compassion for a person who is about to lose their job, it may be time to look at yourself and why you’ve lost that empathy.

Have Boundaries
It might hurt to tell people no, but you have to learn to say no. Understand when those around you are infringing upon your boundaries, and make sure that they know what the boundaries are, and make sure they do not cross those.

While I don’t think that Dolly Parton had any earth-shattering advice in her discussion with Brené Brown, sometimes you need to hear someone with her stature and humility talk about what it means to be a leader. It’s gratifying to hear from someone who has great success who also has some of the same issues with leading others as most of us have.

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Remote Work Force and State Tax Implications

Originally published by George Rendziperis.

The Covid-19 pandemic has had an impact on our workforce.  Companies were forced to quickly respond to a work-from-home model for its employees.  Many employees began working from states other than the states in which their assigned offices were located.  As a result, questions are being raised such as whether the company will have nexus for corporate income tax and sales and use tax purposes in the states where it has remote employees, should the company begin withholding on wages earned by the employee based on the location of the remote employee and whether the employee should be filing a nonresident tax return in the state in which she is working remotely.

Nexus for Companies – Corporate Income Taxes and Sales and Use Taxes

Generally, states will assert that an employee working from home or remote location within the state will trigger nexus for the company.  Nexus is used in tax law to describe a situation in which a business has a tax presence in a particular state, therefore, subjects the company to the state tax laws, such as corporate income or franchises taxes, or sales and use taxes tax.

States have varied in approaches to nexus relief in response to the COVID-19 pandemic and have not published much guidance on the this issue.  Depending on the state, some states have indicated that nexus for purposes of corporate income tax, and sales and use tax will not be established solely based on employees working remotely due to the pandemic or if the state was under a state at home order. However, certain states have limited such nexus relief only to corporate income tax or franchise tax. 

Companies must track its employees and then understand the state tax laws, rules and guidance in those states to determine whether the company will have an income or franchise tax, or sales and use tax filing obligations.

Withholding by Companies

Generally,  states that impose a personal income tax require a company  to withhold income tax from a employee’s wages for wages earned within the state.    In response to remote working arrangements adopted (or necessitated) as a result of the pandemic, many states have chosen not to enforce employer withholding requirements if the only reason the employer would be subject to such requirements is an employee’s working at home or a remote location as a result of the pandemic. For example, certain states have announced that employers should continue withholding as if the employee had continued to work at the employer’s location during the pandemic, even if withholding guidance applicable prior to the pandemic would not have required withholding.

As with nexus, not all states have published guidance to address withholding obligations during the pandemic. In addition, certain states appear to indicate that it will not deviate from their ordinary employer withholding requirements as a result of the pandemic. Companies should monitor such guidance in the states in which they have remote employees.   Please note it is possible that the state where an employee is domiciled (resident state) could continue to require withholding with respect to employees, while the state where employees are working remotely (nonresident state) could also impose a new withholding requirement on the employer.

Income Earned by Employee in Remote Location (Nonresident State)

Generally, states require individuals who earn income in a state other than the state in which they are domiciled (the “home state”) to file a nonresident return in such state.  For example, if I work and a, a resident of Texas but travel to Louisiana to do work, I would be required to file a nonresident tax return in Louisiana for the income that I earned while in Louisiana and pay Louisiana personal income tax.

If you are working in multiple states during the year, such individuals will likely owe money to the nonresident state because they have not had any tax withholding in that state by their employer.  Generally, an individual pays tax to the state of residence on all of his or her income earned and would be allowed a credit for taxes paid to nonresident states.

Employees must be proactive and notify their employer the location in which they are working and earning such income.  Employees must be specific as to locations, city and counties, because such local governments may also impose a personal income tax on individuals.  Remote employees must consult with a tax professional to make sure they do not have a tax filing and obligation in April 2021 for the 2020 tax year.

Take Away

In conclusion, companies must monitor state tax law, rules and  other guidance published by states in which it has employees working remotely (i.e., away from their traditional offices) to determine whether the employees’ presence at their remote worksites may establish nexus and employer withholding obligations for the company.  Furthermore, employees must also monitor the guidance published by states to determine whether they must a file a nonresident personal income tax return in such state the employees are working remotely and earning income.

Freeman Law’s state and local tax attorneys can help companies and individuals monitor such guidance and provide practical advice based on the facts presented.  Due to the pandemic, states will have budgetary issues and will be required to raise revenue, therefore, the cost of noncompliance with the states may become costly to companies and individuals as a result of tax, interest and penalty assessments.  Please contact George W. Rendziperis at 512.663.0132 or george@freemanlaw.com.

 

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Matching of Damaged Property Topics and United Policyholders Support of Fast and Cost-Effective Resolution of These Issues—Tuesday AT 2 With Chip Merlin

Originally published by Chip Merlin.

Matching of damaged parts of a building is nothing new. This “Give Me Your Walls” episode from the classic Dick Van Dyke Show demonstrates a typical concern most property owners have about the aesthetics of matching property: Some insurance companies are now selling “swiss cheese” and “cheap” insurance because they specifically say they will not… Continue Reading

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Holiday gifts and safety: A reminder to be cautious with your purchases

Originally published by Wyatt Law Firm, Ltd..

As you start your holiday shopping, it’s wise to remember that you don’t always get what you pay for. Defective toys, cookware and hobby products are everywhere — and some of the most dangerous ones may be on your list.

How can you protect your loved ones from dangerous or defective products?

One of the smartest things you can do is go online and check for recalls and consumer warnings before you buy any kind of gift that has the potential to cause harm.

It’s also wise to exercise some caution with your purchases. Keep the following things in mind when you’re buying anything as a gift:

• Who manufactured the item? While name brand products are pricier than the knock-offs that are widely available online and in discount stores, they may also be safer. A lot of copycat toys and hobby items are made overseas with cheaper materials that can be toxic or volatile.
• Does the item require supervision when it’s being used? If you’re buying a gift for a child or even an absent-minded adult, you may want to steer clear of anything that could be dangerous if it is left unattended.
• Are there aspects of the item that are inherently dangerous? Toys with lots of small, moving parts, for example, can turn in to choking hazards. Toys with long strings can end up being a strangulation hazard. Think carefully about the recipient of your intended gift before you buy.

Despite your best efforts, you may still end up with a defective product that causes an injury. Every year, the news is filled with stories about injuries caused by gifts that had hidden dangers. If your loved one is hurt, talk to an attorney about what you need to do to seek fair compensation.

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Prepare for a New Year’s divorce with these 4 steps

Originally published by On behalf of Laura Dale.

You’re pretty sure you want a divorce — but you’ve decided to delay formal action until after the holidays are over.

That does not mean, however, that you should just sit around and look for ways to kill the time between now and then.

Four ways to get ready for your divorce

The more you have at stake in your divorce, the sooner you should readying yourself for the future. Here are some of the best steps to take:

1. Take a good look at your budget. In a high-asset divorce, your lifestyle may become an important factor in settlement negotiations. With that in mind, you want to be able to discuss your needs in detail.
2. Get credit in your own name. Look at the credit cards in your wallet. Are any of them solely your own (not shared with your spouse)? If not, it’s time to open a couple of cards so that you aren’t starting your new life without credit.
3. Start collecting financial records. You will need copies of your joint tax returns for the last few years, along with insurance policies, investment account information, data on any retirement funds, the deeds on any real estate you may jointly own and information about your debts. Gathering all that now can make life a lot easier down the road.
4. Gather your support circle. It never hurts to turn to your close friends and relatives or a therapist during this time for some comfort and advice. Once your divorce becomes public, you can expect many of your existing relationships to change, so try to carve out new avenues of support for yourself.

Finally, you probably shouldn’t wait to speak to an attorney. Even if you are firmly decided about not filing until 2021, learning more about the divorce process and your options can help you make plans.

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Medicaid, Planned Parenthood, and the En Banc Court

Originally published by David Coale.

The dry-sounding issue before the en banc court in Planned Parenthood v. Kauffman, No. 17-50282 (Nov. 23, 2020), was “whether 42 U.S.C. § 1396a(a)(23) gives Medicaid patients a right to challenge, under 42 U.S.C. § 1983, a State’s determination that a health care provider is not ‘qualified’ within the meaning of § 1396a(a)(23).”  The practical consequence of that issue, however, is significant–who may sue about Texas’s termination of several Planned Parenthood facilities from that state’s Medicaid program.

The majority held that under a 1980 Supreme Court case and the structure of the statute, the patients did not have the right to sue. In so doing, the Fifth Circuit joined the Eighth Circuit and split with five others. A 7-judge concurrence (2 votes shy of a majority, given the configuration of the en banc court for this case) would have reached the merits and rejected them. The opinions are illustrated in the chart below:

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Artificial Intelligence and Arbitration: The Computer as an Arbitrator — Are We There Yet?

Originally published by Beth Graham.

Attorney Paul Bennett Marrow, member of the American Arbitration Association’s Commercial Panel and Domestic Arbitration instructor at New York Law School, Mansi Karol, Director of ADR Service for the Commercial Division at the American Arbitration Association in New York, and Steven Kuyan, Director of Entrepreneurship at New York University’s Tandon School of Engineering and Managing Director of the NYU Tandon Future Labs, have published “Artificial Intelligence and Arbitration: The Computer as an Arbitrator — Are We There Yet?,” 74 Dispute Resolution Journal 35 (2020) (American Arbitration Association), 2020.  In their article, the authors examine whether a computer can or should issue enforceable binding arbitration decisions using artificial intelligence.

Here is the abstract:

Artificial Intelligence (A.I.) seems every place these days. This article asks: Using A.I., can a computer serve as an arbitrator issuing final, binding awards, with little or no involvement by a human? The authors conclude the answer is “YES.” Arbitration and A.I. have something in common; something that does not exist when A.I. is applied to courthouse litigation. Both have severe constraints put in place by humans; boundaries that are identifiable and enforceable. With arbitration, the constraints are set out by the parties in the arbitration clause. Arbitrators cannot exceed this authority, and if an arbitrator does, the award can be vacated. A crucial distinction exists between the actions of a judge and an arbitrator. A judge has a first obligation to the law and judges have the power to create and modify jurisprudence. Judges have broad discretion and are not bound by the wishes of those who appear before them. The judge must always apply the law. The arbitrator has a first obligation to the parties as expresses in an arbitration clause, constrained only by the injunction that an arbitrator cannot be required to act in a manner violating public policy or is criminal. If the parties fail to require the application of law, an arbitrator can do what is just under the circumstances. Unlike the judge, the discretion permitted an arbitrator is severely restricted by the demands of those whom the arbitrator serves. Algorithms are slaves to the dictates of the programmer. Absent information from a human, an algorithm has no understanding as to what discretion is or how the concept operates. An algorithm cannot go off on its own doing whatever it pleases. A computer programed to mimic the behavior of an arbitrator can do no more than what the arbitrator may do. These distinctions make arbitration the ideal candidate for applying A.I. for resolving some, but not necessarily all disputes. The authors conclude that A.I. has a place for arbitrating smaller disputes that might otherwise be lost because of the circumstances of a disputant, judicial inefficiencies, or worse, outright corruption. Technical topics are discussed and explanations about how A.I. works are provided in terms the non-computer scientist can easily understand. These include “machine learning” and its various subsets, including “deep learning,” how mathematics and pattern-recognition probabilistic methods play a role in the creation and operation of an algorithm and how to overcome the concern of many that a computer is a “black box” the operation of which is beyond human comprehension. A.I. is applied to a simple dispute involving a dry cleaner who is claimed to have damaged a garment given over for cleaning. The authors conclude that properly structured, A.I provides the basis for a computer taking on the role of an arbitrator, issuing final and binding awards without almost, if not any involvement by the human.

This and other publications written by the authors may be downloaded free of charge from the Social Science Research Network.

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Has “Adding Value” For Your Clients Changed in 2020

Originally published by Cordell Parvin.

How many times have you been told that to differentiate your firm you need to “add value?”

Have you ever asked your clients for suggestions on ways you can add value?

When I practiced law, I did. I asked: “What is most effective way we can, at our expense, invest in our relationship with you?”

Here is what they told me. I want you to think about whether your clients would respond differently in 2020.

GC Client 1: Provide memos explaining new court cases/laws/regulations that would affect our business.

GC Client 2: Don’t charge for learning about our company.

GC Client 3: Willingness to help train, share forms and answer simple questions without opening a file and recording time.

GC Client 4: Meet with us at your expense and find out what we need.

GC Client 5:  Coming back after completion of a project and sharing with us any lessons learned and asking for our feedback.

I do not think there is anything unexpected in these responses. I received these answers over 15 years ago. My question for you is: Are the answers still valid in 2020?

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When is the Best Time to Consider Medicaid Planning?

Originally published by dpl_admin.

There is a “goldilocks” time to do Medicaid planning, but it can be a wide range.  You can be too young, but you can also be too late. An ideal time to consider Medicaid planning is after retirement (unless your idea of retirement is 90!), especially if you have stable income and expenses.  In almost […]

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Thanksgiving 2020: In which we discuss the many reasons we have to be thankful, including but not limited to Dolly Parton!

Originally published by Catherine Hanna.

As we approach Thanksgiving this year, I know it will be different for many of us. There will be empty chairs at the Thanksgiving table, whether because of friends and loved ones we have lost this past year or because the pandemic has caused so many of us to curtail our traditional holiday gatherings. Still, there are reasons to be thankful and this year it may be more important than ever to count our blessings!
When I polled my Hanna & Plaut co-workers to see what they are thankful for, I was not surprised to hear that family, friends, and pets topped the list! Our dogs, including but not limited to Sadie, Harrison, Nova, Bella, and at least one cat, Sparkles, give us reason to celebrate. But I think that Tara may have found the one thing we can all be grateful for – the universal force of love and kindness that is Dolly Parton. As Tara notes, Dolly’s $1 million contribution helped fund the Moderna Covid-19 vaccine. Did you know she also gives away books? Dolly Parton’s Imagination Library is a book gifting program that mails free, high-quality books to children from birth until they begin school, no matter their family’s income. To date, she’s given away over 147, 137, 107 books!

Here are some of the other messages of thanks from your friends at Hanna & Plaut:

• I am very thankful for my health, as well as the Hamilton soundtrack, UberEats, and brownies and ice cream.
  Ana Navarrete
• There are a million things I am thankful for today, but here is a short list: my dear friends and family, including my two little nieces; my cat, Sparkles; copious amounts of coffee; journaling and books; the Greenbelt, where I am often found hiking; Christmas-scented candles; discovering and binging new-to-me music albums; the beautiful autumn weather in Texas; the hard-working folks on the front lines, whether that be in the hospitals, grocery stores, or elsewhere; and of course, my health. Cheers and Happy Thanksgiving, everyone!
  Elina Lupin
• Very thankful for the continued health and safety of loved ones, for the resilience of children, and our supportive community. Also, special thanks to Youtube’s Cocomelon and Disney+’s Mickey Mouse Clubhouse for giving this mama the perfect 30-minute coffee break from toddler chaos.
  Sheila Tan
• My essential worker husband, who will be working this Thanksgiving day a 4-11 shift. ….thanks again 2020! (Ed. note – We are all thankful for John and all the other healthcare workers out there!)
  Teachers who are giving it their all – either in-person or zooming. (Ed. note – Same! Go teachers!)
  My flexible work life – thanks to Catherine and David – which gives me the ability to stay home and help my kids with the nuttiness of online school and countless runs for Covid tests.
  The mild Texas weather this fall/winter.
  And the amazing scientists behind the vaccines (…special shout out to Dolly Parton, whose I million dollar donation in April helped fund the Moderna vaccine!)
• Tara Mireur
• Would it be too obvious if I simply answered with pics of my dogs?
• Lauren Burgess
• This year I am so grateful for my loved ones and that they have stayed healthy, my pup (always lol) and that I am back at Hanna & Plaut. Learned the hard way that it is wayyyy better here than anywhere else! (Ed. note – We are also very grateful that Jill came back!)
  Jill Coon
• Thankful for the unexpected silver linings in this tempestuous year. Also thankful to kick 2020 to the curb.
  Eric Peabody
• I am so very thankful for good people showing their faces in this world. I know I can be naïve at times, however it’s just always important for me to keep belief in the majority of the human race being good. I am also thankful for my health, my job, my family & friends, my loving partner and my fur baby Harrison.
  Raymond Jackson
• Thankful I’m surrounded by smart, scrappy lawyers and a partner who’s managed to keep folks happy and productive despite all the challenges.
  David L. Plaut

As for me, I share David’s gratitude for the great team we have here at Hanna & Plaut and, of course, the clients who we get to work with every day. But one of my top work-related reasons for gratitude is how seamlessly we pivoted to working from home! I am certain that our administrative team, led by office manager extraordinaire Rebekah Murphy, would say that it was not as easy as it looked, but it sure felt like we didn’t miss a beat and I really appreciate that more than I can say.

I am also thankful for books, a mother who taught me that reading can be the best entertainment, and curbside pickup at the Austin Public Library. In a year where many of the things I love the most – travel, going to the movies, and eating out at restaurants – are curtailed, books have been a constant source of comfort and distraction. I won’t miss 2020 when it finally limps to its bitter end in a few weeks, but I certainly recognize there is much to be thankful for, including perspective! ! In the words of the inimitable Dolly, “if you want the rainbow, you got to put up with the rain.”

 

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The “Equitable” Solution – Actors’ Equity Association Handles Streaming Through 2021

Originally published by Charles Wallace.

Photo by Kyle Head

The COVID-19 pandemic has altered the way many businesses operate—including performance venues and theaters. As most theaters have been shut down since March 2020 (Broadway is not scheduled to tentatively return until May 2021), artists and producers have been determined to find a workable solution to safely continue operations. One of the most popular options has been to stream live theatrical performances online, which would enable patrons to enjoy a show from the comfort and safety of their own homes. This solution, however, has called into question which of the two largest actors unions, Actors’ Equity Association (“Equity”) and SAG-AFTRA, would oversee the contracts for the actors participating in these live streaming performances.

On the one hand, Equity has traditionally covered the world of live theatrical performances, and on the other hand, SAG-AFTRA has represented actors working in film and television, recording artists, and media and radio personalities. Thus, the merging of live performance with broadcast has created a rift between these two unions—with Equity claiming that works created by theater producers should fall under its union contracts, and SAG-AFTRA claiming that anything recorded for broadcast should fall under its own union contracts. SAG-AFTRA has for decades covered recorded or live broadcast performances, including Broadway shows like “Hamilton,” “Diana” and “Jesus Christ Superstar,” but the increased demand for streaming of performances has put pressure on Equity to determine whether it has a right to cover these works as well.

Equity first brought its dispute with SAG-AFTRA to the public’s attention by contacting the New York Times, which published an article on October 7, 2020 explaining Equity’s claim that SAG-AFTRA had agreed to cover around 60 streaming theater productions which should have been covered under an Equity contract. Equity further claimed that its members were being offered much lower pay, that its members would need to work longer hours to meet healthcare eligibility thresholds, and that the SAG-AFTRA contracts were not covering stage managers.

In response to the New York Times piece, SAG-AFTRA claimed that it had been negotiating contracts based on a proposed waiver with Equity. This waiver allowed Equity, until April 30, 2021, to cover recorded theater performances streamed on restricted platforms only accessible by ticket holders or subscribers, and not on streaming platforms already working with SAG-AFTRA such as Netflix, Hulu, YouTube, HBO Max, Disney+, Apple TV+, CBS All Access, and Peacock. Under the waiver, Equity was also limited in the number of tickets a producer could sell—the producer could not exceed double the amount of seats in its theater (limited to a maximum of 950 tickets per show). Both unions had the right to revoke the waiver with 60 days notice.

SAG-AFTRA maintained that the two unions were still negotiating the waiver when Equity went to the New York Times, but that it would be launching an investigation into Equity’s contracting practices and filing a formal complaint. Particularly, it believed that many of Equity’s agreements with producers have taken thousands of days of work from performers who should have been working under SAG-AFTRA contracts. Despite the imminent complaint, Equity maintained that it would continue to issue contracts with employers interested in producing remote live theater.

Instead of turning to litigation, however, the unions reached a tentative agreement on November 14, 2020, which was approved unanimously by the SAG-AFTRA National Board of Directors and Actors’ Equity Association National Council. This agreement recognized and preserved SAG-AFTRA’s historic jurisdiction in broadcast of live and recorded performances. However, given that live theater companies would only be able to reach audiences during the COVID-19 pandemic by recording and/or streaming productions, Equity would be allowed to cover these types of works until December 31, 2021 (this would not include distribution on paid streaming services like Netflix, Amazon, HBO Max, and Hulu).

The unions’ settlement of the matter has avoided costly litigation and potential fallout on the livelihoods of the members they represent. Many artists are struggling, and this equitable outcome will give artists a reliable means to maintain their healthcare coverage, make a living, and continue to entertain us while our country continues to fight and adapt to the pandemic.

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The Appeals Process for Property Tax Appraisals

Originally published by Edward Corts.

Property tax, or ad valorem tax, is a fact of life for people and businesses in Texas. As one of the few states in the United States without income tax, Texas counties rely on property tax as a source of revenue to pay for local services.  The counties use the money collected as property tax to pay for public schools, libraries, playgrounds, city streets, county roads, police, fire protection, emergency medical service and many other services.

There are two types of property taxes that that county taxing units collect, real property tax and business personal property tax (‘BPP”).  The Tex. Tax Code §1.04 defines real property as: (a) land; (b) an improvement; (c) a mine or quarry; (d) a mineral in place; (e) standing timber; or (f) an estate or interest, other than a mortgage or deed of trust creating a lien on property or an interest securing payment or performance of an obligation in one of the previous five categories of properties. BPP is the tangible personal property that is owned by a business in production of income.  Tex. Tax Code §1.04(5) defines tangible personal property as property that can be seen, weighed, measured, felt, or otherwise perceived by the senses, but does not include a document or other perceptible object that constitutes evidence of a valuable interest, claim, or right and has no negligible or intrinsic value.  Examples of tangible personal property, or business personal property,

A taxing unit for a county will set the value for taxable property in the county each year.  The value set by the taxing unit is based on the market value of the property for the year.  Market value means the price at which a property would transfer for cash or its equivalent under prevailing market conditions if: (a) exposed for sale in the open market with a reasonable time for the seller to find a purchaser; (b) both the seller and the purchaser know of all the uses and purposes to which the property is adapted and for which it is capable of being used and of the enforceable restrictions on its use;  and (c) both the seller and purchaser seek to maximize their gains and neither is in a position to take advantage of the exigencies of the other.  See Tex. Tax Code §1.04(7).  If a property owner disagrees with the assessed value of his or her property, the Tex. Tax Code provides a process by which the property owner may appeal the assessed value.

The first step is for the property owner to appeal to the taxing unit’s appraisal review board.  If a property owner is protesting the appraised value of real property then she has until May 15^th to file the Notice of Protest (Form 50-132) or the 30th day after the date that notice to the property owner was delivered to the property owner, whichever is later.  See Tex. Tax Code §41.44.  After the protest has been received, the appraisal district with set a date for a formal hearing with three members of the appraisal review board, a staff appraiser, and the property owner or their agent.  At the hearing, the property owner will be allowed to present evidence to support their arguments on the market value of the property.  The decision of the hearing is final but a property owner has options to appeal the decision

A property owner has three avenues to appeal the decision of the appraisal review board.  The first option is to appeal the decision in district court.  A property owner has 60 days from the date they receive the order from the appraisal review board to file a petition with the district court.  The second option is binding arbitration A property owner must file a request for binding arbitration with the taxing unit no later than the 60th day after they receive the order from the appraisal review board.  The last option is to request a hearing with the State Office of Administrative Hearings (“SOAH”). A property owner must file a request for a SOAH hearing with the taxing unit no later than the 60th day after they receive the order from the appraisal review board.  All three options have their strengths and weaknesses with no method seen as the preferred one.

A property owner that fails to file a protest with the county taxing unit loses the right to appeal the appraised value.  Texas courts have uniformly held that a taxpayer who fails to pursue and exhaust his administrative remedies cannot seek judicial review of the appraised amounts and cannot challenge the appraised amounts. See Gen. Elec. Credit Corp. v. Midland Cent. Appraisal Dist., 826 S.W.2d 124, 125 (Tex.1992) (per curiam).  A failure to comply with property Tax Code requirements, such as not protesting the initial valuation before the appraisal review board, deprives the reviewing district court of jurisdiction.  See KM-Timbercreek, LLC v. Harris Cty. Appraisal Dist., 312 S.W.3d 722, 728 (Tex. App. 2009).

If a property owner is sued for property taxes owed the property owner is severely limited in the defenses that they can raise. Tex. Tax Code §42.09 provides the exclusive affirmative defenses that a property owner may raise in a suit for delinquent tax.  Under Tex. Tax Code § 42.09 non-ownership of the property on which the tax was imposed on January 1 of the year for which the tax was imposed; or that the property was not located within the boundaries of the taxing unit claiming the tax are the only two defenses a taxpayer can raise.  A property owner is not allowed to challenge the appraised value of the property in a delinquent tax suit.  See Tex. Tax Code §42.09.

The preceding paragraph really underscores the need for a taxpayer to protest the appraised value of their property be it real or BPP if they believe the value is too high.  Without appealing the appraised value, it severely limits the arguments that a taxpayer can make and can potential create a large financial problem for the taxpayer.

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Navigating Safe Harbors: Review of the Protections Provided to Governing Persons by the Texas Interested Party Statute and the Business Judgment Rule

Originally published by Winstead.

Under Texas law, when the owners of closely held companies have co-investors, they need to exercise care in managing their business. This need for caution is due in large part to a Texas statute that makes it easier for minority shareholders or minority members of LLC’s (“Minority Owners”) in closely held companies to file derivative lawsuits alleging claims for breach of fiduciary duties against the company’s officers, directors and/or managers (“Control Persons”).  See Tex. Bus. Org. Code (“TBOC”) §§ 21.551 and 101.451-463.   This derivative Texas statute removes substantial procedural barriers that would otherwise exist for Minority Owners in filing a derivative lawsuit, and it has been the subject of our previous posts. (Read:  Shareholder Oppression Claims)

When Minority Owners file derivative claims for breach of fiduciary duties against the company’s Control Persons, however, the Control Persons have significant defenses available to them under Texas law.  These “safe harbor” defenses were highlighted in a recent decision by the Austin Court of Appeals, which dismissed most of the shareholders’ claims.  See Roels v. Valkenaar, No. 03-19-00502-CV Tex App. Lexis 6684 (Tex. App. – Austin, August 20, 2020, no pet. history).  This post reviews the appellate court decision in Roels, and the court’s analysis of the minority shareholders’ claims for breach of fiduciary duty and the available defenses to these claims is helpful for both Control Persons and shareholders to understand.

Elements of Fiduciary Duty Claims

In Roels, the minority shareholders contending that certain of the company’s officers and directors had breached their fiduciary duties to the company by allegedly engaging in interested-director transactions, misusing company resources and failing to pursue a valuable corporate opportunity.  The trial court overruled the defendants’ (Governing Persons) motion to dismiss, but the appellate court largely reversed the trial court’s ruling and, for the most part, dismissed the shareholders’ claims.  The court’s decision arose in the context of considering a motion to dismiss the Defendants filed under the Texas Citizens Participation Act (“TCPA”).  It is not necessary to review the TCPA for our purposes here, however, in focusing on the court’s rulings regarding the shareholders ’breach of fiduciary duty claims and the defenses to those claims.

As a starting point, the Court reviewed the specific elements of the shareholders’ breach of fiduciary duty claims:

The elements of a claim for breach of fiduciary duty are: (1) the existence of a fiduciary duty between the parties; and (2) a breach of that duty by the defendant that either (3) caused damages to the plaintiff, Beck v. Law Offices of Edwin J. (Ted) Terry, Jr., P.C., 284 S.W.3d 416, 429 (Tex. App.—Austin 2009, no pet.), or benefit to the defendant, Lundy v. Masson, 260 S.W.3d 482, 501 (Tex. App.—Houston [14th Dist.] 2008, pet. denied); Jones v. Blume, 196 S.W.3d 440, 447 (Tex. App.—Dallas 2006, pet. denied

Texas Law Protects Governing Persons – The Interested Director Rule

After reviewing the underlying facts of the fiduciary duty claim, the court then evaluated the safe harbor defense that the defendants raised to the allegation that they had engaged in an interested party transaction in violation of their fiduciary duties.  TBOC sets forth a statutory framework defining the scope of fiduciary duties that interested persons owe to their companies, as well as providing Governing Persons with statutory protection against claims when they meet specific statutory requirements.  Specifically, TBOC Section 21.418, which is also known as the Interested Director Rule, provides interested governing persons—under certain conditions—with a “safe harbor” immunity.  A similar TBOC provision applies to Governing Persons in LLCs. See TBOC § 101.255.  The three conditions that. Governing Persons must satisfy to avoid liability for what would otherwise be improper, self-dealing transactions are discussed below.

First, the Governing Persons must disclose all material facts related to the transaction to the board of directors or the managers of the company, and a majority of these non-interested directors, members or managers (i.e., governing persons with no self-interest) must approve the transaction in good faith.  Alternatively, the Governing Persons can appoint a special committee to consider the transaction, disclose all material facts regarding the transaction to the members of the special committee, and a majority of disinterested committee members must then approve the transaction in good faith.

Second, the Governing Persons must disclose all material facts related to the transaction to the shareholders or members who must then approve the transaction in good faith.  Material facts are all facts relevant to fairness, including, but not limited to, the extent of the conflict, the price terms, and the effect of those price terms on the members.  Disclosure of all material facts relevant to why Governing Persons might approve or disprove the transaction is required.

The Texas Legislature did not include a definition of “good faith” in the TBOC and case law is sparse regarding this provision.  The good faith obligation is likely part of the Governing Person’s fiduciary duties, however, because Texas law has long held that good faith is included in the duty of loyalty.  This good faith requirement forbids conduct by the Governing Persons contrary to the interests of the entity to which the fiduciary duty is owed, regardless of whether another is benefited.  The other common meaning of good faith is contractual in referring to implied duties of parties to a contract, but Texas law does not favor or generally adopt implied duties.  Thus, a Texas court would likely rely on fiduciary duty case law when considering the meaning of “good faith” in the TBOC.

The final statutory condition protecting Governing Persons from liability from claims for fiduciary duty based on alleged self-dealing transactions is the fairness defense—Governing Persons will not be held liable to minority owners if the transaction is determined to be fair to the company.  This essentially codifies the common law fairness requirement.

In Roels, the court dismissed the shareholders’ interested party claims after determining that the defendants had:

… cited to evidence they presented with their motion to dismiss demonstrating that the Board unanimously consented to and approved of the Series C Deal after all material facts were disclosed. See Tex. Bus. Orgs. Code § 21.418(c) (providing that if interested-director transaction has either been approved by Board after material facts are disclosed or is fair to corporation, shareholders will have “no cause of action” against director for breach of duty with respect to transaction); In re Estate of Poe, 591 S.W.3d 607, 627-28 (Tex. App.—El Paso 2019, pet. filed) (noting that “common law savings rules” of board consent to interested-director transactions were codified by Business Organizations Code’s safe-harbor provisions). The shareholders neither contest this evidence nor allege any specific material facts that Roels and Barshop failed to disclose. Accordingly, we hold that—assuming the shareholders established a prima facie case for Roels‘s and Barshop‘s breaches with respect to the Series C Deal—the defendants established by a preponderance of the evidence a valid safe-harbor defense to that claim, and the trial court should have dismissed the shareholders’ claims related to the Series C Deal.

In sum, the court assumed for purposes of its analysis that the minority shareholders could make out a basic (prima facie) breach of fiduciary claim against the Governing Persons.  The court nevertheless held, however, that because the defendants had fully disclosed all of the material facts to the Board and the board had voted to approve the transaction, the Governing Persons were protected from liability by the safe harbor of the Interested Director Rule.

Business Judgment Rule Also Protects Governing Persons

 The minority shareholders in Roels asserted claims against the Governing Persons based on loans they made to the company from affiliated businesses they controlled.  The shareholders alleged that these loans provided them with personal benefits that constituted self-dealing.   In considering this claim, the court found that that the shareholders failed to present any evidence that the company had been damaged by the loans at issue. The court stated:

“To prove the damage-to-plaintiff or benefit-to-defendant element of a claim for breach of fiduciary duty based on self-dealing, a plaintiff must demonstrate that the fiduciary obtained a benefit for itself either at the expense of its principal or without equally sharing the benefit with the principal.”

While the shareholders have alleged in conclusory fashion that the loans contained “non-market terms” and have “disproportionately benefitted” Roels and Barshop, they have not identified any specific harm to the Company or benefit to the defendants as a direct result of the loans. For instance, they have not cited to any evidence that MBlock and Barshop Ventures have  accelerated or otherwise sought to enforce the notes, attempted to seize collateral, or deducted payments from the Company’s receivables (although they purportedly had the right to do so). Nor have they alleged that the Company has made any payments on the loans.

Regarding the misappropriation claim, the court dismissed this claim against one of the defendants, when there was no evidence that he had intended to benefit personally from the company’s information.  The court found that dismissal of this claim was not appropriate against one of the defendants, however, who was also an officer of an affiliated entity that had allegedly misappropriated company information.  For this Defendant, the court concluded that it could be reasonably inferred he had pursued the acquisition at issue with the intent to personally benefit from the company’s expenditure of funds that were used to conduct due diligence.

Protection Afforded By The Business Judgment Rule

The shareholders in Roels also asserted a number of claims against the company’s CEO based on his alleged dereliction of duties.  The “common thread” of these claims as recited by the Court was that the CEO had “allegedly made inept financial and management decisions” and also “promoted and executed second-rate deals” that favored other board members, which were not in the company’s best interests.  The court’s treatment of these claims is important, because minority shareholders often have strong criticisms of the actions and decisions that are made by the Governing Persons.

These claims of mismanagement triggered the defendants’ assertion of the business judgment rule defense, which the court aptly summarized as follows:

In Texas, the business judgment rule generally protects company officers and directors for alleged breaches of duties that are based on actions that are negligent, unwise, inexpedient, or imprudent if the actions were “within the exercise of their discretion and judgment in the development or prosecution of the enterprise in which their interests are involved.” Sneed, 465 S.W.3d at 178.  Essentially, the business judgment rule, as pronounced long ago by the supreme court in Cates and reaffirmed more recently in Sneed, operates at this stage of a lawsuit as a requirement that a plaintiff plead more than “mere mismanagement,” neglect, abuse of discretion, or unwise and inexpedient acts to state a cause of action. See Sneed, 465 S.W.3d at 186-87 (noting that “[i]t is insufficient for a shareholder plaintiff to allege a derivative right to relief against a corporation’s officers or directors for breach of a duty based upon ‘mere mismanagement or neglect . . . , or the abuse of discretion lodged in them in the conduct of the company’s business,’” which allegations “may be disposed of on special exceptions or summary judgment”)(quoting and citing Cates, 11 S.W. at 849)).

The court also noted that the shareholders had not alleged that the defendants engaged in fraud or offered evidence of any damages the company had sustained from alleged fraudulent conduct.  In the absence of evidence of fraudulent conduct by the CEO or damages caused by his fraudulent actions, the court concluded that the business judgment rule required dismissal of all of the shareholders’ claims based on the CEO’s alleged mismanagement.  In the Court’s words:

Because the shareholders have not identified clear and specific evidence of  conduct by Pabst that does not fall within the business judgment rule, we conclude that the trial court should have granted his motion to dismiss as to the shareholders’ “dereliction of duties” claims.

Conclusion

The majority owners of closely held private companies are given wide discretion to operate their companies as they choose, and the Business Judgment Rule protects them from liability even when they mismanage the business in ways that are negligent or unwise.  Further, majority owners can engage in interested party transactions when they make full disclosure of all material facts and the proposed transaction is approved by the required majority of Governing Persons. But these protections afforded to majority owners by Texas law do not mean that they have carte blanche to exploit their control over the business to act in ways that solely benefit themselves at the company’s expense.   Majority owners remain subject to liability to their minority partners in derivative lawsuits when the owners engage in self-dealing that violates their fiduciary duties and harms the company, because this improper conduct is not protected by the Business Judgment Rule.  Similarly, majority owners who conceal key information about a self-interested transaction from their Governance Persons and engage in deals with the company that do not pass the fairness test will not find a safe harbor in the Interested Director Rule.

Curated by Texas Bar Today. Follow us on Twitter @texasbartoday.

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