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Seasons
Greetings and Best Wishes for the New Year!
A quarterly e-newsletter from Orgain Bell
& Tucker, LLP
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Late Fall 2008
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This
Issue |
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GET IT IN WRITING
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EMPLOYERS: DON'T LET TIPS TRIP
YOU
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LANDOWNER GETS SETTLEMENT FOR
"TAKING"
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CYBER INSURANCE FOR
BUSINESSES
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LLC RULING FAVORS TAXPAYERS
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FEDERAL ESTATE TAX
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IN THE FIRM
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BEAUMONT
470
Orleans Street
P.O. Box 1751
Beaumont, Texas
77704-1751
Phone: 409-838-6412
Fax: 409-838-6959
HOUSTON – THE WOODLANDS
10077 Grogan's Mill
Rd.,
Suite 500
The Woodlands, Texas 77380
Phone: 281-296-8877
Fax: 281-296-7444
SILSBEE
560 South Fourth Street
Silsbee, Texas 77656
Phone: 409-386-0386
Fax:
409-386-0900
AUSTIN
1601 Rio Grande, Suite 330
Austin, Texas 78701
Phone: 512-457-8797
Fax: 512-457-8792
For more
information
visit our website at: www.obt.com
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When an Internet
executive held a meeting with the chairman of a
telecommunications company, the
agenda was a new business idea that the Internet
executive had. The discussion was transformed into
a recruitment when the telecommunications
executive suggested that the idea should be
pursued within the company he headed. For two men
in the upper echelons of high-tech businesses,
they then chose a decidedly low-tech way to
memorialize their agreement. The end result,
however, shows how substance can sometimes triumph
over form in the law of contracts formation.
At the end of their
meeting, the telecommunications executive simply
wrote out the agreement by hand on two notebook
pages, and both men signed it. The writing
included specifics as to how the newly hired
executive would be compensated, the terms on which
he could quit if he became unhappy, and what would
happen if intellectual property involved in the
deal could not be transferred to the
telecommunications firm. It also included the
statement that "[t]he parties will complete formal
contracts as soon as possible but this is
binding." This would turn out to be pivotal
language in the litigation that followed.
Unfortunately, the new
arrangement quickly went downhill, and after about
six months the new employee was fired. The
relationship ended with the "formal contracts"
never having been drafted and executed. When the
former employee sued for breach of contract and
other wrongs, more than six years of litigation
ensued, with two trials and two appeals.
Much of the case
focused on whether the handwritten agreement that
started everything was a valid, binding contract.
The telecommunications company argued that it was
merely an "agreement to agree." However, a jury
eventually ruled that the agreement was valid, and
that the telecommunications firm had breached the
terms of the contract represented by the two
notebook pages.
Four factors are
usually considered in determining whether a
"preliminary agreement" is binding. In this case,
the first two clearly favored the fired executive:
There was no explicit reservation of a right not
to be bound (in fact, the handwritten agreement
said the opposite) and the executive had partially
performed the contract. The third factor is
whether all of the terms of the alleged contract
were agreed upon. On that point, the agreement,
although it may have lacked some details,
addressed all of the essentials for a binding
contract.
The final factor is
whether the agreement was a type of contract that
is usually committed to writing in a formal
manner. When millions are at stake, as was the
case here, it may be unusual to seal the deal with
a handwritten document, in outline form, and
drafted on the spot by one of the principals
without benefit of legal counsel. The agreement
was not much to look at, barely surpassing in
formality the proverbial agreement scribbled on a
cocktail napkin. Still, that it was unorthodox did
not mean that the method was unprecedented. In the
end, this factor, balanced against the other
three, was not enough to discard the agreement and
deprive the departed executive of the
benefits of his bargain. |
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Protection |
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Employers in
service industries are well advised to pay close
attention to their practices and policies
affecting customers' tips for their employees.
There are a variety of ways in which missteps can
run afoul of federal or state laws, including the
federal Fair Labor Standards Act (FLSA).
Employees might contend, for
example, that the employer is effectively reducing
their tip income by imposing various fees or other
charges on customers. Or, contrary to a
requirement in the FLSA, employees who are paid
less than the minimum wage might not be getting
enough in tip income to make up the difference
between their hourly rate and the minimum wage.
Recent cases in the news involved yet another
alleged violation, sometimes taking place on a
very large scale, where employees are made to
share tip income with fellow employees who
supervise them.
In one of the tip-sharing cases, a
state court ruled in favor of a class of
plaintiffs consisting of baristas, or coffee
counter servers, whose tips were required to be
shared with their shift supervisors, in violation
of state law. Change left for tips apparently adds
up, as the judgment for the tens of thousands of
servers, for about an eight-year period, topped
$100 million, including interest.
The case was not cut-and-dried, as
the supervisors were themselves hourly workers who
had customer service duties in addition to the
responsibility of scheduling workers and giving
directions to the baristas. It was not a case of
highly paid bosses dipping into the tip jars
filled by customers they never saw in person.
When a shift supervisor hands a
customer his latte and muffin, and the customer
responds with a tip, the customer may assume that
the money, or at least part of it, goes to the
supervisor. Instead, under the ruling, the
supervisors must now keep their hands off the
tips, and the employers must ensure such an
outcome. |
In the wake of this case, similar
lawsuits have been filed against the same
employer, a national chain, and against other
employers in other states. Companies in the
restaurant, hotel, gaming, transportation, and
delivery businesses face the largest risks for
mishandling the treatment of tips. There is
another pending case in which casino dealers have
complained that an employer's new policy illegally
requires them to share tips with floor
supervisors.
The legal issues surrounding the
treatment of tips are murky enough in any one
state, but further complicating the matter is the
fact that there are variations among the states
and between the statutes for a state and for the
federal government. This makes it especially risky
for national employers to assume that a
one-size-fits-all policy on tips will be
sufficient for all of their locations.
"Back-room" personnel, shift
supervisors, hostesses, greeters, drink servers,
and other similar positions could be treated
differently depending on what state you are in.
Employers should regularly assess their job
descriptions and tip-sharing policies against
applicable state and federal laws. This kind of
audit is useful not only for detecting or avoiding
possible violations, but for laying the groundwork
for a potential "good-faith" defense under the
FLSA if litigation ensues.
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When the
government takes aim at private property to be taken for
some public purpose, more often than not any resulting
litigation is a contest over how much the property owner
should be paid, rather than whether the exercise of the
power of eminent domain was appropriate in the first
place.
From the
landowner's standpoint, it is important to realize that
adequate compensation is not determined simply on the
basis of the current use of the property. Instead, the
landowner is entitled to the value of the property based
on its "highest and best" use (whether that use already
exists or is only in the eye of a developer), so long as
such a potential use is not too speculative or otherwise
foreclosed by applicable laws and regulations.
The importance to
a property owner of negotiating compensation on the
basis of a best-case, but realistic, development
scenario for the property is illustrated by a recent
case in which the owner of a vacant, 22,000-square-foot
lot settled with a town for compensation in an amount
that was about 27 times higher than the amount initially
offered by the town.
The lot was zoned
for residential use, although at the time of the
condemnation action the owner had no building or
development plans. Appraisers hired by the town offered
an opinion that the vacant lot's best use was only as
open space, or as a buffer for an abutting lot. They
reasoned that compliance with the town's lot area and
frontage requirements, as well as with its road
standards for improving the dirt road on which the lot
was located, would be so burdensome as to make any
development of the property prohibitively expensive.
They also indicated that extensive development costs
would preclude development even if the lot was
considered to have grandfathered status that would
protect it from certain town requirements.
For its part, the
landowner retained experts who opined that the lot was,
in fact, suitable for residential purposes and should be
valued as such when arriving at a compensation figure
for the taking. As the town's experts had noted, there
were various requirements on the books that, in theory,
could be costly to comply with. However, an examination
of past rulings by the town's zoning and conservation
officials showed that the lot was likely to be exempted
from some of the requirements. Moreover, improvement of
the dirt road, which would have been an especially
big-ticket item, was not likely to be required.
Both sides were
necessarily looking into the future to some extent, but
the landowner was able to depict a scenario for the lot
that was optimistic enough to bring about a favorable
monetary settlement with the town.
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 Businesses have been dependent on
computerized information for some time now, but it has
been only relatively recently that insurance companies
have devised and offered insurance policies specifically
tailored to the potential losses from a variety of
problems that can affect a computer system.
An early impetus
for cyber insurance was anticipation in the late 1990s
of losses associated with the coming of "Y2K." That
concern turned out to be overblown, but the threats that
have spurred cyber insurance offerings since then are
real enough, including viruses, hackers, and legal
injuries to others from information on a company's
website. One study has found that the average annual
technology- related financial loss for United States
companies more than doubled just from 2006 to 2007.
Another
development that prompted more cyber insurance policies
was the realization, which sometimes came as a surprise
to insured businesses, that general liability policies
did not cover computer problems. Cyber insurance is a
good idea for all of the usual reasons associated with
insuring against business losses. But it also makes
sense because of the particular costs associated with
responding to a computer data breach, especially now
that many states have adopted data breach notification
laws.
This kind of
postmortem after a breach could include such measures as
notifying affected customers, paying for credit
monitoring for those customers, replacing compromised
credit or debit cards, and undertaking forensic analyses
of affected databases. All in all, there are some
expensive scenarios to insure against.
Categories of
Losses
The losses covered
by cyber insurance generally fall into two categories:
first-party losses, meaning those affecting the business
itself; and third-party losses, meaning incidents mainly
affecting outside parties, including the customers of a
business. Of course, the same underlying problem can
cause both kinds of losses, such as when unauthorized
access to a computer system shuts down the computer
system of a company whose customers or clients rely on
that system through an extranet.
A comprehensive
cyber insurance policy should encompass both kinds of
risks. These are the typical categories of coverage:
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First-party
business interruption, covering lost revenue
experienced during downtime due to accidents or
security breaches (but typically not losses due to
catastrophic regional power outages);
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First-party
electronic data damage, such as the compromise of data
from a virus infection;
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First-party
extortion, including the demands made by hackers;
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Third-party
network security liability, arising from compromise
and misuse of data stemming from identity theft and
credit-card fraud;
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Third-party
network liability in the form of court judgments
obtained by persons harmed by problems originating
with a business's computer system; and
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Third-party
media liability, aimed at the full range of potential
liability from matter published in interactive online
communications. |
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Anna was the mother of three children
and the widow of the man who invented the heart
defibrillator implant. In 1992, she created a trust for
each of her daughters and gave a portion of her
substantial interests in patent licenses to the trusts.
In 2001, she created a limited liability company (LLC),
to which she made some large transfers. She then gave a
16% interest in the LLC to each of the trusts, keeping a
52% interest to herself. Only four days later, Anna died
suddenly and unexpectedly.
The IRS claimed a deficiency of
millions of dollars in estate taxes. It pointed to a
part of the Internal Revenue Code that provides that all
property is to be included in a decedent's estate to the
extent that the decedent has transferred an interest in
the property while retaining for life the possession or
enjoyment of, or income from, the property. There is an
exception to this general rule in cases of a bona fide
sale for full and adequate consideration in money, but
the IRS argued that the exception did not apply in the
case of Anna's estate.
In a somewhat surprising decision,
given a recent trend favoring the IRS in such disputes,
the United States Tax Court sided with the estate and
kept the LLC assets out of the gross estate for estate
tax purposes. The court ruled that the bona fide sale
exception applied, notwithstanding that the LLC
activities were not in the nature of a "business." It
was sufficient that Anna had "legitimate and significant
nontax reasons" for creating and funding the LLC,
including joint management of family assets, pooling
family assets to maximize investment opportunities, and
providing for each of her daughters on an equal basis.
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Some practical lessons for minimizing estate
tax liability while using family LLCs emerge from the
case of Anna's estate. They include the following: (1)
document the legitimate and significant motivations,
unrelated to estate taxes, for forming such an entity;
(2) continue the entity after the decedent's death, to
avoid the appearance of an ordinary trust; (3) if, as in
Anna's case, the donor dies unexpectedly a short time
after the gifts, be prepared to demonstrate that the
death was unexpected; and (4) keep sufficient assets
outside of the entity to cover the donor's living
expenses, to avoid the possibility that the donor will
treat the assets of the entity as her own. The planning,
drafting, and advice associated with a family LLC
entails resolution of complex issues and requires the
guiding hand of a knowledgeable
professional. |
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The federal estate tax
credit, currently at $2 million, is set to
increase to $3.5 million in 2009. This means
that in 2009 you can leave up to $3.5 million to
your heirs without any federal estate tax
liability.
If Congress takes no action,
the federal estate tax will be repealed
altogether in 2010. While this is an unlikely
scenario, it does underscore the uncertainty
involved in estate planning over the next few
years. Make sure to meet with a professional to
review your
plan.
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 OBT LAWYERS IN THE
NEWS
Best Lawyers in America –
2009. Best Lawyers in America is the definitive
guide to legal excellence in the United States.
Selection to Best Lawyers is based on an exhaustive
peer-review of more than 2.5 million evaluations by the
top attorneys in the country.
Jack P. Carroll – Personal
Injury Litigation
John Creighton III – listed for
at least 10 years in the specialties of Employee
Benefits
Law, Tax Law, and Trust and
Estates
Robert J. Hambright – listed for
at least 25 years in the specialties of Labor and
Employment Law
Benny H. Hughes, Jr. – listed
for at least 10 years in the specialty of Corporate
Law
Gilbert I. Low – listed for at
least 20 years in the specialties of Commercial
Litigation, Personal Injury Litigation, and White-Collar
Criminal Defense
J. Hoke Peacock II – listed for
at least 10 years in the specialty of Commercial
Litigation
Gary Neale Reger – listed for at
least 10 years in the specialties of Banking Law,
Bankruptcy and Creditor-Debtor Rights Law and Real
Estate Law
Jo Ben Whittenburg – Health
Care Law and Personal Injury Litigation
Texas
Super Lawyers – 2008. The annual list by Law &
Politics and the publishers of Texas Monthly magazine
recognizes the top five percent of lawyers who have
received the highest point totals as chosen by their
peers, as well as through independent
research.
Gilbert I. "Buddy" Low and J. Hoke
Peacock II (Business Litigation)
Donean Surratt, Michael Truncale
and Jo Ben Whittenburg (Civil Litigation
Defense)
Robert Hambright (Employment
Litigation Defense)
John Creighton III (Estate
Planning and Probate)
Curry Cooksey
(Healthcare)
David Fisher (Personal Injury
Plaintiff: General).
Texas Rising Stars –
2008. The annual list by Law & Politics and the
publishers of Texas Monthly magazine names the state's
top up-and-coming attorneys.
Nathan Brandimarte (Business
Litigation)
Denise Gremillion (Personal
Injury – Medical Malpractice)
Ronda Harkey
(Immigration)
Brian A. Mills (Estate
Planning/Trusts)
Mike Painter (Civil Litigation –
Defense)
Greg Wilkins (Insurance
Coverage)
Litigation Counsel of
America. Formerly known as the American Academy of
Trial Counsel, the Litigation Counsel of America is a
trial lawyer honorary society that includes for
Fellowship less than one-half of one percent of American
lawyers. Fellows are selected based upon effectiveness
and accomplishment in litigation, both at the trial and
appellate levels, and superior ethical
reputation.
Michael Truncale has been
selected to become a Fellow of the Litigation Counsel of
America
Donean Surratt named
Fellow of the Texas Bar
Foundation.
The Texas Bar Foundation
exists to advance the cause of Justice in Texas by
funding educational and charitable activities directed
to that end. Fellows of the Foundation are selected for
their manifest professional achievements and their
demonstrated commitment to the betterment of our Texas
community. Only those who meet the strictest standards
of the profession are chosen to
serve.
Donean has a broad-based
litigation practice with experience in toxic torts,
premises liability, governmental liability, products
liability and employment law. She has been Board
Certified by the Texas Board of Legal Specialization in
Personal Injury Trial Law since 1997. In addition, she
was named by Texas Monthly magazine as a Rising Star in
the legal profession for the years 2004, 2005, 2006 and
2007.
Jennifer Turner becomes a
licensed CPA
Congratulations to OBT
Associate, Jennifer M. Turner, who has qualified to be a
CPA in the State of Texas. Jennifer practices law in the
areas of business, taxation, estate planning, and
probate.
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DISCLAIMER.
THE ARTICLES AND OTHER INFORMATION IN THIS NEWSLETTER
ARE NOT LEGAL ADVICE. YOU SHOULD CONSULT AN ATTORNEY FOR
ADVICE REGARDING YOUR INDIVIDUAL SITUATION. WE INVITE
YOU TO CONTACT US AND WELCOME YOUR CALLS, LETTERS AND
ELECTRONIC MAIL. YOUR RECEIPT OF THIS NEWSLETTER AND
CONTACTING US DOES NOT CREATE AN ATTORNEY-CLIENT
RELATIONSHIP. PLEASE DO NOT SEND ANY CONFIDENTIAL
INFORMATION TO US UNTIL AN ATTORNEY-CLIENT RELATIONSHIP
HAS BEEN ESTABLISHED. THANK YOU.
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