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Texting

By SGR

Who hasn’t sent a typo when texting?

I plead guilty. Texting is quick, but sometimes (perhaps often) I don’t see my mistake until just after I have sent it. And it’s not just me – errors are so common that many people include comical explanations in their signature blocks. https://www.linkedin.com/pulse/excuse-my-typo-signature-lines-collection-pravash-pujari/

But joking aside, not only do grammarians criticize sloppy texting

(https://contentbureau.com/resources/copywriting-tips/excuse-your-typos-no-i-wont-actually), but business websites also point out the “IRL” risks from using texts for important messages.  https://www.inman.com/next/sent-from-my-iphone-please-excuse-any-typos-and-5-other-text-bombs-youre-making/

But aren’t text typos just an inevitable – and harmless – risk of modern life, like a misaddressed email was, all the way back in 2005?

A recent Canadian court did not see it that way – and held an emoji sender liable for a $62K contract, based on his “thumbs up” emoji. https://www.businessinsider.com/judge-ruled-thumbs-up-emoji-can-represent-legally-binding-agreement-2023-7

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(Although the case was decided under Canadian law, the contract formation principles should be familiar to any first-year contracts law student in this country.)

A “thumbs up” emoji (https://emojiguide.com/people-body/thumbs-up/) was a commodities buyer’s response to a request from a business colleague to “please confirm flax contract”. In court, the buyer claimed that he only wanted to confirm receipt of the contract, rather than acceptance. But the seller – and the court – treated it as a binding acceptance of an offer to sell, a familiar contracts law analysis.

To me, the crucial fact for the court was not just the use of an emoji text to form the contract, but also the parties’ “pattern” of conduct, in other commodities deals, over a period of time. The court explicitly equated the emoji to the parties’ prior verbal exchanges such as “ok”, “yup” or “looks good” – which neither party disputed had actually created contracts. As the court described it, these were  “uncontradicted proof of the manner in which the parties conducted their business”.

In a world where seemingly everyone texts, at all times and for all purposes, “this Court cannot (nor should it) attempt to stem the tide of technology and common usage – this appears to be the new reality in Canadian society and courts will have to be ready to meet the new challenges that may arise from the use of emojis and the like”.

As a result, that quick thumbs-up emoji response cost the sender $61,498.09, plus interest and costs.

As a business attorney, I know from long experience that a sad tale such as this will not stop clients from doing business in the way they prefer – and I can’t deny seeing “ok”, “yup” and “looks good” in our clients’ messages. But I can let them know the potential cost of such business shortcuts. I just hope that I can convince them that what works well for setting a tee time should not be the way to make expensive contracts – especially when a simple, “old fashioned” phone call, or even a Stone Age email, can eliminate any uncertainty, and risk.

For further information, please contact Stanley Jaskiewicz, Esquire, of our Business Law department at sjaskiewicz@sgrvlaw.com, or 215-241-8866.

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Corporate

By SGR

Pennsylvania’s Act 122 updated our corporate laws at the end of 2022. Much of the 123-page, single-spaced collection of “omnibus amendments” reads like a detailed proofreading job, cleaning up glitches in the codification of our corporate laws.

However, there are some noteworthy substantive changes, primarily affecting nonpublic firms.

 

The change most visible to the business community will be the annual report filing required beginning in 2024. Entities that must file this report include corporations (both business and nonprofit), partnerships (limited and LLPs), LLCs, business trusts, and certain other “associations”.

This annual filing (and the associated $7 fee) replaces the $70 “decennial report” previously required every ten years (in the absence of any other corporate filings), which was repealed effective in January 2023.

Corporate law geeks should pay attention to several new provisions:

  • Allowing entities to override otherwise applicable fiduciary limitations.
  • Confirming that certain fiduciary duties exist only in favor of the entity, and not of creditors or a shareholder.
  • Confirming that a shareholder is subject to bylaws, whether or not they know what they may say.
  • Allowing corporations (but not LLCs or partnerships) to limit litigation over “internal corporate claims” to a particular Pennsylvania court (provided that such court has “jurisdiction”, the legal right to decide such a claim).
  • Codifying rules for the personal liability of officers.
  • Confirming the effectiveness of share transfer restrictions to protect an election, or to satisfy a statutory or regulatory requirement.

Many provisions confirm that internet technology may be used for corporate meetings, acceding to the Pandemic’s reality.

Act 122 formally validates the common practice of signing contracts using a fictitious name, registered or unregistered (rather than with the formal name registered in Harrisburg). However, a firm still can’t file a lawsuit using an unregistered fictitious name – the court filing must use a firm’s formal name or a registered fictitious name.

The new law’s text is at 2022 Act 122 – PA General Assembly (state.pa.us).

The Secretary of State’s press release on the new annual report requirement is at Annual Reports in Pennsylvania (pa.gov).

For further information about Act 122’s changes, or Pennsylvania corporate law generally, please contact Stanley Jaskiewicz, Esquire, of our Business Law department at sjaskiewicz@sgrvlaw.com, or 215-241-8866.

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crypto

By SGR

For all the attention crypto assets such as Bitcoin have received in the financial press, can a bank lend against them? They are, after all, a valuable asset. Some advisors even treat crypto as its own asset class, and a key part of a diversified portfolio.

But what are crypto assets, for collateral purposes?

Can a lender foreclose on them as easily as more traditional collateral, such as real estate, or investment securities? Of course, a lender must be willing to make such a loan — crypto’s values are certainly volatile. In other words, the collateral value could fall below the loan balance without warning — or the lender could demand several times the amount of the loan in security. The lender could also ask for additional less volatile, traditional forms of collateral, such as real estate, or receivables.

However, help is on the way for the bank lender facing this question (although that help may be on the proverbial slow boat).

That is not unusual — prior revisions of the Uniform Commercial Code to address technology developments took some time (and a major 2018 proposal was approved in only one state). The Uniform Law Commission, which writes model rules for states, has proposed amendments to the laws governing collateral to include “emerging technologies” — including virtual currencies, distributed ledger technologies, and artificial intelligence. UCC, 2022 Amendments to – Uniform Law Commission (uniformlaws.org)

For technical reasons, crypto assets are not “money” (which a lender must possess for it to serve as collateral). Many practitioners instead lump them into the “general intangibles” catch-all — a far cry from fungible “money.” Therefore, rather than shoehorn crypto assets into the existing structure of the Uniform Commercial Code, the proposed law adds a separate chapter for “digital assets,” formally named “controllable electronic records.” The details of the proposal are complex, but have a business-oriented goal — to “preserve the availability of existing transaction patterns.”

In plain English, the proposed law will adopt key concepts of current secured lending to the practicalities of crypto assets. The proposed rules define such fundamentals as the ability to transfer crypto assets free of liens, and how to take an interest free of third-party claims (key concerns for lenders and buyers).

Until laws are amended to provide some clarity, lenders may consider lending against investment accounts — a familiar asset class — holding crypto assets, rather than against the crypto assets themselves. Lenders will likely also await regulatory guidance on how to value these assets. See https://www.federalreserve.gov/supervisionreg/srletters/SR2206.htmfor the Fed’s August 16, 2022, guidance for banks on “Engagement in Crypto-Asset-Related Activities by Federal Reserve-Supervised Banking Organizations.”

Spoiler alert — the Fed is not a fan.

Instead, it required “A supervised banking organization should notify its lead supervisory point of contact at the Federal Reserve prior to engaging in any crypto-asset-related activity.” (Emphasis added.) The release then catalogs a lengthy list of risks bankers must assess for “relevant supervisory feedback, as appropriate, in a timely manner.”

The FDIC urged similar caution in April. https://www.fdic.gov/news/financial-institution-letters/2022/fil22016.html; https://www.fdic.gov/news/financial-institution-letters/2022/fil22016.html#letter

The OCC had issued its own skeptical warning in late 2021, updating its earlier guidance. https://www.occ.gov/news-issuances/news-releases/2021/nr-occ-2021-121.html; https://www.occ.gov/topics/charters-and-licensing/interpretations-and-actions/2021/int1179.pdf

In fact, the three regulators — the Fed, the OCC and the FDIC — announced in November, “Throughout 2022, the agencies plan to provide greater clarity on whether certain activities related to crypto-assets conducted by banking organizations are legally permissible, and expectations for safety and soundness, consumer protection, and compliance with existing laws and regulations.” https://www.occ.gov/news-issuances/news-releases/2021/nr-ia-2021-120a.pdf

As the banking regulators all emphasized, lenders must understand the risks crypto poses, as with any other type of nontraditional collateral. Not only may you face challenges in foreclosing, but its value may fluctuate so much that your regulators may be skeptical about it — much less your CPA.

However, for those comfortable with those risks, and who can become comfortable about regulatory concerns, crypto lending may be a Gold Rush for the 21st century. In fact, one local bank has even expanded its lending ability through a deal involving crypto currency participations — but with limits. According to the bank, “We’re not going to put cryptocurrency on our books. We’re not going to take cryptocurrency as collateral. We’re not going to do anything on the blockchain. We’re not going to do anything with smart contracts.”

https://www.bizjournals.com/philadelphia/news/2022/08/22/bucks-county-bank-become-first-u-s.html?utm_source=st&utm_medium=en&utm_campaign=OT&utm_content=pl&ana=e_pl_OT&j=28810368&senddate=2022-08-22 (Subscription Required)

For further information on lending secured by atypical collateral, please contact Stanley P. Jaskiewicz, a member of our Business Law Department. sjaskiewicz@sgrvlaw.com; 215-241-8866.

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Ownership

By SGR

In our society, ownership usually beats other claims to property. As lawyers learn in first year Property class, “a thief can’t convey good title.”

But in business, sometimes ownership doesn’t matter.

In one common situation, an undisputed owner will lose its property, to someone it may never have known about. How can this happen? More importantly, as a business owner, how can you avoid it? This risk arises when property is consigned to another firm, rather than sold. Consignment allows a seller to obtain possession of property for resale, without having to pay for it. Sellers sometimes prefer consignment, because of the naïve perception that retaining the title is safer than selling to a customer with less than stellar credit – a “poor man’s” form of security, without the legal fees.

I suspect that most people think of pawn shops and upscale resale boutiques when they hear “consignment”.

However, even before the Pandemic’s challenges, some businesses relied on consignments as a way to reduce their firm’s cash flow needs. For example, I worked with one client that financed inventory acquisition for its manufacturing process by accepting it on consignment, rather than purchasing it. Rather than pay upfront for inventory, such firms pay for it only as it is used after they have the cash from a sale. This transfers the carrying costs and risk of financing, from an intermediate buyer to the original seller. If the intermediate seller doesn’t find a buyer, the original seller – who still owns the inventory – can, in theory, take it back, and try to sell it elsewhere.

But that takes time and money, including shipping costs.

As a legal matter, firms supplying inventory to such firms must understand that commercial rules in all states require extremely specific steps to protect the owner’s interest. If the owner of the property doesn’t follow the procedures of the Uniform Commercial Code on consignments, secured creditors of the intermediate buyer will have a better claim to the inventory than its owner.

In simple terms, the intermediate buyer’s lender can foreclose on inventory that its buyer doesn’t own, as illogical as that seems. The owner that supplied it to the buyer can complain, but will lose – unless it took two simple steps before shipping the inventory:

  • File a UCC-1 Financing Statement against the recipient of the inventory (the “consignee”, in legal jargon), identifying the transaction as a “consignment” (a check box on the form). The consignee no longer must sign the UCC-1, but you, as a supplier of the goods, should demand that it sign an “authorization” for you to file against the consignee that receives your goods.
  • In writing, notify the recipient’s secured creditors that the consignee will receive your inventory. (You must pay for a public records search to identify them.)

Again, you must do both of these, before the recipient receives any inventory, to protect your ownership of your consigned goods. If you miss a detail, the law makes your ownership of the consigned inventory irrelevant.

Even though the recipient hasn’t paid you for it – remember, you shipped on consignment – your ownership is legally meaningless. The recipient’s creditors can seize that inventory on foreclosure to satisfy the recipient’s debt, without any obligation to pay you for them, even though you were (not “are”) the owner of those goods. You still have a claim against the recipient to recover the goods’ value, but good luck. If the recipient’s lender has begun a foreclosure, you have to decide whether suing for the value of the inventory you “owned” (again, past tense) would just be throwing good money after bad.

If all of this sounds complex, congratulations! You are correct – secured credit involving consigned goods is not something anyone should try at home. As a practical matter, don’t let a lender force you to incur significant legal fees, by encouraging you to be able to borrow more, by including consigned goods in your borrowing base. The lender may believe – perhaps sincerely, but wrongly – that it is as easy as filing a UCC-1. In fact, you will probably have to pay your lender’s additional legal fees under the typical “borrower pays all lender expenses” provision of your loan agreement.

Instead, consult with counsel to understand the legal cost of consigning inventory, rather than selling it. Then balance that expense against the benefit of the additional borrowing availability from such added collateral, and the carrying cost of continuing to own those consigned goods until the recipient actually sells them, and can pay you for them.

In other words, there is a reason most boilerplate asset-based loan agreements exclude consigned goods in the possession of a third party (the recipient of the goods) from the consignor’s borrowing base. A typical lender may see inventory onsite, without realizing that its borrower does not own it (and can’t use it as collateral). The business moral of the story is simple: call your counsel before incurring costs on a new business arrangement, whether as a supplier or lender. If you don’t, the cliché, “you snooze, you lose” will become “you own, you lose” – and you will pay your counsel for the privilege of doing so.

For further information on this issue, or on writing your form agreements to protect your business and assets in everyday transactions, please contact Stanley Jaskiewicz (https://www.sgrvlaw.com/attorney/stanley-p-jaskiewicz/) at 215-241-8866, or sjaskiewicz@sgrvlaw.com for a no-cost initial consultation.

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Forgiveness

By SGR

Bankers and SBA staffers may soon have that hangover, of their own making. I am speaking, of course, about the Paycheck Protection Program debt hangover – 11.7 million loans created to be forgiven. Everyone knows that forgiveness is hard – hard to request, and, often, even harder to grant – especially when big money is involved. But who could have imagined the challenges of walking away from $400 billion in bank debt?

(Actually, the total amount began as $800 billion, before loans already wiped off the books.)

To try to chip away at that mountain of, literally, debt, the Small Business Administration recently created its “direct forgiveness” portal (https://dfussbaforgiveness.zendesk.com/hc/en-us), for loans under $150,000.00 – over 90% of all PPP loans. That sheer volume has, reportedly, delayed completion of bank forgiveness approvals – 11.7 million separate applications must be filed, reviewed and processed.

To try to break the backlog, the Small Business Administration recently created a new portal (open on August 4, 2021) for “direct” forgiveness by the SBA, rather than by the bank lender. To avoid the appearance of cutting into lender/borrower relationships, the SBA quickly clarified that it will not take “over the forgiveness decision responsibility from the lender.”

Instead, according to the SBA, “Lenders retain responsibility for making the loan forgiveness decision. SBA is simply providing a proven, user-friendly platform on which borrowers may submit their forgiveness applications and lenders will submit their forgiveness decisions to SBA.”

If so, why go to the expense of reinventing the loan forgiveness wheel – and adding a new step to what has been a convoluted process?

Lenders must also choose to “opt in” to the portal, presumably to avoid the cost of creating their own review process – a procedure lenders already do every day, for all loans. Veterans of the PPP scramble in 2020 may also question the characterization of the SBA software as “proven.” Moreover, many lenders may have already incurred costs to build their own forgiveness software. In fact, the 60-day deadline for lenders to process forgiveness applications, and constantly changing program rules (including predictions of expedited procedures), may even have led some lenders to delay the start of processing of their own forgiveness applications.

Why incur unrecoverable costs today, that may be avoidable tomorrow, under the next attempt at simplification? Whatever the reason, many lenders have already declined to participate in the SBA’s direct forgiveness procedure, in favor of their own portals. From a lender perspective, direct forgiveness also eliminates a major incentive to participate in the PPP program – new customer relationships. A bank can’t promote its fee-based services if the customer deals only with the SBA, rather than with a bank relationship officer. Keeping the forgiveness process “in-house,” in contrast, preserves that relationship-building opportunity, in the context of a success experience for the PPP borrower (loan forgiveness).

Lenders must also monitor the new SBA portal for information about the loan status. Without affirmative SBA reporting of loan status, however, bank auditors and compliance officers must regularly check the forgiveness portal before issuing routine financial statements or reports – a lender headache, especially for smaller PPP loans with little or no margin to recover monitoring and forgiveness expenses. If those loans were marginally profitable before this direct forgiveness program, how much more so will they be with these additional expenses? Regardless whose software is used, of course it will work, seamlessly – doesn’t all software perform as intended, out of the box? Perhaps the banks that have “opted out” of the SBA portal don’t want to risk their reputation with borrowers on the quality of the SBA’s new software code (or the SBA’s “real time” quality control of it).

SBA Associate Administrator Patrick Kelley well stated what may be bank lenders’ frustration:

Give it over to the government and get your life back. All of us want to be done with forgiveness — borrowers, lenders, government — by the fall, across the board. So this is the final push that will hopefully put PPP in the rearview mirror for the borrowers, for the lenders and for the agency.

Will we soon have to do it all over again, if a portal is created for larger PPP loans? Or for the required lender verification of borrower revenue loss eligibility for Second Draw PPP loans? To continue the “hangover” metaphor, perhaps the new portal is just the proverbial “hair of the dog” – let’s just get the PPP loans off society’s books, and let banks return to “real” loans.

To discuss this or other issues involving the Paycheck Protection Program, please contact Stanley P. Jaskiewicz or the SGRV Corporate Group at 215-241-8866.

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Virus

By SGR

Despite our progress on reducing infections and deaths from COVID-19, we still seem stuck with one aspect of the Pandemic: ever changing rules. (I wrote about 2020’s challenges at https://www.sgrvlaw.com/the-paycheck-protection-program-what-a-long-strange-trip-its-been/.)

In today’s race to “get back to normal”, however, businesses again face the same frenetic pace of change – but now at the same time as they try to recover from the shutdown. In recent days, businesses and nonprofits had to digest new rules for schools (https://www.cdc.gov/coronavirus/2019-ncov/community/schools-childcare/index.html), employee safety (Federal Register :: Occupational Exposure to COVID-19; Emergency Temporary Standard), and, of course, the ever-changing mask mandates (Pennsylvania’s universal mask mandate lifts Monday, but businesses can still require them – Philadelphia Business Journal (bizjournals.com)), all in real time – and the list could go on.

Businesses must also balance whether it is worth trying to get any of the massive amount of relief money that is still available (Small-business COVID-19 stimulus funds: What’s still available? (inquirer.com)), against the risk of criminal prosecution if the funds may later be deemed not “necessary”, with 20 – 20 hindsight.

(That choice just became easier with the Small Business Administration’s abandonment of its “loan necessity” questionnaire.  SBA officially drops PPP Loan Necessity Questionnaire requirement – Journal of Accountancy)

But all this talk about “normal” seems more than a bit surreal. After all, the virus is still here.  It is even surging in some parts of the country. People are still getting sick – and dying. Businesses must still devote time to try to keep up with all the rule changes. If all those burdens were not enough, PPP loan forgiveness deadlines are looming, albeit with promises of even easier procedures. SBA preps new PPP loan forgiveness portal for small businesses – Philadelphia Business Journal (bizjournals.com)

Unlike in 2020, however, at a personal level we now have safe and effective vaccines to protect us – for those who choose to be vaccinated. Some are skeptical about their safety, and prefer to “wait and see” – or even to risk avoiding vaccination totally.  Moreover, many are not yet eligible for a shot.  Children, in particular, and those with compromised immunity (such as transplant recipients) remain at risk. (The tests leading to the vaccines’ approval did not include children, although trials are ongoing.)

From an even broader perspective, there are not enough doses for much of the world. Calls for booster shots seem like first world privilege (https://en.wikipedia.org/wiki/First_World_privilege) to those who are still waiting for their first or second shot. And the vaccinated in the first world should care about this – quite a lot, actually. The virus doesn’t care where a potential victim lives.  A mutation in an unvaccinated person in Africa or South America could lead to an infection in the US or Europe that mutates to bypass the vaccines’ protection.

In short, according to Yale infectious disease physician Dr. Jaimie Meyer:

Even though we very much want this pandemic to be over … the fact that some people, including children, aren’t vaccinated means we’re still vulnerable. … While it might be exhausting to continue to take precautions, especially for unvaccinated kids, that becomes increasingly important.

Looking ahead, therefore, businesses’ desire to be done with virus and virus precautions, and get back to business – will not simply “make it so”, despite all our progress so far (with apologies to Captain Jean-Luc Picard). Although skipping protections – eating out without a mask, or attending a concert – may be less risky today than it was in 2020, business compliance costs and burdens have not gone away.

In the face of that reality, perhaps Nirvana’s “Feels Like Teen Spirit” offers a better soundtrack for 2021 than my high school anthem in the title of this alert: “I feel stupid and contagious.”

Copyright 2021 Stanley P. Jaskiewicz, Esquire

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USPS

By Stanley Jaskiewicz

Are you still waiting for a holiday package sent by USPS? On Sunday, January 24, 2021, I received a gift-wrapped box that had been “in transit” since December 7, 2020 – bearing a mailing label, “Expected delivery December 10”. It contained a “one of a kind”, surprise gift from a long-time friend, which could not have easily been replaced if lost.

But at least my package showed up.

As the Philadelphia Inquirer reported, “Still waiting for packages that were mailed in December? It could be a while.” Similar problems were reported across the nation.  See, for example,

Although many attributed the delays, at first, to an increased volume of holiday packages and voting by mail, the continued lag points to a persistent problem, much bigger then a frustrating gift giving concern. Even worse, consider how much of “every day life” is disrupted by late mail, for individuals and businesses;

  • Bills and bill payments are late. (Fortunately, some utilities like PECO have suspended late fees.)
  • Prescriptions by mail are late, risking health problems.

(Since I take several medicines following major surgery, I have developed a great relationship with my local pharmacist. who always fills them on time.)

  • Doctors and other businesses that mail bills each month must receive timely payment, to avoid cash droughts.
  • Taxpayers must receive their W-2’s and 1099’s to file on time.

Charities in particular face great practical problems, especially during “tax season”.

Although they must provide confirmations to donors by a fixed deadline, email can efficiently solve that problem. But not all donors use or want email – many prefer handing a traditional paper receipt to their tax preparer. Moreover, many nonprofits may simply not have collected email contacts, particularly smaller charities, or faith based organizations. Of course, businesses can impose late fees, but no one wants to discourage an otherwise good customer – especially when the delay was not the customer’s fault.  (I even received one bill several days after the grace period had expired.)

Fortunately, I successfully disputed several such late charges.  But I can’t count on doing that every month.  And no business can afford to haggle over every routine bill. From a creditor perspective, delayed delivery of bills doesn’t excuse a customer’s late payment.  Such delays are outside the creditor’s control, and sellers’ cash flow depends on timely payment of receivables. Some credit card firms temporarily suspended all late fees – a windfall for the habitually late (and loss of a lucrative revenue source).

So what can an ordinary business do? The answer seems obvious, if painful: plan for inevitable delays in both the bills you send, and your clients’ payment of them. Apply the same approach to every bill your firm receives.  Every payable is someone else’s receivable.

The steps to do this are certainly not typical for business payments.  They will also take more time, effort and expense – perhaps a lot more. But your relationships with your vendors, customers and credit bureau are worth the effort.

  • Set up online or ACH payments, rather than mailed checks.
  • Schedule credit card payments of regular bills, or pay by phone.
  • Alert delinquent accounts by phone – the customer may have mailed payment on time, and be unaware of the delay.
  • Schedule automatic monthly withdrawals from your checking account in the exact amount of each bill – and be sure to fund the account in advance.
  • Monitor your balances online, regularly, and bill and pay online.
  • Plan for the loss of float in your account when you pay automatically.

You must make sure funds are immediately available to avoid overdraft fees or bounced checks, especially if you have large bills.

Finally, don’t blame the USPS for your problems – it has enough troubles of its own handling its increased workload.  The Pandemic has accelerated the shift from in-person shopping to online buying – and shipping. In addition, although the USPS may be an easy target for your anger, that won’t solve your problem. Instead, channel your energy and attention to taking control of your own finances and credit status in our “new normal” of delayed mail – a great idea for personal management, even had we never experienced the Pandemic.

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Loan

By Leslie Baskin

Courts appeared to be split as to whether businesses are eligible for a Paycheck Protection Program (“PPP”) loan under the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) if you are a business in bankruptcy. The CARES Act was created to, inter alia, provide small businesses with loans under the PPP to keep their workforce employed. Uncertainty quickly arose as to whether businesses in bankruptcy were proper candidates for these loans. Neither the statute nor the initial regulation disqualified them, but the SBA later adopted an application form which specifically disqualified them. The SBA disqualification was under the rubric that business debtors pose an “unacceptably high risk for an authorized use of funds or non-payment of unforgiven loans.” Further, the SBA posits that the PPP loans fall under the category referred to as Section 7(a) loans which embody the standard of the loan being of “sound value or so secured as reasonable to assure repayment.”

Earlier this year, bankruptcy courts in Florida, Washington, New Mexico and Tennessee found debtor’s exclusion from eligibility from the SBA/PPP loans to be unlawful, determining that the exclusion of business debtors from PPP loans while in bankruptcy was “arbitrary and capricious” and a violation of 11 USC Section 525(a), which in essence provides that a government unit may not discriminate with respect to a request for a grant based solely on the fact that they are a bankruptcy debtor. Other bankruptcy courts, such as in Delaware, New York, Maryland, Georgia and Maine, have found to the contrary and upheld the SBA’s position determining that business debtors are ineligible.  Most recent rulings have sided with the SBA’s position that such businesses are ineligible for a loan, noting that while the bankruptcy exclusion may be harsh, it is within the SBA’s authority. For example, see In re Cosi, Inc. Case # 20-10417 ( Bankr. D. Del. April 30, 2020)

On December 22, 2020, a three-judge panel in the 11th U.S. Circuit Court overturned a Bankruptcy Court ruling and upheld the SBA rule that makes bankruptcy business debtors ineligible for the PPP loans. See Gateway Radiology Consultants, P.A. , No. 20-13462 (11th Cir.), wherein the 11th Circuit overruled the Bankruptcy Court which had found that the SBA was “arbitrary and capricious” in exceeding its authority by disqualifying businesses in bankruptcy proceedings from PPP availability. The 11th Circuit now joins the 5th Circuit in finding that the SBA does not exceed its authority in declining to grant PPP loans to business debtors. ( In re Hidalgo County Emergency Service Foundation, 962 F.3d 838 ( 5th Cir. 2020)).

On December 27, 2020, President Trump signed the Bipartisan-Bicameral Omnibus COVID Relief Deal, which temporarily amended the bankruptcy code to allow PPP loans to some business debtors, but with the caveat that this change only would become effective if the SBA agrees to allow PPP loans in bankruptcy. Query as to whether this amendment changes the status quo on this issue at all, and why the SBA would do a 180 turn at this juncture.

To avoid the denial of a PPP loan, some businesses who otherwise would need bankruptcy protection have chosen to not file for bankruptcy relief at all, or once in a bankruptcy dismiss their bankruptcy to pursue PPP loans. Questions to ponder here are: whether a debtor who receives a PPP loan and then files for bankruptcy protection (as part of a pre-ordained plan) must disgorge the PPP loan, whether PPP loans received prior to a bankruptcy filing may be used as cash collateral in a later bankruptcy filing for purposes other than those allowed under SBA guidelines, the commingling of PPP loan funds with other bankruptcy proceeds, etc.

To discuss issues regarding PPP loans, creditors rights and bankruptcy or business workouts, please contact Leslie Beth Baskin, Esquire at 215-241-8926 or at lbaskin@sgrvlaw.com.

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Charitable

By Morgan Maxwell

As a result of recent amendments to the Internal Revenue Code, fewer taxpayers get a bang for bucks donated to charitable organizations. Except… Buried in the debris of frenzied responses to the scourge of COVID-19, a glimmer of light. Whether or not you itemize, cash gifts of up to $300 (in the aggregate) to qualifying charitable organizations made before December 31, 2020, are deductible in determining your 2020 tax bill, period, end of thought. No less an authority than the IRS has just sent out a reminder. (Do you suppose this means they have a beating heart? Nah.)

The reduction in tax may not change your life, but from the point of view of many smaller charitable organizations, truly every little bit helps. If you are stuck, any of us at SGRV could suggest a worthy recipient of your smallish but still important largesse.

Certainly everyone should try to scrape together $300 to take advantage of this (relatively) tax freebie.

For those one in ten of you who still itemize deductions, there is another tax saving opportunity. Under the CARES Act there is a suspension of the normal rule that charitable contributions for the year may not exceed 60% of adjusted gross income. For 2020 the limitation is 100% of AGI, with (as under prior law) a 5 year carryover for excess gifts. As in the provision above, this higher limit only applies to cash gifts. So, are you a potential donor who might be induced to jump at a larger cash gift this year, wipe out your tax liability and maybe have some carryover to boot? If you otherwise have the disposable cash, it may just be a question of hating the IRS as much as (or more than) you love your favorite charity.

As in all things tax, it is important to get advice on your particular circumstances from your return preparer, CPA, or financial adviser. Morgan Maxwell, our Of Counsel for tax matters, can also be helpful.

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Family

By SGR
In August 2020, a federal court in New York struck down several parts of the Department of Labor’s (“DOL”) Final Rule providing guidance to employers and employees on the scope of the Family First Coronavirus Response Act (“Family First Act”). The decision of the United States District Court for the Southern District of New York struck down: (1) the Rule’s requirement that work must be available before the employer is required to provide paid sick leave; (2) the Rule’s definition of “health care provider”; (3) the requirement that an employer consent to an employee’s use of intermittent leave; and (4) the requirement that an employee provide appropriate documentation prior to taking Family First Act leave. As expected, the DOL has issued revised Regulations to address the issues raised in the New York decision, changing some of the prior requirements and keeping others with additional explanation or clarification.
 
The Family First Act, which is in effect through the end of 2020, requires employers with 500 or fewer employees to provide at least 80 hours of paid sick leave to any employee who:
  1. is subject to a federal, state, or local quarantine or isolation order related to COVID–19;
  2. has been advised by a health care provider to self-quarantine due to concerns related to COVID-19;
  3. is experiencing symptoms of COVID-19 and seeking a medical diagnosis;
  4. is caring for an individual who is subject to an order as described in subparagraph (1) or has been advised as described in paragraph (2) (at 2/3 pay); or
  5. is experiencing any other substantially similar condition specified by the Secretary of Health and Human Services in consultation with the Secretary of the Treasury and the Secretary of Labor.
 
The Family First Act also provided up to 10 weeks of paid leave at 2/3 pay (after 2 unpaid weeks) for employees who must care for their child because the child’s school or place of care has been closed, or the child’s childcare provider is unavailable, due to COVID-19 precautions. 
 
Work Availability
 
The DOL’s final Rule clarified that the paid leave provisions did not entitle an employee to paid leave “where the Employer does not have work for the Employee.” The New York court found that this qualification was not included in the Family First Act itself and, therefore, the DOL exceeded its authority when it added the qualification. Under the court’s ruling, an employee who otherwise qualifies for Family First Act leave would be entitled to that leave even if his or her employer is closed or the employee has been furloughed or laid off due to Covid-19 restrictions. 
 
In its revised Regulations, the DOL retained the qualification that, before a leave is payable, work must otherwise be available. The revised Regulations specifically rely on longstanding FMLA regulations making it clear that periods of time when the employee would not otherwise be expected to work may not be counted as part of the employee’s FMLA leave entitlement. The revised Regulations also rely on the wording of the Family First Act that the leave must be “because of” or “due to” one of the six reasons listed in that act, which the revised Regulations interpret as a requirement that one of the six reasons listed in the Family First Act be the “but for” reason for the leave. The revised Regulations also specifically noted that requiring employers who were not paying other employees because the workplace was closed down or employees were furloughed to pay employees for Family First leave would be an “illogical result” that Congress clearly did not intend.
 
Definition of “Health Care Provider”
 
The Family First Act permits employers to, at their option, exclude “health care providers” from paid leave benefits, but does not define “health care providers.” The DOL’s final Rule defined “health care providers” as any employee of “any doctor’s office, hospital, health care center, clinic, post-secondary educational institution offering health care instruction, medical school, local health department or agency, nursing facility, retirement facility, nursing home, home health care provider, any facility that performs laboratory or medical testing, pharmacy, or any similar institutions, Employer, or entity.” The court found that this definition was too broad as it focused on the employer rather the employee and the employee’s actual duties, even though it conceded that employees who do not directly provide health care services to patients may nonetheless be essential to the health care system’s ability to function. The court left open the possibility that the DOL could provide a different interpretation of “health care provider” for purposes of the Family First Act than it does for the FMLA, but until it does, the only current regulatory definition for “health care provider” was the much narrower definition that is contained in the general FMLA regulations.
 
The DOL’s revised Regulations did change the definition of “health care provider” for purposes of which employees may be excluded from paid leave, but narrowed the definition from that contained in the original Regulations. Relying on the Pandemic and All-Hazards Preparedness and Advancing Innovation Act of 2019, the revised Regulations’ definition of “health care provider” includes “only employees who meet the definition of that term under the Family and Medical Leave Act regulations or who are employed to provide diagnostic services, preventative services, treatment services or other services that are integrated with and necessary to the provision of patient care which, if not provided, would adversely impact patient care.” The revised definition excludes individuals who provide services that affect, but are not integrated into, the provision of patient care. The revised Regulations also provide examples of employees who are not considered to be “health care providers” who can be excluded from paid leave, specifically information technology (IT) professionals, building maintenance staff, human resources personnel, cooks, food service workers, records managers, consultants, and billers. This list is intended to be illustrative, not exhaustive. 
 
Intermittent Leave
 
The Family First Act does not address the issue of intermittent leave. In its final Rule, the DOL significantly limited the availability of intermittent leave under the Family First Act, specifying that the employer and employee must agree to the employee’s use of intermittent leave and limiting the use of intermittent leave for employees working on the employer’s premises to leave for the employee’s need to care for a child whose school or place of care is closed or where child care is unavailable. The court agreed that the limitation that intermittent leave could only be used by employees who needed to care for a child was reasonable in light of the need to minimize the risk that an employee could spread Covid-19 to others. However, the court found no reasonable basis for the requirement that the employer consent to the employee’s use of intermittent leave, and struck that part of the Rule.
 
The DOL’s revised Regulations reaffirmed that employer consent was required for intermittent leave, but clarified the difference between intermittent leave and consecutive requests for leave. The revised Regulations state that “the employer-approval condition would not apply to employees who take Family First leave in full-day increments to care for their children whose schools are operating on an alternate day (or other hybrid-attendance) basis because such leave would not be intermittent. In an alternate day or other hybrid-attendance schedule implemented due to COVID-19, the school is physically closed with respect to certain students on particular days as determined and directed by the school, not the employee.” Under this interpretation, each day the school is closed creates a separate reason for Family First leave that ends when the school opens again for that student.
 
Documentation Requirements
 
The final Rule also required that, before taking Family First Act leave, employees must submit documentation to their employer that indicates the reason for, and duration of, the leave, and where relevant, the authority for the isolation or quarantine order qualifying them for leave. The court found that the requirement that an employee submit documentation before beginning a leave was unreasonable, but left in place the requirement that documentation be presented to support the need for the leave. The Revised Regulations were amended to address this concern and now provide that, like documentation for a leave under the FMLA, documentation for a Family First leave must be provided as soon “as is practical.”
 
Employers should discuss any leave decisions regarding Family First Act compliance with counsel to avoid any potential exposure to liability relating to employee leave applications.
 
           
If you have any questions regarding the foregoing, please contact Nancy Abrams at (215) 241-8894 or nabrams@sgrvlaw.com.
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Tax

By Morgan Maxwell

In these troubled times, this seems like a not unreasonable statement and it is oft-expressed. Particularly when some heartless retailers charged Pennsylvania sales tax on face masks and other personal protective equipment that INNOCENT and VIRTUOUS CITIZENS acquired to protect THEMSELVES and OTHERS, truly ALL OTHERS, in this pandemic. And so, consistent with the sentiment above, SUE THE BASTARDS!!

Which is what has happened: Garcia v. American Eagle Outfitters Inc. et al., recently filed in the Court of Common Pleas for Allegheny County.

Garcia is not a tax case, strictly speaking. It was brought as a class action under the Pennsylvania Unfair Trade Practices and Consumer Protection Law (the “UTPCPL”). The claim is that the retail sellers of face masks and other PPE should have known that these items were (or had been declared) exempt from the sales tax (the substantive quality of this premise will be considered below), and thus when they charged sales tax, they engaged in activity prohibited by the UTPCPL. Recoverable damages under the UTPCPL include $100 per violation (which may be trebled in extreme cases) and attorneys’ fees.

The UTPCPL specifies twenty acts defined as unfair trade practices. They all fall in the category of false, deceptive, misleading, or intentionally confusing claims. None of the specified acts can be reasonably be stretched to cover a retailer that overcharges sales tac. However, the UTPCPL has a catch-all prohibition of “any other fraudulent or deceptive conduct which creates likelihood of confusion or of misunderstanding.

At this point, I, a mere tax lawyer, have a little trouble completing a summary of the plaintiff’s claims that would begin “In other words…” I would think that the false, misleading, deceptive or confusing statements, in order to be actionable under the UTPCPL, would have to create some unfair advantage to the seller, to make a sale more likely than would have been the case had the consumer been fully and fairly informed. The argument has to be that the seller, knowing that sales tac was being overcharged, mislead the consumer by concealing this fact and thus made the sale more likely than if the consumer had been aware of the overcharging. But I still have trouble in figuring out what’s in it for the retailor carrying out this deception. I assume that the retailor, having collected the sales tax, simply paid it over to the Department of Revenue in the ordinary course, if not the retailor has a world of trouble with the department, and we would be talking about a run-of—the-mill, grimy sales tax case. Surely, the retailor is marginally better off being truthful if the items are exempt from the sales tac, since the total price to the consumer would be less and thus the sale should be marginally more likely.

What interests me, as a tax lawyer, is looking at it from the point of view of the duties that are imposed upon the “taxpayer” and how the law is administered. In the case of the sales tax, I had to put taxpayer in quotes because the consumer is the taxpayer, but all of his duties are imposed on the retailer. That’s where the action is. The retailor has to collect the tax, account for it and report to the Commonwealth, and pay the collected taxes over to the Department of Revenue. A misstep, mistake. Or intentional malfeasance with respect to any of this results in the retailor (and perhaps its owners and others personally) being responsible for the tax, penalties, interest, possible loss of its sales tax license, banishment to outer darkness.

From the point of view of the consumer, the taxpayer, the sales tac is pretty simple. The consumer may have some vague understanding that certain purchases are sales tax exempt, but in general, the consumer simply has to pay the price for the desired goods.

From the point of view of the retailor, the tax collector, the sales tax can be mindlessly complicated. There are hundreds of published sales tac cases in Pennsylvania law books, and few if any deal with the consumer. They deal with the collector.

The sales tax applies to tens of millions of transactions in Pennsylvania annually. In the vast majority, it is easy to.  Identify the transaction as a “sale at retail” (which is the legal incidence of sales tax) and the only complication is whether only the state-level 6% rate applies, or there is an additional county-level tax. But when we get to exclusions it can get tricky. To navigate this trickiness, we obviously have to delve into what the law (in its grand generality) provides, and we have to determine what we mean by “the law” This may risk getting a little boring at times, you really were not expecting a civics lesson, but stick with me. I will try to keep it interesting, after all, if we are going to concede that the Government can impose duties on its citizens, we ought to be able to determine pretty clearly how, with reference.

Consider: Did the plaintiffs sue the department to recover the sales tax? Nah, $100 per violation, maybe trebled, plus attorneys’ fees, is more than a couple of bucks of sales tac (and good luck trying to get the tax back. From the Department, by the way) Did the plaintiffs sue the Department for failing to issue guidance that it arguably could have done? Nah, Did the plaintiffs sue the Governor for issuing a vague executive order, or failing to issue one at all? Nah.

But I’m just a tax lawyer.

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Paycheck

By Stanley Jaskiewicz

Have you read the Small Business Administration’s latest revision of the rules for its Paycheck Protection Program (“PPP”) yet? If not, that’s OK – the rules just changed again.

I am exaggerating, but not by much.  At times, rules were issued and revised on almost a daily basis. Major changes occurred in the night, or over weekends. But was that any way to spend $659 billion – one of the largest economic programs in our history? Congress certainly didn’t plan to save the economy on an ad hoc basis, when it first began to act in April. Similarly, many states’ planned on closings measured in weeks – over six months ago. But as job losses kept rising, Congress was ready to try anything that might work – and to change when it the economy continued to sputter.

For example, the Paycheck Protection Flexibility Act in early June fixed some of the problems that arose in the early funding, particularly requirements to rehire employees – even though many businesses were closed by government order. But giving money away wasn’t easy. In just six months, 24 separate PPP “interim” final rules were announced, according to a lenders’ trade group.  https://www.naggl.org/resource/resmgr/ppp/IFR_Chart.docx

Of course, the PPP wasn’t the only effort to spend our way out of the problems.  So many federal, state and local relief efforts were approved that it became difficult to keep up with all of them. So what have 5,212,128 approved PPP loans, totalling $525,012,201,124 bought us?

(The data is through the program close on August 8, 2020, according to the SBA’s PPP dashboard.  https://www.sba.gov/funding-programs/loans/coronavirus-relief-options/paycheck-protection-program.)

Not much, apparently. But Congress worked so much that the legislators needed a vacation. As a result, President Trump reacted by to bypassing Congress with Executive Orders of questionable legal legality to try to fix some of the problems, and avoid further economic meltdown. But across the nation, businesses remain closed.

One respected political journal proclaimed, “The Paycheck Protection Program Was a Flop”.  (https://slate.com/business/2020/07/paycheck-protection-program-was-a-flop.html)

At the same time, PPP fraud became a stumbling block to further relief.  “Paycheck Protection Fraud Is Massive and Unsurprising”, as massive fraud became apparent in loans to ineligible borrowers, or without any job preservation.  (www.forbes.com/sites/peterjreilly/2020/08/29/paycheck-protection-fraud-is-massive-and-unsurprising/#7dfbb8ac4df6)

Despite their pain, larger businesses ignored significant relief programs, particularly the Main Street Lending program perceived to be expensive and onerous. Schools that tried to reopen have switched to online learning – with all of the problems it presents for students from families without reliable internet access, or for those with disabilities. On a positive note, the national unemployment rate climbed fell from a high of 14.7% in April, to 8.4% in August, perhaps as a result of the PPP largesse.

Continuing its frenetic pace, Congress will likely consider another massive relief bill when it returns from its recess. However, further aid must overcome political disputes over key provisions:

  • Maintaining increased unemployment benefits that ended in late July.
  • “Liability reform” to protect reopening schools and businesses against claims by both employees, students and customers who may contract the virus.
  • Restoring lost business deductions for routine expenses paid with PPP funds – causing increased taxes for businesses already hammered by the effects of the virus.
  • Another round of PPP grants and stimulus payments – they worked so well the first time, why not spend again?
  • Blanket PPP forgiveness for borrowers under $150 million (85% of all such loans), to avoid the delays and expense of manual review of millions of loans for compliance with the complex program rules.
  • Emergency relief for hospitality and transit firms, as safety concerns discourage both business and personal travelers.
  • Support for the Postal Service, critical for both Presidential voting and shopping “by mail”.

Despite all of the stops and starts since March, one thing has become absolutely clear: “man plans, the virus laughs”. Until a vaccine has been finalized and tested for safety, the virus is in control. Business and political planning can only remain a hope – contingent on the success of our public health efforts, and universal compliance with its recommendations. Clear rules will also help – conflicts between states and federal leaders’ advice don’t help to build a national consensus on how to beat the virus. We need the same unanimity our country had in times of crisis, such as World War 2, or the oil shortages of the 1970s.

With US coronavirus deaths alone approaching 200,000, our leaders, political and cultural, must now help build that consensus to restore our economy and our health. Without it, as the Grateful Dead once sang, “Ain’t it a shame?”

P.S.: While you were reading this, the PPP rules changed again.

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Employees

By Nancy Abrams
As businesses begin to reopen, business owners face numerous challenges regarding the safety of their employees and their customers and clients. There are several steps that can minimize these risks and help protect the business from claims made by employees or customers.

Health Screening for Employees

            It is permissible, and advisable, to do a certain amount of screening of employees returning to the workplace. Employers may take employee temperatures and may ask questions regarding whether or not they have been exposed to COVID-19, are suffering from any symptoms associated with COVID-19, or have recently traveled outside the area to a COVID-19 “hotspot.” Employers should refrain from asking about any other medical condition unless the employee indicates that they have a medical condition that makes them more at-risk for contracting COVID-19.

Safety Protocols

            All employers should put into place safety protocols that help to promote social distancing and enhanced sanitation. These protocols can include staggering work schedules, separating work stations either by distance or by providing physical barriers, limiting gatherings and meetings, limiting outside visitors to the workplace, requiring that face masks be worn in common areas, and providing enhanced cleaning and hand sanitizing products. Employee contacts should also be tracked in case an employee is exposed to or is diagnosed with COVID-19.

Employees Hesitant to Return to Work

            Employees recalled to work may express an unwillingness to return to the workplace. If an employee has a health condition that makes them particularly susceptible to contracting COVID-19 you may be required to extend a “reasonable accommodation,” which could include permission to work from home or an unpaid leave. A request of this type should be handled like any other request for a reasonable accommodation and a medical certification from the employee’s doctor may be required.
         If an employee is simply afraid to come back to work or does not want to come back because they are being paid more in unemployment compensation than they would earn working, an employer may insist that the employee return to work and, if the employee does not, treat the separation as a voluntary resignation. Any refusal to return to work, particularly if it is because the employee does not want to return because they are making more in unemployment compensation, should be reported to the Unemployment Compensation Bureau.

Customer/Client Waivers

            Employers who serve the general public may want to consider having customers or clients sign a liability waiver. In any event, customers/clients should be asked the same health screening questions posed to employees and should be required to wear face masks.
            If you have any questions or need assistance drafting return-to-work policies or waivers, please contact Nancy Abrams at 215 241-8894 or nabrams@sgrvlaw.com.
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