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FMG Law Blog Line

Archive for April, 2014

Severance Payments are Subject to FICA Taxes

Posted on: April 1st, 2014

By: Jonathan Kandel  

                Many companies offer terminated employees severance packages.  This is true whether the employee is terminated as part of a layoff (or reduction in work force) or for other reasons.  Earlier this week, the U.S. Supreme Court ruled in United States v. Quality Stores, Inc. that severance payments are taxable wages under FICA (Federal Insurance Contributions Act).

Under FICA, all “wages” paid by an employer or received by an employee “with respect to employment” are taxed to fund Social Security and Medicare benefits.  “Wages” is defined very broadly in FICA as “all remuneration for employment, including the cash value of all remuneration (including benefits) paid in any medium other than cash.”

As a result of the Court’s decision, severance payments must now be reported as wages on W-2 forms and employers must pay their share and withhold the employee’s share of the FICA tax.  Similarly, many people don’t realize there is individual liability under FICA for certain “responsible parties” if an employer fails to pay withheld FICA taxes.

“Just the Carfax, Ma’am.”

Posted on: April 1st, 2014

By: Michael Wolak 

While Dragnet’s Joe Friday was interested only in “the facts,” more than 530 automotive dealers throughout the country are interested in the “Carfax.”  As of March 2014, the number of auto retailers joining the $250 million antitrust lawsuit filed last year against Carfax – the provider of used vehicle history reports – has quadrupled.  The lawsuit, filed in federal court in New York City, alleges that Carfax is preventing competition and has become a monopolist in the sale of vehicle history reports through its exclusive alliances with automobile manufacturers and web-based auto retailers such as Autotrader.com and Cars.com.  According to the complaint, Carfax is the provider of vehicle reports for 37 out of 40 manufacturers’ certified pre-owned programs and has a 90 percent market share, resulting in higher prices for dealers who must use Carfax reports if they wish to participate in the certified pre-owned programs.  The number of plaintiffs is expected to continue to grow as the case proceeds into the discovery phase within the next three months.  While Carfax has commented very little on the case, consumer advocate groups are encouraged by the lawsuit because increased competition will keep prices in check and ensure that vehicle history reports are more reliable.  The lawsuit could also fare very well for AutoCheck, Carfax’s main competitor.  In the meantime, though, dealerships will have to rely on “just the Carfax.”

More Target-Related Lawsuits

Posted on: April 1st, 2014

By: David Cole

In credit card data breaches, individual consumers are usually not directly harmed because they are issued new cards and not held responsible for fraudulent charges.  Instead, it is the card issuers that are usually harmed because they have to incur the cost of cancelling and reissuing stolen cards and absorbing the fraudulent charges.

Last week, two banks filed a class action lawsuit against Target for their losses in connection with the data breach.  Citing different sources, the complaint estimates that the total costs to banks and other class members could exceed $1 billion for replacing cards and covering fraudulent charges.  In an unusual move, however, the banks also sued TrustWave Holdings, which is the third-party auditor that validated Target’s compliance with the Payment Card Industry Data Security Standard (PCI DSS).  The lawsuit alleges that in addition to Target, TrustWave is responsible for the breach because it negligently performed its audit and monitored Target’s point-of-sale system for intrusions.

The lawsuit was filed in federal court in Chicago and seeks class-action status, accusing both TrustWave and Target of negligence, deceptive practices, and misrepresentation.  More information can be read here and here.

Georgia Court Says FIRREA Imposes Jurisdictional Bar to D&O Insurer’s Failed Bank Coverage Action

Posted on: April 1st, 2014

By: Michael Wolak 

In a recent decision that could dramatically change the face of failed bank insurance coverage litigation, a federal district court judge reaffirmed earlier holdings that a failed bank’s D&O insurer’s declaratory judgment action against the FDIC (as receiver for the failed bank) and against the bank’s former officers and directors was barred by the anti-injunction provision of the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA).  See OneBeacon Midwest Ins. Co. v. F.D.I.C., 2013 WL 1337193 (N.D. Ga. Mar. 28, 2013), Reconsideration Denied, 2014 WL 869286 (N.D. Ga. Mar. 05, 2014).  After the bank failed, the FDIC claimed that several of the bank’s former officers and directors were liable for damages for their purported breaches of fiduciary duties to the bank.  The bank’s D&O insurer sought a declaratory judgment that the policy did not cover the FDIC’s claims.  The FDIC moved to dismiss the insurer’s lawsuit, arguing that Section 1821(j) of FIRREA presented a jurisdictional bar to the bank’s action.  Section 1821(j) states that “no court may take any action, except at the requeinterest in the D&O coverage” and that issuing a judicial declaration on the insurer’s claims “would affect the FDIC’s ability to collect money due [the failed bank].”

Federal District Judge Richard Story further held that the insurer’s declaratory judgment action against the bank’s former officers and directors was also barred because the action would “affect the FDIC’s interests in the policy if and when the FDIC attempts to assert its rights to the policy.”  Judge Story denied the D&O insurer’s motion for reconsideration and refused to grant the insurer leave to amend the complaint to drop the FDIC as a party and proceed solely against the officers and directors.

The opinion will likely be appealed. If the decision is affirmed on appeal and/or other federal courts, it could mark a significant shift in failed bank coverage litigation as insurers pursue their claims through the administrative process.  The court emphasized that D&O insurers can still pursue their declaratory judgment claims through FIRREA’s administrative channels despite Section 1821(j)’s jurisdictional bar, and seek de novo review in a federal district court if its claims are not adequately addressed. Still, the insurer may be required to cover the former officers’ and directors’ defense costs in the FDIC litigation during the pendency of the administrative claim.