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Archive for May, 2020

Law Firm Falls Victim To E-Mail Scam – Loses Appeal Following Allowance Of Summary Judgment

Posted on: May 28th, 2020

By: Marc Finkel

In 2019, the United States Treasury Department released statistics detailing the number of reported business email compromise incidents over a three- year period.  The number of monthly incidents increased exponentially over those three years from approximately 500 reported incidents per month in 2016 to over 1,100 reported incidents per month in 2018.  Additionally, the total value of such scams increased from approximately $110 million per month in 2016 to $310 million per month in 2018.  Despite the efforts of law enforcement to curtail such scams, the Treasury Department statistics suggest that the problems associated with business email compromise incidents are worsening over time. 

Businesses that routinely conduct large wire transfers in the ordinary course of business, such as law firms, are particularly vulnerable to such scams.  Unfortunately, when a law firm falls victim to such a scam, the consequences can be financially devastating with little-to-no available recourse.  Such a situation recently befell a Boston area law firm that was denied relief from the Massachusetts Appeals Court in a matter arising out of an email scam that cost the firm over $300,000.00. 

In Sarrouf Law LLP v. First Republic Bank & another, a lawyer from the Plaintiff law firm was contacted through the firm’s email system from someone pretending to be the president of a large foreign construction manufacturing company.  The scammer sought to hire the law firm to represent the manufacturing company in the sale of construction equipment to a purported Massachusetts based purchaser.  The scammer went so far as to have a telephone conference with a lawyer from the Plaintiff law firm in order to discuss details concerning what was ultimately a phony business transaction and to execute a fee agreement as required by the Plaintiff. 

Once “engaged” the Plaintiff was sent two checks that were purportedly from the equipment buyer’s insurance broker.  The first check was in the amount of $3,000.00 which was meant to cover the Plaintiff’s fee.  The second check was in the amount of $337,044.00 and was purportedly an initial deposit for the purchase of the construction equipment.  Both checks were subsequently deposited in the Plaintiff’s lawyer trust account.  The scammer thereafter provided the Plaintiff with specific wiring instructions as to the second check which the Plaintiff followed—even though the first check for $3,000.00 had been returned as non-payable.

The Plaintiff’s bank, Defendant First Republic Bank, conducted a multi-tiered procedure in order to verify the requested wire transfers.  The Defendant ultimately approved the wire transfers and the recipients received the funds as directed.  It was discovered after the wire transfers were completed that the second check for $337,044.00 was counterfeit and, as a result, the Plaintiff was charged back the amount of the second check.  Accordingly, the Plaintiff’s lawyer trust account became overdrawn and required them to deposit over $300,000.00 of their own money in order to restore the account to its prior balance.  Ultimately, the Plaintiff filed a two- count complaint in the Massachusetts Superior Court against the Defendant alleging, under California law (due to choice of law considerations), negligence and a violation of the California Uniform Commercial Code.  The Superior Court granted summary judgment on behalf of the Defendant and dismissed both counts of the Plaintiff’s complaint.

On appeal, the Massachusetts Appeals Court affirmed the allowance of summary judgment.  Specifically, the Appeals Court found that the Plaintiff could not bring a viable claim for negligence against the Defendant due to (1) the absence of a legal duty based upon the relationship between the parties; (2) the economic loss doctrine’s bar against the recovery of pure economic losses in claims sounding in tort; and (3) that the Plaintiff’s common law negligence claim is preempted by sections of the Uniform Commercial Code that apply to banks and transactions similarly at issue.  Furthermore, the Appeals Court affirmed summary judgment as to the second count of Plaintiff’s complaint alleging a violation of the California Uniform Commercial Code because there was no evidence that the Defendant failed to exercise good faith or ordinary care in the performance of its obligations to follow the wire instructions as directed by the Plaintiff.  Here, the Defendant had no legal obligation to inspect the check to determine whether it was potentially counterfeit.

The Sarrouf Law LLP matter serves as a truly sad and cautionary tale of which practicing lawyers should be aware.  As the Appeals Court stated, “[a] party is in the best position to guard against the risk of a counterfeit check by knowing it’s ‘client,’ it’s client’s purported debtor and the recipient of [a] wire transfer.”  When it comes to business email compromise incidents none of us are immune to such scams and vigilance on our part alone is the only form of true protection.

If you have questions or would like more information, please contact Marc Finkel at [email protected].

SBA Updates PPP Forgiveness Guidance: The Good News and The Bad News

Posted on: May 27th, 2020

By: Justin Boron

If you borrowed less than $2 million for all of your businesses under the Paycheck Protection Program, you can feel re-assured that you won’t be questioned by the government on whether you really needed the money.

The Small Business Administration made clear that those circumstances amount to a good-faith certification of need under the PPP’s requirements. 

That doesn’t mean that you are home free.  There are still important limits to how you spend the money so that when you apply for forgiveness, you can in good-faith certify that your business used the money to retain employees, make interest payments on a covered mortgage obligation, make payments on a covered rent obligation, or make covered utility payments, according to the guidelines.

Fortunately, the SBA recently published a model forgiveness application that instructs borrowers on important issues related to how they can spend their PPP money to maximize forgiveness.

Probably No Bonuses for Owner-Employees, Self-Employed, and General Partners

The PPP’s most recent guidance on forgiveness caps compensation for “owner-employees,” self-employed individuals, and general partners to “the eight-week equivalent of their applicable compensation in 2019.”

If you fit one of those categories and you made more than $100,000 last year, that means your forgivable compensation over the eight-week forgiveness period cannot exceed $15,385. 

If you fit one of those categories and paid yourself less than $100,000 last year, that means your forgivable compensation over the eight-week forgiveness period cannot exceed the eight-week equivalent of your compensation in 2019.

Without saying it expressly, the SBA’s guidance tells business owners that they may not increase their compensation or pay themselves bonuses using PPP funds for which they seek forgiveness. However, there is still an open question about whether the SBA will forgive compensation in the form of bonuses for non-owner employees.

Timing of Forgiveness Period

To obtain full forgiveness of the loan, the PPP requires the borrower to spend all of the loan proceeds—and at least 75 percent on payroll costs—in the eight weeks from when the loan is disbursed.  That requirement has proved daunting to some employers, particularly seasonal ones or those whose employees refuse to return to work.

There was hope that before it adjourned Thursday, the Senate would pass a House-approved bill that extended this period.  But that did not happen.  As a result, the eight-week period remains in place.  But the most recent SBA guidance does provide some limited flexibility.

First, it allows employers to line up the eight-week forgiveness period with their payroll using the Alternative Payroll Covered Period.  Second, it makes clear that forgivable expenses must be either paid or incurred during the eight-week forgiveness period.  Additionally, costs incurred during the eight-week period but paid outside of it must be paid during the next regular payroll or billing date.

Full-Time Equivalent Employees

The PPP requires a reduction in the forgiveness amount of a loan if an employer fails to maintain certain headcount levels of employment.  The PPP measures this head account according to Full-Time Equivalent (FTE) employees.  But the PPP didn’t define FTE.

Although the SBA and the Internal Revenue Code had defined this term in other contexts like the Affordable Care Act, the SBA chose a different definition than used in those contexts.  For purposes of the PPP, an FTE is a person that averages at least 40 hours per week during the relevant period or the combination of multiple employees whose part-time hours add up to 40 hours per week.

Here’s how you calculate your FTE level according to the SBA guidance:

For each employee, enter the average number of hours paid per week, divide by 40, and round the total to the nearest tenth. The maximum for each employee is capped at 1.0. A simplified method that assigns a 1.0 for employees who work 40 hours or more per week and 0.5 for employees who work fewer hours may be used at the election of the Borrower.

Salary-Reductions

The PPP also requires a reduction in the forgiveness amount of a loan based on an employee pay reductions.  Frankly, the statute that Congress passed didn’t make sense and would have inevitably resulted in a reduction in forgiveness if the language was applied literally as it read.  Fortunately, the SBA’s guidance fixed what was likely a drafting error: as long as an employer maintains 75 percent of its salary or wage levels when compared to the first quarter of this year, it can avoid reductions in forgiveness.

If you don’t do that, it gets complicated.  On page 7 of its forgiveness application, the SBA has supplied the formulas to use in its model forgiveness application.  You should work closely with a legal or accounting professional in assessing the reduction in forgiveness based on compensation reductions.

If you have questions or would like more information, please contact Justin Boron at [email protected].

Wage & Hour Violations, Family Leave, Discrimination, Harassment

Posted on: May 22nd, 2020

By: David Daniels

These topics continue to generate conversation throughout workplaces across the country. No matter the size of your business, at some point you will encounter one of these regulations. For that reason, it’s important for supervisors and managers to understand the basics of employment laws and regulations to maintain proper compliance.  Here is a 30,000 foot view of the employment areas that can be the most troubling for the employer.

At-Will Employment

We all know that at-will employment means that an employer can terminate an employee at any time for any reason, except an illegal one, or for no reason without suffering legal liability. Likewise, an employee is free to leave a job at any time for any or no reason with no adverse legal consequences.

Most organizations will define their employment policies in an employee handbook or manual, a job application or contract. Though not legally mandated, many employers require new hires to sign the employment handbook acknowledging that they have read and are aware of the policies in place.

State laws offer some general protection from at-will termination since most employers are required to provide the following within 24 to 72 hours of separation:

  • Final Paycheck
  • Benefits an employee is entitled to, such as severance or continued health insurance
  • Any statutory benefits, such as unemployment compensation or other forms of government benefits

If an employer violates the worker’s right through discrimination or harassment, the employee can sue for damages.

Age Discrimination in Employment Act (ADEA)

The Equal Employment Opportunity Commission (EEOC) describes this Act as forbidding age discrimination against people who are age 40 or older.  The law forbids discrimination in any facet of employment, including hiring, firing, pay, job assignments, promotions, layoff, training, benefits and any other term or condition of employment. While this act doesn’t protect employees under the age of 40, some states have established laws that protect younger workers from age discrimination. It’s important to know that it is not illegal for an employer to favor an older worker over a younger one, even if both employees are age 40 or older.  In recent years it has been legal and popular for employers to ‘buy out’ older employees by offering attractive severance packages to workers they wish to replace. If an employee accepts the package, they sign away their rights to sue for age discrimination.

Here are some requirements for employers that choose to take this path:

  • Workers must be given 21 days to review the agreement.
  • They have the right to review with an attorney at the cost of the employer.
  • Even after they have accepted the offer, they must be given 7 days to revoke the deal.
  • If you are letting two or more people go, you must give them 45 days to review and 7 days to revoke the deal if they choose to accept.

Americans With Disabilities Act (ADA)

According to the US Department of Justice, the ADA prohibits discrimination based on disability in employment, public accommodations, commercial facilities, transportation and telecommunications.

A person with a disability is defined by the ADA as:

  • An individual who has a physical or mental impairment that considerably limits one or more major life activities
  • A person with a history or record of such an impairment, or;
  • An individual who is perceived by others as having such an impairment.

In 2008, The Americans With Disabilities Amendments Act (ADAAA) was added to the original law. These amendments make important changes to the definition of the term disability. The purpose of this addition was to make it easier for an individual seeking protection under the ADA to establish that he or she has a disability.

Potential disabilities in the ADAAA include:

  • Alcoholism
  • Asthma
  • Depression
  • Cancer in remission

The Fair Labor Standards Act (FLSA)

According to the Department of Labor, the FLSA establishes minimum wage, overtime pay, record keeping and child labor standards.  Arguably the hottest topic surrounding the FLSA is wage & hour violations. Employers with the best intentions can improperly classify a worker as FLSA exempt and then fail to pay the overtime wages they’re due, leaving the organization open to potential penalties and litigation.  No matter the size of your business, the Department of Labor is keeping close watch on wage and hour violations. Think it can’t happen to you? Here are just a few examples of some businesses that were not spared the wrath of the DOL:

  • A Florida roofing company was required to pay $239,893 in back wages to 259 employees for overtime and recordkeeping violations
  • An Ohio restaurant was ordered to pay $118,354 in back wages and damages to a total of 21 workers
  • A Pennsylvania printing company was required to pay $1.45 million in back wages and damages

Family and Medical Leave Act of 1993 (FMLA)

The FMLA is a labor law requiring covered employers to provide employees with job-protected and unpaid leave for qualified medical and family reasons. Eligible employees are entitled to 12 workweeks of leave in a 12-month period for:

  • Pregnancy/ Birth of a child
  • Adoption
  • Foster Care placement of a child
  • Personal or family illness
  • Family military leave

The FMLA was introduced to balance the demands of the workplace with the needs of families. Should the FMLA be violated by an employer, workers can seek damages for lost wages and benefits, the cost of child care, plus an equal amount of liquidated damages unless an employer can show it acted in good faith and reasonable cause to believe it was not breaking the law.

Title VII of the Civil Rights Act of 1964

This federal law originally prohibited employers from discriminating against workers or applicants on the basis of sex, race, color, national origin and religion. Now protections for physical or mental disability, reprisal and sexual orientation have been included as well.

Employment Class Actions

Class actions brought on behalf of employees for wage and hour violations have been around for decades, but evidence is emerging hinting that these allegedly illegal practices by employers are becoming more prevalent than ever.  

U.S. federal law protects individuals from discrimination or harassment based on the following nine protected classes: sex, race, age, disability, color, creed, national origin, religion, or genetic information (added in 2008). Many state laws also give certain protected groups special protection against harassment and discrimination, as do many employer policies. Although it is not required by federal law, state law and employer policies may also protect employees from harassment or discrimination based on marital status or sexual orientation.  The following characteristics are “protected” by United States federal anti-discrimination law:

    Race – Civil Rights Act of 1964

    Religion – Civil Rights Act of 1964

    National origin – Civil Rights Act of 1964

    Age (40 and over) – Age Discrimination in Employment Act of 1967

    Sex – Equal Pay Act of 1963 and Civil Rights Act of 1964

    The Equal Employment Opportunity Commission interprets ‘sex’ to include discrimination based on sexual orientation and gender identity[2]

    Pregnancy – Pregnancy Discrimination Act

    Familial status – Civil Rights Act of 1968 Title VIII: Prohibits discrimination for having children, with an exception for senior housing. Also prohibits making a preference for those with children.

    Disability status – Rehabilitation Act of 1973 and Americans with Disabilities Act of 1990

    Veteran status – Vietnam Era Veterans’ Readjustment Assistance Act of 1974 and Uniformed Services Employment and Reemployment Rights Act

    Genetic information – Genetic Information Nondiscrimination Act

Individual states can and do create other classes for protection under state law.

To prevent class-action lawsuits, here are some established guidelines for what you cannot do during the hiring and firing process on the basis of  membership in a protected class:

  • Refuse to hire an individual
  • Segregate or force someone to segregate
  • Deny training to an individual
  • Fire or layoff an individual

If you have questions or would like more information, please contact David Daniels at [email protected].

A Slow Moving Storm is Brewing: Attorneys Should Expect an Uptick in Malpractice Claims, Just Not Right Away

Posted on: May 22nd, 2020

By: Anastasia Osbrink

Many attorneys are wondering whether to expect an increase in legal malpractice claims when courts – and society at large – begin to reopen. Such an increase would follow the pattern seen with previous economic declines. For instance, after the 2008 Great Recession, there was a significant increase in legal malpractice claims. However, it took a year for those claims to reach their peak in 2009. That is because the claims against attorneys followed an initial increase in other insurance claims. The number of claims in the five most likely areas for legal malpractice suits – personal injury, real estate, family, bankruptcy and estate law – nearly doubled between 2005 and 2009. Of course, such an increase can be expected during an economic downturn.

In the case of attorneys, following the initial wave of legal filings, the number of legal malpractice claims jumped as well in 2009. A similar increase in malpractice claims occurred in 2012 following the downturn caused by the European debt crisis and the downgrading of America’s credit rating in 2011. Again, the increase in malpractice claims occurred approximately one year after the peak of other types of filings had taken place.

This time, the increase in lawsuits in general likely will take even longer. Courts are reopening slowly, deadlines have been and likely will continue to be extended, statutes of limitations are being tolled, and there will be a significant backlog for the courts. Additionally, the disease itself likely has discouraged many people from going out and finding an attorney. Eventually, though, as people feel the devastating economic effects of the largest unemployment rate since the Great Depression, they will turn to litigation and the hope of a settlement or a large verdict to ease their financial pain. When this happens, legal malpractice suits may follow, as they did in 2009 and 2012.

Yet another factor likely will lead to an increase in malpractice suits that is unique to the pandemic. Even though courts are closed and many jurisdictions have been extending filing deadlines and tolling statutes of limitations, attorneys cannot simply assume that all cases are on hold. Indeed, as is typical, how and when a case is litigated must be evaluated on a jurisdiction by jurisdiction and case by case basis. An attorney’s failure to do his or her due diligence easily could lead to one or more claims of legal malpractice (though it remains to be seen how lenient courts will be to parties that missed deadlines during the pandemic).

Given this potential paradigm, it is essential that attorneys keep track of the rules and approaches by all courts in all jurisdictions in which they practice. Nevertheless, history suggests that we can expect an increase in the number of legal malpractice claims filed, even if it takes a year or two to get there.

If you have questions or would like more information, please contact Anastasia Osbrink at [email protected].

COVID-19 in Jails: A Case Study

Posted on: May 22nd, 2020

By: Wes Jackson

By now we are all familiar with the CDC’s recommendations for limiting the spread of COVID-19: “social distancing,” maintaining a distance of six feet from others as much as possible, avoiding large gatherings, and self-isolation if you exhibit symptoms of the disease or test positive, among others. As challenging as these practices can be for the general public, they pose a unique challenge to jail administrators who are now tasked with limiting the spread of COVID-19 amongst inmates tightly packed into closed places. All the while, jail officials must also maintain order and security in the jail while respecting the constitutional rights of inmates.

How should jails balance these competing interests and, perhaps more importantly, who gets to decide? There are no clear answers to those questions. Interestingly, though, the Eleventh Circuit Court of Appeals recently issued an opinion in Swain v. Junior that provides a helpful analysis.

In Swain, inmates at Miami’s Metro West Detention Center filed for a preliminary injunction and habeas relief against the jail administrator, arguing that the jail was not doing enough to stop the spread of COVID-19 between inmates. While it was uncontested that the jail had already undertaken many measures recommended by the CDC  to address COVID-19 in jail settings (you can read that guidance here), the inmates nevertheless asked the federal district court to issue an injunction requiring the jail to take various precautions. The district court agreed and ordered the jail to implement several specific practices to stop the spread of COVID-19 in the jail, including maintenance of six feet social distancing “to the maximum extent possible;” strict testing and PPE requirements, and new procedures for the provision of medical care, among others.

The jail then went to the Eleventh Circuit Court of Appeals to ask for a stay of the injunction. The Eleventh Circuit, applying the “deliberate indifference to a risk of serious harm” standard, found that the measures the jail had taken were constitutionally adequate and did not require an immediate injunction. Specifically, the Court of Appeals found that “the evidence supports that the defendants are taking the risk of COVID-19 seriously.” The Court also noted that local governments are in the best position to allocate resources in high-demand needed to prevent, test for, and treat COVID-19 amongst various local facilities, and the district court could not assume the role of “super warden” in ordering a particular allocation of those limited resources.

In short, the COVID-19 pandemic poses a novel challenge to jail administrators. At least for now, the Eleventh Circuit has granted one jail some latitude in how it addresses that challenge. The Eleventh Circuit’s decision is consistent with federal courts’ reluctance to micromanage correctional facilities in the absence of widespread constitutional violations.   

If you have any questions about local governments’ response to COVID-19, please contact Wes Jackson at [email protected].

Additional Information:

The FMG Coronavirus Task Team will be conducting a series of webinars on Coronavirus issues on a regular basis.  Click here to view upcoming webinars.

FMG has formed a Coronavirus Task Force to provide up-to-the-minute information, strategic advice, and practical solutions for our clients.  Our group is an interdisciplinary team of attorneys who can address the multitude of legal issues arising out of the coronavirus pandemic, including issues related to Healthcare, Product Liability, Tort Liability, Data Privacy, and Cyber and Local Governments.  For more information about the Task Force, click here.

You can also contact your FMG relationship partner or email the team with any questions at [email protected].

**DISCLAIMER:  The attorneys at Freeman Mathis & Gary, LLP (“FMG”) have been working hard to produce educational content to address issues arising from the concern over COVID-19.  The webinars and our written material have produced many questions. Some we have been able to answer, but many we cannot without a specific legal engagement.  We can only give legal advice to clients.  Please be aware that your attendance at one of our webinars or receipt of our written material does not establish an attorney-client relationship between you and FMG.  An attorney-client relationship will not exist unless and until an FMG partner expressly and explicitly states IN WRITING that FMG will undertake an attorney-client relationship with you, after ascertaining that the firm does not have any legal conflicts of interest.  As a result, you should not transmit any personal or confidential information to FMG unless we have entered into a formal written agreement with you.  We will continue to produce education content for the public, but we must point out that none of our webinars, articles, blog posts, or other similar material constitutes legal advice, does not create an attorney client relationship and you cannot rely on it as such.  We hope you will continue to take advantage of the conferences and materials that may pertain to your work or interests.**