Chattanooga Business and Litigation Blog

NEW PROCESS ON HARDSHIP WAIVER APPLICATIONS
SHOULD ALLOW FAMILIES TO STAY TOGETHER LONGER
AND PROVIDE RELIEF TO THOSE PREVIOUSLY AFRAID TO FILE

David M. Elliott
LinkedIn: DavidElliottAttorney
Twitter: @davidmelliott 

On January 9, 2012, the United States Citizenship and Immigration Services ("CIS") announced a proposed rule, Provisional Waivers of Inadmissibility for Certain Immediate Relatives of U.S. Citizens. The proposed rule would streamline the adjudication process of waivers of inadmissibility for immediate relatives of U.S. citizens by allowing aliens to file waiver applications and wait for adjudication in the U.S. This could be beneficial to tens of thousands of families with an immediate relative that entered the U.S. illegally; whereas the alien previously would have had to leave the U.S. for an extended period in order to get a green card, the alien can now wait in the U.S. for preliminary approval and have a much shortened wait abroad.

· Background on USCIS, Illegal Entry and Removal, and Consular Processing: The United States Citizenship and Immigration Services ("CIS") processes applications, petitions and waivers by and for aliens pursuant to the Immigration and Nationality Act ("INA"). Many of the applications are for immediate relatives of U.S. Citizens. The INA provides a penalty for entry without inspection ("EWI") into the U.S. - aliens are barred from most forms of relief without leaving the U.S., and must go through Consular Processing. Generally, aliens who have entered without inspection have to travel to a U.S. Embassy abroad and get a visa to re-enter from the "consular" section of the Embassy. Even if an alien marries a U.S. citizen, to get a green card he or she typically must leave the country in order to re-enter with an immigrant visa. Unfortunately, however, once an alien leaves the U.S. after EWI, he or she is subject to either a three- or ten-year bar to re-entry. Waivers of this bar to re-entry are available, but not guaranteed.

· Waivers: Previously, waivers could only be filed upon leaving the U.S. (and triggering the three- or ten-year bar) and arriving at a U.S. Embassy, where it would take many months to adjudicate. The alien and his or her family would have to spend those months apart, with no guarantee that the waiver application would be approved. The alien must show that his U.S. citizen relative(s) would suffer extreme hardship if the alien was required to remain outside the U.S. during the bar period. CIS has announced a proposed rule, Provisional Waivers of Inadmissibility for Certain Immediate Relatives of U.S. Citizens, which would streamline the waiver adjudication process for immediate relatives of U.S. citizens by allowing the aliens to file waiver applications and wait for adjudication while remaining in the U.S. This could save months of time that families would typically spend apart. Further, this allows many aliens who were too afraid of a waiver denial to leave the U.S. to now "test the waters" with a waiver application without leaving the U.S. The requirement of showing extreme hardship has not changed.

· Current Status: The provisional waiver is still a proposed rule, and CIS is awaiting comment from the public. CIS should issue a final rule later this year. Hopefully, CIS will also issue the new provisional waiver application form this year as well. The provisional waiver application is not eligible for those who have already received an appointment notice for consular processing. It also is not applicable for alien relatives of U.S. permanent residents.

· Bottom Line: This is great news for aliens who entered without inspection and are immediate relatives (spouses, children over 21, or parents) of U.S. citizens. Many families have been afraid to file petitions, only to become subject to the requirement of the alien leaving the U.S. for a long waiver process, possible denial of the application, and possibly a bar to re-entry. Now is a great time to file an immigrant petition for eligible aliens to try to get at the front of what will likely be a wave of new filings. Please contact David Elliott for more information or to determine eligibility.

This blog is not intended to create an attorney/client relationship or provide legal advice. Please contact the author if you have any questions or comments regarding the subject matter. 

NO GOOD DEED GOES UNPUNISHED -- MUTUAL STOCK VALUATION LANGUAGE IN SHAREHOLDERS' AGREEMENT PRECLUDES SUMMARY JUDGMENT IN SUIT BY FORMER SHAREHOLDER

By David M. Elliott
LinkedIn: DavidElliottAttorney 
Twitter 

In KOVACS-WHALEY v. WELLNESS SOLUTIONS, INC. ET AL., No. M2011-00089-COA-R3-CV decided March 16, 2012, the Tennessee Court of Appeals held that Defendants were not entitled to summary judgment on a breach of contract claim because a jury could ultimately decide that Plaintiff's objection to the stock appraiser chosen by Defendants was reasonable. This case highlights the perils of including provisions of mutuality and reasonableness in Shareholders' Agreements, or as we like to say, "no good deed goes unpunished."

Plaintiff, a former employee, shareholder and director of Defendant Company, filed an action against the Defendant and its shareholders following the termination of Plaintiff's employment. Thereafter, the Company exercised a call option contained within the Shareholders' Agreement and purchased Plaintiff's stock. Plaintiff then amended her complaint to include a claim for breach of contract based upon the call option exercise and valuation of Plaintiff's stock over her objection to the appraiser.

The Shareholders' Agreement provided that the stock value would be determined in an appraisal obtained by the Company "performed by an appraiser reasonably acceptable to the Company and such Shareholder" (Emphasis added). The dispositive issue was whether the appraiser was reasonably acceptable to Plaintiff. At issue was not that Plaintiff complained about the competency of the appraiser; rather, that the Company had obtained an informal valuation from the appraiser before he performed a full valuation. The Court took umbrage with the Company's "show me your cards first" approach, and held that Plaintiff's objection to such appraiser under the circumstances was an issue of fact for the jury.

The lesson to learn is that extreme care should be taken in drafting Shareholders' Agreements. This valuation provision was fairly typical, and may have been negotiated by the parties, but it suffered from a double whammy of allowing a veto to a disgruntled former employee, and based such veto on a standard of reasonableness. As reasonableness is an issue of fact, this language unnecessarily opened the door to summary judgment. One could argue that the drafter attempted to avoid conflict by requiring reasonableness as a safeguard, as opposed to giving the Plaintiff an outright veto. And clearly what bothered the Court was the Company's obtaining a sneak peak at the value of the stock before hiring the appraiser. But the Agreement apparently failed to contain a methodology for appraisal in the absence of agreement of the parties. Thus, it appears that different or additional language in this situation may have prevented further litigation.

This blog is not intended to create an attorney/client relationship or provide legal advice. Please contact the author if you have any questions or comments regarding the subject matter. 

CAN AN EMPLOYEE ON FMLA LEAVE WHO ANSWERS WORK CALLS AND EMAILS CLAIM HER EMPLOYER INTERFERED WITH HER LEAVE?

By Charles D. Lawson

Most employers know that the federal Family and Medical Leave Act ("FMLA" or "the Act") provides eligible employees up to 12 weeks of unpaid leave per year for the birth, placement or adoption of a child, for the employee's own "serious health condition, to care for an eligible family member with a "serious health condition," or for certain situations caused by the military service of a covered family member of the employee. An employer may not interfere or attempt to interfere with an employee's rights under the FMLA.

So what, exactly, is interference? Traditionally, it has meant that the employer did one or more of the following: (1) terminated an employee for taking FMLA leave, (2) refused to reinstate an employee at the end of leave, (3) ordered an employee not to take leave, or (4) attempted to discourage an employee from taking leave.¹ Recently, however, employees on FMLA leave have claimed that their employer required them to perform work on behalf of the employer while on leave and that this requirement itself amounted to unlawful "interference." For example, employees on leave have claimed that having to answer work emails and field job-related calls have "interfered" with their FMLA leave.

Not so fast, say the courts. A Revlon employee, for example, who was given a laptop, cell phone and internet connection in her home to use while on protected FMLA leave claimed she was forced to work and that this "interfered" with her leave. The court, however, found that the employee simply answered some routine questions by phone, but did not complete any projects or do anything that prompted a finding of "interference."² The court explained: "Fielding occasional calls about one's job while on leave is a professional courtesy that does not abrogate or interfere with the exercise of an employee's FMLA rights. When limited to the scope of passing on institutional knowledge to new staff, or providing closure on completed assignments, employers do not violate the FMLA by making such calls."³

Similarly, an employee who claimed that calls from her employer during her FMLA leave interfered with that leave failed to show unlawful "interference."⁴ The court found that the calls were limited to "instances in which defendant contacted plaintiff . . . asking details regarding documents plaintiff had worked on as well as where those documents were located."⁵

Finally, an employee on FMLA leave who performed work from home and later claimed that doing so "interfered" with his leave failed to make an interference claim when he admitted that his supervisor never required him to do the work (and may not have even known he was doing it). Instead, the employee took it upon himself to keep up with his department's performance and the like. Under those circumstances, the court held that no unlawful interference had been shown.⁶

Lessons for Employers. The good news for employers is that employees who perform limited work of the type described above while on FMLA leave will not likely succeed on an interference claim. Similarly, employees who take it upon themselves to stay involved in projects at work or in their departments without being required to do so, or without management's knowledge, will also be unlikely to successfully pursue such a claim.

On the other hand, it is clear from the examples given above that if an employer requires an employee to perform a significant amount of work while on FMLA leave, there is a risk of a successful interference claim being made. Employers should therefore make clear to employees on FMLA leave, in writing, that they will not be expected to perform work, other than simple ministerial tasks, such as advising co-workers or management regarding the location of files or other materials, or the status of the employee's ongoing work assignments. If an employee expresses an interest in performing more than a minimal amount of work during leave, it is probably a good idea for the employer to require the employee to express her willingness to do so in writing, with a specific statement that such work is not required by the employer, and that the employee will not later claim that performing such work interfered with her leave under the Act.

If you have questions regarding the FMLA, or any other employment-related matter, please contact the Author or any member of our Labor & Employment Section.

¹ The legal standard for interference requires an employee to show that: (1) she is an eligible employee; (2) the defendant is an employer; (3) she was entitled to leave under the FMLA; (4) she gave the employer notice of her intention to take leave; and (5) the employer denied her FMLA benefits to which she was entitled. Novak v. Metro Health Med. Ctr., 503 F.3d 572, 577-78 (6th Cir. 2007).

² Reilly v. Revlon, Inc., 620 F.Supp.2d 524 (S.D. N.Y., 2009).

³ Id.

⁴ Kesler v. Barris, Sott, Denn & Driker, PLLC, 482 F.Supp.2d 886, 910-11 (E.D. Mich. 2007).

⁵ Id. at 910.

⁶ Soehner v. Time Warner Cable, Inc., 2009 WL 3855176, at *5 (S.D.Ohio, Nov. 16, 2009).

TAX RAMIFICATIONS FOR AN S-CORPORATION RELATIVE TO FICA WITHHOLDINGS

By Mark W. Litchford, Esq.

A majority of American small businesses use the s-corporation form of doing business (i.e. dentists, opticians, and even retailers). The main reason is that an s-corporation is a pass-through entity, meaning the net earnings of the s-corporation are passed through to the shareholders of the company and reported on their individual income tax returns. This may seem simple enough for accounting principles but the tax ramifications can be substantial.

Specifically, if, as is the case in most situations, the shareholder of the s-corporation is also an employee, there are two categories of payments to the shareholder/employee (not including loans, repayment of loans and return on capital investment): (1) wages and (2) shareholder distributions, i.e. dividends. Working with these two categories, it is important that the shareholder/employee understand the options available to minimize taxable income.

With regard to wages paid to the shareholder/employee, the wages are treated like wages paid to any other non-shareholder employee. The IRS requires that the s-corporation withhold employee payroll taxes (social security and medicare) from the paycheck, which breaks down as follows:

2012 Social Security Tax and 2012 Medicare Tax Rates

For 2012, the employee tax rate for social security is 4.2%.

The employer tax rate for social security remains unchanged at 6.2%.

The 2012 social security wage base limit is $110,100.00.

In 2012, the Medicare tax rate is 1.45% each for employers and employees, unchanged from 2010. There is no wage base limit for Medicare tax.

With regard to shareholder dividends, the IRS treats them differently because they are considered to be a return on the employee/shareholder's investment in the s-corporation and, thus, not wages for services performed on behalf of the s-corporation. While the employee/shareholder must include the dividend on his or her income tax return (Schedule F), the dividend is not subject to FICA tax and is not considered self-employment income subject to self-employment tax.

An example will best illustrate the difference in tax treatments between wages and dividends:

Scenario 1:

Joe Widget creates Widget , Inc. and selects to be treated as an s-corporation. He is the sole shareholder and is also an employee that builds the widgets for the corporation. In 2012, Widget, Inc. pays Joe $100,000.00 in wages and does not issue a dividend. The FICA calculation for the wages paid to Joe is as follows:

· FICA withholding from Joe's paycheck: $5,650.00 (5.65% x $100,000.00)

· Employer (Widgets, Inc.) pays from s-corp. funds: $7,650.00 (7.65% x $100,000.00)

· Total amount of FICA tax paid to IRS: $13,300.00

Widgets, Inc. will issue a W-2 to Joe showing wages paid in the amount of $100,000.00 that he must report as income on his 1040 tax return for 2011.

Scenario 2:

In contrast to Scenario 1, Widgets, Inc. elects to pay Joe $50,000.00 as wages for his services and the remaining $50,000.00 is issued to Joe as a dividend. The FICA calculation for wages paid to Joe is as follows:

· FICA withholding from Joe's paycheck: $2,825.00 ($50,000 x 5.65%)

· Employer (Widgets, Inc.) pays from S-Corp. funds: $3,825.00 ($50,000 x 7.65%)

· Total amount of FICA tax paid to IRS: $6,650.00

Joe will receive a W-2 for $50,0000.00 for wages paid for his services to Widgets, Inc. The $50,000.00 issued as a dividend to Joe will be reported on his Schedule F of his tax return and it will not be subject to self-employment tax.

Which Scenario Is Best?

The answer to this question depends on many factors ( e.g. does employee need monthly paychecks, does corporation want to show higher dividends for purposes of securing capital investors, etc.) As is evidenced above, by withholding regular payments to Joe that would have been in the form of wages or salary, there is an overall tax savings of $6,650.00. Irrespective of the best scenario, the employee/shareholder must always first consider the possibility of being selected for a tax audit because the IRS has promised to target s-corporation returns based on the above described issue. In my next article, I will discuss the IRS position on this issue and how to best comply with the IRS requirements.

This blog is not intended to create an attorney/client relationship or provide legal advice. Please contact the author if you have any questions or comments regarding the subject matter. 

Marsh v. Storie - a Cautionary Tale of Tax Sales and Mortgagees

By: Chuck Fisher

On January 26, 2012, the Court of Appeals of Tennessee, Eastern Section, filed its opinion in the case of Marsh v. Storie, No. E2001-00101-COA-R3-CV. The facts of Marsh are best stated in a timeline:

August, 1964 -- Homeowner acquires property

August, 2001 -- Homeowner mortgages property; mortgagee records deed of trust against property

Sometime between August, 2001 and February, 2004 -- the property taxes become deliquent

March 17, 2004 -- Property sold at tax sale to Storie

April 7, 2004 -- Chancery Court enters order confirming sale to Storie          

October, 2004 -- Mortgagee forecloses on deed of trust

January, 2005 -- Property conveyed to Marshes by Trustee's Deed for $26,000   

March 15, 2005 -- Trustee's Deed recorded by Marshes

April 8, 2005 -- Statutory redemption period ends

July 11, 2005 -- Clerk & Master's Deed recorded by Storie

Sometime thereafter -- The Marshes find out that Storie is claiming ownership of the property

July, 2007 -- The Marshes sue Storie and the mortgagee

The Marshes' claims against the mortgagee were based on the theory that, because the property had been sold at a tax sale prior to the mortgagee's foreclosure, the mortgagee had no interest in the property that could have been sold; thus, the Marshes were "flim-flammed" when they paid the mortagee $26,000 for the property. In January, 2011, the Chancery Court granted summary judgment in favor of the mortgagee, dismissed all claims against the mortgagee and certified the judgment in favor of the mortgagee as final pursuant to Rule 54.02. The Marshes appealed the dismissal of the mortgagee; the Marses' claims against Storie are still pending in the Chancery Court.

The Court of Appeals affirmed, holding that the mortgagee conveyed its right of redemption to the Marshes; thus, the Marshes were not "flim-flammed" and actually received value for their $26,000. The Court of Appeals noted that the Trustee's Deed clearly stated that the sale was subject to, among other things, current or delinquent property taxes and tax liens. The Court of Appeals further noted that the Marshes had notice that certain 2002 and 2003 property taxes were delinquent.

The Marsh opinion is full of great stuff for those who care about tax sales, mortgages and foreclosures.

First, the Court of Appeals determined that the tax sale and confirmation left the mortgagee with only the right of redemption to convey. The lesson to be learned - a tax sale and confirmation cuts off all rights of the prior mortgagee other than the right of redemption.

Second, the Court of Appeals relied heavily on the language in the Trustee's Deed that it was subject to current or delinquent property taxes and tax liens. The lesson to be learned - put similar language in your Trustee's Deeds.

Third, the Court of Appeals held that the mortgagee did not have to exercise its right of redemption and was free to sell it to another. The lesson to be learned - it's good to be a bank.

Fourth, the Court of Appeals implied that the Marshes had a duty to investigate after they received a title commitment noting the delinquent property taxes and were subsequently informed that the taxes had been paid. The lesson to be learned - the sudden payment of long-delinquent property taxes on a foreclosed property is a good indication that a tax sale has occurred and that the purchaser is buying a right of redemption rather than title to the property.

Fifth, the Court of Appeals upheld a prior decision that a right of redemption may be conveyed subsequent to a tax sale. That's good news for folks who purchase rights of redemption.

Finally, the most interesting thing about the case is that it has been pending for almost 5 years, and has gone through one appeal, all over $26,000.

This blog is not intended to create an attorney/client relationship or provide legal advice. Please contact the author if you have any questions or comments regarding the subject matter. 

NLRB INVALIDATES CLASS ACTION WAIVERS 

IN EMPLOYMENT ARBITRATION AGREEMENTS

Charles D. Lawson

On January 3, 2012, the National Labor Relations Board ("NLRB" or "the Board") announced that employers could no longer require employees to sign arbitration agreements in which they waived their right to participate in any form of class action. At issue in D.R. Horton Inc. and Michael Cuda, Case 12-CA-25764 (January 3, 2012) was an arbitration agreement that provided that:

(1) all disputes and claims relating to the employee's employment would be determined exclusively by final and binding arbitration;

(2) an arbitrator could hear only an employee's individual claims, while being precluded from consolidating the claims of other employees or fashioning a proceeding as a class or collective action; and

(3) the employee waived the right to file a lawsuit or other civil proceeding relating to Employee's employment with the employer.

The NLRB observed that such a "class action waiver" precluded an employee from taking joint or collective action in either an arbitral or judicial forum. The Board thus held the provision violated the federal National Labor Relations Act ("NLRA") which guarantees workers the right to engage in "concerted action" to protest wages or other terms and conditions of employment. The Board's ruling applies to white-collar employees of private companies, as well as to unionized workers, but not to management employees or government workers.

Opponents of the decision declare that the Board's ruling flies in the face of recent U.S. Supreme Court cases holding that class waivers must be permitted under the Federal Arbitration Act ("FAA"),¹ and that the ruling elevates the "procedural" right to a class action over the "substantive" right under the FAA to have an arbitration agreement enforced as written. The NLRB, however, takes the position that it is not refusing to permit class action waivers, generally, but simply holding that an employer may not require employees to surrender their ability to act collectively in both arbitration and litigation.

The Board's decision will almost certainly be challenged in federal court. For now, however, employers should allow their Labor and Employment counsel to review any arbitration agreement they plan to present to their employees to be sure it does not run afoul of the NLRB's latest pronouncement.

If you would like more information or would like your arbitration agreements reviewed, please contact the author or any member of our Labor and Employment Group.

¹ See, e.g., AT&T Mobility v. Concepcion, 131 S.Ct. 1740, 1751-1753 (2011) (claim that class-action waiver in consumer arbitration agreement was unconscionable under state law was preempted by FAA).

About the author: Mr. Lawson received his B.S. from the University of Tennessee at Chattanooga, magna cum laude, in 1994, and his J.D. from Vanderbilt University in 1997 where he was elected to the Order of the Coif. He is a member of GKH's Labor and Employment group and specializes in all phases of the employer-employee relationship, including wage and hour, FMLA, ADA, unemployment compensation, and discrimination/harassment law. He provides regular employer counseling on issues ranging from workplace policy development and labor law compliance to non-competition and confidentiality issues. He also defends employment claims filed with administrative bodies such as the EEOC and the Tennessee Human Rights Commission, as well as claims filed in state and federal court. Mr. Lawson's work with employers is designed to educate them about particular areas of the law governing the employment relationship, with a focus on minimizing exposure to employment-related claims and providing cost-effective litigation strategies should litigation arise.

This blog is not intended to create an attorney/client relationship or provide legal advice. Please contact the author if you have any questions or comments regarding the subject matter.

Collection of a Judgment: The Real Battle

Katherine Higgason Lentz

Obtaining a judgment against a defendant is not the same thing as collecting that judgment and often collecting a final judgment is the real battle in a case. You will often hear attorneys tell their clients that winning a lawsuit can be the easy part and collecting the judgment can be what takes time and considerable effort. When a judgment is obtained at the conclusion of a lawsuit, very rarely will a defendant write a check for the amount owed. Collection of the judgment may also be delayed if a defendant chooses to appeal to a higher court. If the defendant does not voluntarily pay a judgment, there are, however, ways to attempt to collect a judgment after it becomes final.

Many methods used to collect a judgment require substantial information about a defendant. Consequently, after the conclusion of litigation and obtaining a judgment, it may be necessary to engage in post-judgment discovery to learn what assets a defendant owns, where a defendant is employed, or where a defendant banks. Post-judgment discovery is similar to the regular discovery process in that the some process and procedure may be followed, including the use of depositions and written discovery requests. Tenn. R. Civ. P. 69.03. But once an individual has the necessary information, there are various ways to attempt to collect a judgment after it is final, including:

• Garnishing a paycheck if aware of where a defendant works
• Garnishing a bank account if aware of where a defendant banks
• Placing a lien on real property
• Executing on personal property

Is Your Corporation's Charter Doing Everything it Can for You?

Richard G. Pearce

When forming a corporation, too many people simply visit the Secretary of State's website, or a form provider's website, download an inexpensive or free sample charter, and file it with the Secretary of State. Using such forms without careful consideration of the many variables that go into forming and operating a corporate entity, however, does a great disservice to you and your corporation.

A charter is the document that you file with the Secretary of State that creates your corporation. It, along with the corporation's bylaws and shareholders' agreement, are the documents that govern how your corporation must be run, with the provisions of the charter having priority over contrary provisions of the bylaws and shareholders' agreement.

In this article, which is part of a series of articles regarding entity formation, we are going to apply Tennessee law; however, many of these same benefits are provided in other states. Let's start with the general rule that your corporation's charter cannot be inconsistent with applicable law. T.C.A. §48-12-102. In other words, if Tennessee law requires the shareholders to vote to take a particular action, the charter cannot choose to have the directors vote to take that action. Building upon the general rule, Tennessee law accords certain powers or rights to a corporation that can only be taken advantage of by exercising those powers in the charter.

A charter can limit a corporation's purpose, which is by default "any lawful business". When would a corporation want to limit the business it can engage in? Perhaps when it is required by law to have a limited purpose. For example, there are prohibitions, or at least certain complications, in financial advisor businesses engaging in actions other than providing financial advice. If a director or officer attempts to take such actions on behalf of the corporation that would cause hardship for the shareholders, those shareholders could have the corporation, or the director/officer, stopped from taking such an action and have the action "set aside" under T.C.A. § 48-13-104.

A charter can further limit the power of the board of directors and even, if it has 50 or fewer shareholders, bestow upon another position some or all of the duties of a board of directors. T.C.A. § 48-18-101. This can greatly simplify the operations of small corporations.

In the second article of this series, I will complete the discussion of how a charter can be used to your benefit and therefore requires careful consideration in drafting.

It should be clear that it is not in your best interest to just print a form charter and file it. Instead, please consult with counsel before forming your next company. Further, if you used a form or simple charter when you formed your company, please consider contacting an attorney to have it revised to take advantage of all of the opportunities provided by law so that the charter can be carefully tailored to your unique circumstances.

This blog is not intended to create an attorney/client relationship or provide legal advice. Please contact the author if you have any questions or comments regarding the subject matter.