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COMMERCIAL LANDLORDS – DON’T FEAR TENANT BANKRUPTCIES!

Tenant Bankruptcy

By Leslie R. Horowitz, Esq.

The Problem

The term “bankruptcy” usually strikes fear in the hearts of Landlords, sometimes for good reason. Tenants who file for bankruptcy may stop paying rent, and prevent Landlords from regaining possession in order to re-let the premises. Most creditors hear the words “automatic stay” and are concerned they have no recourse. The automatic stay in bankruptcy does stop all proceedings against the Debtor and the Debtor’s property. However, with regard to commercial, non-residential leases, the Landlord is in a stronger position than one might think.

Assumption of Lease

In a Chapter 7 (liquidation), the Trustee, or in a Chapter 11 (reorganization), a Debtor has 120 days from the date of the bankruptcy petition (or a plan is confirmed whichever is earlier) to assume a non-residential lease. Prior to the expiration of the 120 days, the Trustee or Debtor or sometimes even the Lessor may request the court to extend this period an additional 90 days. If the lease is assumed, the Trustee or Debtor is required to cure any defaults and make current payments throughout the bankruptcy case.

Rejection of Lease

If not assumed within 120 days, the lease is deemed rejected.

During the time that a Debtor or Trustee occupies the premises, the Landlord is entitled to administrative rent which places the Landlord pari parsu with other administrative claimants, including the Trustee and the Trustee’s lawyer. Most judges require post-petition rent to be kept current as a condition to staying in Chapter 11.  However, if the Debtor or Trustee rejects the lease, the Landlord is not entitled to an administrative claim for any remaining balance due under the lease. The Landlord is entitled to an unsecured claim as if there was a pre-petition breach of the lease/contract. However, the Landlord’s damages are limited by the Bankruptcy Code to the following formula:

“The claim may not exceed the rent stated by such lease, without acceleration, for the greater of one year, or 15 percent, not to exceed three years, of the remaining term of such lease, following the earlier of the date of the filing of the petition and the date on which such lessor repossessed or the lessee surrendered the leased property, plus any unpaid rent due under such lease, on the earlier of such dates.”

In other words, the longer the lease, the less the Landlord will be able to recover in damages beyond three years. In theory, the Landlord would re-let the premises long before such damages would be realized. If the lease has less than three years left on the term, the Landlord has a greater chance of recovering close to the entire claim.

Under most circumstances, the Landlord is entitled to administrative rent even after rejection if the Trustee or Debtor continue to occupy and use the premises. The majority of Trustees do surrender the premises, but occasionally the Trustee wants to sell the Debtor’s personal property on the premises, which often takes a few months and may result an administrative claim for the Landlord.

Surrender Property

If rejection of the lease occurs, the Bankruptcy Code states that the Trustee or Debtor must immediately surrender the premises to the Landlord. If the Trustee or Debtor does not surrender the premises, the Landlord may file a motion in the Bankruptcy Court to compel surrender. Furthermore, the law provides that the Landlord may seek a writ of possession directly from the Bankruptcy Court. Thus, the Landlord is not required to return to state court, file a notice to pay or quit, file a complaint and litigate.

For Commercial Landlords, all is not lost when a Tenant files for bankruptcy.


Thank you for joining us on CIarkTalk! We look forward to seeing you again on this forum.  Please note that views expressed in the above blog post do not constitute legal advice and are not intended to substitute the need for an attorney to represent your interests relating to the subject matter covered by the blog.  If you have any questions about the article, please feel free to contact Les Horowitz at lhorowitz@ClarkTrev.com or telephonically at (213) 629-5700.

 

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2017 Employment Law Update

Employment and Labor Law

By Leonard Brazil, Esq.

Court Decision

When Is a Rest Break Not a Rest Break?

In December 2016, the California Supreme Court published an opinion (Augustus v. ABM Security Services, Inc.) which exposes many employers to an unknowing violation of the rest break law.  Security guards filed a class-action against their employer alleging rest break violations.  The guards were required to keep their pagers and radio phones on during their rest breaks and to respond when the need arose even if they were on their rest break.

The Supreme Court concluded that “[d]uring rest breaks, employers must relieve their non-exempt employees of all duties and relinquish any control over how employees spend their break time.” The Court reasoned that because the guards were on call to respond, if needed, the employer had not relinquished control over the guards during their rest break.  As a result, the Court ruled that the guards’ rest break rights were violated and reinstated a class action judgment of $90 million.  Significantly, no evidence was presented that any of the guards ever had their rest break interrupted by having to respond to a page or call.

Statutes

A. Minimum Wage.  California’s minimum wage increased to $10.50 on January 1, 2017 for employers with 26 or more employees.  Employers with less than 26 employees will be increased to $10.50 on January 1, 2018.  Employers also need to be mindful of city ordinances regulating the pay of employees in specific cities, such as Los Angeles, Santa Monica, San Francisco and San Jose which have established separate minimum wage requirements. Other cities are likely to do the same thereby increasing the burden on employers to keep track of local government wage and hour decisions.

The minimum wage in California will increase to $11 on January 1, 2018 for employers with 26 or more employees and a $1/year thereafter until the minimum wage increases to $15 on January 1, 2022. The increases for employers with less than 26 employees will follow one year after minimum wage increases are imposed on employers with more than 25 employees.  For example, on January 1, 2019, the minimum wage for employers with less than 26 employees will be $12.

B. Marijuana Legalized. California legalized marijuana in November of 2016. Employers are not affected by the new law.  Employees cannot smoke marijuana at work or come to work under the influence even if they have been prescribed marijuana for medical purposes.  Employers can continue to test employees for drug use when they have “reasonable suspicion.”

C. Restrictions on Employment Agreements.  Out of state employers often times have California employees agree to what is referred to as a choice of laws and venue provision––meaning employee claims must be (i) determined under the laws of another state and (ii) filed and litigated outside of California.  Labor Code §925 is a new statute which prohibits employers from including such a provision in an agreement with an employee.

  1. This new statute applies to an employee who “primarily resides and works in California.”  However, the new law allows a choice of law and venue provision in an agreement if the employee is individually represented by an attorney in negotiating the contract.
  2. Employees can collect attorney’s fees if they enforce their rights under this statute which provides a motivation for plaintiff’s attorneys to file lawsuits.

D. Sick Leave

  1. There are a number of local jurisdictions which have passed their own sick leave laws.  Currently, these include San Diego, Los Angeles, Santa Monica, San Francisco, Oakland and Emeryville.  These sick leave laws provide greater benefits that the California sick leave law and generally apply if an employee works two hours per week or more in that City even if the employer is not located there.  These laws differ in who is considered a family member, whether sick leave can be accrued or front loaded, as well as in other areas.

Accordingly, employers need to maintain an awareness of changes in sick leave laws in cities where they have facilities or have employees working.

E. Gender Wage Equality (Labor Code 1197.5)

This law was revised and effective January 1, 2016. The law prohibits employers from paying any employee less than an employee of the opposite sex for “substantially similar work, when viewed as a composite of skill, effort and responsibility.”

Additionally, the amendment prohibits employers from prohibiting an employee from disclosing the employee’s own wages, discussing the wages of others, inquiring about another employee’s wages, or aiding or encouraging any other employee to exercise his or her rights under these provisions.

As of January 1, 2017, the law has been expanded to also prohibit paying an employee less based on that person’s race or ethnicity. It also prohibits an employer from justifying an employee’s salary disparity based on that person’s prior salary.

F. Amendment to Labor Code Section 432.7 – Criminal History of Applicants – Also Known as “Ban the Box.”

The amendment prohibits employers from asking an applicant for employment to disclose, through any written form or verbally, certain information concerning arrests without a conviction, participation in pretrial or post trial diversion programs, or to use such information as a factor in determining any condition of employment, including hiring.

Excluded from the definition of conviction is a judicial adjudication entered by a juvenile court or any other court order or action taken against a person who is under the process and jurisdiction of the juvenile court.  There are also carve outs for health care facilities as defined by Health and Safety Code Section 1250 (dealing with the health of humans).

The City of Los Angeles passed an Ordinance, which is effective January 22, 2017, applies to all employers with 10 or more employees who are located in or doing business with the City of Los Angeles and provides:

  1. Covered employers are prohibited from asking any applicant about their criminal history or requiring disclosure of any criminal history.
  2. After a conditional offer has been made (defined as an offer of employment conditioned on the applicant’s criminal history), the employer can ask the employee about their criminal background, but must then perform a written assessment that links aspects of the applicant’s criminal history with the job duties for the position sought.
  3. If employers decide to deny the applicant the position, they must go through the “Fair Chance Process” which requires written notification to the applicant and gives the applicant five business days to provide information or documentation. Then the employer must perform a written reassessment before taking the adverse action of not hiring the applicant.
  4. There are carve outs for specific jobs, such as police officers or jobs that require use of a gun, or positions for which the employer is prohibited from hiring an individual convicted of a crime, etc.

G. Smoking in the Workplace (AB 7; Labor Code Section 6404.5)

This statute became effective June 9, 2016. Existing law prohibits smoking of tobacco products inside most enclosed spaces at a place of employment.

The new law expands the prohibition on smoking to an owner-operated business which is defined as one where the owner-operator is the only worker–meaning there are no other employees, independent contractors or volunteers working there. The new law also eliminates most prior exemptions that permitted smoking in certain work environments.

H. Janitorial Workers (AB 1978; Labor Code Sections 1420 et. seq)

This bill enacts new record-keeping, registration and training requirements for the janitorial industry. The intent is to protect janitorial workers from wage theft and sexual violence or harassment.

Effective July 1, 2018, an employer must register its business with the Division of Labor Standards Enforcement (“DLSE”) requiring the employer to make various disclosures and meet certain conditions. Thereafter, there are specified dates by which the DLSE and employers must be taken certain steps intended to minimize incidents of wage theft and sexual violence or harassment against janitorial employees.

I. Agricultural Employee Overtime (AB 1066; Labor Code Section 857 et. Seq)

Existing law states agricultural workers who work more than 10 hours per day are entitled to overtime at 1 1/2 times their regular rate of pay. Agricultural employers are also exempt from the requirement to provide one day’s rest in seven worked.

Effective January 1, 2017, agricultural employers are no longer exempt and cannot require employees to work more than six days in seven. The new law will phase in increased over time requirements for agricultural employees over a period of four years beginning January 1, 2019.

J. Single-User Restrooms (AB 1732; Health & Safety Code Section 118600)

  1. Effective March 1, 2017, all single-user toilets in any business establishment, place of public accommodation, or state or local government agency must be identified by signage as all-gender toilet facilities and designated for use by no more than one occupant at a time, or for family or assisted use. “Single user toilet facility” means a toilet facility with no more than one toilet and urinal with a lock.

K. Employment Protections for Victims of Domestic Violence, Sexual Assault or Stocking (AB 2337; Labor Code 230.1)

Existing law prohibits an employer with 25 or more employees from discharging or discriminating against an employee who is a victim of domestic violence, sexual assault or stalking for taking time off from work for specified purposes.

Effective July 1, 2017, employers must also inform, in writing, each employee of such rights at the time of hire or at any other time upon request of the employee. The Labor Commissioner must develop and post on its website a form an employer may use to comply with this notice requirement.

L. Itemized Wage Statements (AB 2535; Labor Code 226)

Existing law requires an employer to provide employees with an accurate itemized statement in writing which discloses certain information related to hours worked and wages paid. The new law clarifies that employers are not required to include in itemized wage statements the total number of work hours by an exempt employee.

M. Minimum Wage Violations (AB 2899; Labor Code 1197.1)

Under existing law, employers who pay less than the required minimum wage are subject to a civil penalty and damages. The new law requires that, prior to an employer appealing a Labor Commissioner’s decision to a court, the employer must post a bond with the Commissioner equal to the total amount the Commissioner ordered the employer to pay, excluding penalties.  The bond must be in favor of the employee and is forfeited to the employee if the court enters judgment against the employer and the employer fails to pay the amount owed within 10 days from entry of judgment.

N. Unfair Immigration Practices (SB 1001; Labor Code 1019.1)

Under existing law it is unlawful for an employer to require an employee to provide more or different documents then are required under federal law, or to refuse to honor documents provided which, on their face, reasonably appear to be genuine. The new law permits applicants or employees to file a complaint with the Division of Labor Standards Enforcement and recover a penalty of up to $10,000 against the employer.

 O. Revisions to the Regulations Governing the Fair Employment and Housing Act (“FEHA”). 

In April 2016, California Regulations were amended to require employers to specifically list all of the bases of discrimination prohibited by FEHA.  For example, an employer’s Equal Employment Opportunity Policy must list each such protected classification.

Employers are also required to amend their discrimination, sexual harassment and retaliation policies to include specific provisions regarding their complaint and investigation procedures.

For most employers, if their employee handbook’s discrimination, sexual harassment and retaliation policies have not been updated since April 2016, those policies are probably not compliant with the amended regulation.

 P. New I-9 Form Must Be Used By Employers

  1. U.S. Citizenship & Immigration Services (“USCIS”) has revised and issued a new I-9 Form effective November 14, 2016. Employers are required to begin using the new I-9 Form on January 22, 2017.
  2. Employers are required to have every new employee fill out Section 1 of the I-9 Form on their first day of hire and Section 2 of the I-9 Form within three (3) days of their hire.
  3. Employers must retain I-9 Forms while the employee is employed and for at least one year after the employee leaves the employer.
  4. Applicants should not be requested to fill out an I-9 Form until they have been offered employment.
  5. Employers can be penalized if they fail to have employees fill out I-9 Forms and if they fail to retain the completed I-9 Forms. Employers can also be penalized for failing to properly fill out the I-9 Form.
  6. The form can be filled out in hard copy or on the computer and printed. Employers can ask to see and copy documents which support an employee’s right to work in the United States.  The best practice is to copy those documents and maintain them with the I-9 Form.
  7. Employers are subject to audit and should keep I-9 Forms in a file separate from employee personnel files. The file containing the I-9 Forms can then be handed to the government agent for review and there is no reason to review the employees’ personnel files.
  8. The USCIS has an Employer Handbook online to assist employers with their obligations.
  9. The new I-9 Form is available on the USCIS website at https://www.uscis.gov/i-9.

Thank you for joining us on CIarkTalk! We look forward to seeing you again on this forum.  Please note that views expressed in the above blog post do not constitute legal advice and are not intended to substitute the need for an attorney to represent your interests relating to the subject matter covered by the blog.  If you have any questions about the new employment laws, please feel free to contact Leonard Brazil by email at lbrazil@clarktrev.com or Deborah Petito at dpetito@clartktrev.com or telephonically by calling the author at (213) 341-1359.

 

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New I-9 Form Required

Signing Contract

By Deborah Petito, Esq.

U.S. Citizenship & Immigration Services (“USCIS”) has revised and issued a new I-9 Form effective November 14, 2016. Employers are required to have every new employee fill out Section 1 of the I-9 Form on their first day of hire and Section 2 of the I-9 Form within three (3) days of their hire.  Employers must retain I-9 Forms while the employee is employed and for at least one year after the employee leaves the employer.  Applicants should not be requested to fill out an I-9 Form until they have been offered employment.  Employers can be penalized if they fail to have employees fill out I-9 Forms and if they fail to retain the completed I-9 Forms.  Employers can also be penalized for failing to properly fill out the I-9 Form.  The form can be filled out in hard copy or on the computer and printed.

Employers are prohibited from discriminating against employees because of their immigration status. Employers should ensure that all employees are required to fill out an I-9 Form and should carefully review each form to ensure it is properly and fully completed.  Employers can ask to see and copy documents which support an employee’s right to work in the United States.  The best practice is to copy those documents and maintain them with the I-9 Form.

Employers are subject to audit and should keep I-9 Forms in a file separate from employee personnel files. The file containing the I-9 Forms can then be handed to the government agent for review and there is no reason to review the employees’ personnel files.

Employers are required to begin using the new I-9 Form on January 22, 2017. Employers should make sure they review the instructions and other documents available from USCIS so that they understand their obligations: www.uscis.gov/i-9.


Thank you for joining us on CIarkTalk! We look forward to seeing you again on this forum.  Please note that views expressed in the above blog post do not constitute legal advice and are not intended to substitute the need for an attorney to represent your interests relating to the subject matter covered by the blog.  If you have any questions about the new I-9 form, please feel free to contact our Labor & Employment attorneys Deborah Petito by email at dpetito@clartktrev.com or Leonard Brazil at lbrazil@clarktrev.com or telephonically by calling the author at (213) 341-1359.

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When Is An Arbitration Agreement Not An Agreement to Arbitrate?

Abitration agreements

By Stephen E. Hyam, Esq.

This year, the California Court of Appeal issued a published decision in Rice v. Downs concluding that a contract requiring arbitration of claims “arising out of” the agreement did not include tort claims that were based on a duty that is separate from the contractual relationship. This holding signaled a shift (some may call it a clarification) in the interpretation of arbitration clauses.

Rice and Downs were members of a limited liability company. The company’s Operating Agreement stated: “…any controversy between the parties arising out of this Agreement shall be submitted to the American Arbitration Association for arbitration in Los Angeles, California or San Francisco, California.” Years after entering into the Operating Agreement, Rice sued Downs in Superior Court alleging that Downs committed torts based on a purported relationship that pre-existed the Operating Agreement. Relying on language in the Operating Agreement, Downs successfully compelled those claims into binding arbitration. The parties then engaged in a lengthy and expensive arbitration proceeding and the arbitrator ruled in Downs’ favor. When Downs entered judgment based on the arbitrator’s decision, Rice appealed the Court’s order compelling certain of the tort claims into arbitration. The Court of Appeal partially reversed the judgment, concluding that some of Rice’s tort claims fell outside of the operating agreement’s arbitration provision.

In evaluating whether the claims were subject to arbitration, the Court of Appeal focused on the scope of the arbitration provision, in particular, the “arising out of” language. The Court of Appeal analyzed broad and narrow arbitration provisions, holding that broad arbitration provisions use language such as “any claim arising from or related to the agreement” or arising in connection with the agreement. These broad provisions were found to encompass tort claims that “have their roots in the relationship between the parties which was created by the contract” and are included in the arbitration provision. The Court of Appeal found that narrow arbitration provisions, including those that use “arising from” or “arising out of” language only encompass disputes that relate to the interpretation and performance of the agreement. Since contract and tort claims may both be subject to arbitration, any dispute about the arbitrability of claims requires a specific evaluation to determine if they “arise out of” the agreement (and, thus, would be arbitrable).

Acknowledging that Rice’s tort claims fall within the “any controversy” language, the Court evaluated the particular claims asserted to determine if they were properly compelled into arbitration. Although the Court found that the particular phrase in the operating agreement (“any controversy…arising out of the Agreement”) was a more narrow arbitration provision, the Court of Appeal concluded that Rice’s tort claims, which were based on violations of “an independent duty or right originating outside of the agreement,” were not subject to arbitration. This analysis led to the Court vacating the judgment of certain of Rice’s claims that pre-dated and were independent of the Operating Agreement. Those claims that fell outside of the arbitration provision were ordered to be tried in Superior Court, even though they had already been litigated during the arbitration proceeding.

Rice v. Downs stands as a reminder that the terms of agreements you read, understood, and entered into years ago may be interpreted differently than you originally expected. This emphasizes the importance of a periodic review of your agreements to identify areas that may need to be revised.


Thank you for joining us on ClarkTalk!  We look forward to seeing you again on this forum.  Please note that the views expressed in the above blog post do not constitute legal advice and are not intended to substitute the need for an attorney to represent your interests relating to the subject matter covered by the blog. If you have any questions about arbitration agreements, please feel free to contact Stephen E. Hyam at shyam@clarktrev.com by email or telephonically at (213) 629-5700.

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Relief for the Dissolution of a California LLC

Limited Liability Company

By Peter V. Hogan, Esq.

Effective January 1, 2017, California Assembly Bill 1722 will amend California’s Revised Uniform Limited Liability Company Act to provide potential relief to members of limited liability companies (“LLC”).

The Act previously provided that a LLC is dissolved, and its activities are required to be wound up, if, among other things, a majority of the members of the LLC vote to dissolve. For an LLC with two members who each own a 50% membership interest, both members would have to agree to dissolve the Company since a “majority” would require 51% or more. If the two members can’t agree to dissolve the LLC, the member who wants to dissolve would need to go to court and seek judicial dissolution which can be costly and time consuming. Assembly Bill 1722 now requires the vote of 50% or more of the voting interests of the members of the LLC to dissolve. The bill is designed to help small, two member LLCs locked in a voting dissolution deadlock to avoid unnecessary litigation and expense.

The amendment does, however, allow for the members to require a higher voting percentage approval to initiate dissolution in the LLC’s articles of organization or the operating agreement. Thus, in the case where it doesn’t make business sense for one member to be able to decide the dissolution issue, the members of the LLC can agree to revert back to a simple majority rule on such decisions.

You can read the bill and the amended law in its entirety here.


Thank you for joining us on ClarkTalk!  We look forward to seeing you again on this forum.  Please note that the views expressed in the above blog post do not constitute legal advice and are not intended to substitute the need for an attorney to represent your interests relating to the subject matter covered by the blog. If you have any questions, please feel free to contact the author, Peter Hogan, by email at phogan@clarktrev.com or telephonically at (213) 629-5700.

Circular 230 Disclaimer: To comply with IRS requirements, please be advised that, any tax advice contained in this blog is not intended or written to be used, and cannot be used, by the recipient to avoid any federal tax penalty that may be imposed on the recipient, or to promote, market or recommend to another any referenced entity, investment plan or arrangement. For more information, please go to www.Clarktrev.com.