What Can Cities Do About Dangerous Buildings?

(June 25, 2010): Cities have the authority, usually provided by State statute, to regulate dangerous and substandard buildings and structures.   In Texas, a City has to pass an ordinance to activate its ability to regulate dangerous buildings and structures.  See TEX. LOC. GVT CODE § 214 Subchapter A.

Before taking action against a dangerous building, City officials should check their code of ordinances to make sure they have the ability and authority to regulate dangerous structures.   This authority will include the ability to require the repair, removal, or demolition of the building and to require occupants of a dangerous building to either vacate the premises or relocate.  Common criteria to cause the vacating of a premise include whether or not the building is “dilapidated, substandard, or unfit for human habitation”.

Unoccupied buildings that may pose a danger to the public or be an attractive nuisance to children and/or vagrants are also subject to the regulatory authority of a City.  It does not matter if the building or structure is secured or unsecured.  This broad regulatory authority is given to a City under the umbrella of providing for the “health, safety and welfare” of its citizens.

The City must follow due process and give proper notification to a property owner before taking action against a building. Consequently, property owners, landlords, or investors who purchase property within a city limit should contact the City and determine what city ordinances are applicable to the property.  The same applies to a person who may inherit a building or home, or the business that purchases a property.  This also allows the owner to determine if the City is following proper procedure in giving notice and in its determination that a building is unsafe or dangerous.

Cities should always consult legal counsel to ensure proper procedure is being followed when adverse action taken against a building.  Concurrently, owners of a building within city limits should consult their attorney if they get a notice that their building is considered a nuisance.

Should you have any questions regarding these issues, don’t hesitate to contact us.  For a complementary consultation, you may call Robert W. Liles or one of our other attorneys at 1 (800) 475-1906.

Contracts and Cities 101

(May 10, 2010): Inevitably a service provider, such as an IT professional or a vendor supplying coffee or coke machines, will sign a yea- to-year or a 3-5 year contract with a City.

And the contract may be signed by a City Officer such as the City Manager, City Administrator, or even a Mayor.  The service provider believes all is well and is happy to have a contract with a client who always pays.  The City personnel are happy to have the service.

It is all fine if the person who signed on behalf of the City had been given authority by the City Council to enter into the contract.  If that person had not been given authority by City Council, then the contract may be voidable.

How can that be?  Surely a service provider can rely upon the authority of a Mayor or City Manager as an agent of the City to enter into a contract.  That is not always the case.

For example, pursuant to Texas law, a City cannot be bound by a contract that the City Council did not authorize an officer or city employee to enter into.  See Stirman v City of Tyler, 443 S.W.2d 354, 358 (Tex.Civ.App.-Tyler 1969, writ ref’d n.r.e.); Alamo Carriage v. City of San Antonio, 768 S.W.2d 937, 941-942 (Tex.App.—San Antonio, no writ).  While the City in all likelihood will have to pay for service rendered up till the time of any termination of the contract, the City will also have the ability to adopt a position there is no contract or the contract is voidable because the City officer or City employee was not given authority to sign the contract.

The City officer or employee should always check to make sure he or she has been given authority to sign a contract, either by City Council vote or by City Council approved budgetary guidelines.  And the service provider should always request that the City officer or employee verify their authority to sign the contract.  For example, you can imagine the stakes are considerably higher for city construction contracts.

This due diligence should be done for all contracts by both City and the service provider and always each party should consult their attorney.

Should you have any questions regarding these issues, don’t hesitate to contact us.  For a complementary consultation, you may call Robert W. Liles or one of our other attorneys at 1 (800) 475-1906.

Mechanic Liens against Public Property

(May 10, 2010): Whenever a company contracts to provide construction work for a city on public property, the company should always check the state law that governs the city in regards to liens against the land where the public property is located.  And the city should always make sure of what rights it has as a governmental unit in regards to liens against land.

In Texas, section 43.002 of the Texas Property Code protects public lands from attachment, execution, and forced sale.  Whenever a city authorizes construction work on public property, the contractor, subcontractors, and material suppliers cannot impose a lien on that land.

What if there is a lien that existed against land before purchase by a city?  Again state law should be checked to determine whether or not liens that are filed against private land later purchased by a city become invalid or remain enforceable.  In Texas, the general rule is that liens that existed on private land later purchased by a city are invalid.

Both companies and cities should always have their attorney review lien rights whenever there is proposed construction on public property or when there is a proposed purchase of private land by a city.

Should you have any questions regarding these issues, don’t hesitate to contact us.  For a complementary consultation, you may call Robert W. Liles or one of our other attorneys at 1 (800) 475-1906.

Limitations and City Claims

(May 10, 2010): Normally there is statute of limitations that will apply to most civil lawsuits.  This means that a claim must be filed in Court within a certain time after the action complained about occurred.  For instance, in Texas, if you are involved in a motor vehicle accident and suffer an injury you must file a lawsuit within 2 years of the date of the accident.  Failure to do so will prevent you from being able to file a lawsuit after the 2 years expires.

A common statute of limitations for a party to bring a lawsuit for breach of contract is four years from the date of the breach.  However, in many states, the statute of limitations does not apply or is greatly expanded for a City or other governmental unit if the cause of action is for a public purpose, such as collecting taxes or recovering money or damages for a breach of contract for public construction.  In Texas, Section 16.061 of Texas Civil Practice and Remedies Code Section provides that the statue of limitations does not apply and does not bar many causes of actions that a city may have against an individual or a private entity.

Courts in various other states have also provided that limitations do not bar a City in certain civil  actions.  The cases and summaries are provided by the treatise“McQuillin The Law of Municipal Corporations” 17 McQuillin Mun. Corp. § 49:6 (3rd ed.).

In conclusion, Cities should always consult legal counsel on their ability to pursue monies owed or damages to Cities, no matter how long ago the breach or damage occurred.  Concurrently, individual and entities that contract with a City should also consult their attorney in regards to limitations and what measures they can take to alleviate or protect from lawsuits for incidents that occur many years in the past.

Arizona

Statute of limitations did not run against city in action against county for taxes collected. City of Bisbee v. Cochise County, 52 Ariz. 1, 78 P.2d 982 (1938)

Colorado

Statute of limitations was inapplicable to statutory action of county to recover expense of relief to paupers. Cherrington v. Board of Com’rs of Otero County, 89 Colo. 116, 299 P. 711 (1931)

Shootman v. Department of Transp., 926 P.2d 1200 (Colo. 1996)

Board of Educ. of City of Chicago v. A, C and S, Inc., 131 Ill. 2d 428, 137 Ill. Dec. 635, 546 N.E.2d 580, 57 Ed. Law Rep. 206, Prod. Liab. Rep. (CCH) ¶ 12285, 10 U.C.C. Rep. Serv. 2d 90 (1989) (school seeking compensation for removal of asbestos as public purpose); City of Shelbyville v. Shelbyville Restorium, Inc., 96 Ill. 2d 457, 71 Ill. Dec. 720, 451 N.E.2d 874 (1983) (street and sidewalk construction as public purpose); Brown v. Trustees of Schools, 224 Ill. 184, 79 N.E. 579 (1906); Greenwood v. Town of La Salle, 137 Ill. 225, 26 N.E. 1089 (1891); People ex rel. v. Town of Oran, 121 Ill. 650, 13 N.E. 726 (1887)

Iowa

Chicago & N.W. Ry. Co. v. City of Osage, 176 N.W.2d 788 (Iowa 1970); State ex rel. Schlagel v. Munn, 216 Iowa 1232, 250 N.W. 471 (1933)

Suit by public to oust owner of electric lighting system in operation over 10 years was not barred by limitation statute. State ex rel. Schlagel v. Munn, 216 Iowa 1232, 250 N.W. 471 (1933)

Illinois

Savoie v. Town of Bourbonnais, 339 Ill. App. 551, 90 N.E.2d 645 (2d Dist. 1950) (matters involving public rights)

Oregon

City of Pendleton v. Holman, 177 Or. 532, 164 P.2d 434, 162 A.L.R. 249 (1945)

The common-law rule is that statutes of limitations do not apply against government bodies unless they are included expressly or by necessary implication. City of Medford By and Through Medford Water Com’n v. Budge-McHugh Supply Co., 91 Or. App. 213, 754 P.2d 607, Prod. Liab. Rep. (CCH) ¶ 11831 (1988) (negligence in product liability actions)

Should you have any questions regarding these issues, don’t hesitate to contact us.  For a complementary consultation, you may call Robert W. Liles or one of our other attorneys at 1 (800) 475-1906.

Cities and Trade Secrets

(May 3, 2010): Is your company information confidential when given in an electronic or written format to a City officer or employee?  Alternatively, is your pricing information and technological information provided in conjunction with a contract with a City confidential?

The answer to both questions is “maybe”.  The public information laws of the state where the City is located should always be reviewed, by both the City and the Company.

For example, most state public information laws start with the proposition that all documents given to a City are public information.  There are exceptions to this rule, such as social security numbers,  attorney/client communications and trade secrets.   The burden is normally on the City to show that an exception applies to the information requested thereby making it confidential and not “public”.  And a City usually has a specific time frame in which to respond or to assert the reasons why the information is not public and is confidential.  Failure to do so usually will result in the requirement the documents be released without any type of redress other than filing a protective action in Court.

Normally the facts are that a public information request is made to the City for any and all documents given to the City by Company “A”.  The City determines if there is an exception that applies to the documents.   The City may either argue the exception to the appropriate authority (usually the state attorney general (AG)) or notify the AG that the City believes the information is confidential and will rely on the Company to make the arguments the information is confidential.   Of course the City is usually required to timely notify the Company of the action taken and the Company has a specific time frame to assert the reasons why the information is confidential.

Confidentiality provisions in a contract between the City and a Company should always be reviewed.  The City should review to make sure that there is language such as “to the extent provided by law” the City agrees to keep certain information confidential.  The Company should make sure that there is a provision stating that the City will timely notify the Company of any requests for its information and to take the appropriate actions to allow the Company to protect any information the Company believes is confidential.

As always, both the City and the Company should have their respective attorneys review the contracts and confidentiality provisions.

Should you have any questions regarding these issues, don’t hesitate to contact us.  For a complementary consultation, you may call Robert W. Liles or one of our other attorneys at 1 (800) 475-1906.

Part III: Analysis and Conclusion

(April 26, 2010): Part III:  Analysis and Conclusion

In the midst of an economic downturn, headlines are filled with accounts of failed corporations and bankruptcies as well as notorious government bailouts.  There are many threatened lawsuits directed at directed at Officers and Directors of corporations for breaches of their fiduciary duties or seeking judicial declarations that corporations are insolvent or in the so called “zone of insolvency.” Gheewalla provides important guidance to  Directors, creditors and their professionals. It establishes that, irrespective of whether a Delaware corporation is within the zone of insolvency or insolvent, individual creditors cannot assert direct claims for breach of fiduciary duty against Directors. In the case of an insolvent corporation, however, creditors can assert derivative claims on behalf of the corporation against Directors. It should be noted that the ruling is limited to breach of fiduciary duty claims: it does not restrict other kinds of claims or rights that may be asserted by creditors directly against a corporation under a contract, agreement or applicable law. Also, the ruling may engender increased litigation over when a corporation becomes “insolvent” and which parties should have the right to prosecute derivative claims.

Should you have any questions regarding these issues, don’t hesitate to contact us.  For a complementary consultation, you may call Robert W. Liles or one of our other attorneys at 1 (800) 475-1906.

Part II: The “Zone of Insolvency” — the Delaware Example

(April 26, 2010): This is the second installment of a three part article by David P. Parker examining the fiduciary duties of officers and directors of insolvent corporations and corporations operating in the so called “Zone of Insolvency.”

In Gheewalla, a significant Delaware law decision regarding creditors’ ability to sue corporate fiduciaries, the Delaware Supreme Court addressed the issue of whether a corporate director owes fiduciary duties to the creditors of a company that is insolvent or in the “zone of insolvency.”  The Court ruled that directors of a solvent Delaware corporation that is operating in the zone of insolvency owe their fiduciary duties to the corporation and its shareholders, and not to its creditors. The Court also ruled that the fiduciary duties of directors of an insolvent corporation continue to be owed to the corporation.   However, with respect to an insolvent corporation, have standing to pursue derivative claims for directors’ breaches of fiduciary duty to the corporation.

The Supreme Court of Delaware examined the issue as to whether Delaware law recognizes a creditor’s right to bring direct fiduciary-duty claims against the directors of a corporation operating in the zone of insolvency. In holding that Delaware law does not recognize such a right, the Court explained:

When a solvent corporation enters the zone of insolvency the focus for Delaware directors does not change: Directors must continue to discharge their fiduciary duties to the corporation and its shareholders by exercising their business judgment in the best interests of the corporation for the benefit of its shareholder owners.

The Court also stated that creditors, unlike shareholders, already have several protections available to them, including contractual agreements, security instruments, the implied covenant of good faith and fair dealing, and fraudulent conveyance laws that “render the imposition of an additional, unique layer of protection through direct claims for breach of fiduciary duty unnecessary.” The Court also agreed with the Chancery Court’s reasoning that:

[A]n otherwise solvent corporation operating in the zone of insolvency is one in most need of effective and proactive leadership — as well as the ability to negotiate in good faith with its creditors — goals which would likely be significantly undermined by the prospect of individual liability arising from the pursuit of direct claims by creditors.

The Court also closed the door on a creditor’s right to bring a direct breach of fiduciary duty claim against directors of an insolvent corporation, reasoning that such a right would create uncertainty for directors who have a fiduciary duty to exercise their business judgment in the best interests of an insolvent corporation. According to the Court, a direct right of action would create a conflict between the duty of the directors to “maximize the value of the insolvent corporation for the benefit of all of those having an interest in it, and the newly recognized direct fiduciary duty to individual creditors.” The Court explained that it is important to allow a director to “engage in vigorous, good faith negotiations with individual creditors for the benefit of the corporation.” The Court did not, however, leave creditors without recourse for a breach of fiduciary duty by a director. It made clear that creditors of an insolvent corporation have standing to maintain derivative claims against directors on behalf of the corporation for a breach of fiduciary duty.

Should you have any questions regarding these issues, don’t hesitate to contact us.  For a complementary consultation, you may call Robert W. Liles or one of our other attorneys at 1 (800) 475-1906.

Part I: The Fiduciary Duties of Officers and Directors of Insolvent Corporations

(April 23, 2010): This is the first installment of a three part article by David Parker examining the Fiduciary Duties of Officers and Directors of Insolvent Corporations and Corporations operating in the so called “Zone of Insolvency.”

Part I:  The Fiduciary Duties of Officers and Directors of Insolvent Corporations

Over the next few days, David P. Parker will be posting several articles examing the  fiduciary duties of Officers and Directors of insolvent corporations and corporations operating in the so called “Zone of Insolvency.”

In the United States, corporations are creatures of state law, and the fiduciary duties of a corporation’s directors are defined by its state of incorporation. Many U.S. corporations are incorporated in the state of Delaware, which has a strong tradition of well-developed corporate jurisprudence.   There may, however, be differences between Delaware law and the laws of other states within the United States.  In general, Directors of solvent corporations have two basic “fiduciary” duties, the duty of care and the duty of loyalty, owed to the corporation itself and the shareholders. Directors must act in good faith, with the care of a prudent person, and in the best interest of the corporation. Directors must also refrain from self-dealing, usurping corporate opportunities and receiving improper personal benefits.  Decisions made by a Director on an informed basis, in good faith and in the honest belief that the action was taken in the best interest of the corporation will be protected by the “business judgment rule.”  Generally, officers owe the same fiduciary duties as directors.

It has long been settled that under ordinary (i.e., solvent) circumstances, shareholders typically have only a derivative (and not direct) right to sue for breach of the fiduciary duties of directors. If they do bring suit against directors, they must do so on behalf of the corporation, and any proceeds of those suits are for the benefit of the corporation.

The Delaware Supreme Court in Catholic Educ. Programming Found., Inc. v. Gheewalla opined that upon insolvency, creditors (who have, after all, taken the place of shareholders as the de facto owners) may likewise bring only derivative – and not direct – suits on behalf of the corporation against directors

D&O Coverage: Understanding the Role of Outside Directors

(March 29, 2010): A federal court recently preliminarily approved a $55.95 million settlement involving securities claims against outside directors in a case against Peregrine Systems, Inc.  This is one of the largest ever recorded settlements involving outside directors.  Pursuant to the settlement, several former Peregrine directors agreed to settle claims for $55.95 million. It has been reported that the Peregrine’s insurers contributed to the settlement, and the outside directors are pursuing coverage from the excess insurers.  However, the payment terms of the settlement indicate that a large part of the settlement will be paid from the outside directors’ personal assets.  So how do you respond when your outside directors ask you about your company’s D&O insurance?

Peregrine Systems Litigation

In 2002, plaintiffs filed securities class action lawsuits against Peregrine, certain Peregrine officers and directors, and various other defendants. The outside directors settled these claims for $55.95 million. Like prior settlements involving personal contributions from outside directors, the case featured elements including a bankrupt company, insider trading allegations, a huge accounting restatement and officers guilty of criminal charges.

Why Peregrine’s  D&O Coverage Proved Inadequate to Fully Cover Losses of the Outside Directors

Court records reveal that Peregrine Systems Inc. maintained $20 million of D&O insurance: $10 million primary, and two $5 million excess policies. The total $20 million limits, in the face of massive litigation, proved insufficient to meet all of the defense and settlement costs.  Court records also show that Peregrine’s primary policy did not contain application “severability” or other non-rescission wording to protect innocent directors. Therefore, the D&O insurers sought to rescind coverage as to all named insureds under the policies, rather than just the officer defendants who pleaded guilty to crimes.

How to Avoid Personal Contribution by Outside Directors In The Event of Claims

One thing that can be done to prevent personal contribution by outside directors in the event of claims is to insert “severability” provisions to carve back coverage for outside directors in the event that officer conduct triggers fraud, criminal conduct, or illegal profit exclusions. These exclusions should include a “final adjudication” requirement, ensuring they are not triggered until after a court determines that insured persons engaged in the excluded conduct.  In addition, companies should make sure that “priority of payment” provisions are included to ensure that Side A director losses are paid before the policy pays for covered losses of the company, either through its indemnity obligation under Side B or for covered Side C claims directly against the company.  Furthermore, companies should provide adequate and “non-rescindable” Side-A only excess “difference in conditions” (DIC) coverage to insure directors have sufficient insurance in the event indemnification is unavailable from the company, the underlying limits are eroded by company claims, or the underlying insurers deny coverage to the directors. Include in the Side A policies automatic “reinstatement of limits” for outside directors only.  Finally, consider purchasing independent director liability (IDL) policies that can apply to a single nonofficer director, or group of such directors.

Senator Dodd: Dabbling in Major Corporate Governance Reform

(March 29, 2010): Chairman of the Senate Banking Committee, Senator Chris Dodd (D-Conn.) is flaunting  his “regulatory reform” bill, the Restoring American Financial Stability Act of 2010, as a bi-partisan effort with Senate Republicans  and Committee Ranking Members.

Senator Dodd stated on March 11, 2010: “I have been fortunate to have a strong partner in Senator Corker, and my new proposal will reflect his input and the good work done by many of our colleagues as well.” Senator Dodd’s draft financial reform bill, over 1,000 pages long, is primarily aimed at regulating financial institutions and their products.  Under the bill, the Federal Reserve would gain new powers over non-bank financial firms and keep much of its authority over banks.  However, it also includes several corporate governance and executive compensation provisions that would apply to all public companies.

The corporate governance provisions would require the following:

• The SEC would need to adopt rules requiring companies that are subject to the SEC’s proxy rules to include shareholder nominees for the board in the company’s proxy statement on terms determined by the SEC.
• Companies listed on securities exchanges would be required to adopt a majority voting standard in uncontested elections. Any directors that do not receive a majority vote would be required to resign. The board must accept the resignation or vote unanimously to reject it and disclose the reasons for the rejection.
• Companies listed on securities exchanges would be prohibited from having a staggered board unless approved by shareholders.
• Companies would be required to disclose in their annual proxy statements the reasons they have chosen to either have a single CEO and chairman or have separated the CEO and chairman positions.

The executive compensation provisions would require the following:

• Companies subject to the SEC’s proxy rules would be required to have an annual advisory vote on executive compensation and golden parachutes.
• Companies would be required to include proxy disclosure of the relationship between executive compensation and financial performance, and a pictorial comparison of the amount of executive compensation and the company’s financial performance over the preceding five years.
• Compensation committee members of companies listed on securities exchanges would need to satisfy independence standards established by the national securities exchanges. In addition, the SEC would be required to adopt rules ensuring that any compensation consultant, legal counsel, or other advisor to the compensation committee was “independent” (as defined by the SEC).
• Companies would need to develop and implement a clawback policy that would require recovery of all incentive-based compensation from all executive officers (both current and former) in the event of a financial restatement, for the three-year period preceding the restatement in excess of what they would have been paid under the restatement.
• Companies would be required to disclose whether their employees are permitted to engage in hedging activities that are designed to hedge or offset market declines affecting compensatory equity awards.

This bill, if passed, would significantly alter the landscape for executive and corporate compensation. For more information on this or other corporate compliance matters, please give us a call at (202) 298-8750.