An Insurer’s Failure to Investigate an Accident and Decline Coverage Based Upon a Policy Exclusion Renders the Subsequent Disclaimer of a Claim Untimely as a Matter of Law

The New York legislature and courts impose strict requirements on insurance companies to  “timely disclaim” coverage under a liability policy. New York Insurance Law § 3420(d) requires that insurers disclaim coverage under a liability policy issued or delivered in New York “as soon as is reasonably possible.”[1] The New York Court of Appeals has clarified that a “timely” disclaimer is measured from the “time when the insurer first learns of the grounds for disclaimer.”[2] And New York appellate courts interpreting the phrase “as soon as reasonably practicable” have found that that, absent excuse or mitigating circumstances, “relatively short periods” are “unreasonable as a matter of law.” [3] Thus, it is well-established that an insurer in New York must swiftly decline coverage after an insured provides notice of a claim and/or requests a defense under a liability policy.

The Appellate Division, First Department recently determined that an insurer’s obligation to investigate and decline coverage based upon a policy exclusion begins ticking before receiving a notice of claim from the insured. In ADD Plumbing, Inc. v. Burlington Insurance Co., 2021 N.Y. App. Div. LEXIS 1580 (1st Dep’t 2021), the court held that the insurer’s duty to investigate and decline coverage promptly pursuant to a policy exclusion is triggered not by receiving a notice of claim but by becoming aware of the underlying accident. Specifically, the court found that where the insurance company was “on notice of the underlying accident” for “several months before it disclaimed coverage and commenced an investigation with respect to the alleged incident,” the disclaimer of coverage was “untimely as a matter of law.” Id. at *2.[4] Further, the court unanimously reversed the lower court’s finding that the timeliness of a disclaimer is not based upon the knowledge of an accident alone but by the insured’s actual notice of claim. Add Plumbing, Inc. v. Burlington Ins. Co., 2020 N.Y. Misc. LEXIS 419 at *1.

What does this mean for the insured?

After an insured provides a notice of claim, there are generally three likely responses by the insurer:

  1. Accept the claim and defense without any reservation of rights. If the accident is covered under the policy and no exclusions apply, the insurance company will be obligated to assume the policyholder’s defense subject to the insured’s cooperation and preservation of the insurance company’s rights.
  2. Decline Coverage for Claims Not Covered by the Policy. If the claim is not covered under the policy, the insurer will issue a declination of coverage letter explaining that the accident is not covered by the terms of the policy.
  3. Investigate and Defend Under a Reservation of Rights and/or Promptly Decline Coverage for Claims Barred by a Policy Exclusion. If the claim is covered in part under the policy but is subject to one or more policy exclusions, the insurer must promptly advise the insured of same and issue a clear reservation of rights delineating what is covered and what is barred under the policy. However, if the entire claim is barred by a policy exclusion, the insurer must issue a timely disclaimer letter.

ADD Plumbing relates to the third listed outcome, and the takeaway for the insured is that it may be able to successfully challenge the timeliness of an insurer’s disclaimer of coverage of a notice of claim if the insured provided prior notice of the underlying accident and the insurer failed to investigate the accident and identify the facts that would have triggered a policy exclusion prior to the insured providing an actual notice of claim.

What does this mean for insurers?

The takeaway from Add Plumbing for the insurer is that New York places a high bar on “timely” disclaiming coverage under a liability policy. The case instructs that insurer’s must promptly investigate any accident reported (regardless of whether the insured has been named in a litigation); determine the existence of any facts that trigger a policy exclusion, and “timely” decline coverage based upon same, or risk that a court will find that any delay in disclaiming coverage caused by failing to take these steps renders a subsequent declination of coverage untimely as a matter of law (in colloquial terms: late and out of luck).

[1] N.Y. Ins. Law § 3420(d)(2) provides in relevant part: “If under a liability policy issued or delivered in this state, an insurer shall disclaim liability or deny coverage for death or bodily injury arising out of a motor vehicle accident or any other type of accident occurring within this state, it shall give written notice as soon as is reasonably possible of such disclaimer of liability or denial of coverage to the insured and the injured person or any other claimant.”

[2] Country-Wide Ins. Co. v. Preferred Trucking Servs. Corp., 22 NY3d 571, 575-576 (NY 2014).

[3] Travelers Inc. Co. v. Volmar Constru. Co., 300 A.D. 2d 40. 43 (1st Dep’t 2002).

[4] The underlying court’s decision and order, which was reversed by the appellate court, framed the issue this way: “At issue in this action is whether an insurer’s knowledge of an underlying accident is sufficient to trigger an insurer’s duty to disclaim coverage under Insurance Law § 3420(d)(2).” Add Plumbing, Inc. v. Burlington Ins. Co., 2020 N.Y. Misc. LEXIS 419 at *1 (N.Y. Co.) In concluding that that the duty to disclaim had not been triggered, the lower court noted that the notice provided by the insured was marked “For Records Only”; no demand for coverage had been made; the named insured had not been sued, and the additional insured under the policy had not tendered the claim to the insurance company at the time the insurer became aware of the underlying accident. Id. at *2. Based upon these facts, the lower court reasoned that, pursuant to binding precedent “[t]he mere occurrence of an event which could potentially implicate coverage if a claim is later made does not mean that an insurer’s responsibility to timely disclaim has been triggered” and that knowledge of an accident alone “is insufficient to trigger the time to issue a disclaimer.” Id. at *2. The Appellate Division First Department unanimously reversed the lower court’s decision on the law.

As previously discussed here, Congress recently enacted the Corporate Transparency Act (the “Act”) to amend the Bank Secrecy Act by requiring businesses to file information about their beneficial ownership. Pursuant to the Act, the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) has until January 1, 2022 to adopt regulations and establish a private national database for information collected under the Act.

On April 5, 2021, FinCEN took one of the first steps in the process to develop the regulations by publishing an advance notice of proposed rulemaking (the “Notice”). The Notice provides the relevant portions of the Act, puts forth questions for discussion and invites the public to provide written comments to the Act in general and in response to FinCEN’s questions. The comment period is open until May 5, 2021. In a release, FinCEN “strongly encourage[s] all interested parties, particularly those that would be affected by the beneficial ownership information reporting provisions or would seek access to reported beneficial ownership information, to submit written comments.  Such written comments will help inform FinCEN’s implementation of all aspects of the beneficial ownership reporting rulemaking. ” Following the notice and comment period, FinCEN will review the submissions prior to developing the regulations.

Prior to January 1, 2022, businesses should review regulations as and when promulgated by FinCEN to understand how the Act will be implemented and how it may apply to them, including whether they must file a beneficial owner report or are eligible to file for an exemption. Additionally, companies should keep updated records of the required information for each owner and enhance their compliance processes to ensure that the required information is being collected and reported to FinCEN in accordance with the Act.

Companies should also include language in their shareholder, partnership, or operating agreements or similar documents requiring their owners to regularly provide any information required to comply with the Act and any relevant regulations. Additionally, companies may want to consider indemnification provisions in such agreement if an owner fails to timely provide required information or provides false or incomplete information. If such agreement contains a confidentiality provision, it should include an exception to permit the company to report the required information to FinCEN.

For further information or guidance on revising your policies, procedures, and operating agreement, please contact David Paseltiner.

 

 

Property lines in New York and especially in New York City are usually very close together – sometimes in what are referred to as “lot line” configurations (properties with building that abut each other with no space between them).  Often times when a property owner seeks to make improvements or repairs to their property, for development purposes or just to comply with safety rules – such as “Local Law 11” in New York City, relating to the inspection and repair of masonry – such improvements and repairs cannot be accomplished without entering directly onto or working over the premises of the adjoining property owner. Fortunately, even if the adjoining property owner refuses to voluntarily grant access, Real Property Action and Proceedings Law (“RPAPL”) § 881 provides a mechanism to allow an owner (or lessee) to obtain a temporary license to enter onto the adjoining owner’s property to make such improvements and repairs. The general situations when access is required and the requirements to obtain the necessary license are discussed below.

Situations When Access Is Needed

There are two general situations where a property owner requires access to the adjoining property owner. The first situation is when the planned construction work by the property owner cannot be done without actually obtaining access to the adjoining property owner’s property or its airspace. The other situation is where the property owner must provide safety protections to protect the public and the adjoining property.

The first situation is pretty straight forward. In such a situation, a property owner actually needs to enter onto the adjoining property owner’s property or air space to obtain access to their own property to perform the work. For example, a property owner may seek to repair or stucco the side of the building that is on the property line. In such a situation, the property owner must actually obtain access to the adjoining property to perform the work on their own building.

In addition, many times a property owner is also required to provide safety protections[1] before it can perform the construction work. Such safety protections include sidewalk sheds, roof protection or netting, vibration monitoring, underpinning and shoring protection. In such situations, a property owner requires access to the adjoining property owner’s property to install the necessary safety protections to ensure that their construction work can be performed in a safe manner. In either situation, a property owner can obtain a Court ordered temporary license to enter onto the adjoining property of a non-cooperative neighbor through a RPAPL § 881 proceeding.

Obtaining Access To Adjoining Property Owner’s Property

RPAPL § 881 allows a property owner to make improvements or repairs to their real property when such improvements or repairs cannot be made by the owner without entering the premises of an adjoining owner and permission to enter has been refused. “The statute recognizes the fact that property owners often build up to the building line, and it was enacted in furtherance of the public interest in preventing urban blight by making it possible to repair such buildings which otherwise would be inaccessible.”[2]  In particular, RPAPL § 881 provides that:

When an owner or lessee seeks to make improvements or repairs to real property so situated that such improvements or repairs cannot be made by the owner or lessee without entering the premises of an adjoining owner or his lessee, and permission so to enter has been refused, the owner or lessee seeking to make such improvements or repairs may commence a special proceeding for a license so to enter pursuant to article four of the civil practice law and rules. The petition and affidavits, if any, shall state the facts making such entry necessary and the date or dates on which entry is sought. Such license shall be granted by the court in an appropriate case upon such terms as justice requires. The licensee shall be liable to the adjoining owner or his lessee for actual damages occurring as a result of the entry.[3]

Courts routinely grant licenses, pursuant to RPAPL § 881, for the use, access, mandated protection, and temporary support which is sought by a property owner provided that the use and access meets a standard of reasonableness.[4] In considering whether to grant a license under RPAPL § 881, “the court must apply a ‘standard of reasonableness.”‘ [5]

In order to obtain a temporary license, a property owner must commence a special proceeding. Pursuant to RPAPL § 881, a license should be granted where:  (i) “permission to so enter has been denied”; and (ii) “the property owners’ real property is so ‘situated that such improvements or repairs cannot be made by the property owners . . . without entering the premises of the adjoining property owners.'”[6]

Essentially, in order to obtain a temporary license an owner must set forth the facts for making entry onto their neighbor’s property including alleging and establishing that: (a) the owner seeks to make improvements or repairs to its actual real property; (b) the repairs cannot be made without entering the premises of the adjoining property owner; (c) permission to enter the adjoining property owner’s property has been denied; and (d) the owner must also state dates that the entry is needed.  The Court shall grant a temporary licensor in appropriate cases and may impose conditions on obtaining a licensor including license and other fees.

License Fees And Costs

Pursuant to RPAPL § 881, “[t]he licensee shall be liable to the adjoining owner or his lessee for actual damages occurring as a result of the entry the party seeking.”[7] Court’s will often require the licensee to pay all reasonable costs associated with the temporary license including the reasonable fees of the neighbor’s architect incurred in reviewing the owner’s plans and making counter proposals, as well as ongoing monitoring of the work during the term of the license;[8] reasonable attorneys’ fees in negotiating the license;[9] monthly license fee;[10] and costs relating to the necessary steps the licensor takes to safeguard his property.[11]

Important Issues To Negotiate As Part of License

When negotiating a license it is important to consider the actual construction and protective work to be performed, the actual access to be provided, the duration of the access, the contact person, whether the licensor needs to retain its own architect or construction consultant to confirm that the licensee is complying with the terms of the license.

Other important issues to contemplate when negotiating a license include: license and professional fees, pre-construction inspections and surveys, providing protection and construction plans, security for the adjoining property, providing and obtaining adequate insurance coverage, indemnification for damages and post construction damage assessments.

Conclusion

Whether you are the property owner seeking the license or the adjoining property owner, there are numerous issues to be considered before the work can be performed. Although RPAPL § 881 provides a mechanism for obtaining a temporary license, before moving to obtain a such license, both sides must consider the costs and risks associated with the construction work.  In addition, the cost and time involved in pursuing a RPAPL § 881 Proceeding should also be evaluated, as negotiating a voluntary license with an adjoining property owner can often save time and money.

Whether you are the property owner seeking the license or the adjoining property owner and whether you seek to negotiate a voluntary license or pursue a RPAPL § 881 proceeding, Jaspan Schlesinger LLP can help you address the many issues related to construction on boundary lines and the issuance of temporary licenses to perform such work.  If you need assistance, please contact Christopher E. Vatter at cvatter@jaspanllp.com or Charles W. Segal at csegal@jaspanllp.com.

[1] Pursuant to New York City Department of Building Code, Chapter 33 of the Code, entitled: “Safeguards During Construction or Demolition”, expressly mandates that: “[a]djoining . . . private property . . . shall be protected from damage and injury during construction or demolition work . . . .  Protection must be provided for … skylights and roofs” (see § 3309.1), as well as protection for pedestrians (see § 3307.1), and the placement of sidewalk shed to 20 feet past the building. See § 3307.6.2. and 3301.6.3

[2] 1 NY Jur Adjoining Landowners § 5 (2) citing Sunrise Jewish Center of Valley Stream, Inc. v. Lipko, 61 Misc. 2d 673 (Sup. Ct. Nassau Cty. 1969).

[3] RPAPL § 881

[4] See e.g. Chase Manhattan Bank v. Broadway, Whitney Co., 59 Misc. 2d 1085, 1091 (Sup. Ct. Queens Cty. 1969) aff’d 24 N.Y.2d 927 (1969) (license granted as requested duration and area of access “not unreasonable.”).

[5] Matter of Rosma Dev., LLC v. South, 5 Misc. 3d 1014(A) at ***7 (Sup. Ct. N.Y. Cty. 2004), citing Mindel v. Phoenix Owners Corp., 210 A.D.2d 167, 167 (1st Dep’t 1994) (granting license under RPAPL § 881 and finding proposed license reasonable).

[6] Ponito Residence LLC v. 12th Street Apartment Corp., 38 Misc. 3d 604, 611 (Sup. Ct. N.Y. Cty. 2012); Matter of Lincoln Spencer Apts., Inc. v. Zeckendorf-68th St. Assoc., 88 A.D.3d 606 (1st Dep’t 2011) (“RPAPL 881 is the means by which a landowner seeking ‘to make improvements or repairs’ to its property may seek a license to enter an adjoining landowner’s property when those ‘improvements or repairs cannot be made’ without such entry.”).

[7]  RPAPL § 881.

[8] Matter of North 7-8 Invs. LLC v. Newgarden, 982 N.Y.S.2d 704 (Sup. Ct. N.Y. Cty. 2014).

[9] Id. (Licensee required to pay the neighbor’s reasonable attorney’s fees because the owner’s demand to make use of the neighbor’s property required the neighbor to hire an attorney to negotiate a license agreement).

[10] Id.

[11] Matter of 2225 46th St., LLC. v. Hahralampopoulos, 55 Misc. 3d 621 (Sup. Ct. N.Y. Cty. 2017) (licensee responsible for paying any costs resulting from the access, including steps necessary to safeguard licensors’ property).

 

As we discussed in an article a couple of months ago, LIBOR (the London Inter-Bank Offered Rate), an interest rate benchmark that is used as a reference rate for a wide range of financial transactions, will cease to be published in the near future. A major concern in the capital market and securitization industries has been addressing the  difficult problem of how to fairly compensate investors in when a contracted LIBOR rate ceases to be available and no agreement on a new rate has been implemented.

In order to address this issue, on March 24, the New York State Assembly and Senate passed Assembly Bill 164, which adds a new Section 18-C to the General Obligations Law dealing with LIBOR replacement. The bill is awaiting transmission to the governor for his signature.  The full text of this Bill is available at nysenate.gov. Capitalized terms in the summary below are used as defined in the Bill.

Pursuant to the new legislation, on  the  LIBOR  Replacement Date, the Recommended Benchmark Replacement (essentially a replacement based on the secured  overnight financing rate published by the Federal Reserve Bank of New York) will, by operation of law, be the Benchmark Replacement for any contract that uses LIBOR as a Benchmark and either contains no Fallback Provisions or contains Fallback Provisions that result in  a  Benchmark  Replacement, other  than a Recommended Benchmark Replacement, that is based in any way on any LIBOR value. In addition, following the occurrence of a LIBOR Discontinuance Event, any Fall Back Provisions in a contract that provide  for a  Benchmark  Replacement based on or otherwise involving a poll, survey or inquiries for quotes  or  information  concerning  interbank  lending rates  or  any  interest  rate  or dividend rate based on LIBOR will be  disregarded as if not included in such contract and will be deemed null and void and without any force or effect.

Determining Persons under a contract are granted the authority,  but are not  required, to select on or after the occurrence of a LIBOR Discontinuance Event the Recommended Benchmark Replacement as the Benchmark Replacement. Such selection of the Recommended  Benchmark  Replacement will be: (i) irrevocable; (ii)  made by the earlier of either the LIBOR Replacement Date, or the latest date for selecting a  Benchmark  Replacement  according  to  such contract; and (iii)  used  in  any  determinations  of  the  Benchmark under or with  respect to such contract occurring on and  after the LIBOR Replacement Date.

The legislation includes a number of safe harbor provisions. First, it provides that the selection  or  use  of  a  Recommended Benchmark Replacement as a Benchmark Replacement  under or in respect of a contract by  operation  of the statute constitutes (i) a  commercially  reasonable  replacement  for  and  a commercially substantial equivalent to LIBOR; (ii) a reasonable, comparable or analogous term for LIBOR  under  or  in  respect of such contract; (iii) a replacement that is based on a methodology or information that is similar or comparable to LIBOR; and (iv) substantial  performance  by any person of any right or obligation relating to or based on LIBOR under or in respect of a contract.

Second, none of (i) a LIBOR Discontinuance Event  or  a  LIBOR  Replacement Date,  (ii) the selection or use of a Recommended Benchmark Replacement as a Benchmark Replacement; or (iii) the  determination,  implementation  or  performance  of  Benchmark Replacement Conforming Changes, in each case,  by operation of the statute, will: (a) be deemed to impair or affect the right of any person to receive a payment, or affect the amount or  timing  of  such  payment,  under  any contract; or (b)  have the effect of (x) discharging or excusing performance under any contract for any reason, claim  or  defense, including,  but  not limited to, any force majeure or other provision in any contract; (b) giving any person the right to unilaterally terminate or suspend performance under any contract; (c) constituting a breach of a contract;  or  (d)  voiding  or  nullifying  any contract.

In addition, no person will have any liability for damages to any person or  be subject  to  any claim or request for equitable relief arising out of or related to the selection or use of a Recommended  Benchmark  Replacement or   the  determination,  implementation  or  performance  of  Benchmark Replacement Conforming Changes, in each case, by  operation  of  the statute,  and such selection or use of the Recommended Benchmark Replacement or such determination implementation  or  performance  of Benchmark Replacement Conforming Changes shall not give rise to any claim or cause of action by any person in law or in equity.

Finally, the selection or use of a Recommended Benchmark Replacement or  the  determination,  implementation,  or performance of Benchmark Replacement Conforming Changes, by operation of  the statute, shall be not deemed to (i) be an amendment or modification of any contract, or (ii) prejudice, impair or affect any person’s rights,  interests  or obligations under or in respect of any contract.

This legislation is intended to target securitizations, mortgages and other long-term, legacy floating-rate products which were issued before the announcement of LIBOIR’s cessation where the relevant documents include no workable fallback language. The Fed-backed Alternative Reference Rates Committee working group and The Securities Industry and Financial Markets Association, an ARRC member, issued statements of support for the legislation Thursday.

David Paseltiner is chair of the firm’s corporate and commercial transactions practice group and a member of its banking and financial services practice group. He represents businesses in a wide variety of industries, ranging in size from small start-ups to well established firms with national and international operations. He also represents individuals in connection with employment agreements, shareholders agreements and operating agreements. David can be reached at 516-393-8223 or dpaseltiner@jaspanllp.com.

The question of which party to a contract writes the first draft is generally understood among attorneys, but can sometimes be a mystery to clients. This article will present a brief overview of which side usually drafts, the reasons for doing so, the exceptions to the rule, and some discussion about the consequences for not following tradition.

Who Drafts?

The general rule is that the party that most needs to be protected in a transaction is the party that does the first draft. For example, a landlord needs to be able to control how tenants use the leased property. Lenders want to impose covenants to better ensure their loans will be repaid. A buyer of a business wants assurances as to the assets he is acquiring so as to minimize risk of post-closing liabilities for pre-closing activities. A software licensor wants to make sure that its code is not reverse engineered or used beyond the scope of the license. Employers want to clearly set forth an employee’s duties, the employee’s “at will” status (or, if applicable, a description of the grounds for termination), and post-termination obligations.

The party that doesn’t need the protection would normally draft the shortest document possible. A tenant would prefer a lease that does little more than describe the leased property, the start and end dates of the lease, and the amount of the rent. The tenant isn’t interested in language detailing how it can or can’t use the property, restricting renovations, or prohibiting assignments. A borrower’s ideal loan document would state the amount of the loan, the interest rate and the repayment terms. It’s the lender that wants affirmative and negative covenants, financial covenants, and events of default. Similarly, a seller of a business would be happy to sign a one page bill of sale listing the assets sold, their purchase price, and stating that the sale is as is. The buyer, on the other hand, wants the protection gained by a long list of representations and warranties about the business and the assets it’s purchasing, along with indemnification provisions to address any breach of those representations and from certain pre-closing activities of the seller.

Accordingly, it’s the party that needs the protection of a more fulsome document that is the party that normally does the first draft of the document.

Common Exceptions

There are however, times where the general rule described above does not apply.

First, when real estate is being sold, the common practice is that the seller drafts the purchase and sale agreement. The reason for this custom is that the buyer is not looking to the contract for its protection when purchasing a property (normally all liability of the seller terminates at the closing of the sale);  instead, the buyer obtains title insurance as the source of its protection if there’s an issue with the title to the property. In some transactions, the sale of real property is being made concurrently with the sale of an operating business, in which case, contrary to the rule stated above, the seller’s attorney may also draft the asset purchase agreement. This is more common if the purchase price for the business is a relatively small part of the overall purchase price – if the value of the business is a substantial part of the overall transaction, then the seller may draft the real estate contract and the buyer the asset purchase contract.

Second, a seller of a business may sometimes have a number of interested buyers. In this situation, the seller may elect to send out its version of the purchase agreement in order to be able to gauge the potential buyers’ attitudes on issues such as escrow, scope of representations and warranties, survival of representations and warranties, and indemnification deductibles, baskets and caps. A seller may be willing to sacrifice some purchase price for a reduction in its post-closing exposure, and having potential buyers mark-up a seller prepared purchase agreement is an efficient way of accomplishing this.

Third, while it would be consistent with the general rule for non-disclosure agreements to be drafted by the party making the disclosure, as a matter of practice the rule is not followed here as regularly as it is with the other contracts described above. For one thing, in many deals both parties are making disclosure, in which case both parties are presumably aligned in having  a reasonable agreement, such that it doesn’t matter who does the drafting. While this may appear to be the case, other than in a transaction such as a merger or joint venture, disclosure is not equal in terms of the sensitivity or scope of the information being disclosed, so that even a mutual non-disclosure agreement can be revised to provide some better protection for one side or the other. In addition, because non-disclosure agreements are used so often, and usually do not require significant modification, most larger companies have standard forms, meaning that the party who does the first draft is simply the first one that hits the send button on the email sending out the document.

When Not to Make an Exception

Clients sometimes believe that having the other side do the first draft, in a situation where this is not normally done, can result in reduced legal fees. After all, doesn’t it take less time to read a 20 page agreement than to write one? As such clients generally find out, this is a misguided belief.

As discussed above, the party to be protected by a contract is the party the benefits from a lengthier agreement. When the “wrong” side drafts, counsel for the party that should have done the drafting is faced with a twofold concern. First, what provisions of the contract need to be revised? And second, and equally if not more so important, what isn’t in the contract that should be there? This second issue is particularly challenging for attorneys who are less experienced with the subject matter of the contract – it’s hard to know what’s missing if you don’t already know what should be there.

When drafting contracts, attorneys almost always start from an existing contract. They know from experience that the contract contains the terms that are needed to protect their client, and when a new deal comes along, the existing template just needs to be revised to conform to the deal terms. However, when the “wrong” side drafts, the attorney who receives that contact not only needs to review every word of it (even boilerplate provisions can be problematic), he or she also needs to compare that contact against the template in order to determine what the drafting attorney did not include.

One of the issues that we often see arise in this situation is that the revising attorney is accused of going overboard on their revisions – that she or he is looking to cause problems with the deal, or is “over lawyering” the contract – and tries to use this as leverage to keep the number of changes to a minimum. Clients sometimes don’t understand that making changes to proposed text that is not market, or adding text that should have been there to begin with, is not over lawyering but merely an attempt to put the parties in the position they would have been had the “correct” party drafted the agreement in the first place.

Letting the “wrong” side do the first draft rarely saves money and can often put the non-drafting party in a worse negotiating position, and should be avoided whenever possible.

***********

David Paseltiner is chair of the firm’s corporate and commercial transactions practice group and a member of its banking and financial services practice group. He represents businesses in a wide variety of industries, ranging in size from small start-ups to well established firms with national and international operations. He also represents individuals in connection with employment agreements, shareholders agreements and operating agreements. David can be reached at 516-393-8223 or dpaseltiner@jaspanllp.com.

Over the last several years, there has been growing concern within the financial and trade regulatory communities about the use of shell companies to evade anti-money laundering laws, economic sanctions, and other laws.  Congress has found that malign actors have “exploited State formation procedures to conceal their identities” when forming these companies in the United States, in turn using the entities to “commit crimes affecting interstate and international commerce.” In response to this concern, Congress enacted the Corporate Transparency Act (the “Act”), requiring businesses to file information about their beneficial ownership with the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN). The stated purposes of the Act include the collection of beneficial ownership interest information for corporations, limited liability companies and similar entities “to (A) set a clear, Federal standard for incorporation practices; (B) protect vital United States national security interests; (C) protect interstate and foreign commerce; (D) better enable critical national security, intelligence and law enforcement efforts to counter money laundering, the financing of terrorism and other illicit activity; and (E) bring the United States into compliance with international anti-money laundering and countering the financing of terrorism standards.”

FinCEN has until January 1, 2022 to adopt regulations and establish a private national database for information collected under the Act. The following is a summary of  the basic provisions of the Act.

What entities are affected by the Act?

Under the Act, a “reporting company” is defined as a corporation, limited liability company or other similar entity that is created by filing documents with a secretary of state. This definition includes foreign businesses that transact business within the United States.

The Act exempts most financial services institutions, including investment and accounting firms, securities trading firms, banks, and credit unions that report to and are regulated by government agencies such as the Securities and Exchange Commission, the Office of the Comptroller of the Currency, or the FDIC, as well as non-profit organizations and certain inactive entities. Additionally, an entity that (i) employs more than 20 full-time employees; (ii) filed in the previous year Federal income tax returns demonstrating more than $5,000,000 in gross receipts or sales in the aggregate; and (iii) has an operating presence at a physical office within the United States is exempt from reporting. Exemption is not automatic – in order to become exempt, entities will have to apply for exemption.

While partnerships and most business trusts are not specifically referred to in the definition of “reporting company”, it is likely they will be considered “other similar entities” as they are not included among the exempt business entities. Presumably this will be clarified in the forthcoming regulations.

Who constitutes a “beneficial owner” under the Act?

A “beneficial owner” is defined as “an individual who, directly or indirectly, through a contract, arrangement, understanding, relationship, or otherwise– (i) exercises substantial control over the entity; or (ii) owns or controls not less than 25 percent of the ownership interests of the entity.” The term “indirectly” means that a reporting company will need to trace its ownership back through any entities in the ownership chain to identify the individual or individuals who own, ultimately own, or control the company.

However, a “beneficial owner” does not include (i) a minor, if the minor’s parent or guardian provides the required information; (ii) an individual acting as a nominee, intermediary, custodian, or agent on behalf of another individual; (iii) an employee of the company and whose control over or economic benefits are derived solely from his or her employment; (iv) an individual whose only interest is through a right of inheritance; or (v) a creditor (only in their capacity as such).

What constitutes “required information” under the Act?

The Act requires that the report to be filed by the reporting company identify each beneficial owner and each applicant (the individual who files the application to register the entity with a secretary of state or similar office)  by (i) full legal name; (ii) date of birth; (iii) current residential or business street address, and (iv) a unique identifying number from an acceptable identification document or an identifier issued by FinCEN. Acceptable identification documents include a non-expired passport issued by the United States or a foreign government, and a non-expired identification document issued by a State, local government or Indian Tribe.

If an exempt entity is a beneficial owner, then the beneficial owner report must give the name of the exempt entity, but does not have to provide any other required information.

When must the information be filed with FinCEN under the Act?

Entities in existence on the date FinCEN adopts the implementing rules will have to file beneficial ownership information or an exemption application within two years after such date. Entities formed after this date will be required to file the beneficial ownership information at the time of formation.

All entities must file updated beneficial ownership information or an exemption application within one year of any change in beneficial ownership.

What are the penalties for failing to comply with the Act?

The Act establishes criminal and civil penalties for willful noncompliance. Persons who knowingly provide false or fraudulent information or willfully fail to report complete or updated information may be fined $10,000 and/or imprisoned for up to two years. Additionally, a civil penalty of $500 for each day that the violation continues will be owed to the United States.

A person who negligently provides false information or fails to provide complete or updated beneficial ownership information will not be subject to civil or criminal penalties. The Act does contain a safe harbor provision, protecting a person who provided inaccurate information if that person voluntarily and promptly corrects the report within 90 days of its initial filing.

Who can access the national database?

The information collected by FinCen will not be made available to the public, and is not subject to disclosure under a Freedom of Information Act request. Under the Act, collected information may only be released to:

  • A federal, state, local, or tribal law enforcement agency conducting an active
    investigation;
  • A federal agency making the request on behalf of a foreign law enforcement agency under mutual legal assistance protocols; and
  • A financial institution conducting due diligence under the Banking Secrecy Act or USA PATRIOT Act – with customer consent.

What should companies do to comply with the Act?

Prior to January 1, 2022, companies should check to see if FinCEN has issued regulations for compliance with the Act. Once the rules have been issued, entities should review the regulations to confirm whether they must file a beneficial owner report or are eligible to file for an exemption. Additionally, companies should keep updated records of the required information for each owner and enhance their compliance processes to ensure that the required information is being collected and reported to FinCEN in accordance with the Act.

Companies should also include language in their shareholders, partnership, or operating agreement or similar document that requires owners of the company to regularly provide any information required to comply with the Act and any relevant regulations, and may want to consider indemnification provisions if an owner fails to timely provide required information or provides false or incomplete information. If such agreement contains a confidentiality provision, it should include an exception to permit the company to report the required information to FinCen.

For further information or guidance on revising your policies, procedures, and operating agreement, please contact David Paseltiner.

On December 28, 2020, New York Governor Andrew Cuomo signed into law the COVID-19 Emergency Eviction and Foreclosure Prevention Act of 2020 (the “Act”), which, among other things, implements certain requirements and restrictions on residential foreclosures in New York.  The Act does not apply to certain commercial foreclosures or to vacant and abandoned properties that were listed on the statewide vacant and abandoned property electronic registry before March 7, 2020, and remain on the registry.

The Act applies in “any action to foreclose a mortgage relating to residential real property, provided the owner or mortgagor of such property is a natural person, regardless of how title is held, and owns ten or fewer dwelling units whether directly or indirectly.”  The units may be in more than one building, but must include the primary residence of the mortgagor/owner and the remaining units must be currently occupied by a tenant or available for rent.

The Act immediately stayed all pending residential foreclosure actions for a period of sixty days (through February 27, 2021), and allows for the submission of a hardship declaration by a mortgagor/owner attesting to hardship due to the Covid-19 pandemic. If a mortgagor/owner submits a hardship declaration, any pending foreclosure proceeding or the initiation of a new foreclosure proceeding, will be stayed until May 1, 2021.

The Act contains the form of the hardship declaration that is to be used and requires that the Office of Court Administration translate the hardship declaration into Spanish and the six most common languages in the city of New York, after Spanish.  The Act directs the courts to mail copies of the hardship declaration to mortgagors in all pending residential foreclosure matters.  The Act also directs that a hardship declaration form be sent by the mortgagee with every notice sent pursuant to New York Real Property Actions and Proceedings Law Sections 1303 (Help for Homeowners in Foreclosure) and 1304 (90-Day Pre-Foreclosure Notice) in the mortgagor/owner’s primary language.

When a new residential foreclosure proceeding is initiated, the court will require both an affidavit of service of a hardship declaration and an affidavit from the foreclosing party or agent of the foreclosing party stating that no hardship declaration has been received from the mortgagor/owner.  Further, the Act requires that upon the commencement of a new action, the court must seek confirmation, on the record or in writing, that the mortgagor/owner has received the blank hardship declaration and has not submitted a completed hardship declaration.

On December 31, 2020, New York State Chief Administrative Judge Lawrence Marks issued a memorandum regarding the requirements of the Act and the implementation of the Act by the courts.

The Unified Court System has published the hardship declaration in English, Spanish, Arabic, Bengali, Chinese (simplified and traditional), Haitian-Creole, Polish and Russian on its website.  The website also states that the Unified Court System is in the process of updating various web pages to reflect the requirements of the Act.

As previously discussed here, LIBOR (the London Inter-Bank Offered Rate) is an interest rate benchmark that is used as a reference rate for a wide range of financial transactions. It is typically offered as a floating rate interest option for corporate borrowers in the US loan market. Corporate borrowers may pay interest on their loans based on LIBOR (typically, LIBOR plus a spread, or applicable margin).

ICE Benchmark Administration (IBA), the administrator of LIBOR, announced on November 30, 2020 that it expects to consult on its intention to cease publication of one-week and two-month LIBOR on December 31, 2021, and the remaining USD LIBOR settings on June 30, 2023 (IBA later clarified that this was not an announcement that IBA will cease the publication of LIBOR). See our blog article here for a discussion of the potential effects of the COVID-19 pandemic on cessation of the LIBOR publication. As the likely end of the most commonly used LIBOR periods remains approximately two and a half years away, most existing agreements utilizing USD LIBOR will mature prior to the expected end date.

Notwithstanding the future termination of LIBOR, several United States regulatory authorities, including the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency, issued a joint statement supporting a transition away from using LIBOR “without delay” regardless of the unclear end date. These authorities further advised that successor language be included in financial agreements to preemptively provide an alternate interest rate after discontinuance of the existing reference rate.

Attorneys drafting new loan agreements and amendments to existing loan agreements utilizing LIBOR have taken two approaches to establish a successor interest rate following the cessation of LIBOR, namely the “amendment approach” and the “hardwired fallback language approach.” Under the amendment approach, the loan document provides the parties will cooperate to amend the applicable interest rate provisions to incorporate a new interest rate. This approach requires the parties to reach agreement on the terms of the new rate and to execute amendments to reflect this agreement. Under the hardwired fallback language approach, the fallback language provides for the successor rate within the original agreement and generally removes the need for a future amendment.

Both approaches provide for several triggers to transition from LIBOR to the successor reference rate including notice of the cessation of LIBOR, agreement among the parties to transition to the successor rate, or both. For the LIBOR cessation notice language, the agreement may provide that successor rate provisions will become effective if certain sources announce the termination of publication of LIBOR, regardless of whether those provisions provide for the amendment approach or the hardwired fallback language approach. For the election language, certain specified parties to the agreement (whether that be one, some or all of the parties) can elect to transition to the successor rate as provided for in the agreement.

The Alternative Reference Rates Committee (ARRC), a committee created by the Federal Reserve, released recommended USD LIBOR fallback contract language for syndicated loans to deal with the transition, in which it recommended either approach. For the hardwired option, the successor rate proposed by ARRC was Term SOFR plus a spread adjustment, or if that does not exist Compounded SOFR plus a spread adjustment, if neither exist, the hardwired approach reverts to an amendment approach, giving due consideration to relevant governmental body recommendations or evolving or then prevailing market conventions. The Secured Overnight Financing Rate (SOFR) is a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities.

In 2019, the International Swaps and Derivatives Association (ISDA®) determined that the fallback for LIBOR in their documentation would be Compounded SOFR in arrears together with a spread adjustment based on a historical median approach.

In June 2020, ARRC revisited and revised its position regarding LIBOR transition. Consistent with the ISDA® documentation, only the hardwired approach is now recommended, with the amendment approach being deleted. In addition, contrary to both its prior position and the ISDA documentation, rather than using Compounded SOFR in the second level of the waterfall of alternative benchmark replacements, ARRC now recommends Daily Simple SOFR.

Initially, the amendment approach was more commonly used; however, in light of the ARRC and ISDA® documentation and recommendations, the hardwired fallback language approach has become more prevalent in recent months.

David Paseltiner is chair of the firm’s corporate and commercial transactions practice group and a member of its banking and financial services practice group. He represents businesses in a wide variety of industries, ranging in size from small start-ups to well established firms with national and international operations. He also represents individuals in connection with employment agreements, shareholders agreements and operating agreements. David can be reached at 516-393-8223 or dpaseltiner@jaspanllp.com. Rose C. Egan, an associate in the corporate and commercial transactions practice group, assisted in the drafting of this article.

Parties regularly enter into contracts for the purpose of achieving a desired result. Sometimes there is an absolute requirement to achieve the result; sometimes merely an agreement to try to achieve the result. Included in this spectrum of commitment is a trio of phrases that are commonly used but not so commonly understood: “best efforts”, “reasonable efforts”, and “commercially reasonable efforts.” What do these terms require of a party that agrees to use such efforts? Does one of them require something more than the others?  In this article, we will explain why and when such terms are used, look at how New York courts interpret them, and offer some advice on how to reduce the uncertainties that accompany their use.

When Are These Terms Used?

Efforts clauses are most likely to be used where a party is unable to control an outcome, the parties are unable to predict if an outcome can be achieved, or a party simply is unwilling to guarantee an outcome. For example, a party selling its business may require a third party’s consent to an assignment of a contract between the selling party and the third party. The purchase agreement could require the seller to obtain the consent, failing which it would be in breach of the agreement, or provide for one of the “efforts” standards. So long as the seller used the required efforts, it would not be in breach of the contract if the third party refused to consent to the assignment of its contract.

What Are Efforts Clauses?

An efforts clause requires a party to take some level of effort to achieve the desired result. Failure to use such efforts would be a breach of the clause; failure to achieve the desired result would not be a breach, so long as the required effort was used.

The three most common used efforts clauses are “best efforts”, “reasonable efforts”, and “commercially reasonable efforts.” Attorneys and contracting parties generally view best efforts as the most demanding of the efforts clauses, commercially reasonable efforts as the least, and reasonable efforts as a middle ground. As discussed below, what attorneys and parties believe is not necessarily what the case law dictates.

Does Best (or Any Other) Efforts Require a Party to Do Anything Necessary?

The obligation to use reasonable efforts, commercially reasonable efforts, or even best efforts does not generally mean that the promising party must be successful or take exhaustive measures to fulfill the obligation. Under New York law, these efforts terms do not require a party to act against its own business interests.  Courts in other states have frequently held that even “best efforts” does not require a party to take every conceivable effort, take unreasonable actions, or incur substantial losses to perform an obligation. By agreeing to use best efforts, a party is not agreeing to take every possible action, to incur unlimited costs, or take unlimited time to achieve the desired result.

What’s the Difference Among the Efforts Clauses? Is There Even a Difference?

Parties rarely bother to define what they mean by “best”, “commercially reasonable” or “reasonable” efforts, meaning that in a dispute they are leaving it to a court to determine not only whether the effort has been made but what the effort required in the first place. Courts have wide latitude in determining what the parties may have intended to be required, and attempting to reconcile the efforts clause with other provisions of the contract so that the provisions of the contract work in harmony. Judges will often look to the contract’s surrounding facts and circumstances, if such facts and circumstances will enable them to determine the meaning of the efforts clause with a reasonable degree of certainty.

“Best Efforts” and “Reasonable Efforts”

New York courts have taken inconsistent positions with regard to the interpretation of efforts clauses. Some courts view “best efforts” and “reasonable efforts” as equivalent and interchangeable, while other courts find a distinction between them. One decision interpreted “commercially reasonable efforts” as requiring at the very least some conscious exertion to accomplish the agreed goal, but something less than a degree of efforts that jeopardizes a party’s business interests. As one federal court noted, New York has been “anything but a model of clarity” when it comes to interpreting efforts clauses[1].

In particular, there is a series of cases holding that both best efforts and reasonable efforts (the two more stringent standards in the view of most attorneys) impose an obligation on the promising party to act with good faith in light of its own capabilities; allow such parties the right to give reasonable consideration to their own interests; and permit such parties to rely on their good faith business judgment.

On the other hand, there is also case law in New York supporting the proposition that a best efforts standard is more onerous than a reasonable-efforts standard. Following this line of cases, courts often define the standard by using the implied covenant of good faith and fair dealing (as the base standard expected in all New York contracts) to explain that a best-efforts clause requires (i) a higher standard than mere good faith and (ii) a party to pursue all reasonable methods to achieve the result in question.

Finally, some courts analogize a best-efforts provision to a contractual obligation to perform promptly or diligently.

Most New York courts agree on one issue (not that it is helpful to litigants): the determination of whether a party used best efforts or reasonable efforts is a fact-intensive inquiry. Unfortunately, due to the lack of a decision by the New York Court of Appeals, New York case law is divided as to whether (a) there must be objective criteria or clear guidelines against which a party’s efforts to meet the required standard can be measured to be enforceable, or (b) best efforts is an enforceable obligation, even when objective criteria are unavailable if external standards or circumstances impart a reasonable degree of certainty to the meaning of the phrase.

“Commercially Reasonable Efforts”

Until recently, few New York courts had dealt with interpreting and applying a commercially-reasonable-efforts standard. The developing consensus is that the standard for satisfying commercial reasonability under New York is fairly lenient, with a balance between some conscious exertion to accomplish the agreed goal and something less than a degree of effort that jeopardizes the party’s business interests, as judged objectively based on industry standards.

With regard to “commercially reasonable efforts”, New York courts generally evaluate a party’s performance in light of an objective standard of reasonableness as opposed to a party’s subjective belief of what the contract requires.

What Can Be Done to Reduce Uncertainty?

There are some actions that can be considered if a party desires to reduce, to the extent possible, the uncertainty of a judicial interpretation of an efforts clause.

First, if at all possible, simply avoid using an efforts clause — make the desired result an express obligation of the other party. In this case, the inquiry is simply whether the result was achieved, not whether a party used sufficient efforts to try to achieve the result.

Second, define what is meant by “best”, “reasonable” or “commercially reasonable” efforts. This gives the court an ascertainable standard to determine whether the required effort was made, with the less subjectivity the better in this regard. For example, efforts could include sending a notice, incurring up to a certain amount of expense, engaging a specialist with expertise in the given subject matter,  appealing an adverse administrative decision, and so on, tailored, of course, to the applicable result being sought. An efforts clause can also be defined to state what efforts are not required, such as commencing litigation, incurring excess costs, taking actions that are illegal, or taking action that would reasonably be likely to expose the party to liability.

Third, use objective criteria. For example, if a party is required to give a notice or take other action as part of an efforts clause, state the date by which the notice must be given or the action taken, and avoid phrases such as “within a reasonable period of time.”

In Summary

While there is much ambiguity in the use of efforts clauses, with some (best/reasonable/commercially reasonable) effort, the following conclusions can be drawn:

  • unless specifically agreed to, none of the “efforts” clauses requires a party to do everything possible (such as bankrupting itself or take other unreasonable actions) to achieve the desired result;
  • depending on what court you end up in, “best” and “reasonable” efforts may, despite what may appear from the respective terms, mean the same level of effort; and
  • if achieving a desired result is important, and the counterparty is unwilling to commit to an absolute obligation to accomplish it, then consider including objective details as to what that party is expected to do as part of its efforts so that a court can more readily determine whether that effort has been made if the result is not achieved.

[1] Holland Loader Co. v. FLSmidth A/S, 313 F. Supp. 3d 447 (S.D.N.Y. 2018)

Governor Cuomo recently announced the creation of New York’s Green Energy Program aimed at building New York’s green economy. Urging that the program will combat global climate change while stimulating New York’s COVID-19 stressed economy, the Governor’s proposal includes the development of the largest offshore wind program in the nation, upgrades to five dedicated port facilities (in Albany, Coeymans, South Brooklyn, Port Jefferson and Port of Montauk Harbor), and the construction of a “green energy transmission superhighway” to transport clean energy generated upstate to under-serviced downstate areas (with projects in Western New York, Mid-Hudson and the Capital Region). He estimates that the green energy program will “… create a total 12,400 megawatts of green energy to power 6 million homes, directly create more than 50,000 jobs, and spur $29 billion in private investment all across the state.”

The cornerstone of the Governor’s proposal is his call for the acceleration of renewable energy development programs.  Indeed, the New York State Legislature recently enacted the Accelerated Renewable Energy Growth and Community Benefit Act (the Act) to facilitate siting and construction of clean energy projects. The Act establishes a new Office of Renewable Energy Siting (the “ORES”) to review siting applications for renewable energy facilities whose capacities exceed 25 megawatts, and those between 20-25 megawatts who opt into the new process. According to ORES’ website, it will “… implement the timely consolidated review and permitting of major renewable energy facilities in a single forum that takes into consideration local laws, public health and safety, environmental, social and economic factors pertinent to the decision to permit such facilities.” Notably, under certain circumstances, the Act permits ORES to disregard local laws and regulations when approving siting applications. ORES issued draft regulations, and uniform standards and conditions for public comment on September 16, 2020.

It remains to be seen how (or whether) ORES will balance the State’s interests in developing New York’s wind program against impacted municipalities’ interests, in particular, those articulated  in local land use and zoning regulations, as well as siting and permitting processes. Even if ORES does manage to streamline the process for certain projects, it is unlikely that local municipalities will simply go quietly into the night when a project hits home. After all, isn’t that precisely why municipalities maintain local siting control over land use and zoning matters?

Should you have questions or inquiries regarding renewable energy siting and procurement processes, please contact Simone M. Freeman in our Zoning and Land Use and Municipal Law Groups at 516-746-8000 or sfreeman@jaspanllp.com.