Documents with title alternative dispute resolution ADR in an office.

With most cases facing indefinite suspensions in the courts, it behooves litigants and their counsel to at least consider alternative methods of resolving disputes. Alternative Dispute Resolution (“ADR”), most notably mediation and arbitration (and their variations), can offer a more expeditious and flexible means of resolving controversies even in normal times. In the current extraordinary environment, the advantages of ADR become even more pronounced.

Is ADR a Practical Alternative in Light of the Pandemic?

Mediation is valued not only as a substitute for litigation, but as an adjunct to it, and has been vigorously promoted by the courts for years. In an appropriate case, it presents the opportunity for a quick and inexpensive way to resolve a case and enables parties to design a settlement, including forms of relief not usually available in the courts.

Despite these and other advantages, mediation is not always embraced. At times the level of hostility between parties poses an apparent barrier to mediation. In other circumstances, while parties may be generally amenable to mediation, they may feel that it is premature, such as where they believe that some amount of discovery needs to be completed before proceeding down that path. I suggest that, given the current health crisis and its impact on court proceedings, the evaluation of the pros and cons of mediation warrants reconsideration. Indeed, the harsh reality is that, for some businesses, as well as individuals, some financial recovery now is more attractive than the uncertainty of what, if any, recovery will be obtained at an indefinite future date.

Arbitration, as well, may offer a more practical and expeditious manner of resolving a pending dispute. Again, the reasons why parties might be reluctant to pursue arbitration in place of litigation in normal times should be reassessed in the current environment. Furthermore, any perceived shortcomings in the arbitration process can be addressed in the parties’ arbitration agreement.

In most cases, arbitration procedures are dictated by the parties’pre-dispute arbitration agreement. At the point such agreement is signed, the parties are, at least in theory, on the same page. Reaching an arbitration agreement when the dispute has already arisen is clearly more difficult. Adversaries may reflexively adopt a mind-set that “if the other side wants it, then I’m against it.” Currently, however, adverse parties may have a common interest in not having their cases drag on indefinitely and may be more receptive to agreeing to alternative procedures.

Can ADR Be Successful Without Face-to-Face Meetings?

Once the parties determine to proceed with mediation or arbitration, they can work with counsel and the neutral to design a process that is effective. With respect to mediation, the inability to conduct in-person sessions should not pose an insurmountable obstacle. In a perfect world, face to face mediations are most effective. However, even now, parties can strive to duplicate the effectiveness of traditional mediations through use of a variety of means including conference calls and videoconferencing using Zoom, Skype, FaceTime and other platforms.

There are a number of challenges when planning and conducting virtual mediations that should be addressed at the outset. For example, it must be assured that all participants are comfortable with the technology and have the necessary equipment to make the process as seamless as possible. To facilitate this, it is advisable to conduct a trial run in advance.

There are also privacy and confidentiality issues that are unique to remote mediations. It is essential that only authorized individuals participate and listen to the mediation sessions, and that there is no unauthorized taping of the discussions. These and other ground rules should be the subject of a protocol agreed to before the mediation starts.

As with mediations, the inability to conduct in-person arbitration hearings can be overcome through means of technology as discussed above. Telephonic hearings are often used in American Arbitration Association (“AAA”) Expedited Procedures. In addition, AAA Commercial Rules, for example, already provide that “when deemed appropriate, the arbitrator may also allow for the presentation of evidence by alternative means including videoconferencing, internet communication, telephone conferences and means other than in-person presentation” (AAA Commercial Arbitration Rule R-32(c)). It is actually quite common for people who cannot testify in-person to provide telephonic testimony. To be sure, conducting hearings in which all participants are in remote locations is far more challenging, but I believe is doable. In the end, the parties can by mutual agreement determine the means by which their case is to be conducted and, in my experience, arbitrators will almost always follow any reasonable agreed upon procedures.

If you have any questions in this area, feel free to contact me at afelsenfeld@jaspanllp.com.

Scaffolding and crane in the construction of a bridge for a highway

​The COVID-19 pandemic has brought uncertainty and upheaval to communities and businesses across the country. There is particular confusion in the New York construction industry about which types of construction activities are considered “essential” and therefore exempt from Governor Cuomo’s stay-at-home order. Although the rules are changing daily, we have summarized some of the current construction-related guidelines.

Executive Orders and Related Guidance

​On March 17, 2020, Governor Cuomo signed Executive Order 202.6, which requires non-essential businesses to keep at least half of their workforces at home. Over the following days, this directive was revised to require non-essential businesses to keep 100% of their workforces at home.

The Governor directed the Empire State Development Corporation (ESDC) to develop guidance as to which businesses are essential. Initially, ESDC designated “construction,” generally, as an essential business, without any specifics. ​Thereafter, ESDC issued additional guidance which stated that “skilled trades such as electricians, plumbers” and “other related construction firms and professionals for essential infrastructure or for emergency repair and safety purposes” were considered essential services.

​After a question was asked at one of the Governor’s daily press briefings concerning the type and manner of construction continuing in various parts of New York City, the following clarification was issued by the ESDC with respect to essential construction activities:
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• All non-essential construction must shut down, except emergency construction, (e.g., a project necessary to protect health and safety of the occupants, or to continue a project if it would be unsafe to allow to remain undone until it is safe to shut the site).

• Essential construction may continue and includes roads, bridges, transit facilities, utilities, hospitals or health care facilities, affordable housing, and homeless shelters. At every site, if essential or emergency non-essential construction continues, existing recommendations must be followed as to maintaining social distance, including for purposes of elevators/meals/entry and exit. Sites that cannot maintain distance and safety best practices must close and enforcement will be provided by the state in coordination with the city/local governments. This will include fines of up to $10,000 per violation.

• These restrictions on construction work do not apply to a single worker, who is the sole employee/worker on a job site.

​On March 30, 2020, the New York City Department of Buildings (DOB) issued its own “Guidance to owners and contractors regarding enforcement of Essential vs. Nonessential construction in accordance with NYS Governor’s Executive Order 202.6 and subsequent orders, and the Guidance on Executive Order 202.6 published by NYS ESDC Item 9” (DOB Guidance). This Guidance expands upon the clarifications issued by ESDC and discusses which activities are considered “emergency construction” and “essential construction”.
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​These clarifications and guidance(s) establish certain criteria for “emergency” and “essential” construction, such as a project necessary to protect the health and safety of the occupants; continuing a project to make it safe to shut down; and certain categories of essential “infrastructure” type activities. The clarifications and guidance(s) also make it clear that work that violates the criteria may subject the violator to a $10,000 fine for each such violation.

​The DOB Guidance also provides that work being performed on “affordable housing” is an essential construction activity. With respect to affordable housing, the DOB provides the following guidance:

Construction work on public housing, or a private or multiple dwelling or real property that is a new building (NB) or that is 100% vacant; or is work on unoccupied public housing units for the designation as housing for specific populations (i.e. shelter set aside, domestic violence referrals), or work on the exterior to address emergency conditions requiring immediate corrective action, set forth in Section 1(a)(iii) or within public housing, correction of critical systems for seasonal preparedness for the 2020-2021 heating season of an existing public housing building. Construction work on a private or multiple dwelling or real property that is a new building (NB) or that is 100% vacant that is now used or will be converted to such use: (i) For the provision of affordable inclusionary housing or mandatory inclusionary housing pursuant to the New York city zoning resolution; or (ii) Where no less than 30% of the residential units are subject to a regulatory agreement, restrictive declaration, or similar instrument with a local, state, or federal governmental entity or a local housing authority in a city with a population of one million or more.

Based upon ESDC’s guidance and the DOB’s guidance, electricians, plumbers and other contractors who are restoring essential services such as “heat, hot water, cold water, gas, electricity, or other utility services” or are performing work that “severely affects life, health, safety, property, or significant number of persons,” are permitted to perform such work because it is essential.

Unanswered Questions

​Notwithstanding these clarifications, there are numerous questions that remain. For example:

1. New York City Local Law 11, which requires the regular inspection and maintenance of certain categories of masonry structures, is a “safety” law, enacted to address deaths and injuries that occurred as a result of falling masonry from unmaintained buildings. Can this work continue – and on every project? Local Law 11 work is done on “cycles”, based on the length of time allowed between applicable inspections and maintenance. Building owners are often given extensions of time to perform the required maintenance based on the nature and severity of the identified work to be done. However, certain work is often designated as “emergency” in nature and the DOB will often issue violations that identify work of an “emergency” nature. Work that has been identified as “emergency” in nature can likely continue but can the work that could be done in an extension period be performed?

2. The “infrastructure” categories include “hospitals or health care facilities”. Clearly constructing something like a temporary or field hospital is covered. However, what about a landlord who has hired a contractor to do a “landlord’s buildout” for a new tenant who is a doctor. The doctor’s office is unrelated to the current health emergency and will likely not open until the health emergency passes. Is this “essential” construction? Can the landlord demand that the contractor continue working, claiming it is “essential” construction and that the contractor’s failure to continue will be a breach of the parties’ contract? What should the contractor do if it believes that continuing work will be a violation of the law?

3. With respect to the guidance relating to “affordable housing”, what if part of the project is affordable housing? Does the 30% rule apply, i.e., if 30% of the project is affordable per an agreement or declaration, can all the work continue? If so, do the social distancing rules apply to this type of project?

4. As to the $10,000 fine, who is the “violator,” the project owner or the contractor? If the owner demands that the contractor continue work, whether or not the contractor disagrees, can the contractor pass the fine on to the owner if the contractor is given the violation? Furthermore, will violations relate solely to the “social distancing” requirement in the sentence that precedes the establishment of the fine, or to the very act of performing non-essential construction itself?

There are also likely to be other questions that arise. The safest practice would be to apply to ESDC for designation as an essential business.

Other Considerations

There are other practical issues which must be addressed as a result of the limitation on construction activities. For example, the current circumstances may make it impossible to meet contractual deadlines for the completion of work and expose contractors to liability for liquidated damages. These issues should be addressed directly between the contractor and owners and may require amendments to existing contracts to ensure that, once the limitations on construction have been lifted, projects can continue and be completed in a timely manner.

​We have also learned that, at least in Nassau County, the Clerk will be accepting the filing of Mechanic’s Liens and Mechanic’s Lien Discharges, even though most filings are currently suspended, as the Clerk is treating them as “emergency” in nature. There is logic behind this practice. A Mechanic’s Lien is notice to the public that there is a claim against the property. The purpose of a Mechanic’s Lien is to protect the lienor’s interest in the property, as allowed by the Lien Law. If the Clerk did not accept the Lien, even if the time to file a lien were extended, the property owner could sell the property (which is currently allowed) before a lien could be filed and the lienor’s rights would be lost. Allowing the filing of the Lien protects the lienor’s rights. Similarly, allowing the discharge of the lien protects the property owner’s rights and allows the property to be sold, even as the lienor’s rights are protected.

Conclusion

The rapidly changing nature of the restrictions on the construction industry has caused serious confusing. We will continue to post real-time updates in our COVID-19 Resource Center. If you need assistance, contact Chris Vatter at (516) 393-8227 or cvatter@jaspanllp.com or Charlie Segal at (516) 393-8234 or csegal@jaspanllp.com.

Gavel on bankruptcy Law books

Yesterday, Jaspan Schlesinger LLP appeared telephonically, on behalf of a creditor, in the Pier 1 bankruptcy proceedings before U.S. Bankruptcy Court for the Eastern District of Virginia. Pier 1 Imports, Inc., et al., Case No. 20-30805 (KRH) (Bankr. E.D. Va., Apr. 2, 2020). Pier 1 Imports Inc. and its affiliates (collectively, Pier 1) brought an emergency motion seeking financial and administrative relief in light of the COVID-19 pandemic and resulting government-mandated closures. Undoubtedly, this hearing is one of the first of many to come before our bankruptcy courts as businesses assess the viability of continued operation in these uncertain times, and as courts across the country accommodate social distancing requirements by embracing virtual courtroom technologies.

In this instance, Pier 1 sought an order permitting it to, among other things, effectively defer rental payments owed to its various landlords, including our client, for an indefinite period of time. Proceedings began with an air of somber practicality, as the Court noted the unprecedented nature of the circumstances at hand, which it termed a “critical business problem” in need of “business solutions,” rather than “litigation solutions.”

The Court drew a comparison between the Pier 1 proceedings and Modell’s Sporting Goods, Inc., No. 20-14179 (VFP) (Bankr. D. N.J., Mar. 23, 2020), a New Jersey case in which Modell’s and its subsidiaries filed for Chapter 11 bankruptcy shortly before President Trump declared the COVID-19 pandemic a national emergency. Because of the pandemic and government-mandated closures, the Modell’s debtors successfully sought a complete “suspension” of their bankruptcy cases. Specifically, they asked for a temporary suspension of all deadlines and activities in the case (pursuant to Bankruptcy Code § 305 or, in the alternative, Bankruptcy Code § 105), and the right to seek additional time in the future. They also sought to defer payment of all expenses other than those specifically outlined in their modified budget, which excluded any rent payments.

Much like the debtors in Modell’s, Pier 1 premised its motion on Bankruptcy Code § 105 and § 305, and legal doctrines such as impossibility and frustration of purposes. It argued that, until ordinary operations resume, it will be unable to make the monthly rent payments of $9.4 million owed to its various landlords. However, Pier 1 conceded that its e-commerce business remains in operation.

Notwithstanding the resounding sympathy expressed by the Court and the U.S. Trustee, as well as certain lenders, vendors, and landlords, concerns remained for the businesses and individuals to whom Pier 1 owes money. Because there is no way of knowing when Pier 1 will be able to resume operations, any order temporarily relieving them of their financial obligations might effectively leave creditors high and dry for many months.

Of those who participated in the hearing, the landlords were undoubtedly most vocal in their concerns since the relief Pier 1 sought offered little means to protect their financial interests if Pier 1 fails to reorganize and must instead liquidate without any assets remaining to satisfy debts “temporarily” set aside. Others argued that the protections typically available to creditors under the Bankruptcy Code were seemingly cast aside in light of the pandemic, and that the relief sought by Pier 1 threatened to stretch the Court’s equitable powers beyond their usual reach at the expense of the rights of Pier’s creditors.

In the end, the “business solution” ruled the day, and Pier 1 will be permitted to cease rental payments to its landlords until either the end of the pandemic is in sight, or a cogent vision of its financial prospects becomes apparent, or until the Court says otherwise. Though it is uncertain whether other debtors will be able to obtain similar relief, it is clear that the pandemic has opened new doors in bankruptcy law, and all signs point to more change ahead. For now, landlords should be prepared to bear the costs of their leased and occupied but otherwise non-operating retail properties. The decisions in Modell’s and yesterday’s proceedings in the Pier 1 bankruptcy will undoubtedly be cited by chapter 11 bankruptcy debtors who seek to halt their cases and rent obligations in their tracks due to the COVID-19 pandemic.

Our firm’s COVID-19 Resource Center is available to you day and night. Our attorneys remain on-call to assist our clients with the unprecedented challenges confronting them. Please reach out to us, your usual firm contacts or a member of our Coronavirus Response Team if you need guidance.

Jet plane taking off the airport.

As the novel coronavirus continues to wreak havoc around the world, our Coronavirus Response Team persists in analyzing the more than 800 pages comprising the Coronavirus Aid, Relief and Economic Security (CARES) Act – legislation that makes the 2009 Stimulus Bill and 2008 Wall Street Bailout Package look like child’s play. The CARES Act is the largest stimulus package in United States history, providing for $2 trillion dollars in relief, a massive increase over the 2009 and 2008 stimulus packages, which provided for relief in the amounts of $831 billion and $700 billion, respectively.

The CARES Act appropriates approximately $500 billion to Title IV, known as the “Economic Stabilization and Assistance to Severely Distressed Sectors of the United States Economy Act” (Title IV). Moreover, in a win for aviation and national defense, about $46 billion has been allocated to specific industries: $25 billion to passenger air carriers, $4 billion to cargo air carriers; and $17 billion to businesses critical to maintaining national security. The remaining $454 billion is allocated more generally to “programs or facilities established by the Board of Governors of the Federal Reserve System for the purpose of providing liquidity to the financial system that supports lending to eligible businesses, states and municipalities.”

This post offers a cursory summary of certain portions of Title IV (those addressed to the aviation and national security industries), including how these funds can be utilized and who may be eligible to receive them.

Which Businesses are Generally “Eligible”?

Under Title IV, an “eligible business” is broadly defined as “an air carrier” or “any “United States business that has not otherwise received adequate economic relief in the form of loans or loan guarantees provided under” the CARES Act. However, the fine print narrows the scope of eligibility significantly, as is well explained by, among others, the U.S. Senate Committee on Banking, Housing and Urban Affairs.

Those businesses for which credit is “reasonably available” may not be entitled to funding. To a similar point, the business must intend that the obligation be “prudently incurred.” Additionally, Title IV provides that a loan guarantee must be sufficiently secured (or that the loan must bear a rate of interest reflecting higher risk), and must be for a time “as short as is practicable,” and for no more than 5 years.

Perhaps most importantly, the business must, as a result of the COVID-19 pandemic, “have incurred or [be] expected to incur covered losses such that its continued operations are jeopardized.” Accordingly, businesses that are still operating but have yet to see the effects of the COVID-19 pandemic, may still be entitled to receive funds if a downturn in business is anticipated.

Where a company receives relief under Title IV, neither it nor any of its affiliates will be able to repurchase stock until 12 months after the loan is no longer outstanding, unless the obligation to purchase stock so arises from a prior contractual obligation. Further, the eligible business may not pay dividends on common stock until 12 months after the loan is no longer outstanding.

Compensation and Operations Requirements

To receive Title IV funding, there are also certain requirements with respect to location of employees and maintaining employment levels. First, the eligible business must certify that it was created or organized in the United States or under United States law, and that it has significant operations in and a majority of its employees based in the United States.

The eligible business must maintain its employment levels as of March 24, 2020 at full compensation and benefits until September 30, 2020, if practicable. If it is not practicable to maintain the workforce at 100%, the business can reduce its employment levels up to 10%.

However, that is not all. With respect to employees or officers who make more than $425,000 in total compensation (including salary, bonuses, awards of stock, and other financial benefits), the eligible business must agree that, during the period beginning on the date on which the agreement is executed and ending one (1) year after the date the loan or loan guarantee is no longer outstanding, no employee or officer will receive total compensation for a 12 consecutive month period exceeding the total compensation received in 2019, or will receive severance pay or other benefits upon termination of employment in excess of two times the maximum total compensation received by said employee or officer in 2019.

As for employees or officers who earn more than $3 million in total compensation, the eligible business must agree that, during the period beginning on the date on which the agreement is executed and ending one (1) year after the date the loan or loan guarantee is no longer outstanding, no officer or employee will receive total compensation during any consecutive 12 month period in excess of $3 million plus 50% of the excess over $3 million of the total compensation received by said employee or officer in 2019.

Compensation to the Government

The government requires businesses receive relief under Title IV to provide something of value in exchange. A public company must provide “a warrant or equity interest” in the A private company must provide “a warrant or equity interest in the eligible business” or “a senior debt instrument issued by the eligible business.”

All warrants, equity interests, and senior debt instruments must provide for a reasonable participation by the government, for the benefit of the taxpayers, in equity appreciation in the case of warrants and equity interests or a reasonable interest rate premium in the case of senior debt instruments. The government must also be able to sell, exercise, or surrender a warrant or any senior debt instrument for the primary benefit of taxpayers; although the Secretary is not permitted to exercise voting power with respect to any share of common stock acquired.

Conclusion

Clearly, the CARES Act provides support to various entities in an attempt to keep individuals employed and businesses from failing. Stay tuned for a follow-up post about the remainder $454 billion allocated to loans, loan guarantees, and other investments in programs and facilities established by the Board of Governors of the Federal Reserve System for the purpose of providing liquidity to the financial system that supports lending to eligible businesses, States or municipalities.

If you have any questions about the contents of this post, the contents of CARES Act, or need assistance, contact any member of our Coronavirus Response Team.

Like most other areas of life, the COVID-19 pandemic is impacting trademark deadlines imposed by the United States Patent and Trademark Office (“PTO” or “Office”).  In recognition of the difficulties affecting entrepreneurs, businesses, individuals, and practitioners, on March 31, 2020, the PTO announced extensions to the time allowed to file patent and trademark-related documents and to pay certain required filing fees.  The PTO is taking action pursuant to the temporary authority provided to it by the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act signed into law on March 27, 2020.

This post is limited to the extensions applied to trademark-related filings and fees.  Pursuant to the CARES Act, the PTO is extending the time to file certain documents and fees which otherwise would have been due on or after March 27, 2020.

In accordance with Section 12004(a) of the CARES Act, the PTO may toll, waive, adjust, or modify any timing deadline established by the Trademark Act in effect during the COVID-19 emergency period described in the CARES Act, if the Director of the PTO determines the emergency: (1) materially affects the functioning of the PTO; (2) prejudices the rights of applicants, registrants, patent and trademark owners, or others appearing before the Office; or (3) prevents applicants, registrants, patent and trademark owners, or others appearing before the Office from filing a document or fee with the PTO.  CARES Act, Section 12004(e).

As of March 31, 2020, the Director of the PTO has determined that the emergency created by the COVID-19 pandemic has prejudiced the rights of applicants, registrants, trademark owners, or others appearing before the PTO in trademark matters, and has prevented applicants, registrants, trademark owners, or others appearing before the PTO in trademark matters from filing a document or fee with the PTO.

For any of the following categories, where the due date was due between and inclusive of, both March 27, 2020 and April 30, 2020, the due dates will be extended 30 days from the initial date it was due, provided that the filing is accompanied by a statement that the delay in filing or payment is due to the COVID-19 outbreak, as defined below:

  1. response to an Office action, including a notice of appeal from a final refusal, under 15 U.S.C. § 1062(b) and 37 C.F.R. § 2.62(a) and 2.141(a);
  2. statement of use or request for extension of time to file a statement of use under 15 U.S.C. § 1051(d) and 37 C.F.R. § 2.88(a) and 2.89(a);
  3. notice of opposition or request for extension of time to file a notice of opposition under 15 U.S.C. § 1063(a) and 37 C.F.R. § 2.101(c) and 2.102(a);
  4.  priority filing basis under 15 U.S.C. § 1126(d)(I) and 37 C.F.R. § 2.34(a)(4)(i);
  5. priority filing basis under 15 U.S.C. § 1141g and 37 C.F.R. § 7.27(c);
  6.  transformation of an extension of protection to the United States into a United States application under 15 U.S.C. § 1141j(c) and 37 C.F.R. § 7.31(a);
  7. affidavit of use or excusable nonuse under 15 U.S.C. § 1058(a) and 37 C.F.R. § 2.160(a);
  8. renewal application under 15 U.S.C. § 1059(a) and 37 C.F.R. § 2.182; or
  9. affidavit of use or excusable nonuse under 15 U.S.C. § 1141k(a) and 37 C.F.R. § 7.36(b).

For purposes of the extension of trademark deadlines due to the COVID-19 outbreak, if a practitioner, applicant, registrant, or other person associated with the filing or fee was personally affected by the COVID-19 outbreak, including, without limitation, through office closures, cash flow interruptions, inaccessibility of files or other materials, travel delays, personal or family illness, or similar circumstances such that the COVID-19 outbreak materially interfered with timely filing or payment, then the waiver request for delay in filing or payment will be approved.

For all other situations not specified herein, where the COVID-19 pandemic has prevented or interfered with a filing before the Trademark Trial and Appeals Board (“TTAB”), a request or motion for an extension or reopening of time, as appropriate, can be made.

It should be noted that the PTO remains open for the electronic filing of trademark and TTAB documents and fees.  Since the PTO remains opens for the filing of trademark documents and fees, the waiver for an extension of trademark filing or payment deadlines is available only if the delay is due to the COVID-19 outbreak, as defined herein.

If you have any questions regarding the extension of trademark filings or fees, or need assistance with either requesting any trademark extensions or with the filing of any trademark documents or fees, contact the Chair of our Trademark Practice Group, Scott Fisher, at (516) 393-8248 or sfisher@jaspanllp.com.

Close up woman hands holding receipt calculating company expenses

The spread of the novel coronavirus (COVID-19) has wreaked havoc on a multitude of industries.  As we face the uncertainties of this very unprecedented time, governmental agencies are enacting new programs and legislation in an effort to alleviate growing financial concerns.

On March 21, 2020, the Treasury Department and Internal Revenue Service announced that the federal tax filing due date has been automatically extended from April 15, 2020 to July 15, 2020.  The benefit of this extension is that all taxpayers, including individuals, trust, estates, corporations and other non-corporate tax filers, as well as those taxpayers who are required to pay self-employment tax, (“Affected Taxpayer”) have the ability to defer any federal income tax payments which would have been due on April 15, 2020, to July 15, 2020, without incurring penalties and interest, regardless of the amount due and owing.  Absent a further automatic extension, penalties, interest or additional tax for failure to file federal tax returns by July 15, 2020, will begin to accrue on July 16, 2020.

It is important to note that although the federal tax filing extension does not automatically apply to each state, New York State has followed suit and is extending its tax filing deadline to July 15, 2020.  Additionally, according to a bulletin sent by the New York State Department of Taxation and Finance on March 29, 2020, the deadline for all taxpayers to make payments that otherwise would have been due on April 15, 2020 is extended to July 15, 2020, and there will be no penalties or interest incurred as a result of such delayed payments.

The New York City Department of Finance (“DOF”) has also taken steps to alleviate various financial concerns during this pandemic.  The DOF issued a Memorandum advising that there will be a waiver of penalties for Department of Finance administered business and excise taxes due between March 16, 2020 and April 25, 2020.  Under these rules, there will be no underpayment, late filing or late payment penalties.  Despite these waivers, interest, where applicable, is not being waived.  As such, any interest payment, which is calculated from the original due date to the date of payment, must be paid on all tax payments that are received after the original due date.

As the days pass with only “essential businesses” being permitted to stay open and the rest of the workforce “working from home” to the extent possible, we expect that additional programs and initiatives will be implemented to assist various businesses in an effort to restore financial stability to the economy.

Business woman examining insurance policy

With the unprecedented COVID-19 (coronavirus) pandemic devastating cities and states throughout the United States (and the world), and all but bringing the U.S. economy to a screeching halt, business owners are searching for mechanisms to offset the devastating economic impact this virus has wreaked on them. Understandably, many are therefore asking, “Do any of my business insurance policies cover the loss caused by this virus?” The insurance industry is examining this question with equal interest. In any other time, the seemingly simple answer to this question would be an unequivocal, “No.” However, in these strange times, the more likely answer in some jurisdictions may be, “It depends.”

Determining Whether Commercial Property Policies Insure Losses Arising from COVID-19

Every insurance policy is a stand-alone document that must be read carefully and in its entirety before any determination of coverage can be made. Careful consideration of the Declarations, the Insuring Agreement, the policy Conditions, the policy Exclusions, and any endorsements to the policy must be given before a coverage determination can be made, because the specific policy language and specific facts of the claim will ultimately determine whether there is coverage under the policy. That said, there are general guiding principles that can be applied to determining whether a policyholder can reasonably expect to have insurance coverage for business interruption losses caused by the coronavirus under a commercial property insurance policy.

First, look to the insuring agreement to determine what type of commercial property insurance is at issue, i.e., named peril or all-risk? If the policy is a named peril policy, then only the perils named in the policy are covered. For example, if the policy names sinkholes, windstorm, hail, etc., and does not name viruses (or anything arguably akin to a virus), then the policy would not likely be found to include coverage for losses relating to the coronavirus. By contrast, if the policy names bacteria and viruses or only viruses, then there would be a strong likelihood that losses arising from the coronavirus would be covered under the policy assuming no policy exclusions apply. If the policy names contaminants, there may be arguments for and against coverage for losses relating to the coronavirus, depending on the definition of contaminant, if any, and the jurisdiction deciding the issue.

Unlike a named peril policy, an all-risk policy typically covers any risk of direct physical loss or damage unless specifically excluded by the policy. However, physical loss or damage typically must occur to trigger any coverage under the policy. With respect to loss arising from COVID-19, the legal issue would be whether businesses have suffered “direct physical loss or damage” to property as a result of the coronavirus. The intuitive answer to the insurance industry and those who represent insurers would likely be that there is typically is no coverage for losses arising from the coronavirus. However, in light of recent events, whether that result holds true might depend on the jurisdiction determining the issue and will certainly depend on the actual facts and circumstances of each claim, and maybe even what we continue to learn about the COVID-19 virus itself.

The most common approach to determining whether “direct physical loss or damage” occurred requires that the policyholder demonstrate physical injury or destruction to property resulting in “direct physical loss or damage” to the property, e.g., a fire at the premises. Absent a showing of something actually damaging the property, coverage under the policy would not be triggered. However, some jurisdictions have further found that “damage” that is invisible to the eye can trigger coverage under the policy, e.g., noxious fumes/gases.

In that vein, at least one policyholder in Louisiana has already filed a declaratory judgment action relating to damages caused by the closure of a restaurant due to the coronavirus. That policyholder alleged that its all-risk policy “covers all risks unless clearly and specifically excluded” and seeks coverage for business losses arising from the coronavirus on the theory that the policy at issue “does not provide any exclusion due to losses, to business or property, from a virus or global pandemic.” See Cajun Conti LLC et al. v. Certain Underwriters at Lloyd’s, London et al. (Civil District Court for the Parish of New Orleans State of Louisiana, No. 2020-02558). Recognizing that the policy at issue addressed exclusions for certain pathogens, the policyholder alleged that because the policy “only excluded losses due to biological materials such as pathogens in connection with terrorism or malicious use, thereof” it necessarily “provid[ed] coverage to other viruses or global pandemics.” In short, the policyholder asserted that “the covered causes of loss means direct physical loss unless the loss specifically excluded or limited in the policy.”

In support of those contentions, the policyholder alleged that: “[t]he virus is physically impacting public and private property, and physical spaces in cities around the world” and that “the deadly virus physically infects and stays on the surface of materials and, ‘fomites,’ for up to twenty-eight days, particularly in humid areas below eighty-four degrees.” Asserting that the virus is akin to “the intrusion of lead or gaseous fumes,” the policyholder asserted the coronavirus “constitutes a direct physical loss under insurance policies that would need to be remediated.”

Setting aside any other potential legal infirmities, such contentions would likely strike an experienced insurance professional as absurd because insurance companies are in the business of insuring known risks, not every unknown risk. Moreover, coverage typically extends to actual damage, not the preventative actions taken to avoid actual damage. That said, analogizing the current crisis to other novel (and catastrophic) events, Chris Cheatham, the founder of RiskGenius, a provider of software for insurance professional including underwriters, brokers, and most other insurance professionals, recently opined that a policyholder contending there is coverage of the coronavirus by silence may gain traction in some jurisdictions. See also How Silence May Impact Commercial Insurers on COVID Cover.

Legislative Intervention

Some members of Congress have urged the insurance industry to provide coverage for the coronavirus. For example, on March 18, 2020, a bipartisan group of U.S. House members asked insurers to retroactively recognize financial losses relating to COVID-19 under commercial business interruption coverage for policyholders. The representatives (much like the Louisiana policyholder) argued that the shelter-in-place orders being issued throughout cities and states during the pandemic should qualify for business interruption losses sustained as a result of civil authority prohibiting or impairing access to the policyholder’s business premises (despite a lack of damage to the property). However, as explained by industry leaders in response to this call for action, the policies at issue do not apply to preventative measures; were never intended to insure a global pandemic, and the premiums changed did not contemplate coverage for such risks.

Similarly, New Jersey proposed a law requiring coverage for the business losses arising from the coronavirus (see New Jersey Bill A-3844), though that proposal has since quieted somewhat.

Additionally, numerous states have turned to the insurance industry to provide guidance and assistance to states and policyholders through this crisis. As explained more below, New York was the first state to take such action. To date, New York, Wisconsin, Florida, California, Indiana, Washington, Georgia, and W. Virginia have made such overtures.

The New York Department of Financial Services’ Initial Responses to the Coronavirus

On March 10, 2020, the New York State Department of Financial Services (DFS) sent a letter to all authorized Property/Casualty Insurers regarding business interruption and related coverage written in New York under commercial property insurance, which DFS defined to include business owner policies, commercial multiple peril policies, and specialized multiple peril policies. In that letter, DFS instructed insurers to provide a host of information to DFS. It also required insurers to provide the information requested to every commercial property policyholder in New York.

Among other things, insurers were directed to provide “a clear and concise explanation of benefits” to policyholders and to “indicate whether the policy contains a requirement for ‘physical damage or loss’ and explain whether contamination related to a pandemic may constitute ‘physical damage or loss.’” Insurers’ responses were due to DFS on or before March 18, 2020.

Thereafter, DFS posted a Frequently Asked Questions (FAQs) section to its website providing an explanation of typical benefits under those policies. The FAQs mirror the policy language, intent of the insurance industry’s business interruption coverage and provide in relevant part:

What does my business interruption insurance cover? 

Business interruption coverage typically can only be triggered if you have property loss that leads to the business interruption. One example could be that a fire in your office has caused you to suspend your business activities.

***

I have a policy that is called a contingent business interruption insurance policy — how is that different from a regular business interruption policy?

As explained in ‘What does my business interruption insurance cover?’ above, business interruption coverage requires a related property damage…

***

How does my business interruption insurance policy treat the novel coronavirus (COVID-19)?

[A]ny claim would still need to be related to your property damage for coverage to be triggered….

***

Does my business interruption insurance policy cover me if my employees stay home from work out of concern about COVID-19?

As explained … above, business interruption coverage requires a related property damage. Fear of COVID-19 alone is unlikely to trigger business interruption insurance coverage….

***

Does the Governor’s declaration of a State of Emergency affect my business interruption insurance policy?

The State of Emergency declaration does not change the terms of your business interruption policy….

***

The FAQs posted illustrates that proof of “property damage” will be the critical legal and factual issue to determine what, if any, coverage exists for business interruption losses arising from the coronavirus.

The Takeaway for Insurers and Policyholders

The losses arising from the coronavirus will be staggering. Though Congress is attempting to pass legislation to assist companies with offsetting losses from the virus, federal and state governments have already looked to the insurance industry to absorb some of the losses businesses are experiencing. However, the insurance industry neither prepared for nor charged premiums for this global pandemic and will therefore likely continue to resist such government pressure. Policyholders’ attorneys have already begun filing suit to test the scope of coverage under certain policy terms and will presumably continue to do so in an effort to obtain coverage for their clients.

Given these competing interests and differing views, whether and to what extent policyholders will have business interruption coverage under commercial property policies will likely hinge of the specific facts of the claim and the jurisdiction in which the claim is filed. Below are suggestions for policyholders and insurers alike for navigating these uncharted waters:

Policyholders

  • Identify any and all insurance policies that might provide coverage for losses arising from the Coronavirus (commercial property, worker’s compensation, general liability (third-party claims, etc.).
  • Gather complete copies of those policies, including Declarations and endorsements.
  • Review the policies carefully with your risk manager, broker, and/or coverage attorney, paying particular attention to the specific language in the insuring agreement, including definitions, exclusions, and endorsements.
  • Document any and all damage and loss arising from the coronavirus. For example, if your business was advised that someone who had tested positive for the Coronavirus or was believed to have been exposed to someone who had tested positive for the Coronavirus and, as a result, the business was shut down for remediation and/or other measures, document with as much detail as possible the evidence of exposure/potential exposure and the specific losses arising from that exposure/potential exposure.
  • Keep careful records of any information concerning actual exposure to the virus or information of potential actual exposure on the property, the steps taken to mitigate damage from the exposure, and the costs of such actions.
  • Consider working with professional evaluators to quantify and demonstrate any loss.
  • Put your broker and insurance company on notice of any claim/s and provide supporting details of same. Work with your risk manager, broker, and/or attorney in detailing the claim. Timely notice is a condition of coverage under all insurance policies and the failure to provide timely notice of a claim can prevent a policyholder from obtaining coverage of insured losses.
  • Respond promptly to any requests by the insurance company for additional information and/or documentation and adhere to any “duty to cooperate” condition set forth in the policy/ies.

Insurers

  • Be aware of and adhere to any additional inquiries and/or requirements set forth by various states concerning the handling and assessment of claims arising from the Coronavirus.
  • Provide timely information to policyholders concerning any information requested by a particular state and/or required by any state statute.
  • Engage in careful analysis of the particular policy language at issue and the facts provided in any notice of claim when making a coverage determination. Provide such analysis to the policyholder in any declination of coverage and/or reservation of rights letter issued.
  • Consider consulting outside coverage counsel regarding the interpretation of property damage and loss as they related to the specific policy provisions at issue prior to making coverage determinations for the Coronavirus.
  • Consider consulting with outside coverage counsel regarding implementing best practices for claims handling under the circumstances.
Pathogenic viruses causing infection in host organism , Viral disease outbreak , 3d illustration

In light of business interruptions caused by COVID-19 and the resulting executive orders issued by Governor Cuomo and President Trump, there is no better time than now to consider and prepare for liability that may arise when the tide turns and business resumes, at least to some degree, throughout the state and the nation. Those able to do so should use this time to take a close look at contracts new and old – as those contractual relationships already affected by the pandemic may give rise to litigation, and those still in good order may yet be tested.

Below is a cursory review of some of the many legal doctrines and concepts that may come into play when dealing with a potential breach of contract due to COVID-19.

Termination for Non-Performance

One of the first questions to ask is whether the contract contains a provision for termination in the event of non-performance and, if so, whether it provides for immediate termination upon non-performance. In the alternative, it might specify some permissible window of delay — a certain number of days, i.e. 30 days — within which to cure the alleged breach. Moreover, the clock on that hypothetical 30-day window might not even begin to run until one party issues the other notice of the alleged breach. Whether the contract specifies that “time is of the essence” may also be relevant, though such may be implied if not explicitly stated.

Force Majeure

A force majeure clause is a contractual provision that may exempt a party from liability for breach of contract where the breach is caused by “circumstances beyond the control of the parties,” such as “act of God.” See Kel Kim Corp. v Cent. Mkts., Inc., 70 NY2d 900, 902 (1987). Such provisions are construed narrowly under New York law, and where a contract does not contain a force majeure clause, the parties cannot rely on force majeure as a defense. See id.

Moreover, where the parties have listed examples of what constitutes a force majeure event, i.e. flood, storm, war, rebellion, etc., a force majeure provision will generally apply only in those circumstances. See e.g. Reade v Stoneybrook Realty, LLC, 63 AD3d 433, 434 (1st Dept 2009). Even if the list is followed by a catchall phrase, such as “or other circumstances,” the Court is likely to apply the principle of ejusdem generis, and consider only circumstances of the same kind or nature as those expressly listed. See Kel Kim Corp., 70 NY2d at 903. Accordingly, whether the current COVID-19 pandemic will constitute a force majeure will depend on the specific language of the contract and, therefore, may only be determined on a case-by-case basis.

While it is reasonably common for force majeure clauses to contemplate some form of national emergency or government intervention, it is less common for them to contemplate a “pandemic.” However, that is not to say the pandemic is not a force majeure. In Touche Ross & Co. v Manufacturers Hanover Trust Co., the court stated, inter alia, that epidemics are generally accepted by international practice as “Force Majeure.” 107 Misc 2d 438, 441 (Sup Ct, NY County 1980). In that case, however, the parties were dealing with a volatile political situation, so the inclusion of “epidemic” in the clause was not determinative of any legal issue.

Material Adverse Change

A “material adverse change” (“MAC”) is generally understood to be a change in one party’s business or financial condition that prevents the fulfillment of a contractual obligation. See Katz v NVF Co., 100 AD2d 470, 471-472 (1st Dept 1984). The term “material,” however, though commonly understood to mean “significant,” is not clearly defined. Whether changes such as those caused by COVID-19 are significant enough to constitute a “material adverse change” will depend on the specific language of the contract, and the context of the dispute.

Impossibility and Frustration of Purpose

Those unable to rely on either a force majeure or MAC clause may nonetheless be able to rely on the common law doctrines of impossibility and frustration of purpose. The doctrine of impossibility generally applies to situations where performance was physically impossible. See e.g. Warner v Kaplan, 71 AD3d 1, 5 (1st Dept 2009). However, it also may apply where impossibility is legally impossible and/or due to an act of government. See e.g. Metpath, Inc. v Birmingham Fire Ins. Co., 86 AD2d 407, 411 (1st Dept 1982). However, in all cases, performance must have been objectively impossible, and the event that rendered it so must have been unforeseeable.

A similar precept, known as the doctrine of frustration of purpose, may also be relevant with respect to COVID-19. It applies when a change in one party’s circumstances makes performance “virtually worthless” to the other. See e.g. PPF Safeguard, LLC v BCR Safeguard Holding, LLC, 85 AD3d 506, 508 (1st Dept 2011). However, the obligation allegedly frustrated must have been central to the contract such that, without it, the contract would have made little sense. See id. Moreover, as with impossibility, the event that allegedly frustrated the contract’s purpose must have been unforeseeable. See id.

Takeaway

In many instances, the application of the above doctrines will be affected by whether one party has given notice to another, be it notice of an alleged breach, notice of an attempt to cure a breach, or simply a notice memorializing that an event, such as a flood or emergency, has in fact occurred. In certain circumstances, the failure to provide such notice might later be construed as a waiver of the right to rely on the above doctrines. Accordingly, even if neither party intends to litigate, it may be worthwhile to seek the advice of counsel to determine what remedies may be available, and if necessary, when and how to reach out to your counterparty regarding the contract.

Security breach, system hacked alert with red broken padlock icon showing unsecure data under cyberattack, vulnerable access, compromised password, virus infection, internet network with binary code

Cybersecurity is an area that virtually every business owner has become familiar with given the volume of daily online interaction between businesses and their clients.  The New York State Legislature recently enacted the Stop Hacks and Improve Electronic Data Security Act (SHIELD Act), which will take effect on March 21, 2020, in order to impose data security requirements on New York companies. The law requires businesses to implement safeguards that protect New York State residents’ private information, applies to all businesses that collect such information regardless of size or location.  The SHIELD Act, which takes effect later this month, aims to ensure that when a person shares private information with a business it is adequately protected from an unauthorized third party.

The types of private information that are subject to cybersecurity, according to the Act, include a person’s name when it is coupled with the person’s social security number, driver’s license number, financial account number or biometric information including a person’s fingerprint.  Also included is a username or email address when attached to a security question and answer that allows access to the individual’s email account.  Private information does not include information available to the general public from available public records maintained by a government agency.  An example is information provided on a deed that is recorded in a County Clerk’s office.

In order to adequately comply with the Act, businesses must put into action a data security program that provides the following:

(i) reasonable administrative safeguards including designating an employee or employees to manage the security program, review of current safeguards and the selection of adequate service providers to properly maintain safeguards and adequately address expected risks;

(ii) reasonable technical safeguards to assess risks in software design, transmission and storage of information and to regularly test the efficiency of implemented safeguards; and

(iii) reasonable physical safeguards that assess risks, detect and respond to system breakdowns and regularly test the efficiency of key controls.

Certain businesses are currently regulated by government agencies that require data security measures.  These businesses are defined in the Act as “compliant regulated entities” and are deemed to be in compliance with the Act given the existing obligation to provide data security to customers and clients pursuant to laws enacted prior to the SHIELD Act including the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) and the Gramm-Leach-Bliley Act which is also known as the Financial Modernization Act of 1999.

Businesses that knowingly and recklessly fail to comply with the SHIELD Act will risk being subject to a claim brought by the NYS Attorney General’s Office that can result in injunctive relief and civil penalties.  The full text of the Act is available at https://www.nysenate.gov/legislation/bills/2019/s5575

As discussed in my previous blog post, thousands of New York attorneys attended the Annual Meeting of the New York Bar Association’s Commercial and Federal Litigation (ComFed) Section, where we considered some of the ways technology is changing the practice of law and business. Blockchain technology is one source of changes to businesses globally and rules of evidence in the courtroom.

When considering blockchain technology, most people think of Bitcoin. However, blockchain technology has significant business (and legal) implications beyond the universe of cryptocurrencies.

A blockchain is an immutable time-stamped series record of data that is distributed and managed by a cluster of computers.  Blockchain utilizes distributor ledger technology (DLT), which is a technology that allows data to be stored on many servers throughout the globe, which can be viewed in near real-time by those with access to the connected servers without the viewers being able to gain control of or to alter the data. Blockchain can be public or private. Public blockchain can be viewed by utilizing a network that can be freely joined by anyone. Private blockchain utilizes a private network that can be joined only by invitation from the network administrator.

Applying these concepts to the business world, many believe that blockchain technology could lead to global transactional transparency and tout that blockchain technology has the potential to streamline record-keeping and supply chains, save money, and disrupt technology as we know it across numerous industries, including banking, finance, health care, real estate, security/cybersecurity, government services, music and entertainment, intellectual property, insurance, trusts and estates, and education, just to name a few.

One blockchain technology application that is disrupting industries and sectors is referred to as the “smart contract,” which, in the most basic terms, is actually a computer program that enforces its own terms and is stored on blockchain (so that it can be viewed in near real-time but cannot be changed) and processed by blockchain, including through payment, which eliminates the need for third parties. The uses (and critiques) of smart contracts are beyond the scope of this discussion but are worth Googling if you are interested in learning more.

With such far-reaching global implications, the discussion of blockchain at ComFed included how the spread of blockchain technology is impacting the practice of law and how blockchain evidence is being treated by courts.

Across the United States, most courts have not yet addressed the issue of blockchain evidence. However, the Vermont legislature recently enacted a statute that recognizes blockchain as a presumptively admissible form of evidence. (See 12 V.S.A. § 1913 (effective July 1, 2018).) The statute provides in relevant part:

(a)  As used in this section:

(1)  “Blockchain” means a cryptographically secured, chronological, and decentralized consensus ledger or consensus database maintained via Internet, peer-to-peer network, or other interaction.

(2)  “Blockchain technology” means computer software or hardware or collections of computer software or hardware, or both, that utilize or enable a blockchain.

(b)  Authentication, admissibility, and presumptions.

(1)  A digital record electronically registered in a blockchain shall be self-authenticating pursuant to Vermont Rule of Evidence 902, if it is accompanied by a written declaration of a qualified person, made under oath, stating the qualification of the person to make the certification and (A)  the date and time the record entered the blockchain; (B)  the date and time the record was received from the blockchain; (C)  that the record was maintained in the blockchain as a regular conducted activity; and (D)  that the record was made by the regularly conducted activity as a regular practice.

Vermont is the first (and only) state to address the issue of the admissibility of blockchain evidence. The Vermont rule of the admissibility appears to be exceedingly broad. However, like each of the technologies discussed in my first article on ComFed, blockchain, too, is not without potential risk. For example, if the immutable data stored on the servers is incorrect or corrupted when it was created, it remains corrupt forever. Further, as new applications for the use of blockchain technology are developed, those applications could themselves be subject to software bugs. Additionally, though blockchain is considered to be exceedingly secure, there have been instances when it was hacked and/or manipulated by participants on the server.

So what does this mean for businesses and their lawyers? As the application of blockchain technology expands toward reaching the potential of global transactional transparency in wide-ranging industries and sectors, both transactional attorneys and litigators need to stay aware of how blockchain technology is being used by businesses. Further, in light of what is expected to be an explosion of blockchain technology applications, how blockchain evidence is treated in court is now a pressing issue that will need to be resolved sooner rather than later by federal and state legislatures.