Corporation

The more familiar form is the corporation.  A corporation is a separate operation set up for a purpose, usually running a business.  The investors receive stock to represent their ownership.  A board of directors (which can be as small as one, in a single-shareholder corporation) makes policy decisions, and officers (which, again, can be one person) carry out the operations.

Corporate law is generally well-settled and predictable.  An investor in a corporation generally has a good idea what he or she is getting into.

Corporate shareholders’ liability is limited to the amount they invest, but this protection usually is important for tort claims only.  Usually, lenders, landlords, and other people the corporation does business with will ask the investors to guarantee loans, leases, major purchases, and so forth.  Because tort claims usually can be insured against, the limited liability protection often isn’t as important as most people think.

Corporations are usually taxed separately from their shareholders.  The shareholders are taxed on dividends when issued and on capital gains if they sell their stock.  It is possible to set up a corporation for “S” class treatment, which results in the corporation being taxed like a partnership, but this requires careful planning and IRS approval.  It’s not a good idea to try it without talking to a lawyer or a tax professional, or both, first.

In theory, corporate management is fairly formal.  The directors meet on a regular basis to make decisions.  The shareholders meet annually to elect the directors and make major decisions.  A corporation that doesn’t keep good records of actually meeting and following the rules might have a court penalize it by allowing debts to pass through to the shareholders.  In smaller corporations, however, there are ways to get around the procedural rules.  First, in many states, the shareholders are allowed to sign agreements on how they will vote their shares or manage the corporation.  Second, many states allow the directors or shareholders to sign off on decisions without actually holding the meeting.  As a result, a lot of decisions can be made on the fly, so long as records are kept.

A corporation is also the easiest business form for an investor to get out of.  Unless there is an agreement or a law (usually applicable only to publicly traded companies) barring sales, a shareholder who can find someone to buy his or her stock can sell it.  Most states also have laws designed to protect the value of a minority owner’s stock in a small company, designed to prevent the majority owner from lowballing.  For example, in Oregon and Washington, if a minority owner decides he or she wants out after the majority decides on a major action (such as a merger, major stock or asset sale, or amendment to the basic articles of the corporation), he or she often can demand the corporation buy back his or her shares, and the corporation’s offer must be a fair value, as shown by a copy of the corporation’s financial documents.  The minority owner is allowed to make a counteroffer, and if they can’t agree, either side can ask a court to decide.

LLC

Over the last generation, a new business form has emerged.  This is the limited liability company, or “LLC.”  The first LLC law was Wyoming’s, in 1977, and by the end of the 1990’s, every state had followed suit.

The LLC is designed to combine the flexibility of partnership-style management with, as the name suggests, corporate-style limited liability.  The IRS has decided to allow LLC’s to choose between partnership or corporate-style taxation, basically by checking a box on the form when a tax ID number is requested.  As a result, LLC’s have become very popular.

Like a corporation, an LLC has a separate identity from the investors (called “members.”)  Members may choose to operate the LLC themselves or appoint a manager.  The details of how the LLC runs are worked out in an agreement, similar to a partnership agreement, and, like a partnership, there is almost infinite flexibility.

It may be more difficult to get out of an LLC than a corporation.  Some states allow interests to be sold.  If a buyer can’t be found, however, a dissatisfied member may be forced to withdraw.  In many states, this will either break up the LLC or be treated as a breach of the agreement, which basically shuts the withdrawing member out of buyout decisions.  Oregon does not have a law protecting minority members similar to its protection of minority shareholders in a corporation; Washington does.

Courts tend to look to corporate law to resolve questions that LLC statutes do not cover, so there is some predictability, but LLC’s haven’t been around long enough for a complete body of law to develop.  As a result, some questions are likely to remain unresolved if the legislature hasn’t thought about the issue in advance.

Limited Liability Can Be Lost

One issue that anyone who chooses a corporation or LLC has to keep in mind is that the law doesn’t like abuse of limited liability.  If you don’t actually act like the business form you say you’re using, or if you don’t put in enough capital to protect yourself, the courts may decide that you aren’t entitled to the protection.  In most states, this is one of the few parts of corporate law that is hard to predict.  The courts in Oregon, fortunately, make it a bit easier:  a shareholder or member who actually dominates the corporation or LLC has to abuse his or her rights and cause harm to the person complaining, which basically leaves the extent of control and insufficient capital (or siphoning off profits) as the primary questions.

Whatever business form you decide to use, it is probably a good idea to talk to a lawyer for any organizational issues and a tax professional for any tax issues.

One question that a business owner needs to decide at some point is in what form the business entity is going to take. For ordinary for-profit businesses, the law in most states offers four major forms and a few minor forms, each of which has its own benefits and costs. There are three factors that the owner should consider before deciding how to proceed: flexibility of management, protection of personal assets, and tax effects.

In this part, we discuss two major forms that put all of the owner’s assets up for potential payment of any resulting claims against the business. On the other hand, there are tax and flexibility reasons that may benefit the owner in return.

Sole Proprietorship

The simplest form of ownership is the sole proprietorship. In this form, the owner simply runs the business under his or her own name (or a business name, which in most states can and should be registered to discourage duplication by competitors).

The sole proprietorship offers maximum flexibility. There are no requirements how decisions are made or when meetings need to be held.

Sole proprietorships also allow for simplicity of tax treatment: the profits or losses are simply taxed as the owner earns them.

The main disadvantage of a sole proprietorship is that all of the owner’s assets are at risk to pay losses.

Partnership

If you have more than one owner, you can get most of the same effects of a sole proprietorship by forming a partnership. In fact, if you don’t set up a different form, you probably will end up with a partnership created by your actions. In Oregon, for example, there are many cases in which the courts found two or more people to have created a partnership by acting as one – including the divorce case involving the founders of Leathers Fuels.

Partnerships are generally managed according to an agreement reached by the partners. This can be as simple as “you provide the money, I provide the labor, and we split the profits,” and as complicated as a written contract dealing with such issues as how to make decisions, how to divide profit and loss, what business the partnership will or will not do, when and how partners can be removed, and so forth. In general, partners should act fairly with each other, including allowing the partnership first chance at opportunities within the scope of the business. It’s more or less the business equivalent of getting married, except that it’s easier to get out of a partnership. Generally, if a majority want out, or the agreement expires, or a court finds that it’s fair to close up shop, the partnership can be ended, and the result is that the partners pay off the bills and divide what’s left. It is possible that the partners agree that some of the remaining partners can carry on the business, but usually that requires a buyout.

Partnerships are the most flexible arrangement when there is more than one owner. The agreement and legal rules based on fairness are the primary controls on how decisions are made (usually majority or unanimity) and whether meetings need to be held. Most partnerships assume that the partners will remain in close contact and work together. For this reason, with the exception of professional services, most partnerships are small operations.

Partnerships also are treated simply for tax purposes. Generally, the partnership files an annual return, paying no taxes itself, and each partner’s share of the profit or loss is reported on the partner’s returns.

There are two major disadvantages to a partnership. First, if there is a major disagreement, it can tear the partnership apart very easily, and if anyone leaves under conditions that the agreement doesn’t allow, that partner may be shut out of closing down the business. Second, all of the partners’ assets are placed at risk. For this reason, if there is a question as to any of the partners’ or employees’ honesty, the other partners should think carefully before joining, and the partnership may want to consider buying insurance specifically to protect against this.

Partnership Variants

Two variations on the partnership have confusingly similar names but different functions.

The limited partnership is primarily used for investments. There is at least one general partner, who manages the partnership and puts all of his or her assets at risk, and at least one limited partner, who risks only their investment but generally does not get involved in management.

The limited liability partnership (LLP) tends to be used for professional businesses (doctors, lawyers, etc.), and most states allow LLPs only in professional fields. As the name implies, the partners in an LLP generally put only their investments at risk.

Coming Up

In Part Two of this article, we’ll discuss two major forms of business organization that limit the investors’ risk to their investments: the corporation and the limited liability company.

NHTSA and the Department of Transportation dispute the Journal report, deny that NHTSA provided the information for the article, and assert that Toyota has planted it. The DOT reports that NHTSA’s investigation is not complete and that it will not issue a report until it has finished.

If the Journal article is accurate, it suggests that there may not be a software problem in Toyota cars. At least one driver disputes the report on her car. She said she looked down before the incident and saw her foot still on the brake.

Until the NHTSA investigation is completed, I wouldn’t be surprised to see lawyers asking to have the data recorders tested. Toyota uses a design that can have data lost if the battery stops, so the quality of the recording could be compromised. NHTSA has been looking at recent accidents to try to get the best records it can.

If the absence of a software problem is confirmed, that leaves open the two situations that led to the initial Toyota recalls: the floor mats that interfered with the gas pedal, and pedals that didn’t disengage properly. The Journal story doesn’t dispute these issues. On the other hand, if you haven’t brought your car in yet to correct the mats and gas pedal, you’re probably partly at fault for not correcting the problem if there is an accident now, and that is likely to reduce a settlement or award.

On July 8, a federal court in Massachusetts ruled that the federal Defense of Marriage Act, which prohibits federal recognition of same-sex marriage, was unconstitutional.

http://tinyurl.com/2en3re9

The court’s reasoning is that the Act interferes with the states’ traditional power to define marriage, improperly creating classes of same-sex and mixed-sex marriages, and that there was no reasonable grounds for Congress to do so.

This ruling applies only in Massachusetts unless appealed. It may, however, have other implications for Oregon and Washington.

Although neither Oregon nor Washington allow single-sex marriage, both allow “almost-marriage” domestic partnerships. Under current federal law, these are not treated as marriages for any federal purpose. Because the states don’t call these partnerships marriages, I don’t expect that a court would require the federal government to call them marriage either. Unless there are new developments in the law, therefore, I doubt that the current form of Oregon and Washington domestic partnerships could obtain federal benefits related to marriage.

On the other hand, there is a possibility that a court could rule that if a state has domestic partnerships, it must recognize them as marriages. That was how the Connecticut courts ruled when Connecticut’s civil union law was challenged, essentially, as separate but unequal. This would, however, require a ruling under the federal constitution, which Connecticut didn’t need to do because it ruled under the state constitution. The Oregon constitution has been amended to prohibit single-sex marriage and the Washington courts have already refused to require single-sex marriage.

I think there is a reasonable chance a federal court might, under the influence of the Massachusetts opinion, rule that either Oregon’s or Washington’s domestic partnership laws violate equal protection. I am not certain, however, that the “no rational basis” finding of the Massachusetts court would be the best argument. Instead, in my opinion, the better argument is to work off of a few cases that have held that marriage is a fundamental right, and that equal protection law therefore requires strict review.

On the other hand, courts in both Washington and New York essentially have ruled that only mixed-sex marriage is a fundamental right, and the current Supreme Court may have shifted against single-sex marriage with the appointment of the Chief Justice and Justice Alito. That makes this a tough one to call in advance.

Based on this, I wouldn’t be surprised if, after the federal courts in California rule on their single-sex marriage amendment, a case is filed in Oregon or Washington. I won’t predict how it would wind up.

The Quon Case

The Ontario, California, police department issued text pagers to its SWAT officers. Ontario has a computer and e-mail policy allowing the city to monitor and log e-mail and Internet use of city computers, which also applied to the pagers.

One of those officers, Jeff Quon, began using the pager to communicate with his wife, a girlfriend, and another officer. Quon soon began exceeding his monthly use limit. The supervisor in charge of the pager program notified him of the overuse, and accepted payment from Quon for excess use charges. He also told Quon that he didn’t plan to audit the messages to see if the pager was being used for private messages.

After a few months, however, the police chief objected to repeated overuse by Quon and another officer and ordered the supervisor to get transcripts of two months’ messages to find out if the city needed to increase the limit. When it turned out that most of Quon’s messages were not work-related, and some were sexually explicit, Quon was disciplined.

Quon sued the city for civil rights violations based on the Fourth Amendment’s search clause, violation of a federal wiretap law, and under state law. By the time the case reached the Supreme Court, it had boiled down to whether the city’s review of the transcripts was a legal search.

Although the law is not yet settled on the standards for reviewing searches of government employees by their bosses, the court decided that reviewing the transcripts was reasonable under any standard. The reason for this was that the city was not necessarily trying to investigate what the officers were texting, only to find out if the city needed to increase its contract. The court also decided that reading the transcripts was the best way to find out if the officers were running up messages on the job or if they were using the pagers the wrong way. The court also approved limiting the review to two months out of the five or six that Quon had gone over, and noted that only messages sent while Quon was on duty were reviewed. Most significantly, the court highlighted that Quon had been notified from the beginning that the city had an inspection policy, so he should have known that it was possible he could be audited.

Lessons from the Case

Although Quon technically only applies to government employees, it has implications for private employers and employees. The big lesson is that the court endorsed computer use policies. Although there is a federal law protecting privacy of electronic communications, it allows monitoring by consent. The court implied that an employee who is notified of a policy allowing review of use of computers, e-mail, pagers, cell phones, and so forth, and notifies the employees will be considered to have agreed to searches by the employer.

There are other good reasons for an employer to have a computer use policy. First, it can be coordinated with the company’s trade secret protection policy. Second, it can be used to serve as a reminder that harassment by e-mail is just as bad as other harassment. Third, because federal labor law allows employers to prohibit the use of e-mail for union solicitations, the policy can be used to set bounds.

Under state law in Oregon and Washington, an employer probably would have no real difficulty establishing a computer use policy. There appear to be no state laws against it, and the general rule in Oregon is that the employer can set the terms; an employee who doesn’t like it is free to quit. That said, notice of the policy has to be given the employees, and it can’t be ignored or abused once in place. Obviously, discrimination in use of the policy and use of the policy to retaliate against an employee for asserting other rights are not allowed.

In preparing a policy, an employer should decide how much leeway it wants to give the employees with regard to private communications while on company time or using company equipment. The policy also should make clear what is or is not going to be subject to monitoring. As a result, it is probably a good idea to have a lawyer review any proposed policy.

In criminal law, the concepts of assault and battery have been merged under the statutes and are generally called assault of varying degrees. For civil purposes, they are not. Basically, the idea is that if you swing and miss, you can be sued for assault, and if you swing and hit, you can be sued for battery. In both cases, the defendant actually has to intend to either hit or frighten someone. Battery also encompasses the sexual assaults that have been the basis of suits against churches, the Boy Scouts, and similar institutions in recent years; the assailants committed battery, and the institutions generally have been found negligent for failing to prevent it once they had fair warning.

In theory, a person who commits a criminal assault also would be liable for assault or battery in a civil case, but because most criminal defendants do not have anything to collect, they are rarely sued. It does, however, happen. Business that may attract unruly customers, such as bars and restaurants, probably are more likely to have problems than others, but homeowners also could be at risk, particularly in states that have relatively modest protections against judgment creditors, including Oregon and Washington.

It is also possible to sue someone for assault or battery without a criminal prosecution. The burden of proof is lower, which is why O.J. Simpson could be sued after being found not guilty of murder. Self-defense will sometimes be raised as a defense to a suit for assault or battery. This tends to happen when the underlying incident was a fight or if the defendant felt threatened by the plaintiff.

In Oregon, the law says generally that the criminal laws do not automatically set the standards for civil liability, and there is at least one case in which the court has ruled that it is possible to be liable civilly for assault or battery without committing a crime. In many assault and battery cases, however, the courts seem to apply the same standards, and I think that except in unusual situations, following the standards from the criminal laws are probably enough to avoid civil liability. Washington has only a few published civil cases, so most of the understanding of the law is drawn from the criminal cases, and there probably is not much of a difference between the civil and criminal standards.

With a few exceptions, Oregon and Washington have similar rules for self-defense. The general idea of what force is permitted in self-defense is “don’t do more than what’s reasonably necessary.” You must actually believe that you are threatened. You are allowed to be mistaken whether the other person is, in fact, threatening you or attacking you, but your mistake has to be a reasonable one. “He looked at me funny” isn’t enough, and neither is an invitation to step outside. Waiting for someone to strike first is not required if it appears that he or she is about to, but it has to be a threat of violence instead of an insult, and the level of force used must be of the same level threatened. Application of this standard, however, can be complicated. Often, the details of the incident, which the parties may dispute, will make the question of whether there is a real threat hard to decide.

The first major exception is the “first aggressor” rule. If you start the fight, you can’t claim self-defense if the other person uses the same level of force you do. If, however, the other person escalates to deadly force, you can use deadly force to defend yourself. This commonly leads to cases in which both parties will say “he started it.” Oregon appears to allow an “it’s over” exception to the “first aggressor” rule. Basically, self-defense doesn’t apply if you hit someone after they’re down. It’s not as clear where Washington stands on this issue. A variant on the “first aggressor” rule is the “no duelling” rule. Stepping outside when invited is not a self-defense situation. As always, if you are uncertain about your situation, you may want to talk to a lawyer, and be ready to hear that what you think happened isn’t always going to be what a judge or jury would think happened.

The second major exception applies in Oregon, but not Washington. In Oregon, if you can safely retreat from a fight involving deadly force, you are required to do so and may not defend yourself unless you can’t get away. Washington allows you to stand your ground if you have a right to be there.

Deadly force is generally self-explanatory. If someone could be expected to be killed, the force is deadly. This includes guns, knives, clubs, and similar weapons. Steel-toed boots might qualify, and there is one case in Oregon that appears to suggest that a heavyweight boxer’s punches might be considered deadly.

The courts in Oregon and Washington appear to have disagreed as to whether threatening deadly force is the use of deadly force itself. In Oregon, it is not. You are allowed to warn someone with a weapon when nondeadly force is appropriate. On the other hand, that warning will, as seen below, justify the other person’s use of deadly force, so you’d be taking a big risk if the other person is armed. In Washington, the courts appear lean toward saying that pointing an unloaded gun is the use of deadly force. If you get into a situation like this (and don’t get shot), you probably will want to talk to a lawyer.

There are only a few circumstances in which deadly force may be used. First, if faced with deadly force, you may use deadly force to defend yourself. Second, in Oregon, you can use deadly force to stop a felony in which the suspect is using or threatening immediate use of force, deadly or nondeadly. In Washington, deadly force can be used to stop a felony against you, or committed in your presence.

The third exception to the use of deadly force often raises questions: What about burglars and prowlers? Oregon allows deadly force to stop a burglar in a house. Washington allows deadly force to stop either burglary or arson in a residence or another felony in a residence, if committed against a person or in the presence of the person using deadly force. Neither Oregon nor Washington allow deadly force to remove nonviolent trespassers or stop nonviolent thieves.

One problem that has caused occasional arguments is the use of traps. A trap can’t tell who trips it, so they’re generally not allowed. Some very large judgments, including punitive damages, have been awarded in other states.

In general, a third person may be defended by force for the same reasons you can use force to defend yourself. You can’t, however, use more force to defend a third person than you would be allowed to use to protect yourself.

In general, if you find yourself in a situation where you had to use force to defend yourself, and you think you may get sued, you probably want to discuss it with a lawyer. Be ready to tell the full story and expect to answer questions about how it looked from both sides. Don’t expect a clear-cut answer. Many of these cases will turn on whose story is believed.

Although most of the problems in lost document situations involve businesses with many employees, it is also possible for individuals to lose documents.  For example, in divorce cases, financial records often are important.  If these aren’t kept, it may prove necessary to get new copies.

The problem came up in a securities case involving almost 100 investors, led by the Pension Committee of the University of Montreal Pension Plan, who sued various managers, administrators, auditors, directors, brokers, and custodians of two hedge funds that failed in 2003. The defendants claimed that thirteen of the plaintiffs had not properly saved and delivered electronic records, and asked the court to penalize the plaintiffs.

The court found all thirteen of the challenged plaintiffs were careless in preserving electronic records, resulting in the loss of records, but that nothing was purposefully destroyed.

The court’s analysis of the case took four steps:

1.    How bad was the plaintiffs’ behavior?

2.    How does the duty to preserve evidence interact with loss of records?

3.    Who has to prove that evidence has been lost or not lost?

4.    What remedy should the court order?

How Bad is Bad?

The court started by describing the usual standards of negligence, gross negligence, and willfulness as the benchmarks for bad behavior in document production. Basically, negligence is unreasonably failing to protect someone else’s interests; in this context, the defendants’ rights to see the records.  Gross negligence is failing to do what even a careless person would do. Willfulness, wantonness, and recklessness all refer to intentional disregard of a known or obvious risk, bad enough to make harm very likely to result.

In other contexts, negligence is ordinary speeding.  Gross negligence, according to one Oregon case, is taking a curve 20 to 30 mph faster than a warning sign.  Recklessness, according to another Oregon case, is trying to pass a car going 70 mph on a two lane road with traffic coming the other way.

In the document production context, failing to preserve records is negligent.  Failure to issue a written order to employees to preserve records may be gross negligence.  Intentional destruction of records when they should be preserved is willful.

Similarly, failing to collect records from anyone who may have them is generally negligent.  Failing to collect records from important people is likely to be grossly negligent or willful.  In addition, because earlier cases have generally recognized the importance of electronic records since 2004, any of the following probably is grossly negligent:

1.   Not issuing a written “litigation hold” memo.

2.   Not identifying key players and preserving all of their records.

3.   Not ordering that e-mail be retained.

4.   Not preserving records of former employees.

5.   Nor keeping backups.

Preservation and Destruction

The law has long recognized a duty to preserve evidence.  Loss of evidence can be penalized by the courts.

The duty starts when there is a reasonable chance of a suit.  Plaintiffs should start preserving evidence once they start considering making a claim, which may be when they start documenting the case, or consult a lawyer or expert, or other similar event.  Defendants should start when an obviously serious incident occurs, or they are notified that a plaintiff has hired a lawyer, or when a demand is received, or something similar.

Who Proves What?

Once it is clear a document has been lost, the next question is what can be done about it.  Sometimes, other documents or witnesses can help reconstruct the lost document.  If not, the Montreal court recognized two questions:

1.   Who has to prove that the evidence is permanently lost?

2.   Who has to prove that the innocent party has suffered harm?

Fines and orders to pay the other side’s attorney fees are considered minor penalties.  These usually are imposed solely as a result of improper handling of documents.

More significant penalties affect the outcome of the suit.  This can run to the level of dismissal, barring a party from making a particular argument, or allowing or instructing the jury to infer that the lost evidence would have proven or disproven a point.  Before these penalties are imposed, the courts generally want proof that lost documents would have proven a significant point and that the loss harmed the party asking for the document.  Gross negligence, however, may allow the court to force the party who lost the document to prove that it was not harmful and not important.

Remedies

The remedy for failure to provide documents varies from case to case.  As noted above, it can range from allowing more discovery (such as a forensic search of the computers) to dismissal.  The court recognized three goals to be met:

1.   Deterring loss of evidence.

2.   Placing the risk of a wrong judgment on the party who created the risk.

3.   Restoring the harmed party to the position it would have been in had the documents been produced.

Courts usually impose the minimal penalty to meet these goals.  For example, cases usually are dismissed only when perjury, evidence tampering, or intentional and complete destruction of evidence or refusal to respond to a request has occurred.

In the Montreal case, the court chose a range of jury instructions and orders to pay legal fees to the affected defendants.

It appears the earliest indication of a potential suit for any of the Montreal plaintiffs was in March 2003, when two sets of plaintiffs hired lawyers.  The court found that by April 2003, all of the other plaintiffs should have known that a lawsuit was possible, and that they should have started preserving documents then.  Potential plaintiffs began coordinating their efforts in mid-2003, and the suit was filed on February 12, 2004.

In October or November 2003, the lead attorney instructed the various plaintiffs to collect and preserve documents, with specific instructions to include e-mail and electronic documents.  The court found that this was not a sufficient “litigation hold” instruction.  What the should have been done was to preserve all relevant records and set up a procedure to collect the records for review.  Because of pending motions, discovery did not begin until May 2007.  The first full litigation hold was not ordered until about that time.

It was soon realized that documents were missing from the discovery.  The court ordered the plaintiffs to report on their document preservation and to search for the missing documents.  Eventually, a total of 311 documents were found to be missing, and that most of the plaintiffs’ reports were either false, misleading, or signed by people who did not know what they said.

Of the 13 plaintiffs against whom penalties were requested, one had no connection with any of the missing documents.  Three were found not to have had possession or control of the documents in April 2003.  The other nine were found to have lost documents.

The court also found that all of the plaintiffs were institutional investors obligated to conduct due diligence before investing.  The records of the due diligence were extremely sparse, and the court concluded that records were lost or destroyed by all 13 plaintiffs.

Because the case was transferred from Florida to New York in 2005, and the Florida courts had not yet clearly recognized preserving electronic documents, the court ruled that litigation holds should have been issued in 2005.  The failure to issue the holds normally would be grossly negligent.  Because the law was not clear when the suit was filed, however, the court decided that failing to issue the holds was not enough by itself to reach the level of gross negligence.  Also, because none of the lost documents were lost after 2005, the court found no major harm from after 2005.

Instead, the court found that the plaintiffs’ failure to conduct a proper search before 2005 and failure to supervise or monitor document collection by their employees was either negligent or grossly negligent.  One plaintiff admitted it destroyed backups in 2004.   Several plaintiffs failed to collect and preserve documents of important people, including directors and members of investment committees.

In its final review, the court found six plaintiffs to be grossly negligent and seven to be negligent.  The court found that the grossly negligent plaintiffs did cause harm to the defendants, and announced that it would allow the jury to presume the contents of the missing documents and the harm to the defendants, subject to the plaintiffs’ right to disprove the presumption.  In addition, the grossly negligent plaintiffs were ordered to pay costs and attorney fees involved in the discovery dispute.

As for the negligent plaintiffs, the court noted that the identified missing documents were eventually recovered from other sources.  As a result, there was no actual harm from the failure to preserve the identified missing documents.  On the other hand, the court found that although the unidentified missing documents would have been relevant, the defendants did not prove harm that they were harmed.  As a result, the only penalty imposed was an award of costs and attorney fees.

In addition, two of the plaintiffs, who admitted that they had not searched some backup tapes, were ordered to do so within 30 days and provide any documents that might have been requested.

Application to Oregon and Washington State Court Cases

Oregon does not appear to have a clear standard for preservation of records.  Document production, however, is one of the most important pretrial exchanges of information in Oregon.  I predict that if ruled upon, the Oregon courts would impose strict duties to protect documents.

One significant issue that you should be aware of is that Oregon courts are allowed to dismiss cases even without proof of harm if a party has acted willfully or in bad faith.  As a result, if your case may go to Oregon state court, you probably should be even more careful with your records than usual.

Washington has read its discovery rules to impose similar standards for all documents, paper or electronic, so the Montreal standard is likely to be followed.

What You Should Do

The Montreal plaintiffs were handling their own documents very badly.  A series of lessons can be taken from the opinion.

1.   Once you think you are going to be involved in a suit, do not delete any related electronic records without making a backup.  This should start as soon as you decide you want to make a claim or once notice of a problem is received.  Until you realize this, however, you are generally free to maintain a regular document purge schedule.

2.   Once you think you are going to be involved in a suit, circulate a “litigation hold” memo to ensure that all documents are preserved.  Ask a lawyer for help preparing this memo.  It should suspend any regular purge policy, instruct all employees to preserve anything potentially related to the case, and order that the documents (or copies) be collected in a location that they can be easily reviewed by either the lawyer or a person other than the employee who holds the document.

3.   If you have to collect documents from other people, supervise and monitor the collection.  That may mean to make sure you get everything.  If the person who is handling matters is inexperienced in document retention and discovery searches, training and regular contact with lawyers is advisable.

4.   Know who the key players are with regard to any issue that might cause trouble.  If trouble comes, immediately order them to preserve records.

5.   If someone leaves records in your possession, custody, or control, identify what issues they may relate to, and if any of those issues lead to possible suits, preserve those records.

6.   When the document request arrives, think carefully about your search terms so that you don’t miss anything.

7.   Don’t lose your backups – but do review them when the document request arrives.

8.    Don’t let your staff mislead you or your lawyers.

In addition, anyone who stores data on a “cloud computing” (Internet storage) service probably should ask for a copy of the service’s retention policies, and, if the possibility of a suit arises, regularly make additional backups on their local systems.

On a practical point, judges don’t like to be bothered with discovery disputes.  They assume that most people should act reasonably and follow the rules.  Because of this, there is always a risk that anyone found to be withholding documents will be penalized severely.  It’s often not worth it to get into one of these fights.

In a pending case in Illinois, a mother, who has temporary custody during a divorce, wants to raise her daughter Jewish and claims that was the agreement during the marriage. The father, who converted to Judaism when the parents married, now has returned to Catholicism and has had the child baptized without first telling the mother. The mother, probably angered by being told after the fact and being sent the baptism photos in response to a request for pictures, has obtained an order that either tells the father to maintain the status quo or restrains him from interfering in the religious upbringing of the child. (The parents disagree.) That order is now being appealed, and in the interim, the father has tested the order by taking the child to church.

In a case from New York several years ago, a mother belonged to an organization called the Church of the Subgenius, which she calls an artistic group. Its materials either satirize or criticize traditional religion, depending on the reader’s view. The father argued that Subgenius was a real religion and that the mother’s conduct at members-only Subgenius events was potentially harmful to the child. The judge found that Subgenius was a religion, strongly criticized it, and awarded temporary custody to the father. After the judge was removed from the case, a second judge ruled for the mother on permanent custody, but enjoined her from keeping Subgenius materials in the home to avoid exposure to the child because he thought they might be harmful to the child. An appellate court stayed the decision before the mother was able to pick up the child and, without addressing the religion question, later found that the child’s temporary separation from the mother had led to psychological concerns justifying awarding the father custody. I think that opinion may mischaracterize the evidence unfavorably to the mother. The mother eventually regained custody after the father was involved in a drunk-driving accident. The injunction against Subgenius materials appears to remain in effect.

How the Courts Make the Initial Decisions on Custody and Religious Upbringing

In Oregon and Washington, custody decisions in a divorce, or other case involving children, are written into a document called the parenting plan, which is made into either a court order or part of the final judgment. As a result, religious disputes tend to come up in three contexts:

1. Custody decisions;
2. Deciding who decides how to raise the children; and
3. Enforcement or modification of the other two decisions.

Because of freedom of religion issues, the courts are not supposed to consider the theological merits of the parents’ religion in deciding custody. Sometimes, however, a disfavored religion may come before the court, and sometimes judges appear to have taken this disfavor into account. The Subgenius case is an example of this problem; the courts appear not to have seriously restricted themselves to the question of whether the mother believed that Subgenius was a religion. Minor religions and religions that emphasize confrontation with the larger society appear to be more likely to run into problems; there are reports that practitioners of Wicca have drawn increasing challenges in recent years, and several older cases involve the Jehovah’s Witnesses.

The decision of who decides how to raise the children usually follows the custody decision, but sometimes doesn’t. When the parties can’t agree, the major factors appear to be past practice, convenience, and the risk of harm to the children.

Making the Initial Decision: Washington

In Washington, the law requires that some statement regarding religious upbringing be made in the parenting plan. When the parents agree, the court usually honor the agreement.

As can be seen, however, sometimes the parents disagree. In Washington, the courts generally consider this a freedom of religion issue and will not favor one parent unless a child is likely to be harmed. Confusion of different religions is not considered a problem, as the courts consider younger children unable to understand the differences unless there is a direct conflict. Instead, each parent usually gets to include the children in religious activities during their parenting time. If the baptism case had occurred in Washington, I think that is likely what would have been ordered.

Religiously encouraged (but not mandated) use of marijuana (the father was Rastafarian) has been frowned upon, and the reasoning of the court suggests this extends to all illegal activity. Another case awarded custody to a father partially because he was willing to offer a traditional religious upbringing, and partially because the mother was living with a new partner before the divorce was final. The court stressed that adultery was illegal in Washington. (It no longer is, but in some cases may be a factor in questions of potential harm to children.)

Even a direct conflict may not be enough to result in a finding of harm. In one case, the mother’s church taught exclusion and extreme belittling of nonmembers (including swearing at them) and that children should be disciplined by corporal punishment, isolation, and fasting. The mother made visitation with the father very difficult as a result, and also admitted to beating one of the children with a rod for as long as two hours. A psychologist reported, however, that the children were well-adjusted, and the Court of Appeals, by a two to one vote, decided that there was not enough evidence of harm to require an award of custody to the father, and instead ordered the trial court to reconsider the matter without considering the mother’s religion. This case may make it difficult to argue religious-based corporal punishment is a problem without a very strong showing of abuse.

On the other hand, in a later case, the father’s church ostracized former members, and when the mother and child withdrew, the father’s adherence to the practice was held a sufficient risk of harm to the mother-child relationship to support a change from joint custody to sole custody held by the mother. That case also was a two to one vote, and the dissenting judge argued that there was no evidence that the child would, in fact, be harmed.

Making the Initial Decision: Oregon

In Oregon, it is common practice for the parenting plan to state which parent will make the primary decisions about the children’s religious upbringing. The effect of religion on designation of custody is not directly considered. Instead, its effect on the best interest of the children, through the relationship between the parties and the risk of harm, may come into play. As a practical matter, the custodial parent usually is the one allowed to make the decisions, but religious disputes are not often discussed. In one of the rare cases in which religion was at issue, the court ruled that the father’s hostility toward the mother, based in part on religion, was not enough to outweigh the mother’s consistent neglect of the child, and changed custody to the father.

Oregon has a strong policy against child abuse, so if excessive corporal punishment, drug use, sexual abuse, or severe neglect becomes a risk resulting from a parent’s religion, the courts probably would intervene. Withholding of medical care also is likely to raise eyebrows. A series of child deaths among members of an Oregon City church practicing faith healing has led to two convictions in recent years for negligent homicide. If the Subgenius case had occurred in Oregon, I think the court probably would have been more concerned by the potential for recreational drug use at some Subgenius events than anything else, but I am not certain the court would have found the child was exposed to drugs or considered it too serious an issue.

Making the Initial Decision: Religious Objections to Homosexuality

Neither Oregon nor Washington has been particularly hostile to gay parents in recent years, so long as there is no finding that the child is likely to suffer harm from the environment in question. In addition, both Oregon and Washington now recognize domestic partnerships in single-sex relationships as equivalent to marriage. Therefore, if one parent is gay, religious objections to homosexuality on the part of the other parent may lead to conflicts that the court will have to consider, but the courts are not likely to penalize the gay parent solely for his or her orientation. In Washington, the question of whether isolation or belittling is likely to harm the children may be the critical question. In Oregon, the general best interests of the children, which usually support contact with both parents in the absence of other factors, are likely to control. A gay parent who respects the other parent’s religion probably is more likely to be favored by the court than a straight parent who does not respect a gay parent.

Making the Initial Decision: Instructive Cases from Other States

Although most cases from other states stay out of the question of religious upbringing altogether, a few cases where the courts did get involved suggest other issues that may help predict how a court might rule.

Cases from several states suggest, for example, that past practice is important. In a typical case from Minnesota, favored the mother in a custody decision because she was willing to maintain past religious upbringing but the father was not. In an exception to the usual pattern, a New Jersey case did not require past practice to be followed because the children were not old enough to have formed a final opinion on their religious beliefs.

Cases from Colorado and Massachusetts suggest that when there is a direct conflict between the parents’ religious beliefs, the parent who is more likely to respect the other parent’s beliefs is more likely to be awarded custody or the right to make decisions regarding the children’s religious upbringing. This is likely to be easily transferrable to Oregon under the rule favoring the best interest of the children. In Washington, it may be necessary to show belitting of one parent by the other or interference with the other parent’s beliefs to show potential for harm.

Enforcing the Decision

Unfortunately, if the courts do not enforce a religious upbringing clause, then it may not be very useful. Some courts in other states have suggested that they consider freedom of religion more important than the interests of the child, which may mean that there could be some problems in obtaining enforcement.

Enforcing the Decision: Oregon

Enforcement of a religious upbringing clause appears to be an open question in Oregon. Because courts in other states disagree how to enforce religious upbringing clauses, it is hard to predict how an Oregon court would respond. It is possible but by no means certain that the courts will order a non-decision-making parent whose actions seriously contradict the decision-making parent’s wishes to stop. A court is probably more likely to intervene if the judge thinks the child is likely to be harmed by the dispute. Careful analysis of the situation and an examination by a psychologist or social worker probably will be necessary to predict how the court would react.

On the other hand, a non-decision-making parent whose religion is directly challenged by the decision-making parent’s religion may have an argument that the decision-making parent is causing conflict and harming the child. It is probably unlikely, other than in the most extreme cases, that this would be enough to cause a change in either custody or the assignment of the religious upbringing decision. If, however, the custodial parent claims religion as a basis for not allowing the noncustodial parent their proper parenting time, or belittles the noncustodial parent for religious reasons, that may be a separate argument the noncustodial parent can use.

A child welfare case in which the parents, under the influence of a religious leader, engaged in abusive punishments of their child, has established that any remedy will have to be carefully designed to minimize interference in religious practice. A complete ban on contact with the leader was reversed by the Court of Appeals. Had the Subgenius case happened in Oregon, I am not sure the injunction against keeping Subgenius materials in the home would have been imposed; requiring the mother to keep the materials locked up might have been enough.

Enforcing the Decision: Washington

In Washington, there appear to be two cases in which the question of enforcement of a religious upbringing clause in a parenting plan has come before the courts. In one case, the plan called for joint decision making in raising the children, but the mother enrolled the children in a religious school over the father’s objections. The court found this to be a violation of the plan and sanctioned the mother. This suggests that unlike disputes in making decisions, once the plan is in place, the court may enforce it.

The other case also initially called for mutual decision making in religious matters. After the father took the child to a church function that included a memorial service for a preserved six-month fetus, the court issued a temporary order granting sole religious decision-making rights to the mother and specifically ordered the father not to take the child to church without the mother’s consent. It subsequently issued a permanent order giving the mother religious decision-making rights, but without the ban on the father taking the child to church. When the father then took the child to church on two occasions, the court found that he was not in violation of the permanent order. The lesson here is that a lawyer in such cases needs to consider the situation carefully in deciding what to ask for in an order and to read orders carefully to predict whether the court is likely to find a violation.

As in Oregon, a belittling situation or a withholding of parenting time is likely to be a separate violation of the parenting plan that can be remedied.

Conclusion

Unfortunately, it is not easy to predict the resolution of a child custody dispute involving religious upbringing of children. Parents having disputes should be willing to put aside their emotions when explaining the situation to their lawyers so that the lawyer has a full and complete understanding and can advise the clients without making a mistake, and even then probably should expect any advice to be guarded. If either parent is unwilling to agree to this point, parents can expect to have to consult a psychologist or social worker to get a report as to the child’s best interest, and take that report seriously.

How It Works

Estate tax is a direct tax on the right to leave an estate. In 2000, the federal estate tax applied to estates over $1 million. From 2001 to 2009, the minimum was increased in several steps to $3.5 million. In 2010, there is no federal estate tax. In 2011, unless Congress makes a change this year, the $1 million minimum comes back. In counting the value of the estate, everything is included, regardless of whether it passes by will, trust, or otherwise. Jointly held property, life insurance, joint bank accounts, IRAs and anything else you can think of counts.

Oregon and Washington also have estate taxes, which start at $1 million. These are in effect separate from the federal tax and are not likely to be changed.

Capital gains tax is a special form of income tax charged on increases in value on investments when the investment is sold, or the increase is cashed out in some other way. The amount taxed is the sale price minus an accounting concept called basis. Basis is usually the purchase price, with some adjustments for various factors (most notably taking a deduction for depreciation). If you sell your home and buy a replacement, or trade investments, generally the old basis is retained, and you won’t be taxed immediately. (Also, every three years, you’re allowed to cash-out $250,000, and sometimes $500,000 for a married couple, from your home if you’ve owned and lived there for two of the previous five years.)

The Problems

The problem with estate taxes is a matter of planning. The estate tax minimum can be doubled up by taking advantage of the fact that property left to a surviving spouse is not taxed. As a result, it is common for wills and trusts to leave the maximum amount not subject to the federal tax to children and the balance to a surviving spouse, either directly or through a trust. Unfortunately, because there is no federal tax in 2010, that would give everything to the children and nothing to the spouse. People who think their estates may exceed $1 million may want to consider having their wills and trusts changed to include an “if there is no federal estate tax” provision.

The capital gains problem is that when Congress cancelled the estate tax for 2010, it also changed the rules for capital gains. The old rule was that when someone died, the basis for all of their property died with them, and the new basis was set at the value at the time of death (or six months later, at the option of the executor). This “step-up” is now limited to the $1.3 million, plus $3 million for property left to the spouse. As a result, estates worth between $1.3 million and $4.3 million will probably end up having to pay more taxes, in the long run, under the new system.

Fortunately, the executor of the estate can select the property to be stepped up. Usually, this will be the property with the lowest basis that is likely to be sold. The executor should talk to a tax accountant to make that decision.

If there is a dispute in the family as to who gets what property, and someone gets most of the benefit of the step-up, someone else may claim they were unfairly treated. The executor may want to consult a lawyer to make sure the distribution is not challenged as unfair.

Part I:  Protections for the Owner

Modification Requests

If your home (or rental property) is funded by a trust deed and goes into foreclosure, you now have 30 days from the first notice to request a modification of the loan.  If you do make a request, the lender has 45 days to respond and the house cannot be sold until after the lender accepts or denies the request.  You are also entitled to request a meeting, either in person or by telephone (apparently the lender’s choice), with someone who can make decisions on your loan on the spot.  Be aware that if you request a meeting, you have only seven days after the lender contacts you to get back to them to schedule it.

If, however, the lender decides in advance that there is no way you will qualify for a modification, it can tell you that and go ahead with the foreclosure without meeting you or waiting for a modification request.

The lender is required to record an affidavit of compliance with this process on or before sale.  A bill pending in the 2010 special session would require the affidavit to be filed five days before sale.

Second Mortgages to the Foreclosing Lender

In recent years, it was common for lenders to structure loans in two mortgages, one for 80 percent of the price and one for 20 percent.  To protect owners, when a foreclosing lender holds two mortgages, the foreclosure now terminates the second mortgage as well.  In the 2010 special session, a bill is pending to prohibit the lender from suing on the second mortgage first, closing a potential loophole.

Expansion of Consumer Protection Laws

The primary Oregon consumer protection law generally does not apply to loans and credit and insurance.  A bill pending in the 2010 special session would close this loophole.

Anti-Deficiency Rule Expansion

It has long been the law in Oregon that when a lender forecloses a trust deed on residential property without going to court, the borrower doesn’t have to make up the difference if it sells short.  A bill in the 2010 special session would extend this protection to trust deeds on all property.  In return, the lender won’t have to prove that the borrowers and other people with interests in the property actually received notice of the sale, merely that it was sent according to the rules.

Part II:  Protections for Tenants

Tenants have always been the big losers in foreclosures.  Because a tenant’s rights are based on the owner’s rights, when the owner is foreclosed, the lease is typically cancelled, and the tenant is out of luck and out of a home.  This has been modified somewhat in trust deed foreclosures.  As a result, tenants get more time to look for a new home.

A federal law passed after the 2009 session, effective through 2012, has extended the protections passed in state law.

Under the federal law, tenants are allowed 90 days’ notice before a buyer can evict them, unless a fixed term lease expires first.

After 2012, state law would continue to apply:

Tenants are entitled to notice of foreclosures, which will allow them to protect themselves.  A tenant who either receives a notice or learns that the landlord is in foreclosure may direct the landlord (in writing) to apply security deposits and prepaid rent to whatever they owe the landlord, which allows the tenant to save up for a new security deposit.

If the lease is for a fixed term, and the tenant sends the trustee a copy of the lease at least 30 days before the schedule sale, the lender now has to give 60 days’ notice of intent to cancel the lease.  Even if the lender doesn’t give notice, a successful bidder who wants to live in the house may cancel the lease on 30 days’ notice, so the tenant still has to find out who buys the house.

If the lease is a month-to-month or week-to-week, and the tenant sends a copy of the lease to the trustee, the tenant is then entitled to 30 days’ notice of cancellation.

If the tenant doesn’t send a copy of the lease to the trustee, the tenant is still entitled to 30 days’ notice, but this may be sent up to 30 days before the sale.

Be aware that a notice of cancellation should be sent by regular mail.  The legislature wants it received promptly.  The 30 and 60 day counts start three days after mailing.  If it’s sent by other means, such as certified or registered mail, it doesn’t count.

These rights only apply to leases created in good faith.  Anything signed after the notice of foreclosure is not considered in good faith, for obvious reasons.

On the other hand, the Landlord-Tenant Act generally does not apply to buyers, unless they accept rent, agree to a new lease, or fail to start evicting the tenant within 30 days after notice expires.

A bill pending in the 2010 special session would modify the notice required to be given to tenants on a foreclosure to described the tenants’ rights under both federal and state law in detail.

Part III:  Additional Consumer Protections to Prevent Unmanageable Loans

Less-Than-Interest Mortgages

The practice of arranging loans that require less than the interest be paid on a monthly basis has been tightly regulated.  Before offering such a loan, the lender must verify the borrower’s ability to pay.

Prepayment penalties may not be applied after the first 24 months on these loans, or on existing loans that are refinanced.

This law does not apply to 18 month bridge loans, loans of $50,000 or less if there is equity of at least the total debt load on the property, reverse mortgages, and home equity lines of credit.

Non-English speakers get special protections.  If a lender tries to get customers or negotiates with customers in languages other than English, the settlement disclosure and Truth in Lending disclosures must be bilingual.

Debt Management Services

Debt management services, generally, are the “we can help you settle your debt” businesses, with a series of exceptions.  The law regulating them has been revised to expand its scope from simply debt consolidators to the entire range of services.  This is similar to reforms passed in 2008 to regulate several other issues, such as “we can save you from foreclosure” businesses.

Debt management services are required to register with the state and post a bond to cover claims by clients.  The registry is not yet online, but the old registry for debt consolidators can be found at http://www4.cbs.state.or.us/ex/all/mylicsearch/index.cfm?fuseaction=main.show_main&group_id=20&profession_id=22&profession_sub_id=22001, and the new registry is likely to show up at a similar location.

Debt management services are required to give written contracts showing:

• Their contact information;
• Your total list of debts to be handled;
• The amount you can reasonably expect to pay on these debts;
• The services to be performed and itemized fees;
• The approximate installments to be paid and percentage that will be applied to debts;
• The expected duration of the contract;
• A statement of your rights to examine your account in their office or ask for a written statement, and to receive a quarterly statement without asking;
• A warning that the contract can be cancelled if you fail to make payments over a 60 day period; and
• An authorization for the service to negotiate with your creditors.

At the time of the contract, the service also should give you a projected budget.

You may cancel within the first three days (effective immediately) and get back all fees paid or cancel later (effective on 10 days’ notice) and get back all funds not yet used.

Among the things a service may not do is:

• Advise you to make a false statement;
• Represent it can provide services it isn’t licensed for;
• Charge to refer you to a lender, unless you’re getting a better than usual deal;
• Perform services without a budget analysis;
• Set up a plan it doesn’t think you can manage;
• Leave blanks in its contracts to fill in later;
• Take any security, wage assignments, confessions of judgment or powers of attorney to confess judgment for its fees;
• Take releases of its duties to you;
• Charge “at the end” fees or take a reserve for liquidated damages;
• Commingle money it handles on your behalf with anyone else’s including its own;
• Cancel for any reason other than failure to make payments over a 60 day period, unless you agree.

Any money you give the service has to be handled through a trust account similar to a lawyer’s, and fees are regulated.  You can expect an initial fee of $50, a counseling fee of $50, monthly fees up to $130, and a final fee of 7½ percent of the total savings on your debt.  These fees may not be charged until you receive a statement of your rights.  One significant item this statement should include is a warning that the reduction of debt may be treated as income by the IRS; if you have a question, consult a tax lawyer or preparer.

Violations by a service are treated as consumer protection violations and you are entitled to sue.

Part IV.            Protection for the Neighborhood

Maintenance of Vacant Properties After Foreclosure

One of the unfortunate effects of the foreclosure crisis has been the appearance in some cities of large areas of vacant homes, generally left to themselves by the lenders and other buyers who take them over.  A bill pending in the 2010 special session would prohibit foreclosure buyers from neglecting the new property while it remains vacant, and give the city or county the power to order the buyer to clean up neglected properties or face civil penalties of up to $1,000 a day.

As currently written, the anti-neglect bill would expire after 2013.