| Welcome to the Salisian Lee LLP Spring 2023 Newsletter! We look forward to sharing some industry news and providing updates on firm happenings in recent months. |
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Welcome to the Salisian | Lee LLP Newsletter
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Welcome to the Spring 2023 edition of our Newsletter! We look forward to sharing some industry news and providing updates on firm happenings in recent months. As always, we hope that you enjoy these quarterly editions. Please submit any questions or concerns to info@salisianlee.com. Happy Spring!
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Firm News
- Congratulations to Tyler Sanchez for his ascension to Partner.
- Welcome to new Associate Priscilla Chang, who joined us in recent months and who also contributed to this edition of the newsletter.
- In March, we won an appeal of an erroneous district court decision where the Ninth Circuit vacated a $1 million judgment of reimbursement awarded to an insurance company against our three clients and remanded the case for further proceedings in the district court. Congratulations to Partners Neal Salisian and H. Han Pai, as well as Associate Woody Jones.
- In January, we won a week-long jury trial in Orange County Superior Court in a business dispute over medical device equipment. After all evidence was presented, we moved for directed verdict which was ultimately granted entirely in our favor. Congrats to Partner Neal Salisian and Associate Glenn Coffman.
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Cases Making News
By Danya Elbendary, Associate
Chamber of Commerce of the U.S.A. v. Bonta, 62 F.4th 473 (9th Cir. 2023)
On February 15, 2023, the Ninth Circuit rendered its final decision after withdrawing its previous opinion in the case. As previously reported in our Autumn 2022 Newsletter, the Ninth Circuit had largely upheld California's Assembly Bill 51 ("AB 51") criminalizing mandatory arbitration agreements in the employment context.
Following the panel rehearing to reconsider the issues, the Ninth Circuit held that AB 51, as codified in California's Labor Code Section 432.6 and which prohibited employers from requiring applicants and employees to consent to mandatory arbitration agreements "as a condition of employment, continued employment, or the receipt of any employment-related benefit," was preempted by the Federal Arbitration Act ("FAA").
In particular, the Ninth Circuit reasoned that because Section 432.6 imposed a burden on the formation of arbitration agreements in direct contrast to the purpose of the FAA, which is premised on federal policy supporting arbitration agreements, the section was preempted by the FAA, and the Court thus affirmed the federal district court's preliminary injunction temporarily blocking AB 51.
While this ruling clarifies the confusion among employees, employers, and attorneys alike regarding the legality of mandatory arbitration agreements in California formerly left in the wake of the Court's withdrawal of its previous opinion and seemingly gives the go ahead to employers, employers should still carefully consider the benefits of requiring these agreements before engaging in them given the constantly shifting legal landscape.
Bartenwerfer v. Buckley, 143 S. Ct. 665 (2023)
On February 22, 2023, the Supreme Court issued its Opinion in this bankruptcy case involving the discharge of debt related to the fraud of a partner under 11 U.S.C.S. Section 523(a)(2)(A), which prohibits the discharge of debt "obtained by... false pretenses, a false representation, or actual fraud." The issue before the Court was whether a bankruptcy debtor can be held liable for the fraud of another despite a lack of culpability in, or awareness of, that fraud.
Debtor Kate Bartenwerfer and her partner, David Bartenwerfer, purchased a home in San Francisco and eventually decided to renovate and resell the home as a business venture, though there was never a formal partnership agreement between the parties. David spearheaded the remodel, while Kate remained primarily uninvolved, and the home was later sold to Kieran Buckley. However, upon closing, Buckley discovered several undivulged defects in the home and sued the Bartenwerfers in state court; the Bartenwerfers were found jointly liable for breach of contract, negligence, and nondisclosure of material facts arising out of the sale and ordered to pay $200,000 in damages to Buckley.
Incapable of paying this judgment, the Bartenwerfers filed for Chapter 7 bankruptcy, and Buckley then filed an adversary complaint alleging that the money owed on the state court judgment could not be discharged under 523(a)(2)(A) in response. The bankruptcy court initially agreed with Buckley, finding David had knowingly concealed the defects and imputing his fraudulent intent to Kate due to their partnership in connection with the remodel and sale of the home, but on remand determined that Kate lacked the requisite knowledge of the fraud and thus, her debt could be discharged. However, the Ninth Circuit disagreed with this interpretation, holding instead that a debtor who is liable for her partner’s fraud cannot discharge that debt regardless of her own culpability.
Taking a textualist approach to this interpretation, the high Court affirmed the Ninth Circuit's judgment, ruling unanimously that because Section 523(a)(2)(A), which is written in the passive voice to reference money "obtained by" fraud, turns on how money was obtained and not who committed the fraud to obtain it, a debtor is precluded from discharging through bankruptcy a debt obtained by fraud regardless of their own culpability in said fraud. Thus, Kate Bartenwerfer could not discharge these debts.
This holding demonstrates the Supreme Court's inclination to prioritize relief to creditors over debtors in striking the balance between the interests of the two as required by the Bankruptcy Code, and may have far-reaching implications for partners who could potentially be held vicariously liable for their partner's fraudulent activity under broad theories of agency and partnership following this case.
Groff v. DeJoy, U.S. No. 22-174 (2023)
On April 18, 2023, the Supreme Court heard oral arguments in a case that questions the relevant test for refusing religious accommodations under Title VII of the Civil Rights Act of 1964, and more specifically, whether a mere burden to coworkers is sufficient for an employer to be excused from providing accommodations under that test.
Title VII applies to employers with 15 or more employees and requires employers to provide religious accommodations "unless an employer demonstrates that he is unable to reasonably accommodate an employee's or prospective employee's religious practice without undue hardship on the conduct of the employer's business." Since 1977, courts have been applying the "more-than-de-minimis-cost" test established in Trans World Airlines Inc. v. Hardison to determine what constitutes an undue hardship in this context. 432 U.S. 63 (1977).
Mr. Groff was a postal worker at a small, rural post-office with only a few employees who requested Sundays off as a religious accommodation in connection with his practice of Christianity. While the post office initially agreed to accommodate Mr. Groff, this gradually resulted in distress to Mr. Groff's co-workers, and eventually contributed to the transfer and resignation of at least two employees, leading the post office to fire him.
Groff then sued USPS under Title VII alleging that USPS failed to reasonably accommodate his religious practices. The district court granted summary judgment for USPS, finding that the accommodation posed an undue hardship, and the Third Circuit affirmed.
During oral arguments in the Supreme Court, Mr. Groff argued that the Court should reject the de-minimis test as it fails to adequately protect religious liberty in the workplace, while the government argued that the test is sufficient and that ruling otherwise would unnecessarily upend 40-year-old statutory precedent.
The Justices compared treatment of undue hardship under the Americans with Disabilities Act with that under Title VII, considered the issue in the context of statutory stare decisis, and questioned the congressional silence following Hardison's establishment of the de-minimis test. While the Court's position on the relevant test remains unclear at this point, it appears plausible that the Court could expand the burden on employers to require more than a "de-minimis cost" as currently required, which could significantly expand protection of religious liberties in the workplace.
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In Greater Depth
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Successor Liability: When Must a Buyer of a Company's Assets Also Pay for Its Liabilities
By Marius Mateescu, Associate
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Most business owners understand that doing business through an entity with "limited liability" helps to avoid ruinous personal liability. Given this limited liability, when a business' liabilities exceed its assets, it can no longer service its debts as they come due, or if some other event makes selling the business assets necessary (e.g., a change in control), a common question arises: can one company buy another's assets without being forced to pay for its liabilities?
On the one hand, courts consider entities separate persons, so the buyer entity - which had nothing to do with the seller entity's liabilities - should not be held liable for the seller’s debts. On the other hand, this view, taken to its logical conclusion, would theoretically allow any business owner to escape liability on demand by creating a new entity, and then selling the old entity's assets to the new entity while carving out the old entity's liabilities. The law does not permit such an outcome.
In California, a buyer (i.e., a "successor") is not liable for a seller's (i.e., a "predecessor") liabilities, unless: (1) the buyer agrees to assume the seller's liabilities; (2) the asset purchase transaction between the buyer and seller amounts to a "consolidation" or "merger"; (3) the buyer is a "mere continuation" of the seller; or (4) the seller fraudulently transferred assets to the buyer to escape debts. See Ray v. Alad Corp., 19 Cal. 3d 22, 28 (1977). Additionally, California "public policy" may require, in some circumstances, the imposition of a seller's tort liability upon a buyer, but that is outside the scope of this article. See id.
The first and fourth avenue for imposing successor liability are relatively straight forward. As for the first avenue, if a successor expressly or impliedly agrees, either via a specific promise or through its conduct, to assume the predecessor's liability, then imposing successor liability is proper. The converse is also true. That is, where a successor agrees not to assume the predecessor's liabilities, or where those liabilities are allocated to another party, the successor's "legitimate corporate expectations" must generally be upheld. See e.g., Centerpoint Energy, Inc. v. Sup. Ct., 157 Cal. App. 4th 1101, 1120 (2007). As for the fourth avenue, where the predecessor intends to escape an outstanding debt by selling its assets and becoming judgment proof, the successor may be held liable. See Econ. Ref. & Serv. Co. v. Royal Nat’l Bank of N.Y., 20 Cal. App. 3d 434, 439 (1971).
The second and third avenues for imposing successor liability are more nuanced. A "merger," for purposes of applying successor liability, requires one of two things, or perhaps both, depending on the Court. First, if a successor "takes all of another's assets without providing any consideration that could be made available to meet claims of the other's creditors," this exception may apply. The merger exception also applies where "the consideration [paid by the successor] consists wholly of shares of the [successor's] stock which are promptly distributed to the [predecessor's] shareholders in conjunction with the [predecessor's] liquidation." Ray, 19 Cal. 3d at 28-29. In other words, where the successor either did not pay enough for the predecessor's assets to pay creditors, or only paid for those assets via the successor's shares or interests to the same shareholders as the predecessor, the merger exception may apply.
The third avenue for applying successor liability is where the successor is a mere continuation of the predecessor. To apply this exception, the successor must have failed to give "adequate consideration" for the predecessor's assets so as to allow the predecessor to meet claims of its creditors, similar to the merger exception. Additionally, at least one person must be an officer, director, or stockholder of both the seller and buyer. Id. at 29. In essence, this avenue arises if a buyer did not pay enough for the seller's assets to cover a majority of its debts, coupled with the buyer and seller sharing certain personnel.
As shown above, determining whether successor liability may be imposed requires analysis of numerous factors. However, the starting point is always the asset purchase agreement, which will set out numerous details relevant to determining whether any exception to the general rule of successor non-liability applies.
If you have recently purchased a business' assets and are now the subject of a lawsuit related to that business, or if you are looking to purchase a business' assets and avoid its liabilities, contact counsel to explore your options.
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Artificial Intelligence in Law: The Good, the Bad and the Sure to Be Regulated
By Priscilla Chang, Associate
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The use of Artificial Intelligence (AI) continues to grow in the legal field and affects the overall legal services provided to clients by their lawyers. With ever increasing technological advancements, the ability for AI to complete tasks that individual lawyers now perform raises the question of whether AI might someday eliminate the need for lawyers altogether. Simply put, AI may not get rid of lawyers, but it will revolutionize the way law is practiced – in the United States and around the world.
Put simply, AI is a computer database that compiles various input data, and from such data, generates certain output data. At its core, AI is a way of teaching computers how to learn, reason, communicate, and make decisions by focusing on the patterns in data, testing the data, and providing results from such data. What necessitated human input in the past is now often being accurately completed by the various AI tools in ways that are more time and cost efficient.
As AI continues to advance, so does the fear of job replacement across multiple industries – the legal industry is no exception. Even in recent years in the legal field, the low-level drudge work that newer lawyers were typically tasked with has been given over to AI tools advanced enough to get the job done just as well, faster, and perhaps most notably, without a salary.
While this may raise alarms, lawyers do not have to fear a complete takeover by AI because lawyers do offer certain human functions that an AI cannot yet be programmed to learn — judgment, empathy, creativity, adaptability — all skills necessary for the highest caliber of legal practice.
Currently, AI is used in the legal field in several ways: to review and analyze e-discovery, to conduct legal research, and to draft contracts and similar litigation documents. AI software is particularly useful for e-discovery since it can gather extensive amounts of documents for review and categorizes them at a fraction of the time and cost with more accuracy than lawyers and paralegals. AI has additionally allowed individual attorneys to conduct more accurate legal research through a vast database of information with laws and regulations from multiple jurisdictions in a timely manner that also saves costs, in comparison to the limited legal research that lawyers were previously able to conduct using available books. There are also many AI tools today that assist lawyers in drafting legal documents, such as contracts, by referencing various databases of precedents.
Although the numerous benefits already gained from the advancement of AI in the legal field and the excitement of possible future benefits is undeniable, the advancement of AI also brings with it new legal issues and implications that must also be considered.
To what extent can lawyers be liable as to when and how they use, or fail to use, AI? If AI tools are preferred by some lawyers and firms due to their accurate and efficient solutions, should all lawyers and firms use similar AI tools to obtain similar results? Will it be unfair to clients for lawyers and firms not to make use of AI when it cuts the time and costs to provide arguably more accurate legal services to clients? If the AI tools are used in providing legal services to clients, then to what extent will lawyers and firms can be held liable for legal malpractice? Moreover, to what extent are the ethical duties of lawyers implicated with the usage of AI in providing legal services to clients?
The duty of confidentiality is one of the most important ethical duties for all lawyers in the legal profession - maintaining the attorney-client privilege and preserving the confidence of clients. In the context of AI, lawyers must be extremely cautious not to lose the confidence of clients through AI usage, specifically, that the input data does not contain any protected or confidential information.
AI in the legal field also may implicate lawyers' duty to supervise their subordinates, which includes third-party service providers. The duty to supervise implies that lawyers are not only competent with their selection of the use of AI in the first instance, but also with their management in overseeing the usage of the AI - which AI tools are used, how the AI tools are used, to what extent the AI tools are used, and the supervision of the AI in use.
Lawyers additionally owe clients the duty to communicate material matters in connection with providing legal services. To communicate such information in the AI context, lawyers must be competent with their use of AI - to provide sufficient explanation detailing to what extent their selected AI tool was used in providing the legal services - and must also explain the supervision provided with the usage of the AI.
Although AI in the legal field today has advanced beyond imagination, perfection should not be sought or expected. Since AI lacks human experience that shapes the human functions required in providing holistic and competent legal services to clients — legal services which entail judgment, empathy, creativity, and adaptability — it should be noted that factual inaccuracies or strange references may result. Lawyers and clients also should note that while AI continues to be used as an accurate tool to assist lawyers to cut time and costs in reviewing documents and conducting legal research, AI is still a computer database that only is able to compute and analyze data that individual lawyers have input into its database.
Inevitably, lawyers and firms will soon have to adapt to change the recruitment of new lawyers typically hired to perform the drudge work that now AI can perform. But lawyers and firms should also be cognizant that the various drudge work that new lawyers experience make up the human experience which ultimately result in the human functions that AI lacks — judgment, empathy, creativity, adaptability. And where law firms and lawyers fail in regulating their use of AI, the legislature is sure to step in. California is already the first state in the nation to look to proposed legislation as a tool to manage and mitigate the damage that could come from using AI in professional settings. Other states are sure to follow.
As AI continues to advance in the legal world, lawyers must tread carefully to find the balance between the benefits gained from the time and costs saved with the AI usage versus the unchartered legal issues and implications that arise from such usage.
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Student Debt-Relief Program - HEROES or ZEROES? Will the Supreme Court Allow the Biden Administration to Cancel Up to $20,000 of Student Debt, or Hold the Program Unconstitutional?
By Woody Jones, Associate
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This summer the U.S. Supreme Court is expected to rule on whether the Biden Administration's student debt relief plan can go into effect. The law at issue is called the HEROES Act, short for the Higher Education Relief Opportunities for Students Act of 2003. Congress passed the Act in response to the Iraq war to protect student loan recipients from military emergencies, national disasters, and any "unforeseen issues that may arise."1
Congress sought to protect federal student-aid recipients who are affected by national emergencies so that they "are not placed in a worse position financially in relation to that financial assistance because of their status as affected individuals." To accomplish this, the Act permits the Secretary of Education to "waive or modify any statutory or regulatory provision" regarding federal student loan programs. This language is where the legal challenges are focused as demonstrated during oral argument on February 28, 2023, with the scope and meaning of the words "waive" and "modify" in dispute – Chief Justice John Roberts stated that the word "modify" connotes moderate change while others argue for a broader interpretation.
The Chief Justice went on to question how cancelling about half a trillion dollars affecting around 40 million Americans fits under the normal understanding of "modifying."2 The Administration's position is that the HEROES Act's broad language is intentional, to provide "flexibility" in emergency situations, and thus, the Act authorizes the student debt relief plan.
In fact, former President Donald J. Trump's Secretary of Education Betsy DeVos used her HEROES Act authority during the pandemic in 2020 to set the interest rates of federal student loans to zero, allowing all borrowers to suspend payments without penalty. And, that payment pause swept even more broadly than the current debt relief program because it applied to all student borrowers regardless of income, whereas Biden's debt-relief program only applies to individuals making less than $125,000 per year or $250,000 per household.
The argument over the scope of "waiver" and "modify" deepened when Justice Clarence Thomas asked how a waiver or modification becomes a cancellation, since in other provisions there is express language of cancellation, "and, of course, there isn't here."3 Solicitor General Elizabeth Prelogar responded for the Administration by first acknowledging there is no express statement in the HEROES Act to discharge a loan principal, but that the "relevant and operative language" is the provision that empowers the Secretary to waive or modify any Title IV provision.4
The split widened between the Justices as to how much power the Secretary of Education has under the HEROES Act depending on a broad or narrow interpretation of the Act's language. Justice Brett Kavanaugh seemed to pull the momentum away from Chief Justice Robert's narrow interpretation by first agreeing with James Campbell, counsel for the six states challenging the law, by noting that "modify" does not allow the Department of Education to cancel student loans, but then left room for the Administration's argument by noting that "waive" in an extremely broad word.
Justice Elena Kagan doubled down by stating that Congress made the law "quite clear" that when you have an emergency, the Secretary has the power to take care of emergencies, and it has that power "by way of waiving or modifying any provision."5
While we wait until the summer to see whether the high Court will allow the Secretary of Education to moderately "modify" student-loan laws or cancel them completely, we can look at the real-life impact of student debt and how it affects Californians.
The Public Policy Institute of California ("PPIC") reported that about 3.5 million Californians are eligible to have some loans forgiven, which is close to 10% of the 40 million Americans the law directly impacts.6 The debt relief plan under consideration would forgive up to $10,000 in federal loans and an additional $10,000 to borrowers who received a Pell Grant. The difference between Secretary DeVos' use of her authority under the HEROES Act during the height of the pandemic and the current proposed plan is the targeted class of recipients. Back then, payments were paused for everyone, but here, the student-debt relief program is aimed at relieving low-income borrowers.
As for public opinion in California, the PPIC reports that a majority of Californians support a government policy to eliminate college debt, reporting that 60% favor such a policy.7 Whether the Court will seem like a hero to the apparent majority in support of student-debt relief by ruling that the Biden Administration’s program can be implemented or whether indebted students will instead get a big zero from the government will be an issue to watch this summer.
1 https://www.theusconstitution.org/litigation/biden-v-nebraska/
2 Transcript of Oral Argument at 7:10-24, Joseph R. Biden, President of the United States, et al., v. Nebraska, et al. at 7:10-24.
3 Id at 5:25.
4 Id at 6:19-24.
5 Id at 101:1-11.
6 https://www.ppic.org/blog/what-student-debt-relief-means-for-californians/
7 Id.
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Legal Disclaimer: The information contained in this newsletter is provided for informational purposes only, and should not be construed as legal advice on any subject matter. No recipients of content from this newsletter, clients or otherwise, should act or refrain from acting on the basis of any content included in the site without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue from an attorney licensed in the state of California.
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