Newsletter Archive
REPORT FROM COUNSEL
SUMMER 2010
CONDOMINUM BUYERS CANNOT REVOKE CONTRACT
In 2005, a married couple signed a contact with a builder to purchase a unit in a condominium building that was being developed in a luxury resort community. The contract specified that the condominium would be built within two years, although the contract included a "force majeure" provision that allowed for delays under certain circumstances. The contracgt also specifically waived the buyers' right to speculative, punitive and special damages.
After the housing buble burst, the buyers had second thoughts about their decision to purchase the condominium unit. Wanting out of the deal, they seized upon the Interstate Land Sales Full Disclousre Act, a federal statute that has become, in the words of the court that heard their case, "an increasingly popular means of channeling a buyer's remorse into a legal defense to a breach of contract claim."
Just three weeks before the condominium was completed--ahead of the two year deadline in the contract--the buyers gave the builder notice that they were terminating the contract because the builder had failed to provide them witha property report as required by the Disclousre Act. They aslo demanded the return of the sustantial deposit they had paid.
The builder refused, and a federal appellate court sided with the builder. The contract between the parties fit within an exemption set out in the Disclosure Act that applies to "the sale or lease of any improved land on which there is a residential, commercial, condominium, or industrial building, or the sale or lease of land under a contract obligating the seller or lessor to erect such a building thereon within a period of two years."
The buyers could have waited and hoped that the builder did not finish by the deadline, at which point they could have rescinded the contract, demanded their money back with interest, and recovered any actual damages that they had suffered. As for the force majeure clause in the contract, it covered unlikely events, such as acts of God and labor strikes. It did not render "illusory" the builder's contractual duty to complete the condominium within two years.
LAPSED FLOOD INSURANCE
Hurricane Katrina destroyed Merlin's house in August of 2005. About two weeks before Katrina hit, he had missed a deadline to pay a premium to keep his flood insurance policy in effect for 2005 to 2006. After Katrina, the Federal Emergency Management Agency extended a grace period of 90 days for paying premiums to keep policies in force.
When Merlin submitted a cliam under the policy shortly after Katrina, his insurer told him that he would be covered and even sent a small advance check for the claim. Merlin had many telephone calls with the insurer's representatives during this period, but none of them told him a critical fact: Any payments under the policy were conditioned on Merlin later paying the delinquent premium by the extended due date. When that date came and went without the payment having been made, the insurer demanded the return of its advance payment and told Merlin that he had no coverage.
Merlin sued the insurer for the state law claim of negligent misrepresentation. The insurer responded that such a claim was foreclosed, or "preempted", by federal law. The insurer was relying on legal authorities stating that ceratin tort claims against an insurer participating in the National Flood Insurance Program are preempted. However, only tort cliams arising form the "handling" of insurance claims are preempted. The federal appellate court considering Merlin's lawsuit ruled that it could proceed.
When the alleged misrepresenttion happened, Merlin only held the status of a former, and potential future, policy holder. If the case was about a "claim" at all, it was a legally fictitiuous claim, because the policy had expired. Since his dispute with the insurer was really about whether he could even have a policy at all, Merlin's negligent misrepresentaiton claim stemmed from the procuring of insurance, not form the "handling" of a claim.
E-MAILED DOCUMENTS ALLOWED
Shortly before he left the employment of a residential treatment center for addicted persons, an employee e-mailed some of his employer's documents to his and his wife's personal email accounts. The employee operated two consulting businesses of his own concerning addiction rehabilitation services. The employer's documents, including its financial statement and the names of past and current patients at the center, could have been useful to those businesses.
When the employer discovered that the documents had been e-mailed, it sued the then-former employee under the federal Computer Fraud and Abuse Act (CFAA). The CFAA provides civil (and criminal) remedies for knowingly accessing a protected computer without authorization or for exceeding authorized access. A federal appellate court ruled in favor of the employee.
The language in the CFAA prohibiting the accessing of a computer without authorization means that the person has not received permission to use the computer for any purpose (such as when a hacker accesses a computer without permission), or when a computer owner, such as the employer, has rescinded permission and the defendant uses the computer anyway. Neither scenario describes what happened in the case before the court.
The employee, so long as he remained employed, had permission to access and use the company's computers. There was no written employment agreement or set of guidlines for employees that might have prohibited or restricted employees of the company from e-mailing the company's documents to personal computers. If keeping in-house documents in-house was a priority for the company, it would have been wise to incorporate appropriate restrictions on computer access and use by employees into an agreement or personnel policy.
CREDIT CARD ACT
Credit card holders will find it easier to avoid over-limit fees because institutions now have to obtain a consumer's permission to process transactions that would place the account over the limit. So that consumers can better avoid unnecessary costs and manage their finances, creditors must give consumers clear disclosures of account terms before consumers open an account and clear statements of the activity on consumers' accounts afterwards.
The Act contains new protections for college students and young adults, formerly a favorite target for blanket marketing of credit cards. Among other things, there is a new requirement that no card be issued to anyone under 21 unless he or she submits a written application, with either the signature of a co-signer over 21 or information showing independent means for repaying the credit card debt.
CAR DEALERS CLASH WITH WEBSITE
In a variation on a familiar phrase, a federal trial court effectively has ruled that, in the context of a website posting customers' reviews of their retail buying experiences, "you can't blame the message board."
In the case before the court, the defendant was an online consumer affairs company that allowed third parties to post commentary on the company's website about their impressions of various businesses. The plaintiffs were a group of franchised car dealers who went on the offensive because of several less than complimentary reviews of their dealerships by customers who posted reviews on the website.
The dealerships' clams of defamation and tortious inteference with business expectancy failed because of a provisoin in the federal Communcations Decency Act. The statue, by its plain language, creates a federal immunity to any cause of action that would make providers of any interactive computer service liable for information originating with a thrid-party user of the service. Specifically, the law precludes courts from entertaining claims that would place a computer sevice provider in a publisher's role.
WHAT IS AN S CORPORATION?
An S corporation is a form of business classified for federal income tax purposes as a corporation that has elected to be taxed as a pass-through entity, in a manner similar to a partnership or sole proprietor. Unlike a regular corporation, or C corporation, an S corporation (both names derive from sections of the Internal Revenue Code) generally is not subject to federal income tax. Instead, its income is reported on the tax returns of its shareholders, and they have the responsibility for paying the tax. If there are losses suffered by the corporation, they also pass through and are reported on the shareholders’ income tax returns. Because only the shareholders, and not the corporation, are taxed, S corporations avoid the problem of double taxation associated with C corporations. This is the biggest draw for creating an S corporation, particularly for closely held corporations. Shareholders in an S corporation, like shareholders in a C corporation, generally have limited liability arising from corporate matters, even though they pay taxes as if they were partners or sole proprietors. In addition, when the corporation eventually is sold, there can be reduced taxable gains, as compared with the sale of a business operating as a C corporation. On the downside, the limitation on classes of stock in an S corporation provides less control over the company and the value of its stock. Potential outside investors likely will not be attracted by the pass-through tax characteristics of an S corporation, nor by the limit on the number of shareholders. Although corporate taxes are avoided, there is still a requirement for filing and informational tax return every year for a corporation with more than one owner. Finally, if avoiding formalities is an important consideration, it should be noted that, like any other corporation, an S corporation must follow the requirements for having regular meetings and keeping company minutes. The balancing of the advantages and drawbacks of S corporation status in any given case is sufficiently complex that it is advisable to seek professional advice before making this important choice.