| 2003 Final Legislative Update for Business Owners: the Top Ten Bills interesting to business owners fall into one of two categories. First, there are 6 bills (or lack thereof, in one case) that affect us all. Second, there are 4 important bills that may or may not affect your business, given what your business does or how it operates, but if your business includes any of these operations, you may need to make some changes in the way you operate. No.
1 The concept employed to encourage the settlement of lawsuits is an interesting one. The concept is already part of the DTPA, and really allows for some gamesmanship play by defendants. Basically, a party to the lawsuit may invoke this new Chapter 42 of the Civil Practice and Remedies Code, and make a settlement offer to the other party. If the plaintiff/claimant makes the offer, the defendant rejects the offer, and the award in the case is more than 120% of the rejected offer, the defendant also has to pay the claimant’s “litigation costs.” The maximum litigation costs that may be awarded are capped by a fairly involved formula. If the defendant makes the offer, the plaintiff rejects the offer, and the award in the case is less than 80% of the rejected offer, plaintiff has to pay the defendant’s litigation costs. In these cases, the litigation costs awarded to the defendant are offset against the amount awarded to the plaintiff. “Litigation costs” is defined as money actually spent and obligations actually incurred in connection with the case. These specifically include court costs, reasonable fees for not more than 2 testifying expert witnesses, and reasonable attorneys fees. The Texas Supremes must make new rules of civil procedure and have them in effect by January 1, 2004, to implement this settlement procedure. There are many technicalities left unanswered by this bill, so further clarification of the process will be forthcoming, and probably from a trial lawyer, as opposed to me. Consider, however, how you would approach a settlement offer if your case had huge damages, but was weak on liability, and how different that approach would be if you had a case with small damages, but nearly certain liability. I think if this is done right and taken seriously, a defendant can bring some serious pressure to bear on a plaintiff to settle the case by making a settlement offer governed by this new law. The other interesting topic of HB 4 is proportionate responsibility. Proportionate responsibility has historically applied to tort actions. When a plaintiff sued a defendant for negligence, for instance, the defendant could claim that the plaintiff, or other third parties, caused at least some of the damages. The jury would decide the percentage for which each party was responsible for the damages. Assume a jury found the defendant was 60% at fault, the plaintiff was 25% at fault, and a third party was 15% at fault. The defendant would then in most cases only be liable for paying 60% of the judgment. And if the jury found that the plaintiff was more than 50% responsible for causing the damages, the plaintiff recovered nothing. Under these rules, the defendant had to join as a party to the lawsuit all other responsible parties. Under HB 4, that’s no longer the case. Defendants may simply designate the other responsible parties, and those parties need not appear in the case. It’s even possible, under certain circumstances, for defendants to name “unknown” responsible parties if they don’t know the identity of the responsible party. Think about the full implications of this. A jury will be able to let the defendant in the case off the hook by finding that an absent third party caused the damages. I think this makes the plaintiff’s case more difficult in such cases, but properly puts the burden back on the plaintiff to make sure all parties who may be responsible for causing the damages are named as defendants. As it is now, the plaintiff had to tag only one defendant, and the burden was on that defendant to bring in any other possible responsible parties. Under the prior law, the jury could also consider and determine the proportionate responsibility of any party the plaintiff settled with prior to trial. The defendants left in the case would get some, but not full, credit split out among them for the responsibility apportioned to the settling party. The formula is more complicated than you want to read at this point. But now, HB 4 gives full credit to the remaining defendants for the responsibility of any party who settled prior to trial. There is one instance where one defendant can be liable for paying all of the damages even if they are apportioned less than 100% responsibility by the jury. The fancy legal term for this type of liability is “joint and several liability.” If a defendant is apportioned to any one defendant is greater than 50%, the plaintiff can collect the entirety of damages awarded (Iess whatever the plaintiff was apportioned) from that defendant. Under the old law, this was determined on a “per case” basis. HB 4 changes this to require a determination of damages and proportionate responsibility for each separate cause of action. Defendants are jointly and severally liable only for the damages on specific causes of action for which they are apportioned greater than 50% responsibility. This seems inherently logical and fair to me. I think this merely closes a loophole that has been developed and exploited by the trial lawyers. It will make the work for juries a little more tedious, but at the same time I think attention to such detail is required when dealing with someone’s pocketbook. Finally, HB 4 also makes DTPA claims subject to this proportionate responsibility statute too. I just wonder if “stupidity” of the plaintiff is an acceptable reason to apportion some responsibility to that party. All in all, then, HB 4 enacts many changes that directly and positively affect businesses and business owners. The total combination of these changes landed this bill squarely at the top of my Top 10 List. No.
2 The bills filed on this subject proposed everything from imposing a minimum annual franchise tax amount on every business, to expanding the existing franchise tax to every single Texas business entity and others operating in Texas. There were at least two other schemes in between these two extremes. Having discussed this issue several times throughout the session with sources in Austin, I can tell you there was strong opposition to expanding the franchise tax to limited partnerships other than the Dells and SBCs of the world, and the idea eventually died because no one could figure out how to make the distinction between big companies exploiting the system and the other “normal” uses of limited partnerships. But the idea was resurrected at the last minute in the Senate Finance Committee Substitute version of HB 2425, “relating to state fiscal matters” This particular bill was amended 12 times on the floor of the Senate. While the Substitute Bill expanded the franchise tax to certain limited partnerships as a last ditch effort to close the so-called “Delaware Loophole”, one of the 12 Senate floor amendments deleted the franchise tax provisions from the bill. For those of you who are curious, here’s how the Senate Finance Committee proposed to limit the expansion of the franchise tax to only a few limited partnerships and close the Delaware loophole. A corporate partner of an LP either (1) signs and files with the LP a “partner reporting agreement” whereby it agrees to be subject to, and pay, Texas franchise taxes, or (2) the corporate partner becomes a “non-reporting corporate partner” and the LP then withholds and pays the franchise tax which would otherwise be payable by that corporate partner. The bill attempted to eliminate the ability to manipulate the tax result by playing around with management fees, royalty payments, interest on loans, and such. The penalty for failure to do this? Forfeiture of the LP’s certificate of limited partnership. Fortunately, lobbyists killed the bill on the basis of pure power and the argument that this scheme was illegal. As a result of no franchise tax being imposed on limited partnerships, the franchise tax basically remains a voluntary tax. If you volunteer to conduct your business’s operations in a corporation or LLC, you pay the tax. If you decide to convert your corporation or LLC to a limited partnership, or if you start new businesses as limited partnerships, your business doesn’t pay any franchise tax. It’s just that simple. And that can add up to a significant amount of money that just drops right down to your bottom line. For that reason, the lack of franchise tax changes is No. 2 on the Top 10. No.
3 Well, the TBOC is some 643 pages long. One analysis paper of it is over 2,000 pages long. It repeals all the various codes we lawyers consult when it comes to business entities–partnerships, limited partnerships, limited liability companies, corporations, non-profit entities, and all the professional entities, and implements a completely new, more integrated code. Hidden all along the way will be substantive changes to the law governing all our business entities, some intended, some unintended, which is my greatest cause for concern. But overall, I think this will be a positive development for Texas business entities in the long run, particularly in view of my experience in dealing with other states’ laws governing business entities. Texas is light years ahead of many other states, and this will put us even further ahead. There is one part of this bill everyone can understand. It changes the various filing fees for forming new entities and switching from one entity to another. Professional association formation filing fees will increase from $200 to $750. LLC formation filing fees will increase from $200 to $300. In fact, nearly every filing fee relating to LLCs will increase, the idea being to make them the same as the current filing fees for corporations. And also of importance, the filing fees for converting an entity from one type to another type, for example converting a corporation or LLC to a limited partnership (in order to avoid franchise taxes) will increase. The amount will depend on which entity you start with and which one you end up with, but it could be anywhere from an additional $300 to $750 just for the filing fees alone. Although this bill does not become effective until January 1, 2006, it makes some substantive changes to the requirements of the contents of organizational documents of business entities, that practically require us to draft these documents beginning right now, with the TBOC in mind. And between now and January 1, 2006, every business owner should take their organizational documents to a lawyer familiar with the TBOC and get their docs “tuned up” and in sync with this new law. As an interesting side note, it looks to me like the organizational documents that will need the most “tuning up” will be the forms you find in over-the-counter self help books people buy at bookstores, and get on-line, even those from the Secretary of State’s website and form book. The documents drafted by experienced attorneys will, in my most humble opinion, probably need the least amount of changes, and many of these will need none. No.
4 Many businesses have contracts subject to the UCC but are completely unaware of its existence. The UCC takes the agreement parties make, whether or not that contract is in writing, and changes it by adding terms such as how to measure performance, adding or modifying warranties made by a seller of goods, stating how payment may be made, and what damages are available in cases of breach of contract. HB 1394 prohibits parties from disclaiming the obligations of good faith, diligence, reasonableness, and care, from their contracts. So every contract or duty covered by the UCC now includes an obligation of good faith in its performance and enforcement, although the parties, by agreement, may determine the standards by which the performance of those obligations is to be measured if those standards are not manifestly unreasonable. It expands the definition of “good faith” to include not only honesty in fact, but also “the observance of reasonable commercial standards of fair dealing.” Under these revisions, the express terms of any agreement, any applicable course of performance, course of dealing, or usage of trade, are to be construed, whenever reasonable, as consistent with each other. If such a construction is unreasonable, then:
“Course of performance” is a new concept, and means generally the parties’ sequence of conduct in a particular transaction, as contrasted to “course of dealing,” which is redefined to limit it to sequences of conduct concerning previous transactions between the parties. “Course of performance” is now “relevant” to show a waiver or modification of any contract term inconsistent with the course of performance. The implications of these changes are huge in the real world. Basically, there is a higher standard of “good faith” required in the performance of contracts, which is a good thing generally. There are so many lawsuits I read about where one party is desperately trying to impose a duty of good faith in the performance of a contractual relationship gone South, and this fixes many of the problems which have arisen from its omission. And course of performance becomes less important. You can pay a lawyer to write the most comprehensive contract possible, pay for the privilege of having such a wonderful document of course, and now have more of it stick, because express terms prevail over just about everything else. It cannot be so easily altered by the parties’ subsequent course of performance or course of dealing, or the industry’s usage of trade. And so here’s my favorite word again–certainty. This change allows us lawyers to maintain more certainty in contractual relationships that go on over time. This, in turn, makes those written contracts you pay your lawyer to draft hold more of its value for you. And I think that’s definitely worth being No. 4 on the Top 10 List. No.
5 No.
6 But the one part of this bill that is critical to business owners is its regulation of commercial lines of insurance. Commercial auto rates will be governed by the commercial rate statute instead of the old benchmark rating system. This means that commercial auto forms will be “prior approval” and rates will be “file and use”, just like the rest of the country. Commercial property rates written through Lloyds companies will not be subject to rate regulation. And finally, inland marine rates for certain lines, which had been “prior approval,” will be moved to a “file and use” system. What does this gibberish mean to those of us who are not insurance techies? Well, we expect that the opportunity to continue using Lloyds for commercial property rates will stabilize that market, and commercial auto is finally where it belongs. I strongly encourage you to aggressively bid your insurance policies when they come up for renewal after September 1, 2003, in order to see which of these changes, if any, will benefit you by reducing your insurance premiums, and as a result increase your bottom line. No.
7 In any event HB1282 provides the ability for industry and consumers to challenge those that send unsolicited commercial Email. Unsolicited commercial Email violates this new bill if it (1) falsifies Email transmission information or routing information, (2) contains false, deceptive, or misleading information in the subject line, or (3) uses another person’s Internet doman name without that person’s consent. The letters “ADV:” must be the first four characters in the subject line, and “ADV: ADULT ADVERTISEMENT” must be the first word in the subject line if the Email contains any obscene material or material depicting sexual conduct. I suppose this is so that our kids can quickly identify which ones to read. Additionally, the Email must include a functioning return Email address to which a recipient may, at no cost to the recipient, send a reply requesting removal of the recipient’s Email from the sender’s Email distribution list. The sender has 3 days to remove that Email address from its list. I wish the spam I receive with this “opt out” option actually had “functioning” reply Email addresses. Few do. Austin put some teeth into this new regulation by making a violation a “deceptive trade practice” subject to the DTPA. There are both civil and criminal penalties for violating it. So as I said at the outset, if your business sends unsolicited commercial Email, you need to carefully review this very technical statute, in its entirety, and make sure future Emails sent after September 1, 2003, comply. You should probably consider implementing some asset protection planning as well, just in case. No.
8 HB 705 requires your business to obtain from the Department of Public Safety (or a private vendor approved by DPS) all criminal history record information relating to an officer, employee, or prospective employee of the company whose job duties require or will require entry into another person's residence. That’s the bad news. The good news is that when your business does this, it is protected from being sued for negligent hiring. If an employee or officer of your business commits a criminal act or omission by an officer or employee of the company (e.g. theft), while in the performance of the employee's job duties, without regard to where the criminal act or omission occurred, your business is “rebuttably presumed” to have not acted negligently as long as those reports show that (1) in the 20 years preceding the date the information was obtained for a felony, or (2) in the 10 years preceding the date the information was obtained for a misdemeanor, the officer or employee had not been convicted of an offense classified as: (i) an offense against the person or the family; (ii) an offense against property; or (iii) public indecency. There are other technical nuances to this bill, so if it covers your business, you need to read the entire statute and probably have your lawyer explain it to you. This bill was designed to be an incentive for “in home service” or “residential delivery” companies to perform background checks on their employees, and I’d say Austin succeeded. No.
9 In this economy, we’ve been at the 10% per annum minimum for several years now. Turns out, over the past few years, a collectible judgment was one of the best investments available. But it became a form of punishment to the judgment debtor(s). Even at 5% per annum, they still offer a great return compared to the current stock market and other investments. For any business unfortunate enough to lose a lawsuit, however, this is definitely a step in the right direction and removes some pressure to settle the case as the case is appealed through the court system. In honest disputes, there’s less of a penalty to fight the good fight. No.
10 If the bills you get from your dentist, orthodontist, chiropractor, CPA, or medical doctor of any speciality, list the business as “PC” or “PLLC”, know that some of the fees you pay are going to cover their franchise tax overhead. We suggest you politely advise your professional to look into converting to a PA, so they can lower your bill. ******** And there you have it, from the home office in Dallas, Texas, the Top 10 Bills for Business Owners, 2003 edition. Please be sure to browse our Top 10 Real Estate Related Bills List and our recently posted article for downloading, the Legislative Update–Significant Bills of the 78th Legislature Affecting Real Estate, Lending, and Other Commercial Matters, written by the Legislative Committee, Real Estate Division of the Real Estate, Probate & Trust Law Section of the State Bar of Texas which is posted on the McTexLaw Commercial Real Estate Resource Center. This document was just completed on July 1, 2003 so it is literally hot off the presses. And watch for our “Top 10 Bills Interesting For All the Wrong Reasons” list coming in our next Alert. Close
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