Diserio Martin O'Connor & Castiglioni LLP

Avoiding the Avoidable Preference Claim

Fri, 28 Oct 2011 -0400

In the current economic climate, manufacturers and service providers are often faced with difficult situations involving customers and clients experiencing financial difficulties, or worse – who have already filed for bankruptcy protection. Once a bankruptcy case is filed, the creditor’s primary concern is if, when and how will he be paid for any unpaid invoices. Unfortunately, that is only half of the concern. Once a bankruptcy case is filed, not only can a creditor be left with little or no payment on his unpaid invoices, but later on in the case the creditor may actually be requested to return any payments received during the 90 days prior to the bankruptcy filing. The Bankruptcy Code actually permits a bankrupt company, or its trustee, to recover these payments, known as “preferences” under the Code.

While the concept seems patently unfair, the rationale for the statute, 11 U.S.C. Section 547, actually makes some sense. What the Code is trying to avoid is a situation where a debtor, when he is insolvent and likely aware he is about to file for bankruptcy, pays some creditors while ignoring others during the three months prior to filing. By permitting a debtor or trustee to recover, or “avoid,” those preferential payments by returning that money to the bankruptcy estate of the debtor, unsecured creditors will share in the debtor’s assets on an equal footing. Of course, this policy rationale is of little solace to a creditor – already faced with writing off thousands of dollars in debt due to the bankruptcy filing – is actually asked to pay back money to that same debtor.

The first thing to determine when faced with a preference claim is if the alleged payment was, in fact, a “preference” under the statute. Typically, a preference is any transfer of money or property, made to or for the benefit of a creditor, on account of an antecedent debt, made while the debtor was insolvent and within 90 days of the bankruptcy filing, and which allows the creditor to receive more than he would have received in a Chapter 7 liquidation proceeding of the debtor. Essentially, any payment of an old debt made within 90 days of the bankruptcy filing eventually will be challenged by the debtor or trustee as a preference.

The debtor or trustee usually starts the process by sending a letter requesting the immediate repayment of the alleged preferential payment. If the request to repay a preferential payment is ignored, typically the debtor or trustee will commence a lawsuit to avoid the preference. Those actions are commenced as adversary proceedings in the same Bankruptcy Court where the bankruptcy case is pending. Since any creditor who files a proof of claim against a debtor in a bankruptcy case has actually consented to the jurisdiction of the Bankruptcy Court, often the creditor will find that he has to defend the preference action in a court far away from his place of business.

While the preference statute is harsh, fortunately there are some defenses. If a payment made within the 90-day preference period is intended by both the debtor and creditor to be a contemporaneous exchange for new value – such as a C.O.D. payment accompanied by delivery of new goods – that payment typically cannot be avoided as a preference. A payment of a debt incurred by the debtor in the ordinary course of the business of the debtor and the creditor, and made in the ordinary course of the business dealings of the debtor and creditor or according to ordinary business terms, likewise can escape avoidance as a preference. Typically, however, those ordinary course payments must be paid within 30 days of their due date, or meet the exact credit and payment terms between the debtor and creditor, to be considered ordinary course payments. Maintaining good records of the normal payment history between the debtor and creditor is essential to successful assertion of the ordinary course defense. Finally, when a creditor has transferred new value to a debtor – such as by shipping new goods – after the alleged preferential payment, the payment may be protected from a preference avoidance action.

In the event that your company is presented with a demand for repayment of an alleged preferential payment received by a bankrupt debtor – or if you have received a summons and complaint seeking to avoid the preference -- it is important to act quickly and seek appropriate legal representation to evaluate the claim, determine any available defenses, and negotiate or litigate a resolution. For more information, or if you have a question about a preference avoidance claim or any bankruptcy issue, call (203) 358-0800 and ask for Scott Harrington, or e-mail Scott at sharrington [at] dmoc [dot] com.

New Connecticut Law Establishes Employment Rights for Victims of Domestic Violence

Tue, 29 Mar 2011 -0400

Connecticut employers having three or more employees are now subject to a new law mandating time off for employees who are victims of domestic violence. The new law, which became effective in late 2010, affects employers in two important respects. First, an employer may not penalize, threaten or otherwise coerce an employee regarding any aspect of her employment because the employee is a victim of family violence or must attend court proceedings related to a civil case in which the employee is a family violence victim.

Second, the law mandates that an employer must allow a victim of family violence up to 12 days of leave during any calendar year in which the leave is reasonably needed for one or more of the following reasons: (1) to seek medical care or counseling for physical or psychological injury or disability, (2) to obtain services from a victim services organization, (3) to relocate due to family violence, or (4) to participate in any civil or criminal proceeding related to family violence.

The new law specifies that it cannot be construed to require an employer to provide paid leave if the employee is not otherwise entitled to such leave. However, an employer can require that the employee apply unused vacation time or personal days to the leave period. Employers should also recognize that the obligations imposed by this new law are in addition to leave afforded employees under any other federal or state statutes, such as the Family and Medical Leave Act.

An employer is entitled to take certain steps to verify an employee’s request for time off under the statute. The employer may require that the employee provide a copy of a police or court record related to the family violence. In the alternative, the employer may request a signed written statement from an employee of the Court’s Office of Victim Services, from the State’s Office of the Victim Advocate or from any licensed medical professional or other licensed professional from whom the employee has sought assistance related to the family violence. The employee is also required to provide at least seven days notice of the request for time off when the reason is foreseeable and to provide notice “as soon as practicable” when the need for leave is not foreseeable.

If an employer violates the new law, the employee has 180 days from the occurrence of the violation to file a civil action in court. The employee does not have to file his or her claim first with the Commission on Human Rights and Opportunities (CHRO), but rather can file directly in State Superior Court. If the employee prevails, the Court must award the employee’s reasonable attorney’s fees.

While this new law does not require that employers publish a written policy or otherwise provide notice of the law to employees, it is still advisable that employers amend their policies and procedures to address the provisions of this law. In this new environment, it will be crucial for employers, large and small, to understand their newly defined legal obligations to employees that are the victims of domestic violence in order to facilitate and encourage a productive workforce while also effectively managing their legal risk.

This publication is a service to our clients and friends. It is designed only to give general information on the development actually covered. It is not intended to be a comprehensive summary of recent developments in the law, to treat exhaustively the subjects covered, or to provide legal advice or render a legal opinion.

Please contact Scott Centrella, head of our employment litigation group, if you have questions or require more detailed information.

Employee Misclassification; A Wake-Up Call for Employers

Wed, 01 Dec 2010 -0500

Traditionally, smaller to moderately-sized employers have treated at least some of their workers as independent contractors rather than W-2 employees. Setting aside for the moment the issue of whether or not doing so in any particular circumstance is proper and legal, the practical reasons for an employer wanting to do so are obvious. These reasons generally relate to convenience and cost.

While a true independent contractor is paid in gross dollars and issued a Form 1099 at year end for tax purposes, an employer must withhold income taxes from an employee’s paycheck, pay state and federal unemployment taxes and social security taxes. An employer must also pay for the added cost of covering an employee under its workers’ compensation and other insurance policies and provide to the employee employment-related benefits such as group medical coverage.

Additionally, whereas an independent contractor is generally paid a fixed sum of money, non-exempt employees are entitled to be paid time and a half for all hours worked in a week in excess of 40. Lastly, employees are protected by a myriad of laws, both state and federal, relating to their rights in the workplace which are not necessarily available to independent contractors, such as Title VII of the Civil Rights Act of 1964, the Connecticut Fair Employment Practices Act, both federal and state Family Medical Leave Acts, the Americans With Disabilities Act, and so on.

While these potential financial and practical benefits might at first blush appear tempting, the reality is that the risks attendant to misclassification can far exceed any potential benefit, financial or otherwise. Employers must tread very carefully when characterizing any service provider as an independent contractor to insure not only that the relationship will pass muster under scrutiny as one of independent contractor and principal, but also that it is properly documented in the event of an audit by a state or federal public agency.

The federal government has announced that it will hire more than 275,000 workers for “mission-critical” jobs in the next three years, 30,000 of which involve compliance and enforcement positions. The Internal Revenue Service has allocated a significant part of its fiscal year 2010 budget to enforcement activity, citing specifically employee misclassification as a target area. It will engage in random audits of at least 6,000 U.S. employers for worker classification compliance issues in 2010.

Additionally, the Department of Labor is hiring inspectors, investigators and auditors and will spend roughly $244 Million Dollars to ramp up its enforcement efforts in the area of worker misclassification.

Following the lead of the federal government, in May Connecticut’s Governor Rell signed legislation increasing State civil penalties for misclassification from $300 per violation to $300 per day per violation.

The bottom line is that the stakes for employers have been raised significantly by government agencies charged with enforcement of the law regarding worker classification. Therefore, it behooves the prudent and responsible employer to consult with legal counsel to determine whether any independent contractor relationships it currently has may be properly characterized as such under the current state of the law and whether they have been properly and thoroughly documented consistent with applicable legal requirements. It should be noted in this regard that the “ABC” test applied in Connecticut to determine whether a worker is properly characterized as an independent contractor is an extremely restrictive and narrow test which, in many instances, cannot be satisfied. Moreover, while the applicable test in New York is somewhat more general in its approach, in implementation it has also been given rather restrictive effect.

This has become an area fraught with pitfalls and serious risk to the employer. An employer can no longer simply characterize workers as independent contractors without a solid legal basis for doing so hoping that they will never be caught in a random audit. More often than not, the random audits are not so random as a phone call from a disgruntled ex-worker is all that is required to put the employer on the radar screen of the Department of Labor or some other enforcement agency.

Therefore, the most prudent course is for every employer to consult with legal counsel, review any positions that are treated as independent contractors, and come to an informed conclusion as to whether or not they should continue to treat those positions as such. Moreover, a determination should be made as to whether, even if a position can continue to be treated as such, it must be better documented. This is an area where an ounce of prevention is ultimately worth much more than a pound of cure.

Connecticut New Home Warranties Act

Mon, 15 Nov 2010 -0500

Our firm represents contractors, subcontractors, builders, declarants and buyers/purchasers of improvements, including newly constructed single family homes/dwellings, in connection with their real estate needs, including purchases and sales, financings, refinancings, home mortgage and construction loans, equity lines, boundary and property disputes, claims involving title, and construction litigation.

In connection with construction litigation involving the purchase and sale of new construction in the State of Connecticut, claims between contractors/subcontractors/builders/declarants and buyers/purchasers often involve the Connecticut New Home Warranties Act.

The Connecticut Legislature enacted the New Home Warranties Act in an effort to protect new home buyers/purchasers from faulty materials or faulty workmanship. The New Home Warranties Act provides that every "improvement" shall be free from faulty materials, constructed in a workmanlike manner according to sound engineering standards and that the improvement is fit for habitation at the time of the delivery. The term "improvement" is defined to include newly constructed single family homes/dwellings, any conversion condominium unit conveyed by a declarant and any fixture or structure which is made a part thereof at the time of construction or conversion by any building contractor, subcontractor or declarant.

The New Home Warranties Act includes both express warranties and implied warranties.

Creating an express warranty is usually a part of every construction contract and is occasionally done unintentionally. There is no requirement that formal words such as "warranty" or "guarantee" appear anywhere in the contract, nor is it required that there be a specific intention to make a warranty. Express warranties are created by written promises, written descriptions of the project, including any plans or specifications, or any sample or model which was made part of the deal.

In the case of an improvement completed at the time of the delivery of the deed to the buyer/purchaser, an express warranty terminates or is valid until the earlier of (i) one year after the delivery of the deed or (ii) one year after the taking of possession by the buyer/purchaser.

In the case of an improvement not completed at the time of the delivery of the deed to the buyer/purchaser, an express warranty terminates or is valid until the earlier of (i) one year after the date of completion or (ii) one year after the taking of possession by the buyer/purchaser.

Implied warranties exist for the same period of time as express warranties and extend to cover conditions such as faulty materials and faulty workmanship. Also included in the implied warranty is a warranty for a particular purpose. A warranty for a particular purpose embraces the notion that if the buyer/purchaser makes known to the builder/contractor/subcontractor/declarant that he is relying on the project for a particular purpose and it appears that he is relying on the builder's/contractor's/subcontractor's/declarant's skill and judgment, there exists a warranty that the project is reasonably fit for its intended purpose. Implied warranties, however, do not apply to conditions that an inspection of the improvement would reveal to a reasonably diligent buyer/purchaser at the time the contract was signed.

In order for a builder/contractor/subcontractor/declarant to disclaim express and/or implied warranties it must be done explicitly. The disclaimer should clearly identify what warranty is being excluded or a specific defect or class of defect that is being excluded or cite the potential code violation that is being excluded.

General disclaimers stating that the improvement is being sold "as is" or paragraphs that disclaim "all implied warranties" do not satisfy the statutory requirements for disclaiming warranties under the New Home Warranties Act. If a builder/contractor/subcontractor/declarant is trying to disclaim a warranty, it is essential that the disclaimer explicitly state the nature of the warranty that is being disclaimed.

Claims under the New Home Warranties Act have also been brought in connection with several other statutory and common law causes of action under Connecticut law. For example, Connecticut courts have held that a breach of the New Home Warranties Act is also a breach of the Connecticut Unfair Trade Practices Act (CUTPA). Although breaches of the New Home Warranty Act are not a violation of CUTPA in every circumstance, there are many cases where the causes of action are intertwined. This factor is important for builders/contractors/subcontractors/declarants and buyers/purchasers because under CUTPA the prevailing party may be entitled to punitive damages as well as attorneys' fees.

Connecticut Conveyance Tax Statute Amended to Add Exemptions for Deeds in Lieu of Foreclosure, Short Sales and Foreclosure Sales

Mon, 26 Jul 2010 -0400

Conveyance Tax Statute Amended to Add Exemptions for Deeds in Lieu of Foreclosure, Short Sales and Foreclosure Sales

In the recent one-day special session of the Connecticut General Assembly, Senate Bill No. 501 (now Public Act No. 10-1) extended the current conveyance tax rates to July 1, 2011.

The Act also amended Connecticut General Statute Section 12-498 to add the following exemptions to the conveyance tax:

"(19) deeds in lieu of foreclosure that transfer the transferor's principal residence; and (20) any instrument transferring a transferor's principal residence where the gross purchase price is insufficient to pay the sum of (A) mortgages encumbering the property transferred, and (B) any real property taxes and municipal utility or other charges for which the municipality may place a lien on the property and which have priority over the mortgages encumbering the property transferred."

The Act also exempts deeds made pursuant to a decree of the Superior Court under Connecticut General Statutes Section 49-24, which includes committee deeds in a foreclosure by sale (as you may recall, Public Act 09-3 had previously made foreclosure sales subject to conveyance taxes). As with other exemptions set forth in Section 12-498, the new exemptions apply to both state and municipal conveyance taxes. Evidence that the transaction falls within any of these exemptions need not be provided to the town clerk, and Connecticut General Statute Section 12-497 (which prohibits a town clerk from refusing to record any deed if an exemption is claimed under section 12-498 and there is a dispute as to the amount of tax due), will continue to apply to all exemptions.

The Act was signed by the Governor on June 22nd, and the effective date of Section 2 of the Act (which adds the exemptions) is October 1, 2010.

A full copy of the Act can be found at: http://www.cga.ct.gov/2010/ACT/PA/2010PA-00001-R00SB-00501SS1-PA.htm.

For additional information on the Act please contact Charles J. Spiess.

This publication, which may be considered advertising under the ethical rules of certain jurisdictions, is provided with the understanding that it does not constitute the rendering of legal advice or other professional advice by Diserio Martin O'Connor & Castiglioni LLP or its attorneys.

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To ensure compliance with requirements under Treasury Department Circular 230, we inform you that the contents of this publication are not intended or written to be used, and may not be used, for the purpose of (i) avoiding U.S. federal tax penalties or (ii) promoting, marketing or recommending to another party any matter addressed herein. Each taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax adviser.

Supreme Court Finds Contractually Guaranteed Bonus Not Subject to Connecticut Wage Statute

Tue, 08 Jun 2010 -0400

In an opinion issued June 8, 2010, the Connecticut Supreme Court ruled in the case of Angelo A. Ziotas v. The Reardon Law Firm, P.C., that the Plaintiff’s claim for a contractually guaranteed bonus does not fall within the purview of the Connecticut Wage Act.

In this case, a former associate attorney sued his law firm for, among other things, a bonus to which he claimed he was entitled by virtue of a written contract executed with the former employer. The contract, which provided that the associate was an employee at will, also provided him with the right to a year-end bonus as a part of his compensation package. The amount of the bonus was, however, discretionary in nature based upon the judgment of the firm’s senior partner. The associate left the firm in the fall of 1998 and, when he did not receive a bonus in December 1998, sued for non-payment of what he claimed to be a contractually guaranteed bonus, in addition to other compensation.

In the action, he also sought to recover double damages and attorneys’ fees under the Wage Act, Section 31-72 of the Connecticut General Statutes. While the Trial Court struck the wrongful withholding of wage claim finding that the bonus under the circumstances of the case could not be considered “wages” within the meaning of the Wage Act, the Appellate Court overturned that ruling on appeal.

The Connecticut Supreme Court reversed the Appellate Court finding that a bonus which, although contractually promised, is completely discretionary in amount with the employer, does not constitute “wages” under General Statutes Section 31-71a(3). The Court reasoned that while the statute defining wages contemplates a direct link between the individual employee’s labor or services rendered and the compensation sought, that relationship is too attenuated if the amount of the bonus is discretionary and dependent on factors other than the employee’s performance.

The Court went on to say that although Section 31-72, the wrongful withholding statute, is remedial in nature, a violation of that statute can give rise to substantial criminal and civil penalties, including double damages, attorneys’ fees as well as potential fines and imprisonment. An interpretation of the term wages that would allow the imposition of such penalties when the amount of a bonus is indeterminate and discretionary would raise serious questions of fundamental fairness and due process.

The Court went on to distinguish cases in which the bonus at issue was ascertainable by application of a set formula.

The clear message to employers in this decision is that so long as they retain some measure of discretion in the determination of year-end bonuses, they will not be subject in a legal dispute over such bonuses to multiple damages, attorneys’ fees or any of the other remedies or penalties available to employees under General Statutes Section 31-72. Employers should revisit their existing bonus policies and, if appropriate, consult with legal counsel to determine how better to structure the bonus in a way that provides them some additional protection.

This is not about taking advantage of employees. A bonus is certainly one way to reward employees for a job well done and to allow them to participate in the financial success of the employer. However, revising a company’s bonus policy in light of the Ziotas case will provide the employer with protection from the potentially onerous financial burdens of the Connecticut Wage Act in the context of a legitimate dispute over an employee’s bonus.