ADR News from Jim Reiman
This eMail newsletter is a monthly piece that I send to friends and colleagues. In it I identify, link, and briefly describe three to five articles, court decisions, or news items that I’ve come across that I hope readers will find of interest concerning the subjects that occupy my time and thoughts.
As those who are regular readers know, I focus on three principal topics: i) corporate governance; ii) legal and business issues concerning alternative dispute resolution, primarily mediation and arbitration, and iii) e-Documents, or more specifically, corporate governance policies regarding their management and security, and litigation issues regarding their discovery.
This month’s articles address board considerations and issues when a company faces a government investigation or determines to conduct an internal investigation, why cyber-security is keeping directors (and their lawyers and bankers) awake at night, a brief overview of the new Delaware Rapid Arbitration Act, and a case regarding the ownership and control of an electronic database used in a lawsuit. Also included, as my “interesting case of the month,” is a case in which multiple law firms and multiple teams of corporate lawyers all failed to realize that some of the documents described in a loan pay-off agreement were for an unrelated loan, which resulted in a $1.5 billion release of collateral and a subsequent $1.5 billion loss to the lender.
More specifically, this month’s articles and cases are:
Alternative Dispute Resolution
- The new Delaware Rapid-Arbitration Act: what it does and why it is significant
- Thoughts and guideposts for dealing with a government or internal investigation
- Cyber-security; results of a survey that explains why corporate directors are worried, or should be if they’re not
- Attorney’s liens and e-discovery databases
May’s “Interesting Case of the Month”
- A very big “oops” – a $1.5 billion loss resulting from the erroneous release of loan collateral
I hope you find the below discussion and “linked” articles of interest. Before getting to the articles, however, a quick update for those who read last month’s newsletter and wish to know the results of the trial of Henry Rayhons, the 78 year-old husband of a wife suffering dementia. Mr. Rayhons was charged with sexually abusing his wife because he allegedly had sex with her, and her dementia precluded her consent to the sex. He was acquitted. Per the Des Moines Register: “Whatever former state legislator Henry Rayhons did with his wife in a nursing home last May 23 was not a crime, a jury decided.”
Warm regards –
Articles / Alternative Dispute Resolution
Delaware’s New Speedy Arbitration Act
This is BIG news for transactional lawyers and arbitrators. Delaware, home to most of the US’ largest businesses, amended their State arbitration act effective May 4, 2015. As Henry Chalmers, editor emeritus of the American Bar Association’s Litigation News summarizes the new act, titled the “Delaware Rapid Arbitration Act”, “[The Act] streamlines the process for initiating arbitrations, sets tight deadlines for completion, automatically confirms awards without court intervention, and provides speedy and final resolution of challenges directly to the Delaware Supreme Court.” Moreover, it “cleverly ensures quick completion of the process by imposing financial penalties on the arbitrator if an award is not issued within 120 days of commencement, with very limited exceptions.”
Continuing, Chalmer states: The Act “is available for almost any dispute involving at least one business organized under Delaware law or with its principal place of business in Delaware. To invoke the [Act’s] benefits, the parties need only agree in a signed writing that their arbitration will be governed by the [Act].”
David J. Berger, writing in a post published in the Harvard Law School Forum on Corporate Governance and Financial Regulation by Kobi Kastiel, Co-editor of the Forum, declares: The Act “offers a real alternative to the litigation process, providing companies with the chance to engage in a fast, relatively low-cost dispute resolution process without the burden of extensive discovery.”
Henry Chalmers’ article may be viewed at: http://apps.americanbar.org/litigation/litigationnews/top_stories/050615-delaware-rapid-arbitration.html.
David Berger’s article may be viewed at: http://corpgov.law.harvard.edu/2015/04/14/delaware-enacts-new-rapid-arbitration-act/. The Act itself may be viewed at: http://legis.delaware.gov/LIS/lis148.nsf/EngrossmentsforLookup/HB+49/$file/Engross.html?open
Articles / Corporate Governance
It is an unfortunate fact of life that today’s boards are increasingly being called upon to decide whether to conduct an internal investigation, and to set the parameters and guideposts when it directs management to conduct an investigation. Samuel Cooper, a partner with the firm Paul Hastings, has worked with clients in a number of investigatory matters, and writes a compelling piece that is a must read for any director whose company faces a government investigation, or is contemplating or engaged in an internal investigation.
I recommend the piece because Cooper sets out clearly the structural issues that must be considered and addressed, including: Who should do what and who will be responsible for what? Who at the company is going to manage the investigation? Who is going to facilitate the investigation and be “in the room” when reports about the investigation are made? Will outside counsel be retained? What individuals (if any) need separate counsel? Do the company’s outside auditors need to be informed? If so, how and when?
The piece was written for lawyers and published in the American Bar Association’s Litigation section magazine, but is an easy and thought-provoking read for non-lawyers. It may be accessed from the Paul Hastings website at http://www.paulhastings.com/publications-items/details/?id=32fbe369-2334-6428-811c-ff00004cbded
It seems as though every corporate governance conference I attend or journal I read has as a headline or keynote presentation concerning data security. A recent study published by EiQ Networks comprising responses from 168 IT decision makers across industries makes clear why directors are (and should be) losing sleep over the issue: “only 27% of IT decision makers report they are truly ‘confident’ that [the security technologies they are implementing] will work against a cyber-threat,” and only 58% of the 161 surveyed are “somewhat confident.” These are chilling revelations.
The data was compiled in March and April of 2015, hence it is about as current as one can get. Per the authors, “key takeaways” are:
- Company and brand reputation are more at risk than financials:
- 68% of companies surveyed said their “reputation” is more at stake than their financials
- 19% said they could withstand a “small financial hit” while 13% said a cyber-attack would “devastate us financially”
- Top areas of concern regarding IT security:
- Network perimeter (23%), Endpoints (21%), and Web applications (14%)
The full report of the survey may be viewed at: http://www.eiqnetworks.com/abouteiqnetworks/news/pressrelease/2015/IT-Pros-Lack-Confidence-in-their-Cyber-Defenses.php
Articles / e-Documents
Control of E-Data and Attorney’s Liens
In the Illinois case Cronin & Co., Ltd. v Richie Capital Mgmt., LLC, the hedge fund firm Ritchie Capital Management retained the law firm Cronin & Co. to recover losses sustained by Ritchie as a result of a failed investment (an investment that a different court held to be an elaborate Ponzi scheme that defrauded investors out of tens of millions of dollars). Typical of investment and securities lawsuits, many of the records critical to the case were in electronic form. Thus, the law firm requested Ritchie to authorize the law firm to retain a third party vendor (the “Vendor”) to host and manage the electronic data. Ritchie agreed and (most important) gave the law firm money to pay the Vendor its fees.
Thereafter, a dispute arose between Ritchie and the law firm, and Ritchie terminated its engagement of the law firm. A significant issue in the dispute concerned the law firm’s fees. After being terminated, the law firm instructed the Vendor to “‘hibernate’ the database it was hosting (take it off-line), so it could not be accessed,” which the Vendor did. It also directed the Vendor to deliver to it all of the electronic data so that it could hold such as security for its fees. Ritchie simultaneously directed the Vendor to deliver the data to it, claiming that (i) it was the owner of the data and (ii) it and not the law firm had paid the Vendor its fees.
The matter before the court raised technical questions regarding attorneys liens and issues specific to the validity of attorneys liens. Ritchie argued that no lien should exist and it should get the database because it had paid the law firm for the Vendor’s fees. The law firm disagreed, and the court sided with the law firm.
While the technical issues regarding attorneys liens are of interest to both lawyers and clients, I include the case in this newsletter because of the lesson that the case teaches: companies need to make clear in their agreements with their counsel and e-document managers that ownership and control of their data is, and will always be, with the company and not subject to attorney fee liens if the company and not the law firm pays the e-document vendor.
One commentator notes: “In all but the exceptional case, the e-vendor is likely to take direction from the lawyer” hence “the court’s holding invites abuse on the part of attorneys.” While I’m not prepared to agree with the comment regarding abuse, I do agree that the e-vendor is more likely to take direction from the law firm rather than the client since the law firm is the Vendor’s direct customer and source of future work.
The full opinion may be viewed at: http://www.illinoiscourts.gov/R23_Orders/AppellateCourt/2014/1stDistrict/1131892_R23.pdf
Articles / Interesting “Case of the Month”
The $1.5 Billion “Oops”
This case, decided this past January, arises out of the General Motors bankruptcy. In 2001, General Motors entered into a financing arrangement in which it obtained $300 million from a syndicate of lenders led by JP Morgan. In 2006, in an unrelated and separate financing, General Motors raised $1.5 billion in a transaction again led by JP Morgan but funded by a different group of investors. As part of the documentation of both financings, documents called “UCC-1’s” were prepared and filed with the appropriate government record keepers.
For the non-lawyers, UCC-1’s are simple form documents filed with the Secretary of State and other public recorders of documents to give notice to the world that a particular lender has a lien on a particular asset. The purpose of the filing is to advise the world that the identified asset is “taken” and should not be relied upon by other lenders to secure payment of loans.
In 2008, GM determined to pay-off the 2001 $300 million financing, and GM, JP Morgan and lawyers from two major law firms prepared a checklist (“Checklist”) comprising a list of documents necessary to effect the pay-off of the $300 million financing and release of the collateral used to secure it.
The Checklist included a list of collateral release documents called UCC-3’s, and erroneously included UCC-3’s which would cancel the UCC-1’s filed for the $1.5 billion financing as well as the $300 million financing. Per the court, no one at General Motors, JPMorgan, or the two law firms involved “noticed the error, even though copies of the Checklist and draft UCC–3 termination statements were sent to individuals at each organization for review.” All UCC-3’s were subsequently signed and filed, thereby releasing the collateral for both the $300 million financing and the $1.5 billion financing. The mistake went unnoticed until the GM Bankruptcy in 2009.
When discovered, JP Morgan argued to the bankruptcy court that since no one had been authorized to file the UCC-3’s relating to the $1.5 billion financing, those documents were not effective and should be deemed void. Two appeals ensued.
The first appeal addressed State law, which in this case was the law of Delaware. The Delaware Supreme Court held that “it is enough that the secured party authorizes the filing to be made,” and “there is no requirement that the secured party subjectively intends or otherwise understands the plain terms of its own filing.” In other words, what is intended doesn’t matter; only what is actually filed. Bottom line: JP Morgan loses.
The second court, the Second Circuit Court of Appeals (in New York), addressed the question of authority – was the filing of the UCC-3’s authorized? The NY Federal court found that it was. Per the Court, JP Morgan’s law firm had multiple opportunities to review the UCC-3’s and, at each turn, approved the documents. JP Morgan and its counsel knew that upon closing, General Motors’ counsel was going to file all of the UCC-3’s. That was enough: “Nothing more is needed.” Bottom line: JP Morgan loses. Put another way, oops. A $1.5 billion loss.
The opinion may be viewed at: http://www.bing.com/search?q=60%20Bankr.%20Ct.%20Dec.%20136&pc=cosp&ptag=A0E697F225B&form=CONBDF&conlogo=CT3210127