Waiving the Unwaivable: Non-Waivable Conflicts and Statutes of Repose Can’t Be Waived, Right?

October 2017 has been an interesting month for cases involving waiver in the courts of Georgia. These cases are important reminders that legal rights may matter, but a party’s conduct matters more. They underscore the fact that almost anything is waivable in the right circumstance. Waiver is a fancy word for giving parties what they said (or acted like) they wanted or at least accepted, despite changing their minds at some later point.

In Department of Labor v. Preston, No. 17–10833 (11th Cir. Oct. 12, 2017), new Circuit Judge Kevin Newsom writes an interesting opinion on ERISA’s statute of repose (That’s not a thought you would expect to have about an ERISA case, but Judge Newsom is already making a name for himself rendering interesting usually mundane statutory issues.) In concluding that ERISA’s statute of repose is subject to waiver, the Court collected a list of many waivable “rights,” including the Fourth Amendment right to be free from unreasonable searches, the Fifth Amendment right against self-incrimination, and the Sixth Amendment right to assistance of counsel. The opinion concludes: “It would be passing strange—bizarre, in fact—to conclude that while a litigant can renounce his most basic freedoms under the United States Constitution, he is powerless to waive the protection of . . . ERISA’s statute of repose. No way.” No way, indeed.

This Eleventh Circuit case pairs well with an opinion out of the Georgia Court of Appeals to underscore the concept of waiver, even of the unwaivable. In Zelda Enters., LLLP v. Guarino, 2017 Ga. App. LEXIS 447 (Oct. 4, 2017), the Georgia Court of Appeals reminded us that even non-waivable conflicts of interest are waivable in the course of litigation. The Court noted that the Rules of Professional Conduct—which prohibit waiver of certain conflicts of interest among lawyers and their clients—does not control the decision of whether a client subsequently waives the ability to have a lawyer disqualified in a legal proceeding by delaying in seeking disqualification. In sum, the Court seems to have caught on to the fact that litigants are trying to use tenuous connections with counsel to achieve litigation advantage by seeking disqualification of a party’s lawyer of choice, often after months or years of litigating without raising the issue.

To conclude, legal rights are great. But almost all of them can be waived either expressly in writing or by virtue of a party’s conduct in litigation, and courts are increasingly attuned to hyper-technical lawyering seeking to avoid the consequences of a party’s earlier actions. For the moment, substance prevails over form.

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SAS No. 133: Exempt Securities and a New Audit Standard!!

As public offerings have gotten more complex and expensive, capital has flowed to non-public securities.  Consequently, the exempt securities market has expanded and increased in complexity and risk.  Issued on July 27, 2017, SAS 133 is intended to provide guidance to bring auditing consistency across offerings and increase public confidence in the presentation of financial information.

Beginning with offerings made in June 2018, this new standard will apply when audited financials are used in connection with exempt securities offerings.  Common exemptions involve private placements, municipal securities, not-for-profit securities, new crowd-funding and Regulation A offerings, and franchise offerings.  Thus, heightened audit procedures will be the rule rather than the exception, applying in some form to both private and public capital raising efforts.

SAS 133 will apply when an auditor is “involved” in an exempt offering.  Being involved has two components: (1) the auditor’s report is included or referenced in the exempt offering document and (2) the auditor performs specific activities with respect to the offering document like reading the offering materials, offering a comfort letter, or agreeing to allow the use of the report in connection with the offering.  These requirements are designed to protect auditors from fallout from the use of their audits in connection with exempt offerings without their knowledge.
Among other things, SAS 133 will import the requirements AU-C Section 720 regarding “other information in documents containing audited financial statements” and AU-C Section 560, which requires auditors to consider whether events after the report would cause the auditor to revise the report.

This new auditing standard will require auditors to pay attention to two related developments.  First, auditors will have to be more attuned to which transactions count as securities.  For example, the SEC recently decided that offering cryptocurrency is a securities offering requiring registration or exemption.  Second, auditors will have to consider how closely to hue to GAAP and the FASB’s auditing standards, which are not yet mandatory but do influence how disappointed investors seek redress for failed investments.  For more information on non-GAAP accounting and the state of the industry, see our video here.

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Does Your Business Policy Actually Protect You? If it has a “Professional Services” Exclusion, it might not

If you did not believe it before, you can believe it now—Ponzi-scheme cases make bad law.  On July 5, 2017, the Eleventh Circuit decided Furr v. National Union Fire Insurance Company of Pittsburgh (No. 15-14716), in which the court considered the impact of a “professional services” exclusion in a bank’s executive and organization liability insurance policy.*  The court held that there was no coverage for anyone because some of the claims asserted were related to the professional services that the bank rendered to the Ponzi scheme.  In denying coverage to everyone, the court reviewed this exclusion:

The Insurer shall not be liable to make any payment for Loss in connection with any Claim made against any Insured alleging, arising out of, based upon, or attributable to the Organization’s or any Insured’s performance of or failure to perform professional services for others, or any act(s), error(s) or omission(s) relating thereto.

The court upheld coverage denial (1) because the policy did not contain a severability provision and (2) because the text of the exclusion prohibited payment if a claim is made against any insured who performed or failed to perform professional services.  To be clear: if anyone was a professional subject to a claim (or performing professional services), no one gets coverage, even non-professionals.

This has two important consequences: First, if a claim is made under a policy with similar contents, then claiming a legal, accounting, or medical error will jeopardize coverage for everyone.  Second, and perhaps more importantly, this particular policy evidently does not protect a bank from claims arising from banking services because those services are professional enough to be encompassed by the exclusion.

Exclusions like the professional services exclusion (and the personal injury exclusion) are designed to keep claims inside the appropriate policy and preclude doubling-up on coverage across multiple policies.  That is fair.  A D&O policy shouldn’t cover personal injury—that is the role of the general liability policy.  But excluding coverage based on a bank’s banking services seems to have left the bank’s executives without any coverage.  That is a harsh result.

I do not mean to sound shrill, but everyone should look at their policies and make sure that they actually have the coverage that they intend to have both from the perspective of whether the company’s services would be included in the “professional services” exclusion and to make sure that an errant claim touching on a professional’s work inside the business does not jeopardize coverage for everyone.

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* I have not actually seen the policy, but this “executive and organizational” policy sounds more like a Director & Officers (D&O) policy than an Errors and Omissions (E&O) policy.

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Can you name Justice Kennedy’s 2017 Term-Ending 5-4 Blockbuster?

On June 26, 2017, the Supreme Court decided CalPERS v. ANZ Securities, Inc., in which it declined to create a judicial exception to the statute of repose in Section 11 cases arising under the Securities Act of 1933.  When Congress passed its cornerstone securities laws in 1933 and 1934, it created an express cause of action against misrepresentations made in connection with the initial offerings of securities.  That cause of action was limited by a two-tier time limitation system: a one-year statute of limitations running from discovery of the misrepresentation and a three-year statute of repose running from the issuance of the security.  Steamy stuff, right?

CalPERS, California’s state pension entity and frequent securities plaintiff, decided to opt-out of a timely class action to file its own separate suit outside of the three-year statute of repose.  In 1974, the Supreme Court had created a form of equitable tolling of antitrust claims relating to individual suits and class-actions.  In this case, the Supreme Court said that American Pipe involved tolling a statute of limitations, which courts can do, but that courts were not permitted to toll a statue of repose.

Three lessons here:

  1. New public companies can have confidence that they will not face new Section 11 suits following three years from their IPO.  Definitely a cupcake worthy day to calendar for companies accepting public capital.
  2. Parties should be very careful in leaving class actions.  Instead, they can consider a request to be added as a named plaintiff or other procedural decides inside a timely suit.  (And lawyers should study the difference between a statute of limitations and a statute of repose.)
  3. Not everything that happens in the Supreme Court in June involves an existential crisis.

The opinion is available in full:  https://www.supremecourt.gov/opinions/16pdf/16-373_pm02.pdf.

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Three Take-Aways from the PLUS Seminar on Mediating Complex Director & Officer (D&O) Claims

Three Take-Aways from the PLUS Seminar on Mediating Complex Director & Officer (D&O) Claims:

  1. Mediation is not a day-of event.  Counsel are well served to work very hard before the mediation to set expectations of parties, carriers, other counsel (including coverage counsel), and the mediator.  The panel noted that, even when a mediation is conducted in person, plaintiffs and carriers often have a range of authority that can be difficult to alter the day of mediation.  Surprises at mediation frustrate the process and do not materially advance settlement potential.  Counsel for all sides must engage constituent decision makers so that they are well informed and understand the risks so that they can bring appropriate authority to a mediation.
  2. Informational asymmetries may hinder the mediation process before, during, and after a mediation.  Participants need to understand what risk plaintiffs are presenting in a case. Defendants must offer honest assessments to carriers—it does not help to tell a carrier that there is no liability throughout a case and then ask for a large check in mediation.  Likewise, if you expect coverage to play a role in the negotiation, in most cases it makes sense to brief the mediator and plaintiff so that they can factor a coverage issue into their calculus.  Finally, no one is scared by a plaintiff or defendant who says they have a persuasive case but is reluctant to present detailed facts about the elements of a claim. 
  3. Defendants should be up-front with insurers about their settlement preferences.  Broadly speaking, litigants fall into two camps at a negotiation: (a) pay a plaintiff as much as needed to end litigation today and (b) pay defense counsel as much as needed to defeat the claim.  While the party’s attitude towards settlement won’t be dispositive of the carrier’s willingness to negotiate, it will inform the carrier’s authority and attitude about the case.  Psychology matters more than people care to admit.
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Did the Georgia Legislature Just Delete the Corporate Duty of Loyalty?

On May 9, 2017, Governor Deal signed House Bill 192 into law.  For claims arising after July 1, 2017, O.C.G.A. §§ 14-2-830(a) (directors); 14-2-842(a) (officers) will provide:

A [director or officer] shall discharge his perform his or her duties as a [director or officer], including his duties as a member of a committee: (1) In a manner he believes in good faith to be in the best interests of the corporation; and with the degree of (2) With the care an ordinarily prudent person in a like position would exercise under similar circumstances. 

That strike through of “to be in the best interests of the corporation” is pretty stark, right?  Perhaps all of an officer’s or director’s duty of loyalty to a company will be placed in the duty of good faith.  But perhaps the legislature wanted to bar an end-run around its duty-of-care enactment by narrowing the statutory duty of loyalty to violations of O.C.G.A. § 14-2-861(interested party transactions) and O.C.G.A. § 14-2-832 (unlawful distributions), which are still prohibited.  Time will tell…

The main thrust of the legislative amendment was to enhance protections for corporate decision making by adding this text:

There shall be a presumption that the process [a director or officer] followed in arriving at decisions was done in good faith and that such [director or officer] has exercised ordinary care; provided, however, that this presumption may be rebutted by evidence that such process constitutes gross negligence by being a gross deviation of the standard of care of [a director or officer] in a like position under similar circumstances.

O.C.G.A. §§ 14-2-830(c) (directors); 14-2-842(c) (officers).

These amendments are a response to FDIC v. Loudermilk, in which the Georgia Supreme Court held that the substance or wisdom of a corporate decision was unreviewable in court absent gross misconduct.  295 Ga. 579, 581 (2014).  But the Court also held that in order to obtain deference for their decisions, corporate actors’ process for making their decisions was reviewable under a simple negligence standard: officers and directors “may be liable for a failure to exercise ordinary care with respect to the way in which business decisions are made.”  Id. at 593.

In amending the statute, the legislature addressed the obvious point that deference to ultimate corporate decisions is of little value if the there is no deference to the decision-making process.  Once this law is in effect, corporate officers and director are presumed to have acted in good faith in the process used to make business decisions.

If you want to know more, look out for a more in-depth treatment in our next firm newsletter.

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