How can you be an effective trustee appointed in a chapter 11 case if you cannot retain counsel when the case first begins? Well one bankruptcy court in North Carolina explained that a trustee’s retention of counsel is not an automatic right in some chapter 11 cases. First, let me lay the predicate.

The New Act. There is a new category of chapter 11 trustees statutorily appointed under the Small Business Reorganization Act of 2019 (the “Act”), which created Subchapter V of chapter 11 of the Bankruptcy Code. The Act, enacted into law on February 19, 2020, came in the nick of time. Subchapter V was enacted to simplify the bankruptcy process for the smaller businesses and reduce the costs of filing bankruptcy and confirming a plan. Then in response to the COVID-19 crisis, Congress through the CARES ACT, expanded eligibility for small businesses and increased the cap for eligibility purposes, making it an option for larger businesses struggling from the widespread pandemic.

How Does the Act Help Small Businesses. For those readers who aren’t familiar with this Act, it makes the appointment of a trustee mandatory in every chapter 11 Subchapter V case just as it is mandatory in chapter 7, 12 and 13 cases. Also, it (i) shortens the timetable for filing a chapter 11 plan, (ii) dispenses with the disclosure statement step, (iii) precludes competing chapter 11 plans, (iv) stretches the payment of administrative expense claims beyond the effective date of a plan, (v) dispenses with the statutory requirement of paying quarterly US Trustee’s fees which can be significant over the life of the chapter 11 case, (vi) eliminates the appointment of a statutory creditors’ committee, and (vii) permits a debtor to retain its interest in the reorganized entity even when senior creditors are not paid in full.

Role of a Trustee. The Act requires the appointment of a trustee in every case. Unlike in a traditional chapter 11 case, the trustee is not charged with operating the debtor’s business. Rather the trustee has the limited role of assisting the debtor with proposing and confirming the plan and overseeing distributions under the plan. The term of the trustee depends on whether the plan is contested or consensual. The trustee’s role ends when the plan is substantially consummated. The debtor is required to notify the trustee when the plan is substantially consummated. In a non-consensual plan, the trustee is obligated to make distributions to creditors as contemplated in the plan until all distributions are made. The trustee files with the court a final report accounting for all distributions.

However, the trustee is held accountable for all funds received from the debtor and is charged with objecting to claims that are improper. In addition, the trustee is the resource to parties seeking information, and may opposed the discharge of a debtor, if appropriate. Despite this statutory guidance, it is not clear how a trustee will be compensated, whether the trustee must meet the statutory qualifications under Section 322 of the bankruptcy code and whether the trustee may retain counsel. Section 326(b) does appear to apply to trustees in Subchapter V cases which limits compensation to five percent of the distributions made. Certain statutory functions imposed on a Subchapter V trustee cannot be performed without counsel, such as objecting to claims and objecting to a debtor’s discharge, if appropriate.

Hiring Counsel. Setting aside the issue of how a professional hired by a trustee will be paid, and whether Sections 327 and 330 apply to the retention of an attorney seeking to be retained by a Subchapter V trustee, there is nothing in the Act that prohibits the hiring of an attorney by the Subchapter V trustee.

Nonetheless, one court put the kibosh on a trustee seeking to retain counsel. In a June 11, 2020, decision issued by a North Carolina bankruptcy court in Penland Heating and Air Conditioning, Inc., Case No. 20-1795 (Bankr. E.D. N. Car. June 11, 2020), the Honorable David M. Warren denied the application of a trustee to retain counsel in a Subchapter V case. The Debtor in this case operated a heating and air conditioning business that performed services throughout the state of North Carolina. The debtor was winding down its business affairs and intended to file a plan to provide for the liquidation of its assets after completing all unfinished jobs.

Citing to In re Ventura, 615 B.R. 1, 6 (Bankr. E.D.N.Y. Apr. 10, 2020), Judge Warren adopted the Ventura court’s summary of a Subchapter V trustee’s duties under Section 1183(b). The Subchapter V trustee acts as a fiduciary for creditors, in lieu of an appointed creditors’ committee. The Subchapter V trustee is also charged with facilitating the Subchapter V debtor’s small business reorganization and monitoring the Subchapter V debtor’s consummation of its plan of reorganization. Ventura, at 7. The role of a Subchapter V trustee is like that of a trustee in chapters 12 and 13, and a Subchapter V debtor remains in possession of assets and operates its business. Id.

Then, citing to the Honorable Paul W. Bonapfel’s article, A Guide to the Small Business Reorganization Act of 2019, 93 Am. Bankr. L.J. 571, 582-83 (2019), Judge Warren concluded that while the Act does not restrict a Subchapter V trustee from employing attorneys and other professionals under Section 327(a), the employment of attorneys or other professionals has the potential to substantially increase the administrative expenses of the case, which in his view contradicts the purposes of the Act which is to streamline and reduce costs. Id. at 591.

Finally, citing to the Department of Justice’s handbook for Subchapter V trustees, Judge Warren concluded that the employment of professionals by a Subchapter V trustee is especially important in cases in which the debtor remains in possession and the debtor has already employed professionals to perform many of the duties that the trustee might seek to retain its professionals to perform. Judge Warren stated that the trustee should keep the statutory purpose of the Act in mind when carefully considering whether employment of the professional is warranted under the specific circumstances of each case. U.S. Dep’t of Justice, Handbook for Small Business Chapter 11 Subchapter V Trustees 3-17-18 (2020).

At the hearing, the trustee stated that he filed the Application as a matter of course but did not have any current need for legal representation in the Debtor’s case. The court denied the request stating that to be consistent with the Act, the trustee has to have a specific purpose for counsel. The court left open the possibility that if during the case the trustee identifies a specific need for the employment of an attorney or other professional, then the court will consider another request.
The court recognized that routinely it allows chapter 7 panel trustees and chapter 11 trustees to hire themselves and their law firms to provide legal services on behalf of the trustee. The court stated that allowing trustees to employ themselves or their firms provides an economical efficiency to case administration. Consistent with Section 330 of the bankruptcy code, the court cautioned that overzealous and ambitious Subchapter V trustees that perform unnecessary or duplicative services may not be compensated, and other fees incurred outside of the scope and purpose of the Act may not be approved.

Takeaway. The direction from the North Carolina court is not necessarily a troublesome decision. A trustee has to be mindful of the purposes for which counsel will be hired and articulate it to bankruptcy court in its application. Simply put, a trustee has to establish necessity not only seeking to pay counsel but also when hiring counsel. It is a good practice anyway.

In light of all the negative new stories in 2020 and the statistics about the rise in divorce rates, it does not hurt to point out that there is a plus side to the pandemic: more requests for premarital agreements means more people are choosing to get married. Whether through chosen quarantine in the early stages of a relationship or slowly getting to know a new love through FaceTime, 2020 has allowed many people to reevaluate their lives, wants, needs. While it is true there is an uptick in divorces and custody disputes related to the pandemic, there is also a rise in requests for Premarital Agreements. So many people have found love and happiness during the pandemic. Family law is not always about ending relationships and fighting over children and assets.  Sometimes it helps to point out the positives.

What Is Premarital Agreement?

              A premarital agreement is a written contract entered into by two individuals prior to a marriage or civil union to solidify property and financials rights and division of that property upon the termination of the marriage by divorce or death. A premarital agreement is valid in Texas if it is in writing and signed by both parties. In addition, the parties must agree that they have each disclosed their assets and have waived any right to further disclosure prior to signing the premarital agreement. While it is not required, each individual should have their own independent attorney review the premarital agreement prior to signing.

Why do I need a Premarital Agreement?

              There are many reasons couples choose to execute a premarital agreement but some of the most frequent reasons to enter an agreement prior to marriage are:

  • one or both spouses plan to bring property into the marriage
  • One spouse owns a thriving business or has recently invested in a small business they expect to profit from in the future
  • One spouse has significant debts coming into the marriage (such as student loans)
  • one spouse is much wealthier than the other
  • The marriage is not the first marriage for one or both spouses
  • one or both spouses have children from prior relationships
  • One or both spouses expect to receive an inheritance they want to protect in the future (income from separate property is in most cases  is considered community property)

Texas Community Property Laws.

Texas is one of the nine community property states. What that means in Texas is that property acquired during the marriage is presumed to be community property and thus owned by both spouses regardless of how the property is titled. In the event of a divorce, community property is subject to a just and right division between the parties. In a premarital agreement, spouses can contract and agree to alter the characterization of their assets, debts and liabilities. Some spouses chose not to create a community estate at all. Other people choose to limit the creation of community property to only jointly titled assets. There are a myriad of options for couples to reach agreements regarding the characterization of property and the division of property in the event of a divorce.

What About Children?

A premarital agreement can address provisions for children from prior marriages such as setting aside certain assets or funds for their benefit. However, Texas law does not allow parties to address child support or child custody for children of the marriage in a premarital agreement.

Couples can reach agreements regarding the payment of alimony or a lump sum payment in the event of the bad acts of one spouse. For example, some couples choose to agree that in the event of adultery, the spouse committing the bad act will owe the other spouse a large lump sum payment as part of the divorce.

Does It Matter If The Marriage Will Not Be In Texas?

              Generally, no. If a couple chooses to get married in another state or country but intends to reside in Texas following the marriage then a Texas premarital agreement can be executed. In order for Texas law to apply to a premarital agreement there should generally be some tie to Texas (such as one party resides in Texas or the parties intend to reside in Texas).

Can a Premarital Agreement Be Set Aside?

              A premarital agreement in Texas can be set aside only under very limited circumstances. Generally, it is the public policy of the State of Texas favoring the freedom of contract so most premarital agreements are found to be valid and enforceable. In order to set aside a premarital agreement, one party must prove that either the agreement was not signed voluntarily or it was unconscionable. Examples of an “unconscionable” agreement are determined on a very fact specific, case by case basis. Some examples include but are not limited to: (1) one of the spouses failed to provide the other spouse with a fair and reasonable disclosure of all financial obligations and property owned prior to marriage; (2) one of the spouses did not voluntarily and expressly waive, in writing, any right to said disclosure and (3) one of the spouses did not, or could not reasonably have had, adequate knowledge of the other spouse’s property interests and financial obligations.

In most states, divorce and family law filings are public information unless specific actions are taken to protect the documents and hearing from the public eye. Whether an individual is a public figure, a celebrity, a high-powered executive or any person who does not want their private affairs available to the public, steps can be taken to maintain privacy. Prior to COVID most courtrooms were open to the public but unless you had hours to spend at the courthouse, you could not view court hearings. However, with hearings being conducted on Zoom and other media platforms, many Judges are forced to broadcast their hearings on YouTube and other public venues open to anyone, anywhere, anytime. However, there are ways to keep divorce filings and hearings private so couples, even in high conflict matters, can divorce with privacy and dignity.

1. Filing Under Initials
Some, but not all counties in Texas allow parties to file under initials in an effort to maintain privacy. There are trolls who monitor case filings and will be quick to publish information on social media if a high profile divorce case is filed under a person’s full legal name. These trolls may publish the Petition for Divorce or other case related information before the other spouse is even aware of the lawsuit. Some clients report that their spouses knew about the filing for divorce before being served because the spouse monitored court filings. Filing under initials, which do not even have to be the parties’ actual initials, keeps information private. While filing a case under initials may maintain privacy in the beginning of the case, eventually a divorce decree will have to be filed with at least one reference to both parties’ full legal names in order for the divorce decree to be enforceable or to document orders related to children of the marriage.

2. Sealing the Case
The Texas Civil Practice and Remedies Code allows a court to seal a case upon a party’s written motion. Most judges will grant a motion to seal a case, keeping the court filings away from public scrutiny if both parties agree the case should be sealed.

3. Alternative Dispute Resolution
Alternative options exist, even in high conflict cases, to keep private family disputes out of family law courtrooms.
a. Collaborative Law
Collaborative law is a voluntary process initiated when couples sign a contract binding each other to the process to work with their collaborative professionals (lawyers, financial professionals, coaches, and oftentimes mental health experts) to achieve a settlement that best meets the needs of both parties without the threat of litigation. Collaborative law is beneficial as a cost and time saving option for resolving several types of family issues including division or property, custody disputes and pre-marital/postnuptial agreements.

b. Hiring a Private Judge- A time saving option to consider.
While the substantial majority of divorce cases settle in mediation, attempts to resolve disputes by exchanging settlement proposals or attending mediation or other attempts and some cases must go to a final trial no matter how much one or both parties try to settle. Experienced, retired Judges occasionally make themselves available for to try cases in a private setting. The Texas Civil Practice and Remedies Code allows parties to use a private judge if both parties agree. There are many benefits to hiring a private judge including but not limited to saving time, ease of scheduling, saving money and choice of judge. Many family law dockets are backlogged with cases so it may take a year or more to get a trial setting. Hiring a private judge may allow for a quicker resolution outside of the courtroom. While this may sound like a great option parties should be aware of the added expense of paying for a private judge expensive because the parties will be required to pay for the private judge’s time as well as paying for a venue to conduct the trial. Some courthouses have unused courtrooms which can be made available for cases tried by private judges. In other cases, couples rent conference rooms at hotels or other private locations to conduct a trial and maintain privacy. The ruling by the private judge is just as enforceable and binding as if the case were litigated before court.

4. Drafting Agreements Not Filed With the Court
Finally, not all final divorce related documents must be filed with the Court. Often parties agree to put the bare minimum in an actual Divorce Decree while outlining the specifics of the agreement in a document called an Agreement Incident to Divorce which is not filed with the Court. The Agreement Incident to Divorce is enforceable as a contract between the parties but if it is not filed with the Court then public information such as detailed financial account information, large cash payments and other private details of the financial agreement are not available for public viewing.
High conflict and high net worth cases can resolved while maintaining the privacy and dignity of the parties if the right steps are taken in advance.

In Texas, small monetary disputes may be brought before the Justice of the Peace or “JP Courts.” Most Texans are probably unfamiliar with the term and know these courts simply as “Small Claims Courts.” However, recent changes to the Texas Rules of Civil Procedure have increased the amount of damages claimants may seek in JP Court, thereby raising the stakes in an arena practicing attorneys often call, the Wild West.

On September 1, 2020, by order of the Supreme Court of Texas, the Texas Rules of Civil Procedure were amended to allow JP Courts to hear cases with a maximum value of $20,000.00. This doubled the amount previously permitted under the Texas Rules of Civil Procedure. The change is significant because JP Courts are not bound by the full Texas Rules of Civil Procedure or to the Texas Rules of Evidence. Such rules only apply if explicitly provided for by statute or by the rule, or if the judge hearing the case determines that a particular rule must be followed to “ensure that the proceedings are fair to all parties.” In other words, a rule only applies if the JP Court says it applies. This free-wheeling approach is meant to encourage the JP Courts as a venue for those who are unable to afford legal representation and would otherwise face complex rules of procedure and evidence as a barrier to recovery.

It remains to be seen what effect, if any, this increase will have on day-to-day practice in Justice of the Peace Courts. Will JP Courts be more likely to apply the rules in maximum damage cases? Perhaps. Will we see more attorneys taking on contingency work in JP Court? Maybe. Only time will tell, but change is certainly upon us.

Law360 reports that more than five thousand civil lawsuits have been filed by businesses seeking to recoup pandemic-related losses under their commercial policies. This new wave of litigation has called upon courts across the country to determine whether commercial policyholders have a right to recover for business losses in light of the COVID-19 pandemic.

Just last month, two federal courts reached conflicting decisions in similar suits brought by commercial policyholders against their insurers. The rulings, issued one day apart, highlight the challenges litigants will face in pursuing lawsuits of this nature on either side of the docket.

In Studio 417, Inc., et al. v. The Cincinnati Ins. Comp., the plaintiff-insureds brought a class action against their insurer after their claims for pandemic-related business losses were denied. The respective policies each contained the same relevant language, which obligated the insurer to cover “direct ‘loss’ unless the ‘loss’ [was] excluded or limited”. A “Covered Cause of Loss” was defined as “accidental [direct] physical loss or accidental [direct] physical damage”. However, the policies were silent as to what constituted a “physical loss” or “physical damage”.

The insurer argued that the plaintiff-insureds had not adequately pled a “physical loss” as required by the policies, and urged the court to define a physical loss as requiring “actual, tangible, permanent, physical alteration of property”. In contrast, the plaintiff-insureds argued that the “physical loss” requirement was met as it was “likely that customers, employees, and/or other visitors to the insured properties … infected the insured properties with the [Coronavirus]”. In addition, the plaintiff-insureds alleged that multiple state orders mandating the closure of plaintiffs’ businesses constituted a loss that “required and continue to require [p]laintiffs to cease and/or significantly reduce operations”.

The court ultimately turned to our dear friend Webster to resolve this dispute. In denying the insurer’s motion to dismiss, the court ruled that the “plain and ordinary meaning” of the phrase “direct physical loss” encompassed the plaintiff-insureds’ claims that the presence of COVID-19 “deprived plaintiffs of their property, making it unsafe and unusable” and “result[ed] in direct physical loss to the premises and property”.

In contrast, the United States District Court for the Western District of Texas issued its decision one day later in Diesel Barbershop, LLC v. State Farm Lloyds, in which the court precluded business owners from recovering COVID-19 related losses under their commercial policies. As in Studio 417, the inquiry in Diesel focused on whether the plaintiffs had sufficiently pled a ‘direct physical loss’. However, the plaintiffs in Diesel argued that only the state-mandated closures resulted in their business losses, not COVID-19 or potential exposure of their properties to COVID-19.

The Diesel court reviewed the plain language of the policies, which read, in relevant part:

“When a Limit Of Insurance is shown in the Declarations for that type of property as described under Coverage A – Buildings, Coverage B – Business Personal Property, or both, we will pay for accidental direct physical loss to that Covered Property at the premises described in the Declarations caused by any loss as described under SECTION I — COVERED CAUSES OF LOSS.”

‘SECTION I — COVERED CAUSES OF LOSS’ stated that the insurer would “insure for accidental and direct physical loss to Covered Property” unless the loss was excluded. Relying on decisions from the Fifth Circuit, Second Circuit, and Northern District of Texas, the Diesel court held that the plain language of the policies calling for a “direct physical loss” necessitated “distinct, demonstrable, physical alteration of the property” and granted the insurer’s motion to dismiss. The court also concluded that the plaintiff business owners’ claims were precluded by a Virus exclusion in the policies.

What do these decisions mean for insurance companies and their insureds moving forward?

Read the policy. While the majority of cases discussing COVID-19 related business losses have been resolved in favor of the insurer, the above courts’ conflicting decisions demonstrate the need for litigants to familiarize themselves with the language of the policy in question, as well as any exclusions that may apply. Thousands of policyholders and their insurers have sought redress on this issue in just the last few months, and we expect them to continue to do so as the pandemic lingers.

On October 7, 2020, Gov. Greg Abbott signed Executive Order No. GA-32 (“Order”), relating to the continued response to the COVID-19 pandemic. The Order brought welcome news to bar owners and thirsty patrons across the state of Texas by permitting the conditional reopening of bars. However, before the bottles are popped and the beers are poured, here are some things to know.

Not everyone gets to fill their glass just yet. The Order prohibits areas with “high hospitalizations” from reopening their bars.  An “area with high hospitalizations” means any Trauma Service Area that has had seven consecutive days in which the number of COVID-19 hospitalized patients as a percentage of total hospital capacity exceeds 15 percent, until such time as the Trauma Service Area has seven consecutive days in which the number of COVID-19 hospitalized patients as a percentage of total hospital capacity is 15 percent or less. As of today, the only high hospitalization areas are Culberson, El Paso, and Hudspeth counties.

But not so fast on the pour. Even if a county does not constitute an area of high hospitalizations, the Order gives county judges discretion as to whether to opt into the reopening or not. While many counties have chosen to reopen, most of the metropolitan counties have kept the tap shut off, including Dallas, Travis, Harris, and Bexar. A notable exception to the metropolitan bar crowd is Tarrant County, which decided to swing the bar room doors open as of October 14.

For those counties that qualify and opt to reopen, restrictions are still in the mix. Capacity is limited to 50 percent inside (with no limitation on outdoor seating) and patrons are required to consume their drinks only while seated, which means no hanging around the bar for now. There is a noticeable and welcome exception to this provision for brewers, distillers, and wineries, who are permitted to sample their wares to groups of 6 or fewer standing patrons, as long as social distancing is observed.

There is also good news for those thirsty Texans still hesitant to return to the bar room scene. The Order preserves the COVID-19 inspired permissive use of drive-thru, pickup, and delivery of alcoholic beverages.

As Texas continues to recover from the effects of the COVID-19 pandemic, these restrictions may rapidly change. For now, many bar owners across the state are breathing a sigh of relief, while others are still anxiously holding their breath.

I recently volunteered to speak at a program about safety precautions for COVID. The irony of it all was that the program inadvertently placed the participants at risk. The program organizers didn’t realize it. The facility staff didn’t catch it, and not a single other presenter blinked an eye. Was I being paranoiac?

In late September, I participated on a panel of speakers at a conference held at an internationally renowned hotel in Dallas, Texas sponsored by one of the largest global meeting and event associations. The program was designed to educate about 250 association participants on the safety measures taken by hotels and airlines in an effort to jump-start an industry hit very hard by COVID. What better venue than to have it at the hotel which that very day earned the GBAC Star Facility Accreditation. This is a performance based accreditation program that helps facilities demonstrate that they have work practices, procedures and protocols in place to prepare, respond and recover from outbreaks and pandemics. The association did everything right, and permitted participants to appear electronically. The hotel was impeccably clean. Hotel staff greeted and directed the participants, regulated the elevators, situated the tables far apart, covered the food appropriately and had individual antibacterial wipes available at each seat. There was nothing apparent that could have gone wrong.

The panel consisted of speakers from different segments of the hospitality industry, each of whom participated live. One of the speakers from a large international airline appeared sick, congested, coughing excessively, and probably contagious. Fortunately, everyone had masks on and each speaker was positioned about six feet apart on stage for the presentation. The sick airline representative which I named Mr. Contagious opened the presentation and I was the closer. So I was on the other end of the stage from him. I felt safe.

When the presentation started, I noticed only one handheld microphone that we were all to share. Mr. Contagious removed his mask, picked up the hand held microphone, and began to spread whatever was going on with him onto the microphone’s top shield. When he finished his part of the presentation, he coughed into the microphone, put his mask back on and walked over to panelist number two to hand her the microphone. Without blinking an eye she took off her mask and placed the contaminated microphone up to her mouth and began her presentation.

I could not believe what I saw. But looking around the room, the audience appeared expressionless as if there was nothing wrong with passing a germified microphone around to each of the panelist and then to the audience members to ask questions of the panelists. Was I being a germaphobe so engulfed in germs that I could not stop thinking about contamination? I said to myself, “I am not placing that microphone close to my mouth,” but not everyone would be able to hear me without the microphone. Panic was beginning to consume me. Just as I looked again into the audience, I saw an individually wrapped antibacterial wipe that I had not fully appreciated when I arrived and first saw it. I had found the solution to my panic.

When I microphone finally reached me, I made the antibacterial wipe a part of my presentation. I stood up, walked to the table to pick up the antibacterial wipe, wiped over the microphone, and sat back down to give my portion of the presentation in my mask. Fortunately, my improvisation was a hit generating laughter followed by applause. I realized that sometimes the best part of a presentation can often be unspoken.

Consider the following scenario that frequently plays out in contract negotiations: You have spent days (if not weeks) going back and forth with the opposing party ironing out the terms of a lucrative deal. The bulk of the negotiating has revolved around important issues such as payment terms, default, and cancellation protocols. You even have the lawyers duke it out over attorney’s fees and choice of law provisions for good measure. But just when you thought that the final draft was ready to be circulated, you realize that the topic of indemnity was not addressed. Since you do not want the deal to be derailed by discussion of such a touchy topic, you decide to just include standard boilerplate language where both parties agree to indemnify each other for any negligence committed by the indemnifying party. After all, the intent is for the other party to indemnify you if they breach any applicable duty stemming from this agreement.

Although the inclusion of such mutual indemnity provisions is the norm rather than the exception, the protection you think you bargained for will likely be unavailable to you if you find yourself sued as a result of the actions of the other party. For example, if you are a contractor who is sued due to the negligence of a subcontractor, your first inclination will be to demand that the subcontractor indemnify and defend you in the lawsuit based on the indemnity provision in your contract. However, if your indemnity provision consists only of rinse and repeat “standard” language, you may be out of luck in seeking recourse from the subcontractor. This is because Texas law is quirky when it comes to contractual indemnification, and the courts in this state have largely found reasons to invalidate all but the most carefully drafted indemnity provisions. In the above example, even though you were named as a defendant through no fault of your own, Texas law still considers you as a party that is accused of being negligent. It does not matter if you will ultimately prevail at trial. The focus is on what you are being accused of at the moment you are sued. Therefore, to request indemnity from the subcontractor, you would have to point to a provision in the contract that entitles you to indemnity for your own negligence. Of course, this may sound counterintuitive because from your vantage point, you are not asking to be indemnified for your own negligence because you did not do anything wrong! Nevertheless, Texas law disfavors contractual indemnity agreements and puts the onus on the parties to clearly spell out what their intent is when drafting these provisions. Therefore, an enforceable indemnity provision would require the subcontractor to indemnify you for any reason, including your own negligent acts. Obviously, asking the other party to agree to indemnify you for your own negligence can be a deal breaker when you are about to finalize an agreement. Oftentimes it comes down to a risk/reward analysis weighing the benefits of finalizing a deal versus the likelihood that indemnification issues will arise in the future. Even if you conclude that the standard boilerplate language will have to suffice, not all hope is lost. If you have a good business relationship with the other party, they will sometimes agree to indemnification even if the agreement is not technically enforceable. But make sure you always have a clear understanding of who is on the hook before finalizing that contract.

At the height of the COVID-19 lockdown, the Supreme Court of Texas issued an opinion that may lead to the shutdown of “eight-liner game rooms” across Texas.

In the City of Fort Worth v. Rylie, 602 S.W.3d 459, 463 (Tex. 2020), the Court considered whether Chapter 2153 of the Texas Occupations Code, which provides comprehensive and uniform statewide regulation of skill or pleasure coin-operated machines, preempted the City of Fort Worth’s (the “City”) ordinances aimed at restricting the operation of “eight-liner” game rooms.

Eight-liners, which most people associate with truck stops, operate like a video slot machine: a patron pays to play the machine, which displays nine symbols arranged in three columns and three rows; the machine records the payment as credits; and the player bets credits by pushing a button to cause the three columns to spin. If the columns stop with three of the same symbols in one of eight possible lines—three vertical, three horizontal, and two diagonal—the player wins an amount of additional credits, redeemable for more “plays” or for a prize.

Although the Texas Constitution requires the legislature to maintain laws banning most gambling and gambling devices, under the so-called “furry-animal exclusion,” a machine that would otherwise constitute a “gambling device” is excluded from the definition if (1) it is used solely for bona fide amusement purposes, (2) it rewards only noncash merchandise prizes, toys, or novelties, or a representation of value redeemable for those items, and (3) the reward for a single play of the game or device is worth no more than the lesser of $5 or ten times the cost of the single play. Eight-liner games have been permitted to operate under this exception.

In an effort to curb the proliferation and use of these machines, the City passed two ordinances: a zoning ordinance restricting where the machines can operate; and a licensing ordinance, which requires game-room operators to obtain a license from the City and pay a licensing and inspection fee.

Dueling motions for summary judgment eventually brought the case to the Supreme Court, which determined that Chapter 2153 does not apply to unconstitutional or illegal machines. However, because the Court of Appeals had not considered the constitutionality of the machines and the furry-animal exception in its decision below, the Court declined to address the constitutionality of the machines and remanded to the Court of Appeals to rule on the constitutional question with the benefit of full briefing on the issue.

The parties are now briefing the Court of Appeals on the constitutional question. The odds for either party’s success are uncertain, so at this point, it’s anyone’s game.

Fox Partner Mark Tabakman dives into the details of an unusual employee misclassification case in Texas:

This is a very interesting case.  A group of nurses at a Texas hospital claimed they their employer intended to pay them an annual salary rather than an hourly rate and thus they were owed no back wages.  They won in the lower court and appellate court but, now, the Texas Supreme Court has reversed, finding that there was insufficient evidence to substantiate that allegation.  The case is entitled McAllen Hospitals LP et al. v. Lopez and issued from the Supreme Court of Texas.

The Court set aside the judgments for the four workers, which totaled more than $389,000.  The Court noted that there was nothing in their yearly performance reviews, payroll change forms, Employee Handbook or any policy of the accounting or HR departments to indicate, much less explicitly state, that the nurses were paid on an annual, as opposed to an hourly rate.  Instead, the Court found that the nurses’ employer made it plain that they would only earn the annual salary if they worked at least forty hours per week in the following year.  The Court found in those years in which they worked less than 2080 hours, they would not receive as much money.

The Court stated that “we hold there is no evidence that would have allowed reasonable, fair-minded people to find that the employer and its employees had a meeting of the minds on a fixed amount of pay.  We therefore reverse and render judgment that the employees take nothing.”

The nurses worked as supervisors and were classified as exempt employees under the Fair Labor Standards Act.  On an annual basis, they met with their bosses to go over their yearly evaluations and to set their pay for the new year.

The Takeaway

If the nurses were hourly paid, they were then, by definition, non-exempt.  Why did not they win on that basis alone?  The only explanation it seems is that the nurses did not work more than forty hours in any week, because if they did they would be entitled to overtime regardless of whether their annual salaries were supposed to be a certain figure.  The important lesson here is that misclassification, in and by itself, means nothing unless the employees at issue actually work more than forty hours, i.e. overtime, in a week(s).

That is a very important point…