As working remotely has grown exponentially since the start of the COVID-19 crisis, more and more employees are questioning where work ends and their own time begins. Birch Horton attorneys William Earnhart and Matt Widmer recently received a decision in Federal District Court and upheld by the Ninth Circuit that gives employers some additional guidance regarding that question.
Wage and hour law is based on the premise that employees are paid for the time they are at work and are not paid when not working. However, when the line between work and home is not clear, on-call employees often feel they should be compensated for the interruption into their personal time when that interruption benefits their employer.
Traditionally, the question of whether on-call time must be paid was a question of whether the employee was “engaged to wait” or “waiting to be engaged.” If an employee is able to use the on-call time for his/her own purposes, the employer was not required to pay him for that time. But what about the employee that is required to carry a cell phone and work remotely if called? Courts in the Ninth Circuit make this distinction by applying a seven-part test, referred to as the Owens factors. Although Owens was decided in 1992, just prior to widespread cell phone use, it summarized years of precedent going back to the 1940s, and did not anticipate employees being in contact with customers all hours of the day in almost any location.
In our case, the District Court applied the Owens factors and found that being required to stay within cell phone range and answer the phone if called was not enough to establish that the employee was required under the FLSA to be paid for the time not answering the phone. The Owens factors are very fact specific with “no one factor controlling.” The key factors in this case where: the employee was able to travel anywhere within cell phone coverage; arrange for others to take the phone if he planned a vacation or otherwise needed to be unavailable; and, although the employee disputed this fact, the calls were not so frequent as to severely limit his ability to use his time as his own. At the appellate level, the former employee added a twist emphasizing the argument that because his job was as a dispatcher, his time carrying, but not actually answering, the phone for after-hours dispatching was simply a continuation of his job duties. The appellate court did not accept that argument.
An additional factor in any wage claim is an agreement of the parties. An employer cannot contract out of the FLSA minimum wage and overtime requirements; however, the reasonable expectations of the parties may establish an agreement to pay beyond the legal minimum. In this case, the employee signed a memorandum confirming he would be paid two hours overtime each day he was required to carry the after-hours phone, and that he was required to record all time spent on the phone that exceeded the two-hour minimum.
When an employee is required to carry and answer a cell phone after ordinary work hours, an employer should carefully analyze the employee’s job description and expectations (preferably with legal assistance) and have an “on call” or “after hours” policy signed by the employee that clearly identifies expectations and requirements during that time period. An employer should also require and enforce a policy of tracking all time worked. This is required by law, but often ignored or rarely enforced. Accurate time cards are often the best source of evidence to dispute a claim for overtime.
While we all hope that we will never have to experience the issue of a poor Contractor Performance Assessment Reporting System (CPARS) performance rating directly, it is an issue that all Federal Contractors (or those who seek Federal Contracts) should be educated about. CPARS ratings can help or hinder the successful awards of Federal Contracts. If you do receive a poor performance rating, the ultimate point is that there is a very limited window when a contractor can object or try to influence the CPARS rating, so time is of the essence when you learn of a less than desirable CPAR. The remedies are also extremely limited, but the consequences are quite significant. Therefore, the Birch Horton Bittner and Cherot Government Contracting Team shares this article in hopes that managers and contract administrators can appropriately plan for the future. We hope that you do not experience a poor rating, but if you do, we want you to be ready and able to respond.
The Contractor Performance Assessment Reporting System (CPARS)
The basic elements of the CPARS Program are:
CPARS is a web-enabled reporting system for Government Contracts.
Contracting Officers assess a contractor’s performance, providing both positive and negative feedback on a given contract during a specified time period, and that data is recorded in the CPARS database.
Each performance assessment is based on objective data supported by program and contract management data.
It is designed with a series of checks and balances to ensure objective and consistent evaluations, which is a helpful, but certainly not a foolproof process to ensure accurate ratings.
The CPARS performance review process provides an opportunity for both the Government and contractor to review and comment within the CPARS system.
CPARS assessments are required under the Federal Acquisition Authority (“FAR”) for source selection evaluations. They rely on clear and timely evaluations of the contractor’s performance to make decisions when awarding contracts. They are critical for providing “quality products and services in support of an agency’s missions.”
Generally, evaluations are NOT completed for subcontractors. However, evaluation of a contractor’s performance should include information regarding the ability of a prime contractor to manage the subcontractor.
There are two grading scales for CPARS, the general metric and a metric for assessing small business subcontracting plan compliance. (See FAR 42.1503(h), Table 42-1, 42-2). The second grading scale becomes relevant only if the (large business) prime contractor has a small business subcontracting plan where upon the prime contractor is rated as to how well it adhered to the plan. But the grading elements are not significantly different.
General Rating System Grades:
Exceptional: The performance meets the requirements and exceeds them to the Governments benefit. Few problems that were corrected effectively.
To demonstrate an exceptional, multiple significant events must be identified highlighting their benefit (on occasion one benefit will suffice if no weakness).
Very Good: The performance met the contractual requirements, and exceed some areas to the Government’s benefits. Few minor problems that were corrected.
To justify a significant event must be identified and explain how it benefits the government. No significant weaknesses.
Satisfactory: The performance meets the contractual requirements. Minor problems were satisfactorily corrected. Major problems were corrected without impacting the contract.
No significant weakness. If you perform beyond the requirements of the contract you cannot get less than satisfactory.
Marginal: The performance does not meet some contractual requirements. The element or sub-element being evaluated reflecting a serious problem proposed actions marginally effective or not fully implemented.
Justification requires a significant event in each category that the contractor had trouble overcoming, with supporting references.
Unsatisfactory: The performance doesn’t meet contractual requirements and recovery is unlikely. Serious problems with the contractual performance, and corrective actions are ineffective.
Multiple significant events must be identified to justify an unsatisfactory rating.
Justification requires identifying a significant event that the contractor had trouble overcoming and how it impacted the contract. Needs to reference action of notice.
How the CPARS Evaluations Are Applied:
When Must CPARS be conducted? This information must be collected and evaluated for all contracts exceeding the simplified acquisition threshold.
What must the evaluation include? CPARS evaluations should include a clear non-technical description of the principal purpose of the contract, be tailored to the contractual requirements, include clear relevant information depicting performance, and be based on objective facts supported by the program.
Who will be evaluated? The Prime Contractor, not subcontractors, is evaluated in the CPARS process. However, this can be more complicated when dealing with joint ventures and teaming arrangements.
In Joint Ventures, a unique DUNS number is issued that is unique from the individual numbers of the joint ventures. A single evaluation is given to the Joint Venture.
In teaming agreements, the evaluation is carried out for the prime contractor, other members are considered subcontractors.
Now that the Past Performance Information Retrieval System (PPIRS) is gone, agencies also now turn to CPARS directly to retrieve performance evaluation information as a means for researching a contractor’s performance history as part of the proposal evaluation process.
Agencies use the information in the CPARS that is within three years (six years for construction and architect-engineer contracts) of the completion of the performance of the contact.
Timeline for CPARS Process
Contract Registration: Basic contract information including contractor name, address, product or service code, dollar value, and award date, etc., are entered into the system. This needs to be done within 30 days of the contract award.
Performance of the Contract
Enter Proposed Ratings and Narratives: Once the period of performance is complete an assessing official enters the ratings and narratives that reflect the contractors’ performance during the reporting period.
Validated Ratings and Narratives: They will then review the proposed rating and narrative to ensure it is consistent with the FAR, detailed, comprehensive, complete, accurate, and supported by objective evidence.
It is signed and sent to a contractor representative.
Contractor Comments: The contractor representative has the option to provide comments on the evaluation and state whether they agree or disagree with the evaluation. They have 60 days to send comments. If this is done within the first 14 days it will become available in a day. On day 15 it becomes available for source selection with or without comments, even if it has yet to close.
On Day 61 the contractor is locked out and unable to comment. The Administrative Contracting Officer (ADO) may then close, modify or send the evaluation. It takes a day to update and retains a pending marking.
Review Contractor Comments Close: On day 61, after the assessing officers’ evaluation signature date, the evaluation is returned to the officer, and Contractor Representative (COR) may no longer send comments, at which point the officer may:
Close the evaluation
Modify the evaluation Reviewing Official.
Send the evaluation to the Reviewing Official.
Modify and send the evaluation to the Reviewing Official.
120-Day Timeframe. The entire evaluation MUST be complete within a 120 days after the period of performance, including the 60-day comment period.
When are CPARS Required?
Interim & Final. FAR requires annual performance evaluation for all contracts/orders for all business sectors meeting the thresholds (these are interim evaluations). For contracts with a longer period, the evaluation must reflect evaluation of at least the first 180 days of performance up to 465 days.
For those less than 365 days, a final report should be prepared.
Interim evaluations are limited to contractor performance after the proceeding evaluation.
Final evaluations should be completed upon completion or delivery of the final marker end item on the contract.
Addendum evaluations may be prepared after the “final” past performance evaluation to record the contractor’s performance relative to contract closeout etc.
Confidential Information. CPAR information is treated as source selection information at all times, and is protected in this manner.
Disclosure is strictly prohibited.
Only the contractor is granted access to the evaluation.
It is privileged source selection information, and not releasable under FOIA.
Written Concerns of Small Business
The contracting officer shall make every reasonable effort to respond in writing to a small business’s concerns submitted in writing with respect to contract administration within 30 days. This does not apply to issues characterized as a decision related to a Contract Dispute.
Legal Challenges to CPARS
In CompuCraft the Civilian Board of Contract Appeals held that a contractor “clearly [has] standing to sue [the government based on the substantive allegation that the [G]overnment acted arbitrarily and capriciously in assigning an inaccurate and unfair performance evaluation.”
However, the Board cannot “direct the Government to revise [a performance evaluation] in a particular way through some form of injunctive relief.” The Board held it lacked the jurisdiction to “remove entirely the evaluations from the CPARS website” or change each evaluative factor to exceptional.
Similar cases in other courts came to the same conclusion—that the Board/Court could find the rating arbitrary and capricious, but cannot force the agency to change the CPAR. (This may be because it would be going too far to tell the agency what to change the evaluation factor to—in other words, the Board/court will not feel it appropriate for the Board/court to give a specific rating.)
Court of Federal Claims: Todd Const., L.P., v. U.S., 88 Fed. CL. 235, 243 (2009).
Armed Services Board of Contract Appeals: Versar, Inc. ASBCA 56857, 10-1 BCA ¶ 3
The best opportunity for a contractor to change a CPAR rating is to use the 14 days to rebut the negative CPAR.
In conclusion, CPARS performance evaluations are a critical element of a contractor’s performance history and will directly impact a business concern’s evaluation on its future federal contract proposals. CPARS evaluations should always be requested and carefully monitored. The Birch Horton Bittner and Cherot attorneys have had diverse and extensive experiences helping Federal Contractors in this area. Foremost, Federal Contractors becoming familiar with the CPAR process and its impacts is extremely important to future success especially as competition increases.
 FAR Subpart 42.15—Contract Performance Information
 Guidance For the Contractor Performance Assessment Reporting System (CPARS), General Services Administration, 3 (June 2020), https://www.cpars.gov/pdfs/CPARS-Guidance.pdf.
 FAR 42.1503(g): Agencies shall use the past performance information in CPARS that is within three years (six for construction and architect-engineer contracts) of the completion of performance of the evaluated contract or order, and information contained in the Federal Awardee Performance and Integrity Information System (FAPIIS), e.g., terminations for default or cause.
 FAR Subpart 42.16.
 See CompuCraft Inc. v. General Services Administration, CBCA No. 5516, 17-1 BCA ¶ 36662, page 5
 Id. at 6.
 FAR 42.1503(g): Agencies shall use the past performance information in CPARS that is within three years (six for construction and architect-engineer contracts) of the completion of performance of the evaluated contract or order, and information contained in the Federal Awardee Performance and Integrity Information System (FAPIIS), e.g., terminations for default or cause.
On July 23, 2020, the Bureau of Land Management (“BLM”) and the National Park Service (“NPS”), within the Department of Interior, and the U.S. Army Corps of Engineers (“USACE”) published several decisions relating to the Alaska Industrial Development and Export Authority’s (“AIDEA’s”) proposal to build a 211-mile industrial access road to the remote Ambler Mining District. The road will connect the closest existing road, the Dalton Highway in the southern foothills of the Brooks Range of north central Alaska to the Mining District. The documents released include, the Record of Decisions (“ROD”), the Environmental and Economic Analysis (“EEA”), and the Clean Water Act Section 404 permit. The decisions were determined to be the least environmental impactful route, the shortest route, and has a remarkably small footprint potentially opening up one of the most mineralized areas in Alaska and the World. The road and the potential developments will bring jobs to the region, revenue to the local and state governments, and potentially further benefit remote communities with access to broadband and commercial use.
In March 2020, BLM released the Final Environmental Impact Statement and selected AIDEA’s planned route as the preferred alternative, and found that the road could go forward without significant environmental impacts. The FEIS laid the groundwork for today’s decisions. The route selected in the EEA and ROD follow the route selected in the FEIS and include mitigation measures to protect wetlands, fish, wildlife and their habitat as well as subsistence hunting and fishing activities.
The Ambler Mining District has long been known for its prime mineral development potential, which has been explored and evaluated for more than a century. Mineral resources found in the area include copper, lead, zinc, gold, silver, cobalt molybdenum and possible rare earth minerals. Congress authorized in 1980 a right of way through the Gates of the Arctic National Park and Preserve (“GAAR”) in the Alaska National Interest Lands Conservation Act (“ANILCA”) to ensure ground transportation access to the Ambler Mining District.
Throughout the its years-long decision-making process, the federal agencies have consulted extensively with Alaskans and people in the Lower 48, including community meetings, tribal consultations, public input, and federal and state cooperation over the past three years. BLM also worked closely with its consulting agencies, including NPS and USACE.
The ROD fulfills the requirements under the National Environmental Policy Act and serves as BLM’s final decision. The agency has approved development of Project Alternative A, identified in the FEIS, after many alternative routes from the West and the South. This route was the original route proposed by AIDEA, accessing the District from the east after years of considering various alternatives. It begins at Milepost (MP) 161 of the Dalton Highway and runs almost directly west for 211 miles to the District across primarily State-managed, BLM-managed, and GAAR lands. Right of Ways on lands owned by Alaska Native Corporations will need to be obtained but the route carefully took into consideration concerns of local villages seeking to avoid impacting them. This route crosses GAAR farther north than the other alternatives examined by the agencies and was the least environmentally impactful route after careful consideration.
The Section 404 Permit
Section 404 of the Clean Water Act establishes a program to regulate the discharge materials into waters of the United States, including wetlands. Infrastructure development, such as Ambler Road, need permits under the program before any material may be discharged into waters of the US. Individual permits are reviewed by USACE, which evaluates applications under a public interest review, as well as the environmental criteria set forth in the Clean Water Act and regulations promulgated by EPA.
During its permit review process, USACE adopted the BLM’s FEIS. After analyzing the FEIS and other supporting materials, the agency determined that the route selected, Alternative A, was the Least Environmentally Damaging Project Alternative (“LEDPA”). USACE has granted a permit which authorizes the discharge of material and allows AIDEA to work within the navigable waters of the United States.
ANILCA mandates that an EEA be prepared for the right of way across NPS lands to determine a preferred road alignment and develop appropriate terms and conditions for the permit.
Two alternative routes across NPS lands were identified in the project application materials. The EEA examined each of these routes to determine which route would generate fewer adverse environmental, social, and economic impacts upon wildlife, fish, and their habitat, and rural and traditional lifestyles including subsistence activities. The EEA’s determination was that Alternative A was the preferred and least environmentally impact route. The EEA also recommends measures that should be instituted to avoid or minimize negative impacts and enhance positive impacts.
The project proposed by AIDEA includes a 211-mile, all-season, industrial access road to the Ambler Mining District in the southern foothills of Alaska’s Brooks Range. The private toll road will provide access for mineral exploration, mine development, and mining operations by connecting the District with the Alaska Pipeline Haul Road (Dalton Highway), an area currently without any road or surface access. Local communities may have commercial access to the road when it is built. Under AIDEA’s proposal, approximately 25 miles of the proposed road will cross BLM-managed lands.
It is estimated that the project will employ an annual average of 766 jobs during construction and an annual average of 141 from operations and road management once the project is complete. It is also estimated that thousands of jobs will be created from mine construction and operations if they are permitted and developed. AIDEA’s proposed project is only the industrial road.
This timely and significant decision fulfills the promise made by ANICLA 40 years ago guaranteeing access to the mineral district while mitigating the impacts to federal and state lands. The Ambler Road Project is perhaps one of the largest infrastructure projects to potentially be built and funded from tolls and not public road funds in Alaska. Birch Horton Bittner and Cherot (“BHBC”) was involved in the original ANILCA legislation and has been involved in the current permit process. BHBC encourages broad public involvement in these types of Alaskan development projects which is why we share this with you.
For more information and to read the ROD visit: https://www.blm.gov/programs/planning-and-nepa/plans-in-development/alaska/AmblerRoadEIS
 See generally, US Department of Interior, Bureau of Land Management, Joint Record of Decision, DOI-BLM-AK-F030-2016-0008-EIS (Jul. 2020).
Birch Horton Bittner & Cherot (BHBC) is starting a new series highlighting a few of the unique leaders and businesses with whom we have the pleasure to work, and have seen develop, grow, and create positive differences within their industry and community.
Our first spotlight features Deidra Mitchell, who has diverse experience working in Alaska with an Alaska Native Corporation and other businesses before taking the helm of the Waséyabek Development Company, LLC (WDC). BHBC has had the opportunity to work with Deidra for over ten years, with the past four years at WDC watching her steady leadership and a focused strategy come to fruition.
WDC is a 100% Tribally-owned holding company formed by the Nottawaseppi Huron Band of the Potawatomi (NHBP). The Tribe’s reservation is located in Southcentral Michigan and WDC is located in a multiuse building in Grand Rapids. While many Tribes throughout the U.S. have experienced economic growth due to expansion of gaming, NHBP chose to broaden their economic development spectrum to avoid singular and long-term dependence on gaming alone.
In 2011, WDC was established with themission to create a diversified portfolio consisting ofcommercial real estate, federal contracting, and commercial operating companies. Deidra Mitchell joined WDC in 2016 as President & CEO. Ms. Mitchell is a Kent State University graduate, has started multiple businesses, and held several executive level positions. Since Ms. Mitchell joined WDC, she has successfully aligned resources and stakeholders managing the acquisition of five income properties, one consulting firm, and a manufacturing / R&D company for the WDC business portfolio. Her leadership has resulted in a stronger internal and external business infrastructure, increased revenue, and produced a 375% increase in assets.
WDC has increased from three employees to 285, with tribal members holding several management positions, and they have deployed over $50 million of capital towards economic development. Their federal contracting subsidiary, Waséyabek Federal Services, LLC (WFS) received 8(a) certification by the Small Business Administration in 2018 and since formedfive subsidiaries, three of which are certified 8(a).
Today more than ever, the financial strain during COVID 19 stresses the need to diversify tribal government income streams. WDC’s successful three-pronged buy-and-hold investment strategy provided financial stability during the unexpected closures by COVID of entertainment venues, casinos and hotels. We talked to Ms. Mitchell about the impacts that COVID has had on WDC, and how she, as a leader in tribal collaborations, foresees future changes within other tribal governments.
How has COVID-19 affected WDC? In what ways has proactively diversifying WDC’s portfolio proven beneficial during these unexpected times? Overall, Waséyabek has had no material impact from COVID to our revenue and cash flow. All of WDC’s companies continue to cash flow and our Federal contracts have been largely spared. At most, we expect to see a 10% negative impact, which is mostly due to WDC voluntarily working with our retail tenants to provide them 90-day rent deferrals to help them manage the effects of COVID on their operations. Our portfolio consists of Commercial Real Estate, Commercial Operating Businesses, and Operating Businesses offering goods and services to the US Government (largely through the (8(a) Program). This diversification strategy was part of our initial strategic plan, which was agreed upon by all stakeholders involved, including myself, the WDC Board of Directors, the Nottawaseppi Huron Band of the Potawatomi (NHBP) Tribal Council and the Tribal Members. Part of that initial diversification strategy also included avoiding investments in the hospitality industry to ensure, to the extent possible, that circumstances impacting the Casino/hospitality industry do not impact the WDC portfolio of companies in the same way. This diversification strategy has proven to be extremely effective during the pandemic.
Do you foresee future changes to WDC’s business practices and procedures post-COVID? COVID has certainly changed some of my personal philosophies about conducting business. Where videoconferencing was a rare and awkward communication choice for me before COVID, it is now common-place. We have adapted to new technology and methods of communication, and there are some things I really like about it. I think the change has also brought about a softer view from my standpoint on teleworking intermittently or when necessitated by geography; however, I feel that personal, face-to-face communication is still vitally important to key relationships and building energy around a business initiative and excitement in a team. I think there is room for a healthy balance of flexibility, technology and in-person interaction. I do think that there has been a healthy best practice that has come out of all this. By more strictly evaluating whether long-range travel is imperative, important, or discretionary, we can collectively make better choices for the environment, employee work/life balance, and business expenses. I think COVID has provided an opportunity for all of us to assess in our business practices and in our lives what we formally did out of habit versus what truly continues to serve all stakeholders.
Understanding WDC has a strong desire to help tribal citizens who are small business owners, will this lead to different collaborations in the future? NHBP and WDC certainly support career development opportunities for Tribal Citizens and utilizing Tribally-owned small businesses. I think the lessons that we learn from COVID will be applied to both of those initiatives. We will continue to apply a Tribal Hiring Preference in our portfolio companies and hopefully, there will be a broader realization among Tribal Members that it is important to personally gain all of the experience available to them and leverage some of the advantages provided by their respective Tribes in preparation for unprecedented times like we are experiencing now. We employ several Tribal Members across our portfolio, and they are supported through individualized Tribal Member Development Plans, mentors, training programs, etc. We also continue to apply a preference for utilizing Tribally-owned suppliers, vendors and contractors in our portfolio companies. COVID has emphasized the need for all of us to remain competitive, innovative and nimble.
Do you think other tribal governments and Native American economic development companies will start to follow WDC’s lead of diversifying in the future? There are no right or wrong answers when it comes to Tribal economic diversification. There are many Tribes that have very active economic diversification and development initiatives and those are based on that specific Tribe’s set of resources (financial, natural, and people), risk appetite, cultural alignment, etc. What I hope others can take away from WDC is the importance to be clear and to have alignment about what your mission truly is, to develop a written strategic plan that transcends Board and Council Member turnover, build a financial model that aligns with and supports your plan, and then execute on the plan and remain disciplined to it. For example, our mission was to diversify BEYOND gaming, and due to that, excluded hospitality and entertainment as it related to the casino industry. The WDC CEO and the Board, as well as the NHBP Tribal Council and Membership, all agreed and we then set about documenting our strategic plan, building a financial model that predicted the investment that would be required as well as expectations for returns. We have remained disciplined, aligned, and focused on implementing that plan. It’s worked for us; even during the pandemic crisis.
What does WDC do to support other Tribes with their economic development activities?
An annual goal for me for the last three years as the CEO of WDC is to support the economic diversification of other Tribes. This will continue to be an important goal for us as we seek to help other Tribes in their journey.
True to Ms. Mitchell’s commitment of supporting collaboration and the economic development of other Tribes, she co-hosts a monthly podcast called ‘Tribal Talks’ alongside Erika Weiss of Barnes & Thornburg. Their goal is to bring relevant and actionable information to Indian Country regarding starting, operating, and governing an economic development and diversification strategy for Tribes, welcoming a guest speaker monthly. Tribal Talks can be found at www.waseyabek.com/podcasts<http://www.waseyabek.com/podcasts and available at no cost to all interested Tribes.
Earlier this year, WDC co-invested with Gun Lake Investments (the economic development arm of the Match-E-Bee-Nash-She-Wish Tribe in Michigan) to purchase the McKay Tower in downtown Grand Rapids, MI. The McKay Tower, a mixed-use building, was a combined investment between the two Tribes of $17.5MM and produces monthly cash flow.
Ms. Mitchell recently coordinated the cooperation and development of a Michigan Tribal Non-Gaming Economic Impact Study among 9 of the 12 federally recognized Tribes in Michigan. The 9 participating Tribes own 38 Tribal Business Entities (TBEs) and the results of the study show Tribes are significant contributors to Michigan’s economy. In 2019 TBEs created $288MM in economic impact and produced 1,847 jobs in the state of Michigan. The report was released on July 7. The study quantifies the benefits of non-gaming TBEs to Tribal leadership and the state of Michigan, and the results will be shared with all Michigan Tribes to support their economic development initiatives.
Additional articles, links, stats, that came out since the publication of the Non-Gaming Michigan Tribal Economic Impact Study:
Michigan Tribal Non-Gaming Economic Impact Study Media Coverage:
Birch Horton Bittner & Cherot attorneys Jennifer Alexander and David Karl Gross joined forces with RISQ Consulting for a round table discussion on what businesses and organizations must consider when reopening to protect against legal liabilities. RISQ Consulting is an Alaskan company providing customized insurance programs and comprehensive employer services and hosts monthly webinars based on trending topics.
Below is the recording of the webinar and the link to find all resources mentioned in the presentation:
There is a famous scene in the Marx Brothers’ film Night at the Opera in which Groucho, representing an opera company, tries to get Chico, representing a singer, to sign his singer up with the opera company. They begin with a lengthy contract on legal-size paper and as Chico reviews and rejects the various provisions, Groucho tears them off, until he is left only with a thin horizontal bit of the document. He tells Chico that he (Chico) has got to like this one, because it merely requires each party to represent that he/she is of sound mind. Chico is adamant in rejecting this clause: everyone knows there is no “Sanity Clause.” After reviewing the rest of this piece, the reader may feel just like Chico.
As we are warned of an avalanche or tsunami of bankruptcy cases (depending upon one’s preference for earth or sea), it will be useful to look at a situation that could face any business at any time: a customer, a supplier or a vendor files for bankruptcy with the objective of getting rid of all that pesky debt, cleaning up an ugly balance sheet and having a fresh start. Usually, when this happens, the bankrupt is already in default under your contract: for example, it has not paid for things you sent or it has not sent items that you paid for and you are prevented from doing anything about it by the automatic stay of creditor action against the debtor after bankruptcy is filed.
Let us also say that you as a supplier, in order to compete effectively in a tough marketplace, gave terms to the debtor – let us say 30-day terms – and that the debtor orders more than $1 million in products from you during a given 30-day period (that is part of the reason that you gave the debtor terms). Now, however, the debtor has filed a bankruptcy case, owing you almost $1 million for products already sent, and now contacts you asking that you continue to ship on terms. You throw the cell phone across the room and don’t think about this situation any longer because it is so ridiculous. Then papers are delivered to you in the debtor’s bankruptcy case, demanding performance under your contract. Do you treat the lawsuit the same way you did the cell phone? As you may guess because this article appears in a law firm blog, the answer is no.
Many business debtors file for bankruptcy not only because they have substantial debts but also because they are parties to bad contracts with suppliers, other businesses or landlords. Think of a retailer that is paying too much for the products in its stores and too much in rent to have the use of stores it no longer wants to operate. In addition to providing some relief from debt generally, bankruptcy also allows the debtor to review its contracts and leases, determine which are good for the business and which are not, and essentially divest itself of the contracts and leases that are not good for the business. Divestiture takes the form of “rejection” of a contract under Section 365 of the Bankruptcy Code. Once a contract is rejected, the other party has a claim for damages that is treated as if it arose before the bankruptcy case was filed. If the debtor wants to continue with the contract, it is “assumed,” or instead “assumed” and then assigned to someone else (usually a purchaser of assets from the debtor who wants the benefit of the contract along with the assets). If a contract is assumed, the debtor/assignee must cure all defaults under the contract and provide “adequate assurance of future performance” (that is, not provide immediate and glaring evidence of inability to pay or perform).
In order for a contract to be subject to assumption or rejection, some performance must be due on each side or, in bankruptcy language, the contract must be “executory.” Although the Bankruptcy Code provides a list of definitions for various terms it employs, somewhat surprisingly, “executory contract” is not among them. Nevertheless, the definition I have provided is uniformly accepted by the courts and disputes regarding whether a contract is executory or not arise in connection with how much, or how little, performance is required to keep a contract “executory.” The answer is: not much. Even a license agreement, under which the licensor is allowing the licensee use of a trademark – for example “Motel 6” – is executory because the licensor must maintain and defend the trademark. Thus, if you have a contract with a debtor that obligates you to do anything at all, you should at least assume that it will end up being executory. Contracts to lend money or to extend financial obligations are not, however, executory, no matter how much they may look like they are. Why? Because the Bankruptcy Code says so in Section 365(c)(2).
Now, of course, bankruptcy cases, even if planned, often have to be planned in a hurry, and a debtor will need time after the filing to figure out what it wants to do, what its creditors will allow it to do, and what the court will determine is appropriate under the circumstances of the case. What happens to executory contracts while the debtor is trying to figure out which ones to assume or reject? Suppose the debtor requires performance under an executory contract in order for its business to survive? For example, take the case of a bankrupt airline to which you supply fuel to keep the planes in the air. The debtor might want to see if it can get a better deal on aviation fuel before it decides what to do with your contract, but, in the interim, it needs the fuel. Suppose the debtor owes you $2,000,000 for fuel supplied before the bankruptcy was filed: may the debtor force you to supply fuel under the terms of the contract, including credit terms, before it decides whether to assume or reject your contract?
Most bankruptcy courts answer ”yes” to this question, on the general theory that this result “preserves” the contract for assumption or rejection and provides the debtor with the necessary time to make intelligent decisions about its executory contracts. “[A] debtor-in possession’s ability to continue to perform and to compel performance with respect to assumable executory contracts is usually the life blood of its reorganization,” says the United States Bankruptcy Court for the Southern District of New York. In re McLean Industries, Inc., 96 B.R. 440, 449 (Bankr. SDNY 1989). (In a liquidation case under Chapter 7 of the Bankruptcy Code, early rejection of executory contracts is compelled, because there is no business to reorganize.)
You will notice that I said that “most courts” agree with the SDNY – most, but not all. If you happen to be involved in a bankruptcy case in the Western District of Michigan, which includes Grand Rapids, headquarters of Amway and birthplace of President Gerald Ford, you will find that the matter of executory contracts is handled differently. First, one starts with the proposition that what comes into bankruptcy is not magically transformed by its transit from ordinary business life into a bankruptcy estate. Second, under general principles of contract law, if the other party is in material default under your contract, you have no obligation to continue performing until the default is cured. Restatement,Second, of Contracts, Sections 225, 242. Therefore, a debtor that is material default under your contract cannot force you to perform until the contract is assumed and the default cured. In re Lucre, Inc., 339 B.R. 648 (W.D. Mich. 2006) (yes, the debtor company in this case was called Lucre, Inc. – as Nietzsche said, we have art to protect us from the truth).
So, which approach is correct? Lawyers will often answer this question by identifying the client they represent. Or, one can say that, unlike science, in law, you begin with the answer and work your way back to the question. Nevertheless, it is important to realize that, in the absence of a Sanity Clause, all we have are the analytical and logical tools that the law provides, which are often more extensive than we might think. Those tools, properly employed, often lead to just results, or, at a minimum, results that we can understand, if not endorse. Therefore, the next time you hear the words “executory” and “contract” applied to any contract to which your business is a party, have your bankruptcy lawyer on speed dial.