Force Majeure and Business Interruption in the Age of COVID-19

By Michael D. Brofman, Esq. & Michael J. Spithogiannis, Esq.

The onset of the COVID-19 pandemic and government’s response was immediate and stunning, but few had time to fully consider and comprehend the long-term effects on their businesses.  The rights and obligations of commercial tenants to pay rent amid the governmental restrictions, and whether an insured can recover for business interruption caused by the government’s response to the pandemic, are questions that clients are asking us to address.  At present, there are no clear answers, but there are steps that should be taken to understand and address the issues.

In a typical commercial landlord and tenant relationship, courts look primarily, if not exclusively, to the parties’ lease to resolve any dispute.  In the immediate future, many tenants and landlords will become familiar with the term, force majeure.  In French, force majeure means superior force.  In the legal sense, it contemplates an event that is neither anticipated nor controlled which prevents performance of an agreed-upon act.  In general, force majeure includes acts of nature, such as earthquakes and hurricanes, and acts of people, such as riots, strikes, and wars.  Although rarely at issue, many contracts include a force-majeure clause to allocate the risk of loss if performance becomes impossible or impracticable due to unforeseen and uncontrollable events.

A recent example illustrates the point.  In response to the pandemic threat, the governor of Illinois issued an executive order directing restaurants to suspend food service for on-premises consumption.  The executive order permitted and encouraged such businesses to sell food and beverages for off-premises consumption through delivery, drive-through and curbside pickup.

On June 2, 2020, the United States Bankruptcy Court, Northern District of Illinois, determined whether a restaurant operator was required to pay the full amount of agreed-upon rent while under the Illinois executive order.  Predictably, the Bankruptcy Court first looked to the parties’ lease which contained the following force-majeure clause:

Landlord and Tenant shall each be excused from performing its obligations or undertakings provided in this Lease, in the event, but only so long as the performance of any of its obligations are prevented or delayed, retarded or hindered by . . . laws, governmental action or inaction, orders of government. . . . Lack of money shall not be grounds for Force Majeure.

Id. (emphasis added).

The Bankruptcy Court observed that a force-majeure clause will only excuse performance if the triggering event was the actual cause of non-performance.  The court determined that the governor’s executive order constituted both governmental action and issuance of an order, which unquestionably hindered the ability of the tenant to pay its rent.  The court observed, however, that the debtor-tenant could still operate by take-out, curbside pick-up, and delivery services.  Consequently, the debtor-tenant was only partially excused from paying rent during the restrictive period, and the rent was only reduced in proportion to its reduced ability to generate revenue.

When a similar case is ultimately considered by a New York court, can we expect the same sort of analysis?  Absent legislative intervention, the parties’ lease will likely control the outcome in New York as well.  New York courts have often recognized that freedom of contract is a deeply-rooted public policy, and a right of constitutional dimension.  Because force-majeure clauses excuse a party’s performance, or limit damages in cases where reasonable expectations and performance have been frustrated by circumstances beyond the parties’ control, New York courts generally apply them narrowly; relieving a party of its contractual obligations only under clear and unambiguous circumstances.  Performance will, therefore, only be excused if the force-majeure clause specifically includes the event that actually prevents compliance.

In response to the COVID-19 crisis, New York Governor Andrew M. Cuomo issued a number of executive orders.  Among them was Executive Order 202.3, issued March 16, 2020, which is similar to the one issued in Illinois.  The likely scenario is that New York courts will look to commercial-tenants’ leases to determine whether the obligation to pay rent can be eliminated or reduced during periods when business operations were restricted.  Each specific force-majeure clause will undoubtedly control how a New York court might determine rent-payment obligations in light of the Executive Order or other governmental action.  It would behoove landlords and tenants alike to examine their leases carefully.  

A corollary issue presented is whether business-interruption insurance provides coverage to either (or both) parties to a lease.  One might expect that a source of relief amidst governmental restrictions arising from COVID-19 – particularly in the restaurant and retail business – would be business-interruption coverage bought and paid for under common all-risk commercial property insurance.  

In a bi-partisan effort, 18 members of the United States House of Representatives wrote to insurance-industry trade groups urging them to recognize financial loss due to COVID-19 as part of business-interruption coverage.  The response was uncompromising: “Standard commercial insurance policies offer coverage and protection against a wide range of risks and threats, and are vetted and approved by state regulators.  Business interruption policies do not, and were not designed to, provide coverage against communicable diseases such as COVID-19.”

In light of the position taken by the insurance industry, on April 9, 2020, in one of the first lawsuits against insurance carriers, two restauranteurs commenced a federal class action lawsuit in the United States in the District Court, Southern District of Florida, asking the court to declare that the standard all-risk commercial property insurance policy provides coverage for business-income losses incurred because of measures taken by governmental authorities to restrict operations in light of COVID-19.  The lawsuit is in its very early stages and will not likely be decided in the immediate future.  We can expect the insurance industry to defend the case vigorously and resist payment of business-interruption claims in general.  Moreover, as policy provisions often differ, class certification may be denied.

Like the force-majeure analysis in the case of commercial leases, the question of coverage will likely come down to the contract between insurer and insured – the insurance policy.  Understanding what an insurance policy provides goes a long way to understanding the likelihood of success when a claim is made and formulating a strategy to pursue the claim once it is rejected.  

Whether a tenant, landlord or insured business owner, knowing your rights will, at minimum, allow you to manage your expectations, negotiate from a position of strength and quite possibly obtain much needed relief.  Getting counsel involved early to help in the analysis and provide guidance is a prudent and cost-effective measure in these highly uncertain times.

Weiss Zarett Brofman Sonnenklar & Levy, P.C. is a Long Island law firm providing a wide array of legal services to the members of the health care industry, including corporate and transactional matters, civil and administrative litigation, healthcare regulatory issues, bankruptcy and creditors’ rights, and commercial real estate transactions.

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Third Department Reverses Award of MLMIC Demutualization Proceeds to Employer, Rules Employee-Policyholder is Legally Entitled to Disputed Funds

By Seth A. Nadel, Esq.

As discussed in a prior article, on April 24, 2020, the Appellate Division, Fourth Department, in the case of Maple-Gate Anesthesiologists v. Nasrin, 182 A.D. 3d 984 (4th Dep’t 2020), unanimously affirmed a decis*ion of the Erie County Supreme Court that a physician-policyholder was entitled to the proceeds resulting from the demutualization of Medical Liability Mutual Insurance Company (“MLMIC”). Notably, in Maple-Gate, the Fourth Department had chosen not to follow the early precedent set by the First Department in Schaffer, Schonholz & Drossman, LLP v. Title, 171 A.D. 3d 465 (1st Dep’t 2019) holding that an employer who paid a policyholder’s malpractice insurance premiums was entitled to the funds under a theory of unjust enrichment. Now, the Third Department, in Albany, has now weighed in and sided with the employees’ position, as reflected in Maple-Gate.

In the Supreme Courts of Saratoga and Broome Counties, respectively, the cases of Schoch v. Lake Champlain OB-GYN, P.C. and Shoback v. Broome Obstetrics and Gynecology, P.C. presented the standard set of facts in a MLMIC dispute. Namely, an employed practitioner was a named MLMIC policyholder, and their employer had agreed to pay their medical malpractice premiums in connection with their employment. Facing motions for summary judgment by the policyholders in both cases to resolve the question as to which party was entitled to demutualization proceeds, the lower courts had deemed themselves constrained to follow the Schaffer decision as binding precedent and denied the policyholders’ motions. Both cases were appealed, and the appeals were heard concurrently by the Third Department during its May 2020 term.

In two decisions issued on June 18, 2020, the Third Department reversed the determinations of the lower courts and held that the employee-policyholders were entitled to summary judgment awarding them the MLMIC demutualization proceeds. In doing so, the Court affirmed that the demutualization was governed by the New York Insurance Law and MLMIC Plan of Conversion, and that a lawful policyholder was entitled to the proceeds absent an assignment of that right. Furthermore, the Court rejected the employer’s argument that it was entitled to the proceeds under a theory of unjust enrichment, explaining that the demutualization proceeds were a “windfall” which neither party anticipated nor bargained for, and thus the employee-policyholder’s receipt of the funds was not unjust when the employer had received everything it had bargained for under the parties’ employment agreement.

With Schoch and Shoback, both the Third and Fourth Departments have now agreed that an employee-policyholder is legally entitled to the proceeds resulting from the demutualization and sale of MLMIC. In the First Department, Schaffer arguably remains controlling precedent, but appeals from subsequent lower court decisions are expected to clarify the scope of its holding. The Second Department, meanwhile, has not had the opportunity to pass on the issue, but pending appeals will afford it the chance to do so in the near future.

A copy of the Third Department’s decisions in Schoch and Shoback may be found here and here, respectively.

Weiss Zarett represents numerous physician-policyholders in MLMIC disputes. If you have any questions about the MLMIC demutualization, please reach out to Seth A. Nadel, Esq. at snadel@weisszarett.com or 516-627-7000.

Weiss Zarett Brofman Sonnenklar & Levy, P.C. is a Long Island law firm providing a wide array of legal services to the members of the health care industry, including corporate and transactional matters, civil and administrative litigation, healthcare regulatory issues, bankruptcy and creditors’ rights, and commercial real estate transactions.

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ANATOMY OF A BUSINESS DISPUTE: PREPARING TO SUE

By Michael J. Spithogiannis, Esq.

Thorough pre-litigation preparation is essential to any lawsuit, but it is particularly so in a case contesting conduct of those who manage corporations and limited-liability companies.  Such entities can be closely held, meaning their stock or membership interests are not freely traded and are held by relatively few individuals.  In a perfect world, those in charge have the expertise and integrity to manage operations and finances. 

It’s safe to say that some conflict is endemic to most business relationships.  The question is whether the conflict pertains to benign day-to-day decisions, or whether it threatens the very existence of the business.  Lawyers are often retained to litigate over the latter situation, and their preparation begins as soon as they meet a prospective client.

A litigated business dispute is complicated, time-consuming, expensive and messy.  It requires a lawyer’s understanding of the business’s structure and governance, and the nature of the specific conflict at hand.  To achieve that understanding, the lawyer must rely on facts and documents provided by the prospective client.  Ideally, our prospective client has sufficient documentation and information to focus the issues in dispute.  A thorough examination of all formation and organizational documents is indispensable.  

Knowing the business structure and form is essential.  Is the business a corporation, limited liability company, partnership, or joint venture?  Is the business a professional entity, such as a medical practice or law practice?  Each type of business structure presents different hurdles to protecting ownership interests, and affords our prospective client different rights and remedies. 

The rights and obligations of the owners of corporations and limited liability companies (namely, shareholders and members, respectively) are usually embedded within corporate documents.  So too, the powers of those who govern these entities are defined in such documents.  As few of these documents are available to the public, the lawyer must rely on the prospective client for disclosure.  In the case of a corporation, there will be a certificate of incorporation, and likely a shareholder’s agreement, by-laws, and stock ledger.  A limited liability company will have articles of organization, and likely an operating agreement.  These documents typically provide limits on the power of management, voting rights of shareholders or members, and for sale of ownership interests.

We may learn, for example, that the prospective client owns a minority membership interest in a limited liability company.  We may learn further that the problem or dispute is with a business associate who controls the management of the company, and has allegedly been self-dealing, withholding distributions, denying access to the company’s books and records, and misappropriating corporate opportunities.  

Fundamentally, those who manage corporate affairs are fiduciaries, and as such must act for the benefit of the company and its members on all corporate matters.  Identifying the alleged misconduct is one thing.  But how to deal with it is another.  Whether to seek a litigated, rather than a corporate, solution depends on understanding how the company’s management is supposed to work.  Governing documents usually detail the authority and role of management: how long is the term of office, what types of agreements can and cannot be entered into on the company’s behalf, what oversight rights do shareholders and members have, when and under what circumstances must membership approval be sought, and procedure for removal.  

Regrettably, in many instances, even if the company’s governing documents provide a mechanism for taking action, it may not solve the problem.  For example, the governing documents may permit owners to band their corporate interests, call a special meeting, and remove a dishonest director.  The person aggrieved, however, may not have sufficient support to take inter-corporate action.  Litigation may be the only option.

Before commencing litigation, it should be clear that the alleged misconduct is likely to rise to the level of fraud on the company, discrimination against a particular member or members, self-dealing or other serious misconduct, rather than simply poor judgment.  Once the decision to litigate becomes evident, a decision must be made on the type of claim or claims to assert.  Generally, an aggrieved member or shareholder may bring personal claims to vindicate personal rights, or derivative claims on behalf of the company for wrongs committed against the company.  

Identifying a claim as derivative presents another hurdle.  The person bringing a derivative action must first demand that the company’s management initiate the lawsuit.  If the action is brought without making such a demand, the plaintiff must demonstrate that a demand would have been futile.  A demand is only futile, and therefore excusable, when the management is incapable of making any impartial decision, as where each member of the board either has an interest in the challenged transaction or is controlled by a self-interested director.

The most common derivative claim against a dishonest or self-dealing director or manager is a breach-of-fiduciary-duty claim, often based on frauds committed against the company, self-dealing, and misappropriation of corporate assets.  Personal claims include recovering withheld distributions, or enforcing rights or benefits provided to the individual shareholder by law or governing documents.

Disputes of the sort described here are not uncommon.  Aggrieved business owners who have invested in the enterprise are often blind-sided by misdeeds of those in control.  

Providing one’s attorney with as much information about the business and issues in dispute as possible is necessary for thorough and effective representation.  A prudent shareholder or member should, therefore, always keep abreast of corporate activity, insist upon corporate formality, attend meetings, review corporate tax returns, scrutinize the conduct of directors or managers, and if improper or unlawful activity is discovered or suspected, proceed quickly to avoid irreparable harm to the business and to his or her investment.

Weiss Zarett Brofman Sonnenklar & Levy, P.C. is a Long Island law firm providing a wide array of legal services to the members of the health care industry, including corporate and transactional matters, civil and administrative litigation, healthcare regulatory issues, bankruptcy and creditors’ rights, and commercial real estate transactions.

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How To Prepare For A Deposition

By Toni-Ann M. Buono, Esq.

During litigation, whether you are a physician, a business owner, or simply a non-party witness, there will likely come a time that you will be faced with having to testify at a deposition.  In Part One of this series, we explained what a deposition is and what to expect during a deposition.  This article will explain how to effectively prepare for your deposition with your attorney. 

First and foremost, you should have a clear understanding of all facts pertinent to your case if you are a plaintiff or a defendant.  If you are a third-party witness, in conjunction with your lawyer, you should review all documents and communications relevant to the pending case and all matters outlined in the subpoena or deposition notice you received.  Your lawyer should meet with you in person to prepare you in advance of your deposition.  As you will need time to digest the information and continue to prepare, the in-person meeting will likely take place days or weeks before the scheduled date of the deposition.

 During your in-person meeting with your attorney, they will discuss with you what to expect and the procedural posture of the case.  It is also likely that your attorney will go through a series of questions that they anticipate the attorney conducting the deposition will ask you.  This is important because it allows you an opportunity to phrase your answer appropriately and to be certain that you are supplying the precise amount of information the answer requires.  Often times, once a witness becomes comfortable with the discussion, he or she will elaborate on matters either irrelevant to or outside the scope of the question posed.  Your attorney should prepare you to listen closely to the questions asked, so you are able to respond accordingly.

If you are a plaintiff or defendant, during the meeting, you may also review documents with your attorney.  These documents could include the pleadings in the litigation (i.e., Complaint or Petition, Answer and Reply), written discovery questions (i.e., Interrogatories), documents produced during discovery, affidavits, previous testimony, photographs, recorded conversations and correspondence.  However, be mindful that the review of documents should be in consultation with your lawyer.  You should be clear with your lawyer what you reviewed prior to your deposition.  This is important because one question that you will certainly be asked is: “Have you reviewed any documents in preparation for your deposition?”  If you have in fact reviewed documents in preparation, the attorney conducting the deposition will go through a series of questions inquiring as to which documents you reviewed, why you reviewed each document, and how you obtained a copy of each document.  Likewise, you should advise your attorney if you have spoken with anyone or intend to speak to anyone about the case or your upcoming testimony.  You will also be asked in detail about those conversations. 

It is also important to note that your attorney may tell you not to review certain documents or information that may be extraneous to your knowledge.  For example, if you are a business owner with an unfair competition claim, reviewing the financial statements of the competing business you are litigating against may subject you to questions regarding your understanding of accounting matters, which may be outside the scope of your expertise.

Lastly, even if uncomfortable, it is vital that you make your attorney aware of all relevant facts and circumstances surrounding the case that may be negative to your position or to you personally.  While you may be anxious to share certain information with your attorney, that information will remain privileged and may be helpful during your preparation session.  Indeed, your attorney may prepare you for certain uncomfortable questions and assist you in formulating a response.     

It is critical that you continue to prepare following your meeting with your attorney.  You should review all documents that you examined with your attorney, think about how you will answer certain questions, and the impression you want to make.  If you are unsure how to answer a question truthfully, have any reservations about your upcoming testimony, or remember anything that you did not discuss with your attorney, be sure to consult with your attorney prior to the day of your deposition.

Weiss Zarett Brofman Sonnenklar & Levy, P.C. is a Long Island law firm providing a wide array of legal services to the members of the health care industry, including corporate and transactional matters, civil and administrative litigation, healthcare regulatory issues, bankruptcy and creditors’ rights, and commercial real estate transactions.

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What To Expect At A Deposition

By Toni-Ann M. Buono, Esq.

During litigation, whether you are a physician, a business owner, or simply a non-party witness, there will likely come a time that you will be faced with having to testify at a deposition.  This article explains what a deposition is and what to expect during a deposition.  Part Two of this series will explain how to effectively prepare for your deposition with your attorney. 

What is a deposition?

A deposition (or an examination before trial) is a witness’ sworn out-of-court testimony regarding facts relevant to a pending case.  A deposition takes the form of a question-and-answer session, which is transcribed by a court reporter.  On occasion, the deposition may also be videotaped.              

Why is a deposition needed?

Depositions are utilized by attorneys during the discovery process in a civil case to gather evidence and information.  The testimony given during a deposition may be used as evidence during trial, in dispositive motions, or even to challenge the witness’s credibility at trial.  During a deposition, your demeanor, personality, appearance and etiquette are all being evaluated to determine whether you would be a credible witness at trial, before a judge and/or jury.              

Where does it take place and who will be there?

A deposition most often occurs in a law office conference room.  Other times it may be scheduled at the courthouse.  If you are a plaintiff or defendant in the case, your attorney will be present with you at the deposition.  If you are a non-party witness, you may choose to have a lawyer represent you at the deposition – although not required, it is highly recommended.  Others present will include the court reporter, the attorney questioning the witness, and potentially the plaintiff and/or defendant in the case, with their respective attorneys.  The judge presiding over the case will not be present, although if there are disputes during the deposition, the judge may be contacted to rule on those disputes.   

What to expect.

As a witness, you have a right to be treated with professionalism and courtesy by all in attendance.  At the beginning of the deposition, you will be asked your name and address for the record.  Next, the attorney questioning you will give you some preliminary instructions for the deposition.  Typical instructions include the following:

  • Please keep all of your responses verbal, as the court reporter is unable to notate hand gestures or nods of the head.
  • If you are unclear about a question or have any confusion, please ask for clarification or ask to have the question rephrased.
  • The witness must let the attorney finish each question before the witness responds, so the court reporter has a proper record of the exchange.
  • The witness is welcome to take a break at any point during the deposition; however, please do not ask to take a break in the middle of a question.  Once the attorney has asked the question and the witness responds, the witness is welcome to take a break after the answer is on the record.

It is also typical that the attorney will ask you if you are under the influence of any alcohol or drugs or have any conditions that would impair your judgment during the deposition.  You may also be asked if you are required to take any medication that you have not taken that day that would impair your judgment.  Those questions are important to ensure that you will not later claim that your ability to truthfully and accurately answer the questions posed was compromised.  You should advise your attorney prior to the deposition if you would answer “yes” to any of these questions.

Next, you will likely be asked if you reviewed any documents or spoke with anyone in preparation for your deposition.  A discussion on how to prepare for your deposition, including a review of documents, is more fully discussed in Part Two of this series.

Following the preliminary instructions and preparation questions, the attorney will proceed to inquire as to whether you have ever testified at a deposition or trial, your educational background, your employment background, and any additional relevant demographic information.  

Once the preliminary and background questions have been posed, the attorney will then focus on questions relevant to the pending litigation.  It may feel as if you are simply having a friendly conversation with another person.  However, no matter how friendly and civil your discussion with counsel is, you should not let your guard down.  Attorneys may try to befriend a witness so that the witness may feel comfortable enough to share with them matters that they have not spoken  about with their own lawyer.

When answering questions during the deposition, it is helpful to remember these tips:

  • Listen to each question carefully.  While the attorney may be asking you a very specific question, you may be prepared to give a full explanation surrounding a particular circumstance.  Always listen to the full question being posed so you can answer succinctly instead of providing information that was not requested. 
  • Think about your answer before responding to the question. If the answer simply requires a “yes” or “no” response, be sure to answer accordingly.  If the attorney wants you to elaborate, they will inquire further. 
  • Take your time when responding.  There is no rush to get the answer on the record.  Be sure that you understand each question and are giving the appropriate answer.  If you do not understand a question, please say so.  Lack of understanding a question framed by a lawyer is not a sign of ignorance!
  • Be honest in your responses.  Remember that you are under oath and if you give a different answer at trial, your previous answer(s) will damage your credibility.  More importantly, you could face criminal and civil penalties for intentionally giving untruthful answers.

While the rules of evidence are relaxed in a deposition, you may observe the attorneys make objections to certain questions.  A rule of thumb is to pause before giving your answer to allow your attorney an opportunity to evaluate the question and make an objection if necessary.  Even if an objection is made, a witness usually must still answer the question.  However, your attorney may advise you not to answer.  In certain circumstances, the attorneys may decide to contact the presiding judge to rule on an objection. 

During your deposition, you will likely be shown various documents, which will be marked as exhibits.  The attorney will give you an opportunity to review each document before you are asked questions about it.  It is important that you carefully read each document in its entirety before you answer questions about it.  It is a normal occurrence for a witness to be shown a document that he/she has never seen before.  You should not be alarmed if you are shown a document for the first time and are unable to answer questions about it.  The attorney asking you questions will have a reason for questioning you about the document, and may be attempting to authenticate it.

Lastly, the length of your deposition will depend on your knowledge and involvement in the case.  For example, as a named party in a commercial case, you should expect a full-day deposition.  Alternatively, if you are merely an employee of a business in the litigation with limited knowledge, your deposition may only last a couple of hours.  Your attorney will be able to advise you on the expected length of your deposition.  

Weiss Zarett Brofman Sonnenklar & Levy, P.C. is a Long Island law firm providing a wide array of legal services to the members of the health care industry, including corporate and transactional matters, civil and administrative litigation, healthcare regulatory issues, bankruptcy and creditors’ rights, and commercial real estate transactions. ATTORNEY ADVERTISING: PRIOR RESULTS DO NOT GUARANTEE FUTURE OUTCOMES