Thursday, October 30, 2003

Don't Say I Didn't Warn Ya'

I've had this weblog for less than a year and I can already say "I warned ya'."

Specifically, in March I had a posting titled Hey, Let's Be Careful Out There! In the posting I discussed the theoretical possibility of a claim against a blogger for defamation and said:

Many, if not all, homeowner policies include within the definition of "personal injury," an injury caused by defamatory comments. Umbrella policies generally mirror that coverage. At the least, weblog authors should make certain that their homeowner's policies provide coverage. Additionally, since umbrella coverage is relatively cheap, they should consider acquiring an umbrella policy with significantly higher limits.

I added that if it could be argued that the blog were being used for business, there should also be appropriate coverage under a business insurance policy.

For those who don't follow the blogs that discuss politics, there is currently a furor on-going as a result of a threat of a slander lawsuit against well-know blogger Atrios by the lesser-know blogger Donald Luskin. Luskin blogs on the site of National Review Online. Mark Kleiman gives a thorough account of the dispute here.

The consensus opinion of bloggers who have commented on the affair seems to be that (i) Luskin is primarily attempting to publicly identify Atrios, who publishes under a nom de plume, (Luskin's attorney has written an e-mail to Atrios threatening to subpoena Blogger, which hosts the Atrios weblog, to force it to disclosed Atrios' identity) and (ii) that as a secondary goal, Luskin hopes to chill further commentary by Atrios and others by exposing them to burdensome defense costs.

If Atrios has a homeowner's policy, he can likely successfully frustrate the second goal. Moreover, if his insurance carrier comes to the rescue soon enough, Atrios may well even be able to block a subpoena directed to publicly identifying him. (Without going into the issue in any greater length, suffice it to say that Luskin's slander claim appears to be nothing more than a pretext to create a public ruckus with a widely-respected commentator in order to inflate his own pathetic public profile.)

Monday, October 27, 2003

Of Course I Trust You, But I Like to Cut the Cards

By and large, I attempt to provide commentary concerning developments in the law rather than merely link to other sites. However, I will make an exception today because there has been a valuable dialogue between two weblogs, By No Other and Corporate Law Blog concerning provisions that should be contained in contracts that are the product of back and forth drafting by each side. Both weblogs suggest provisions to assure each of the parties to the contract that no changes have been made by the other party(ies) without being highlighted by "redline." The postings are, in chronological order, here, here, and here. By No Other's nuanced discussion of the differences between, and the uses of, representations and warranties is particularly noteworthy.

I have never put a provision in a contract such as those suggested by the authors of the weblogs (D.C. Toedt in the case of By No Other and Mike O'Sullivan in the case of Corporate Law Blog). I suspect that I will now begin to do so. Of course, there is actually a better way to assure against surreptitious contractual provisions--become the scribe of the negotiation. It may cost your client a few bucks more, but by controlling the drafting process you provide fairly strong protection against someone slipping a fast one by you.

Sunday, October 26, 2003

The 21st Century Trumped by the 19th

Last week a New York appellate court sustained a ridiculous statute, but was arguably correct in reaching its conclusion. The decision was handed down by the Appellate Division of the New York Supreme Court in the case of Blaklee Realty Co. v. Pataki. The case had been closely watched by LLC practitioners around the country.

The facts are simple. In New York, in order to form an LLC, one must publish the LLC's articles of organization or substantially identical information for six successive weeks in two local newspapers in the county in which the principal office of the LLC is located. Thereafter, one must file an affidavit with the Secretary of State of New York attesting to the completion of the publication requirement. Failure to fulfill the publication requirement or the filing of the affidavit within 120 after formation of an LLC precludes an LLC from prosecuting or defending an action in a New York state court. An LLC that fails to comply with the publication requirement can still bring or defend a lawsuit providing that before it does so it complies with the requirement.

The cost of compliance runs about $1,600. As a consequence, it is considerably more expensive to form an LLC in New York than in any other state.

The ostensible purpose of the law is to "inform[] members of the public of specific important information regarding the newly organized company." No one actually believes that, nor was there any attempt to marshal facts in support of that proposition. New York and its economy are simply too large to allow the publication of a legal notice in a local newspayer to provide any real notice. And, in the age of the Internet, there are any number of cheap and more effective ways of providing such information (e.g., a public database available via the web, a listserve that distributes, for free, the requisite information concerning new LLCs, etc.).

But the ostensible purpose of informing the public is a mere pretense. There is a dirty secret behind the statute, a dirty secret that LLC practitioners around the country are all aware of--the purpose of the filing requirement is purely and simply to provide a subsidy to the newspapers around the state that rely on fees from legal notices for their support. Those newspapers form a powerful lobby in Albany. Their support of or opposition to a state legislator can spell the difference between success or failure in a close election. (And, the fact that, at the time the notice requirement found its way into the state, the son of the publisher of the largest of these newspapers was the leader of one of houses of the New York legislature probably did not impede the passage of the provision.) Furthermore, the provision itself provides little or no effective notice about "specific important information regarding the newly organized company." It would have worked, if at all, in an era when economies were essentially local and the various local papers provided most of the essential information needed for what we today refer to as "economic transparency." In fact, the history of the publication requirement was traced by the court to the 19th century when limited partnerships first appeared.

The plaintiffs brought a declaratory judgment action, seeking to have the publication requirement declared unconstitutional. The lower court agreed, holding that the requirement violated due process because it places a restriction on an LLC's access to the state's courts that is not reasonably related to the state's claimed purpose of informing citizens about the formation of LLCs with which they may have dealings; that, even if the required publication can be done after a lawsuit has been commenced, prejudice is still manifest since litigation commenced before publication will be delayed at least six weeks; and section 206 violates an LLC's right to equal protection by conditioning its access to the courts on a publication requirement that is not imposed on New York corporations.

The appellate court reversed the lower court and upheld the constitutionality of the statute, finding that the statute had a rational basis because there was a "reasonably conceivable state of facts that could provide a rational basis for the classification." Moreover, the court noted that the state did not have an "obligation to produce evidence to sustain the rationality of a statutory classification. '[A] legislative choice is not subject to courtroom factfinding and may be based on rational speculation unsupported by evidence or empirical data.'" In other words, a statutory purpose need only have the most tenuous relationship to reality to have a rational basis.

As I said at the outset, the result here is ridiculous. It is, after all, widely known that the publication requirement is nothing more than a corrupt practice willingly engaged in by the state legislature and the various local newspapers. However, the actual holding is probably correct. After all, there was no evidence introduced concerning the fact that the publication fees are nothing more than a form of bakshish mandated by the legislature to ingratiate its members with the local newspapers. In order to overturn the statute on the record before it, the court would have had to have made an essentially legislative determination that newspaper publication was essentially expensive and ineffective, especially when compared to 21st century alternatives. In other words, a clearly "false" result is upheld, because to do otherwise would blur the division of labor between courts and legislatures.

Wednesday, October 22, 2003

Filing Fee Update

Steve Gevarter has informed me that a note on the SDAT website [here] makes it clear that the increase in the annual fee "is effective for any return, regardless of year, filed after 12/31/2003 . . . ." (Italicized emphasis mine, emphasis in bold by SDAT.)

Tuesday, October 21, 2003

File Those Delinquent Returns Now

Beginning January 1, 2004, the annual filing fee for a corporation in Maryland will be increased from $100 to $300. There is currently no filing fee for LLCs, LPs, LLPs, etc. Beginning January 1, 2004, there will be imposed on these entities the same $300 fee imposed upon corporations.

If an entity required to file a tangible personal property return fails to do so, it will ultimately have its charter revoked. In order to obtain reinstatement, it must file all delinquent returns and pay any tax due.

I belong to a private listserve for Maryland tax practitioners. Recently, I posted on the listserve the following question with respect to the filing of these returns:

I may be one of the only attorneys on this list who remembers when the annual filing fee in Maryland for a corporation was $40. It was subsequently increased to $100. (I assume that anyone older than me is so old that they can no longer remember such things.)

In any event, when the filing fee was increased, SDAT took the position that the filing of any tangible personal property tax return after the date of the increase would cost $100, even if the year for which the return was due was a year where the cost would have been only $40 had return had been timely filed.

Does anyone know whether a similar rule will apply after December 31, 2003? In other words, if a corporation has not filed required tangible personal tax returns in pre-2004 years, will filing them after December 31, 2003 cost $300 for each delinquent year rather than $100. (And, taking this to its logical conclusion, will filing returns for LLCs, LLP, etc., after December 31, 2003 for pre-2004 years will invoke a toll charge of $300 per year rather than being a freebie.)

Evelyn Pasquier and Karen Syrylo both responded that my assumption was correct. As Evelyn said:

The statute says that the new fees for annual reports are applicable to "all annual reports filed after December 31, 2003." I don't think there is any sustainable argument that reports for pre-2004 years carry the lower fee if they are filed on or after January 1, 2004. If one has a corporation or an LLC, LLP, etc., that has not filed its 2003 (or earlier) annual report, I think one would be well advised to get it filed before the end of the year. (By the way, I, too, remember the $40 fee.)

While I, of course, find it impossible to believe that Evelyn is old enough to remember the $40 annual fee, I believe that her and Karen's analysis is correct. I am currently in the process of filing articles of revival for a corporation that has failed to file its last seven annual reports. The cost for filing those reports now is $700. If we were to wait until January 2, the cost would skyrocket to $2,100. The moral: He who hesitates may not be lost, but he most certainly does lose.

Saturday, October 11, 2003

Isn't It Romantic?

I had digressed from my usual haunts to jump into the Novak/Place/Wilson controversy. I will now return to somewhat more familiar ground and discuss a case that caught my attention. Although not, strictly speaking, a tax or business case, it is worthy of some note.

In June, Judge Schneider of the Bankruptcy Court for the District of Maryland was presented with a case where the debtor had a diamond engagement ring. The Court ordered the ring returned to the ex-fiancé rather than sold, with the proceeds distributed to the debtor's creditors. In reaching his conclusion that the ring was a "conditional gift" to be returned upon the failure of the condition subsequent (i.e., the consumation of the marriage), Judge Schneider took judicial notice of the views of such scholars of etiquette and manners as Amy Vanderbilt, Judith Martin (a.k.a., "Miss Manners"), and Emily Post. The case can be found here.

Thursday, October 09, 2003

More On Consent

Eugene Volokh and my friend Mark Kleiman both express doubts whether a journalist who had received information from a confidential source would honor a waiver that had been obtained in the manner I had suggested. Their premise seems to be that the journalist would view such a waiver as illegitimate because it was "coerced." Let me make a somewhat finer distinction.

It appears to me that there are basically four types of confidential communications made to journalists by public officials. The case for honoring the product of a "mass waiver" in some of these cases is stronger than in others. I think that the Plame case involves the strongest case for arguing that the journalist should honor the waiver.

At one end of the spectrum, there is the "Deep Throat" disclosure. That is, a disclosure by a confidential source who is, in essence, blowing the whistle on wrongdoing inside of an administration or an agency or department thereof. I can understand why a journalist would not honor a "mass waiver" in this case, since it would be tantamount to allowing the fox to silence the squawking chicken. In the Watergate context, for instance, had there been a "mass waiver" and the waiver were honored, the truth may never have come out.

Closely related to the Deep Throat type of revelation is the "intramural" leak. That is, officials in one area of the administration (e.g.the State Department) releasing information in order to gain some advantage on a bureaucratic rival (e.g.the Defense Department). I'm not certain whether, as a general question of journalistic ethics, such a "mass waiver" should be honored. However, it is unlikely that an administration would likely ever seek such consents in these circumstances, since to do so would be to demand a public airing of its own dirty linen.

In a similar fashion, the third type of confidential disclosure will likely never be the object of a "mass waiver" directive. This disclosure is the "background" disclosure where officials, whose identities are actually known by all of the policy players, make disclosures either to float trial balloons or to give an "unofficial" warning of some kind that would be too harsh or pointed if the identity of the party making the disclosure was known. Such disclosures are common, and indeed accepted, in the foreign policy arena. It is unlikely that there would ever be an organized push by an administration to make the source public.

Finally, we come to the Plame case. Here, the confidential source(s) were presumably seeking to advance the policies of the administration that they served. However, the offense and the reason that disclosure is sought is that the nature of their disclosure was truly a "foul" (and, of course, may actually have been criminal), intended to harm Wilson and his wife. I think that a "mass consent" should be honored here because the consent is elicited by the organization, that is, the Bush Administration, that was the intended beneficiary of the leak in the first instance. By forcing the leaker to identify himself or herself, the Administration would be disclaiming any relationship to the leak, painting it as a true rogue operation. Under such circumstances, a consent, even though the product of some degree of coercion, should be honored, since the disclosure can no longer be seen as advancing the any legitimate policy interest. With the underlying rationale for the disclosure removed, the disclosure becomes a sort of bare personal assault against Wilson and Plame. Under such circumstances, the source cannot legitimately demand protection. In other words, once the disclosure has become delegitimatized as a tactic to advance some broader public policy goal, a journalist should feel no compulsion to honor the confidentiality pledge.

It is becoming painfully obvious that no consent along the lines that I have outlined will be sought by the Bush Administration because, at some level, the Plame disclosures are still viewed as legitimate tactics to be used in support of the Administration's policies.

Wednesday, October 08, 2003

Dying By The Sword

Even the big guys blow one now and then.

The Rouse Company, a nationally known developer with thousands of square feet of shopping malls to its credit, failed to renew the lease on its headquarters office on time. The lease had three 10 year renewal options at far, far below market rent. In order to exercise the initial option, Rouse had to give notice to renew by December 31, 2002 for an option period beginning April 1, 2004. The spread between the rent under the option and market is somewhere over $2M. The Baltimore Sun has the story here and here.

On one hand, the Baltimore metro area would suffer economically if Rouse, as it intimates it might, leaves town. On the other hand, there's a certain schadenfreude at the sight of a large commercial landlord being hoist by the same petard that it probably hurled at numerous small fry tenants over the years. I wonder how many times Rouse allowed its tenants to re-up at below market rents simply because someone neglected to send a timely notice of renewal. I'm betting none.

Sunday, October 05, 2003

Kol Nidre and Robert Novak

This evening, I will be going to the Kol Nidre service at my shul. The name of the service comes from the first two words of the first prayer which requests divine release from one's vows. Thinking about Kol Nidre, it occurred to me that Bob Novak, who will not be attending services on Sunday evening, should be relieved of some of his vows.

One of the problems that investigators face in looking into the background behind the disclosures concerning Valerie Plame is that journalists, such as Novak, believe that there should be a journalist's privilege that allows them to maintain in confidence the identities of their informants. While there is no such legally cognizable privilege under federal law, a number of states have created such a privilege in one form or fashion by statute, generally referred to as "shield" laws. However, many journalists, and I assume Novak to be in this group, will maintain confidences even they face incarceration due to the absence of an applicable shield law.

While not recognizing that a privilege exists, the formal policies of the Justice Department recommend exercising caution in cases that might require information from journalists who obtained the information from confidential sources. The policy apparently directs that attempts be made to obtain information from alternative sources before seeking information from journalists. Thus, in the Plame case, the federal investigators are looking at a rather large pool of suspects, only two or three of whom are the actual leakers. This increases dramatically the time, energy, and resources that have to be expended in the course of the investigation.

The investigators' task would be incredibly simplified if only Novak (or Andrea Mitchell or any of the other five journalists who spoke to the confidential sources) were released from their vows to maintain confidentiality and could identify their sources. This feat is far easier to accomplish than it might first appear to be.

At the outset, it should be obvious that any "journalist's privilege," quite aside from questions concering whether it exists and its scope, does not belong to the journalist at all. It is a privilege that belongs to the confidential source. Thus, 30 years after the fact, we still don't know the identity of the legendary Deep Throat. Deep Throat's identity will be disclosed by Woodward and Bernstein, however, after his or her death, presumably because Deep Throat gave permission to make disclosure after that event. That is, he or she waived the privilege effective upon a subsequent event, releasing Woodward and Bernstein from their vow of confidentiality. In the present case, if one or both (or all?) of the confidential sources agree to waive their right to confidentiality and to allow disclosure of their identities and the information they shared with any or all of the journalists, the journalists would be free to disclose the identies of the confidential sources and the information they passed on. Hence the solution.

President Bush, through his counsel, prepares a form of waiver. In essence, the waiver would say: "I [Name of Administration Official] hereby waive any right that I might have to require Robert Novak or Andrea Mitchell to hold in confidence any communication that I might have had or any information that I might have transmitted to either of them concerning Robert Wilson or Valerie Plame. Mr. Novak and Ms. Mitchell are urged to give all law enforcement authorities full and complete details of any such communication or information, including the date(s), time(s), and manner in which such communication was made or information conveyed and the details of the communication or informtion. Nothing in this waiver should be deemed to be an admission that any communication between me and either Mr. Novak or Ms. Mitchell ever occurred with respect to Mr.Wilson or Ms. Plame." Watch how this works.

President Bush announces that all relevant White House, State Department, Defense Department, and Vice Presidential staff will be required to sign the waiver or face immediate discharge. Immediately following the announcement, the President, together with the Vice President, Secretary of State, and Secretary of Defense, publicly execute waivers for themselves. Within 48 hours, all possible sources will have either executed waivers or been terminated from their posts. At that point, we will know the source(s) of the leaks since either Novak will be relieved of any vow of confidentiality or the the investigation will focus on those individuals who refused to execute the waiver. The search can then focus on the question of whether there are more people involved then merely the individuals who actually made the disclosures.

Of course, I would only recommend this course to the President if he really wants to discover who was behind the disclosures.