Legal avenues for businesses coping with COVID-19 disruption and damages
In Franchising in the Time of COVID-19, an ABA panel recently discussed the scope of the disruption the pandemic has caused for franchisees and franchisors as well as legal doctrines on which franchisees/franchisors might rely to deal with the monetary damages to their businesses.
This excellent webinar took place on March 23, and the speakers were Kristin Lawrence Corcoran (Franchise World Headquarters LLC), Michael R. Gray (Lathrop GPM), Nicole Liguori Micklich (Urso, Liguori & Micklich), and Tao Xu.
Business interruption insurance: In an effort to stem losses resulting from the pandemic, businesses may consider filing a business interruption claim with their insurance. What losses are covered depends entirely on the individual policy, the speakers say. Consequently, while policies may be similar, they may include different riders and endorsements. Many policies have virus exclusions. Check yours.
The speakers note that, to make a valid claim, a business usually has to show that it suffered a “direct physical loss or damage to property.” In March, a restaurant in Louisiana filed a case arguing it suffered direct physical damage to the property in that employees who proved to have the virus actually contaminated the workspace, requiring the restaurant to shut down for decontamination. The insurance company should be liable for the cost of deep cleaning as well as loss of income.
The premise of the claim is that health experts know the virus can survive on surfaces up to 28 days. Further, health professionals have acknowledged the waiting times to test potentially affected persons and obtain test results. This delay allowed the virus to linger and contaminate the physical space, the argument goes.
The speakers note that insurance companies are much less likely to entertain arguments for “presumed contamination,” i.e., injury based on the general knowledge (assumption) that the virus is omnipresent. The speakers also note that some insurance policies may cover government-ordered closures; others may not. Again, the language of the individual policy controls the claims businesses can file. Diligently document all losses, file claims, and await the response from the insurance company, the speakers advise. They note that responses to claims and the development of claims are evolving.
Force majeure clauses: In this unrivaled crisis, franchise owners and holders may try to invoke force majeure (FM) clauses to escape certain contractual obligations. This French term, which means “superior force,” generally refers to events beyond the control of a party to the contract that make it impossible to perform under a contract. The ABA panelists note that there is no standard legal definition for FM. The language of a specific contract explains what events may allow a party to abandon the contract. Often, FM clauses in contracts expressly exclude health crises. It is not clear whether federal, state, or local orders that prohibit or make difficult movement, the performance of certain services, and access to certain supplies qualify as FM. The panelists caution that parties to a contract cannot escape performance just because doing so has become too expensive. Anyone thinking of pursuing this avenue must pay close attention to notice deadline requirements, the panelists advise.
BVR's dedicated COVID-19 resource page
In recent weeks, Business Valuation Resources has focused a lot of its coverage on how the unprecedented COVID-19 crisis has affected and may affect the work of the business valuation community. Besides the latest news, this web page also includes links to relevant BVR publications and helpful reports and articles from other news outlets, valuation firms, valuation professional organizations, and legal organizations. Click here for details.
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Case Digest Additions |
Noteworthy case additions to BVLaw:
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Grieve v. Commissioner, T.C. Memo 2020-28 (March 2, 2020)
In a gift tax dispute, the U.S. Tax Court rejects the IRS expert’s valuation of noncontrolling, nonmarketable interests in two LLCs. The expert proposed a valuation theory and method that were intended to lower the opposing experts’ minority and marketability discounts but lacked support in the facts, case law, or among peers, the court says. Specifically, the expert’s theory assumed a number of subsequent actions as concerns the hypothetical buyer and hypothetical seller that the court says are not “reasonably probable” under the facts of the case.
- Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLP, 2020 Del. Ch. LEXIS 76; 2020 WL 948513 (Feb. 27, 2020)
The Delaware Court of Chancery rejects the plaintiff’s damages calculation related to sweeping fraud and contract breach allegations where the plaintiff submitted an expert report before the court issued its liability findings. The plaintiff failed to offer a revised, updated expert report targeted to the liability findings, meaning the damages claimed were not sufficiently tied to proven wrongs. Because of the overbroad damages calculation, the court declines to award damages even for proven wrongdoings.
Under a new processing agreement between the DOL and a specific ESOP trustee, the trustee is bound by strict rules on how to handle controlling-interest acquisitions and indemnification issues. Regarding the control issue, the trustee must ensure the ESOP plan acquires a series of specified rights before approving payment of a control premium.
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We welcome your feedback and comments. Contact Sylvia Golden, Esq. (Executive Legal Editor) at: info@bvresources.com. |