Since the 1913 ratification of the Sixteenth Amendment to the U.S. Constitution granting Congress the “power to lay and collect taxes on incomes,” taxpayers have been pitted against the government as to their accurate assessment and collection. Nearly a century’s worth of litigation on the issue has created and defined the concepts of “tax evasion” and “tax avoidance.” In an effort to maximize receipt of taxes owed, the government has increased its focus on tax fraud. The Internal Revenue Service has acknowledged the fine distinction of discerning between tax avoidance and evasion by establishing two avenues of enforcement — the civil tax audit and the criminal investigation. When preparing a return for an individual client or a business, the preparer must always be mindful of the risk of triggering an audit to determine civil tax evasion or, worse, criminal activity. Knowing the circumstances that may lead to a criminal investigation will assist the preparer in determining when its time to refer a client to an attorney well versed in such exposure. Investigative Stage — Badges of Fraud Section 25.1.2.3 of the Internal Revenue Manual (IRM) identifies six “badges of fraud” that may prompt an audit. They are a taxpayer’s income, expenses or deductions, books and records, allocations of income, conduct and methods of concealment. In the context of taxpayer conduct, for example, indicators of fraud include: (a) false statements about material facts during the audit; (b) attempts to hinder the audit by failing or refusing to answer questions, cancelling appointments, or refusing to supply complete and accurate records; (c) testimony of third parties (e.g. employees) about irregular business practices; (d) destruction of books and records; and (e) transfers of assets for purposes of concealment. An agent may initiate an audit based on relatively ambiguous conduct. The IRM states that “[u]nusual, inconsistent or incongruous items should alert examiners to the possibility of fraud and the need for further investigation. Taxpayer misconduct should be an early warning sign of possible fraudulent conduct.” Revenue agents are trained on the importance of the “initial contact” with the taxpayer as it provides “the opportunity to obtain valuable information which may not be readily available later.” Agents will document all statements made by a taxpayer as well as a filer’s failure to respond to questions. The Fraud Development Procedures in IRM 25.1.2.2 provide that, when signs of fraud are uncovered, an agent is to take the matter to their group manager. If the group manager concurs that there are indicators of fraud warranting fraud development, the compliance employee is to contact the fraud technical advisor assigned to that area. If the case is ultimately placed in fraud development status, a plan of action is formulated as early as possible to develop and document affirmative acts of fraud. Note that some cases may not require a face-to-face meeting with the fraud technical advisor. Although in-person interviews are preferred, consultations may occur over the telephone or by email. Several warning signs that an audit may turn into a criminal investigation include a period of unexplained silence from the agent after some investigative activity. This may be the result of the agent’s consultation with a fraud specialist regarding a potential criminal fraud referral. Another red flag is the refusal of the agent to discuss the status of the audit or its conclusion. The government may also issue subpoenas or request information from third parties (e.g. banks, suppliers, or customers). Referral to Tax Counsel A taxpayer may be inclined to continue to work with an accountant even after issues of fraud arise. A fraud investigation will generate anxiety and a client may be eager to simply see the investigation conclude rather than face the uncertainty and/or embarrassment of IRS agents contacting business associates and family members as part of their examination. This may result in the taxpayer directing the return preparer to cooperate with the government. However, due to potential criminal prosecution, it is extremely important for the preparer to instruct the client to retain a criminal tax attorney as early in the course of the proceedings as possible, and before voluntarily providing significant information. The advice to hire tax counsel is not mandated by differences in expertise of attorneys and accountants but rather by the rules of privileged communications. There is no state or federal accountant-client privilege that may protect the shared information and work product of the accountant. Note, however, that information obtained from an accountant hired by counsel for forensic accounting analysis is privileged as attorney work product. It is also important to remember that the attorney represents the interests of the taxpayer and not the accountant. Since revisions to the definitions of criminal tax fraud in the New York Tax Law, return preparers face criminal exposure for assistance in a scheme to defraud the Department of Tax. As a result, a return preparer with concerns about his or her own conduct related to a client’s alleged scheme to defraud is advised to retain separate, personal counsel. Once a client retains tax counsel, it’s important for the return preparer to limit their role, regardless of one’s experience or rapport with a client, due to the limitations of privilege. This will prevent the preparer from developing knowledge that he or she may later have to surrender to the government. In addition, delinquent or amended returns should not be filed unless and until directed by counsel. Care should be taken in this circumstance as information on a current return may provide evidence for a fraud investigation into conduct extending over several years. Although an ongoing criminal investigation does not exempt a taxpayer from filing a currently owed return, the taxpayer’s attorney will need to develop a defense and to ensure that there is no continuing fraudulent activity. Special Agents Audits are conducted by agents who, as employees of the IRS, are instructed to notify the proper officials once badges of fraud are discovered. The criminal investigation will be conducted by a Revenue Crimes Specialist and/or a Special Agent of the U.S. Treasury. Taxpayers are well advised to exercise their right to remain silent and immediately contact an attorney if a special agent appears at their doorstep. Special agents almost always arrive in pairs and they will have already established a significant portion of their case. Additional agents will often appear, simultaneously, at the taxpayer’s residence and at the residences or places of business of potential witnesses. If a special agent attempts to interview a return preparer in connection with tax compliance work, then the accountant should request that the client’s attorney also attend. While not acting as the accountant's attorney, the presence of the taxpayer's counsel will allow for better monitoring of the progress of the investigation and will ultimately help to protect the taxpayer’s rights. Summary Although one can not predict a tax audit or its conversion into a criminal investigation, it is necessary for tax practitioners to know the procedure and steps of a civil tax case. One must be intimately familiar with the facts and prepare appropriate responses in anticipation of the government’s discovery of “badges of fraud” during audit. A client should be advised of the risks of acquiring additional badges during an investigation as well as the need to obtain criminal tax counsel early in the process and before voluntarily providing harmful information. Download the Reprint from The Daily Record As always, if you have any questions, please feel free to contact us here or call us at 585.258.2800.

Thomas F. Knab has been named the partner-in-charge of the Buffalo office of Underberg & Kessler LLP. Tom is a partner in the firm’s Litigation and Labor & Employment Practice Groups, where he concentrates his practice in the areas of commercial law and litigation, and labor and employment litigation. Tom earned his B.A. degree from State University of New York at Buffalo and his J.D. from State University of New York at Buffalo Law School. He is a Member of the Board of Directors of Neighborhood Legal Services, Inc. Tom and his family reside in Williamsville, New York. As always, if you have any questions, please feel free to contact us here or call us at 585.258.2800.

George S. Van Nest has been elected a partner in the law firm of Underberg & Kessler LLP, effective January 1, 2012. As co-chair of the firm’s Environmental Practice Group, and partner in the Litigation and Municipal Practice Groups, Mr. Van Nest counsels businesses, municipal entities and financial institutions on matters regarding environmental, land use and development, construction, and commercial litigation law. Mr. Van Nest holds a B.A., cum laude, from Hartwick College and is a graduate of the Valparaiso University School of Law. He is a member of the Air and Waste Management Association, the Buffalo Niagara Partnership, and is a former adjunct professor, environmental law, at the State University of New York at Buffalo. He is also a member of the Clarence, New York Planning Board. As always, if you have any questions, please feel free to contact us here or call us at 585.258.2800.

Six pharmaceutical sales representatives decided to form a corporation, Stonetek. Each of the six shareholders owned 16.67 percent of Stonetek’s stock. Their Shareholders Agreement provided that a shareholder’s stock could be redeemed at book value, which would be periodically updated. All six shareholders worked as sales representatives and helped manage the business, and Stonetek became highly successful. The shareholders were all paid the same base salary, and they shared the profits as compensation bonuses, based on their equal stock ownership. As the years went by, Keith, Anita and Mick demonstrated their skills in business administration and development and gradually took over the role of Stonetek’s executive committee; Charlie and Bill proved to be the most productive sales representatives. Brian was also a very productive sales representative, but over time, his production diminished as he lost accounts and, having amassed substantial personal wealth, began spending less time on Stonetek’s business. The other shareholders decided that Brian was no longer entitled to an equal share of Stonetek’s profits in light of his disproportionately small contributions. Therefore, Stonetek changed the manner in which shareholders were compensated, going from a stock-based to a “merit-based” system. Over the next two years, the other shareholders received substantially higher compensation bonuses, while Brian’s compensation bonuses were significantly reduced. Brian resigned his position with Stonetek, and asked that the corporation buy his stock at a price based upon Stonetek’s going-concern value. The other shareholders offered to pay book value (which had not been updated) for his stock. Brian went to see a lawyer and said that he wanted out of Stonetek and wanted to be paid a fair price for his stock. The lawyer said, “Well, we can start a dissolution action, and include a breach of fiduciary duty claim and derivative claims. However, you probably won’t be able to get a judgment compelling Stonetek to buy you out at your price, and you would be left with a dissolution. During the course of the lawsuit, we might be able to convince them to pay a fair price, but they could also dig in their heels and try to beat you on the merits because they do not want to dissolve Stonetek. Either way, it could get expensive and, even though it sounds like you have a case, you could lose.” Brian and his lawyer decided to send Stonetek a letter threatening litigation if Stonetek did not purchase Brian’s shares based on Stonetek’s going-concern value. When Stonetek’s shareholders received that letter, they went to see their lawyer (who had not been consulted when the compensation system was changed), and asked her to tell them that Brian had no case. The lawyer said, “Well, he could bring a dissolution action based on allegations that you breached your fiduciary duties. Both a dissolution action, and, if Brian were to win his case, a judicial dissolution, would be disruptive and expensive. If Brian sues, you would have two options: either defend the case on the merits, or negotiate a buyout price. I have seen case law where dissolution was ordered in similar circumstances, but I do not think that a court can order you to buy out Brian’s shares. Either way, you may spend a lot of money litigating and still end up buying Brian out at his price to avoid dissolution.” Both lawyers’ advice was sound. As corporate practitioners know, Business Corporation Law §1104-a(a) authorizes a shareholder in a closely-held corporation to bring a dissolution action if the directors or controlling shareholders have been guilty of illegal, fraudulent or oppressive actions against the petitioning shareholder, or have looted, wasted or diverted the corporation’s property or assets. However, BCL §1104-a(b) requires the court to consider whether liquidation is the “only feasible means” whereby the petitioning shareholder may reasonably expect to obtain a fair return on his investment, and whether liquidation is “reasonably necessary” for the protection of the rights and interests of all of the shareholders. In other words, the BCL gives the court discretion to craft a remedy other than dissolution. In addition, BCL §1118(a) gives the corporation and its other shareholders the option to avoid dissolution under BCL §1104-a through an irrevocable election to purchase the shares of the petitioning shareholder “at their fair value.” The election must be made within 90 days of the filing of the dissolution action, or, at the court’s discretion at a later date. An election to purchase effectively stays the dissolution action, and the proceedings then focus on the determination of fair value. The problem for Stonetek and Brian is that the petitioning shareholder must own at least 20 percent of the corporation’s stock to bring a BCL §1104-a(a) dissolution action, and Brian owns only 16.67 percent of Stonetek’s shares. Although this fact does not bar Brian from petitioning for dissolution of Stonetek, it does take away the certainty and regularity of the statutory process. Under New York law, a corporation’s majority shareholders owe fiduciary duties to its minority shareholders, and even a shareholder with less than 20 percent of a corporation’s shares may seek common law dissolution of that corporation based upon proof that the majority shareholders have engaged in “egregious conduct” which caused injury to the minority shareholder’s interests, see In re Kemp & Beatley, Inc., 64 N.Y.2d 63, 69-70 (1984); Leibert v. Clapp, 13 N.Y.2d 313, 315 (1963). However, while there are numerous decisions defining the “oppressive actions” which would support dissolution under BCL §1104-a(a), there are few cases describing the “egregious conduct” which would support common law dissolution. In addition, the corporation and its other shareholders do not have the statutory right to stay a dissolution proceeding by making an election to purchase, and the New York courts have not formally allowed a minority shareholder the remedy of an “equitable buyout” in a common law dissolution action, see Orloff v. Weinstein Enterprises, Inc., 247 A.D.2d 63, 66-67 (First Dept. 1998). Therefore, if Brian started a dissolution action, the court would likely reject any claim for an “equitable buyout,” and Stonetek would be unable to automatically stay the dissolution action by an election to purchase. This scenario obviously creates substantially more uncertainty than would be found in a BCL §1104-a(a) dissolution action, and opens the door for full-blown litigation in which the continuing viability of Stonetek is at stake. This scenario also highlights an anomaly: A shareholder with a small amount of stock may have the ability to use the threat of a dissolution action to greater effect than a shareholder holding more than 20 percent of the corporation’s stock. Of course, the litigants in a common law dissolution action must weigh the strengths and weaknesses of their positions and the associated risks involved, and these types of actions are, as demonstrated by the paucity of reported decisions, usually resolved short of judgment. Moreover, although in the context of a common law dissolution action the court lacks the statutory authority to exercise its discretion to fashion a remedy other than dissolution, judges handling these cases clearly can, and often do, convince the parties to negotiate a buyout price for the minority shareholder’s stock, thereby avoiding the disruption and expense that would flow from contentious litigation and a judicial dissolution. Download the Reprint from The Daily Record As always, if you have any questions, please feel free to contact us here or call us at 585.258.2800.

In a unanimous decision, the New York State Court of Appeals ruled that, under certain circumstances, a business seller may give active assistance to a new employer’s efforts to pitch its business to former clients without incurring liability for improperly soliciting business. Bessemer Trust Co. N.A. v. Branin, no. 63, 2011 NY Slip Op. 3307 (Apr. 28). Under common law, the seller of the good will of a business cannot actively solicit former clients, as it would deprive the buyer of the value of the bargain. The seller can, however, compete with the buyer in the same business and even accept his former client’s business if he is not otherwise bound by any express restrictive covenants. Background Plaintiff Bessemer Trust Company N.A. is a privately owned wealth management and investment advisory firm that provides services to high net-worth individuals, families and institutional clients. The defendant, Branin, was a principal at investment management firm Brundage, which was sold by purchase agreement to Bessemer in 2000 for $75 million. Branin, the largest Brundage shareholder, received more than $9 million personally. The purchase agreement between Bessemer and Brundage imposed no express restrictive covenants on the Brundage principals. Branin continued to work for Brundage after the sale, but left in 2002 to work for a competing wealth management firm. Although he did not directly solicit his former clients, many of them (including his largest client) contacted him after his departure and followed him to his new place of business. Shortly thereafter, Bessemer commenced an action alleging that Branin had breached his duty of loyalty to Bessemer under the theory that Branin improperly solicited his former clients to join him at his new place of business, thereby impairing the good will that Branin had sold to Bessemer. After a bench trial in the Southern District of New York, Branin was found to have improperly induced his largest client to leave Bessemer. On appeal, the U.S. Court of Appeals for the Second Circuit certified a question seeking guidance in determining what actions under New York law constitute improper solicitation. The New York State Court of Appeals In answering the certified question, the Court of Appeals reiterated that New York Common Law has long prohibited a seller of a business from improper solicitation of its former clients because such solicitation impairs the value of the good will sold. However, the seller of “good will,” absent a non-compete agreement, may compete with a purchaser. Bessemer answered questions about how a seller of good will, who is no longer working for the purchaser, may respond to former clients who inquire about the seller’s current employer or business. The Bessemer court recognized that there is always a risk on the part of the purchaser of a business that customers will decide to go elsewhere as a result of the change in ownership. The court restated that a seller may not initiate direct contact with its former clients. However, for situations where the client initiates the contact, the court declined to provide a bright line rule and instead declared that the trier of fact must weigh the facts on a case-bycase basis as it applies to the industry involved. The court provided guidance in making the determination. While there are certain barriers on a seller’s conduct, there is no prohibition on a former customer or client from gathering information about the seller. The seller, the court said, may not take advantage of client-initiated contacts to disparage the purchaser of its former business or tout its new business, but can respond to factual inquiries from the client about his new venture. As such, a seller of good will may answer the factual inquiries of a former client so long as the response does not go beyond the scope of the specific information sought. In responding to the inquiry, the seller may not explain why he believes the products or services of the new venture are superior to those offered by the purchaser of the business. Further, the seller may not send targeted mailings or make individualized phone calls to former clients, but, absent a covenant not to compete, may advertise to the public if the advertisements are general in nature. Where a former client initiates the inquiry, a seller may even go so far as to assist a new employer in the active development of a plan to respond to the client’s inquiries. The seller may provide the employer with industry appropriate, nonproprietary information about the former client. The seller may also assist the new employer to prepare for a sales pitch meeting requested by the former client and may be present during the meeting. The seller’s role at the meeting, however, must remain largely passive. Warning to Purchasers The Bessemer decision accentuates the importance of utilizing noncompete and nonsolicitation agreements to protect the value of a business purchase. In its decision, the court reminded prospects that “a purchaser is free to negotiate an express covenant, reasonably restricting ... a seller’s right to compete in a particular geographical area or field of endeavor.” Download the Reprint from The Daily Record As always, if you have any questions, please feel free to contact us here or call us at 585.258.2800.

As the potentially catastrophic health impacts from exposure to myriad chemicals, construction materials and other products becomes more evident, questions often arise as to when the statute of limitations accrues for exposures that may have occurred decades ago. CPLR 214-c(2) attempts to address the latent exposure issue, providing that the statute of limitations accrues from “the date of discovery of the injury by plaintiff or from the date when through the exercise of reasonable diligence such injury should have been discovered by the plaintiff, whichever is earlier.” While the language of the statute seems straightforward enough, determining the “discovery” date can prove quite difficult. For example, while the onset of symptoms is critical, it is not necessary that the plaintiff actually be aware that their injury was caused by a particular chemical or hazardous material before the limitations’ period begins to run. As stated by the court in Johnson v. Ashland Oil, 195 A.D.2d 980, 981 (Fourth Dept. 1993), the subdivision clearly indicates that “discovery of the injury” does not depend upon discovery of the cause of the injury. The New York State Court of Appeals addressed this very issue in Wetherill v. Eli Lilly & Co.(In re N.Y. County DES Litig.), 89 N.Y.2d 506 (1997), a case in which the plaintiff alleged damages resulting from the diethylstilbestrol (DES) taken by her mother. It was undisputed that plaintiff knew about the medical condition and symptoms forming the basis of her claim more than three years before the commencement of her action. However, she argued that the “discovery of the injury” is not complete within the meaning of the statute until the connection between symptoms and a plaintiff’s exposure to a toxic substance is recognized. In rejecting this interpretation, the court concluded that CPLR 214-c(2)’s reference to “discovery of the injury” was clearly intended to mean discovery of the condition on which the claim was based. It concluded that the time for bringing the action begins to run under the statute when the injured party discovers the primary condition on which the claim is based. It confirmed this holding the following year in MRI Broadway Rental v. United States Min. Prods. Co., 92 N.Y.2d 421 (1998), writing “discovery occurs when, based upon an objective level of awareness of the dangers and consequences of the particular substance, ‘the injured party discovers the primary condition on which the claim is based’.” However, latent exposures can cause multiple medical problems, and New York courts have recognized that even if the statute of limitations has expired on one exposure-related medical problem, a later exposure-related medical problem that is ‘separate and distinct’ may still be actionable under New York’s two-injury rule, see Braune v. Abbott Labs., 895 F. Supp. 530, 555 (E.D.N.Y. 1995) (citing Fusaro v. Porter-Hayden Co., 145 Misc. 2d 911 [N.Y. Sup. Ct. 1989], affd., 565 N.Y.S.2d 357 [App. Div. First Dept. 1991]). Under the two-injury rule, diseases that share a common cause may nonetheless have separate accrual dates for statute of limitations purposes where the diseases’ biological manifestations are different, and where the presence of one is not necessarily a predicate for the other’s development. The Fusaro case provides a classic example of where the two-injury rule may be applied. The plaintiff in Fusaro claimed exposure to asbestos decades before the onset of any symptoms. He was first diagnosed with asbestosis, and subsequently with mesothelioma. The defendant argued that both causes of action should be time-barred, as plaintiff’s onset of symptoms leading to the asbestosis diagnosis occurred more than three years prior to the commencement of the lawsuit. The plaintiff argued that even if the claims relating to asbestosis were barred, a separate statute of limitations should apply for his mesothelioma symptoms, which developed later. The court agreed with plaintiff, finding that there was a clear distinction between asbestosis and the more virulent mesothelioma. The court explained that while asbestosis and mesothelioma are both causally connected to asbestos fiber exposure, almost every other aspect of the diseases is different. The effects of asbestosis are generally cumulative in that the continued exposure to asbestos dust increases both the risk and severity of the disease, and symptoms include shortness of breath and a dry hacking cough. Conversely, mesothelioma is a rare malignancy which may occur as a result of only a short exposure to asbestos fibers. Symptoms of mesothelioma include severe chest pain, shortness of breath and weight loss. Further, mesothelioma may develop without any manifestation of asbestosis, and one is not an outgrowth, maturation or complication of the other. The court concluded that in view of the fact that the diseases were separate and distinct, and as a party with asbestosis has no way of knowing whether or not he will develop mesothelioma, separate statutes of limitations were appropriate and consistent with CPLR § 214-c. The question then both for defense counsel seeking to invoke a statute of limitations defense in latent exposure cases, and plaintiffs seeking to avoid a dismissal, is when did a plaintiff “discover” his injury within meaning of CPLR § 214-c(2). This fact-specific determination may prove more difficult than the language of the statute suggests, but is critical to determining whether the action is time-barred. Download the Reprint from The Daily Record As always, if you have any questions, please feel free to contact us here or call us at 585.258.2800.

The Patient Protection and Affordable Care Act (PPACA), the recently adopted federal health care reform law was signed into law on March 23, 2010 by President Obama. The provisions that have attracted the most attention deal with the delivery of care, insurance coverage and the cost of each. However, PPACA also contains a substantial expansion in the government’s efforts to deal with fraud, waste and abuse under Medicaid. Section 6402 of PPACA requires the reporting and return of any overpayment of funds by the later of (a) 60 days after the overpayment was identified, or (b) the date on which a cost report was due to the relevant government office (for those entities obligated to file cost reports). What is significant about Section 6402 is that there is now a continuing obligation to report and repay, because the obligation arises from the date of identification of the overpayment and not, as was the case previously, from the date of the overpayment itself. Moreover, under Section 6402, any person who retains an overpayment after the reporting and repayment deadline is now subject to liability under the federal False Claims Act, including possible triple damages and penalties. Reports of overpayments are to be made to the New York State Office of Medicaid Inspector General (OMIG). Download this Legal Alert As always, if you have any questions, please feel free to contact us here or call us at 585.258.2800.

Effective October 1, 2009, any entity that received $500,000 or more in reimbursements from New York Medicaid were required to have in place a corporate compliance program covering at least the following elements: A written code of conduct or code of ethics for employees and others dealing with the entity; The appointment of an individual to act as the entity’s “compliance officer”, responsible for the day-to-day operation of the compliance program; Training of employees and others, including the members of the entity’s governing board, in the applicable laws, rules, regulations and the entity’s compliance program; Development and communication of the systems and procedures to be followed when a violation of the compliance program is suspected, including the protection of the identity of anyone reporting a suspicion, investigation of reports and corrective actions if problems are discovered, self-reporting to NYS Office of Medicaid Inspector General (OMIG) and repayment of overpayments; Policies to ensure compliance with the program and that those reporting suspicions will be not retaliated against or intimidated; and A process for routine self-evaluation of areas of potential risk and development of procedures to address same. Each affected entity was to make a written certification to OMIG that it had such a compliance program in place on or before December 1, 2009. This certification is to be made annually, on or before December 1 of each year. Affected entities should now be scrutinizing their compliance programs to assure they continue to meet OMIG’s requirements and then submit their certifications. Download this Legal Alert As always, if you have any questions, please feel free to contact us here or call us at 585.258.2800.

New York’s Domestic Workers Bill of Rights will take effect Nov. 29. The law is the culmination of a six year organizing campaign by Domestic Workers United, an organization of nannies, housekeepers and elderly caregivers in New York. The law makes New York the first state in the country to provide extensive workplace protection to domestic workers, and amends New York Labor Law, in addition to other statutes. The legislation defines a domestic worker as “a person employed in a home or residence for the purpose of caring for a child, serving as a companion for a sick, convalescing or elderly person, housekeeping or for any other domestic service purpose.” The law subjects individual households that employ domestic workers to potential liability for unlawful harassment and failure to observe maximum hours and overtime pay requirements. The law excludes from coverage casual workers such as ad hoc babysitters; those who engage in companionship services as defined under the Fair Labor Standards Act and who are employed by an employer or agency other than the family or the household and those who are a relative through blood, marriage or adoption of the employer or the person for whom the worker is delivering services under a program funded or administered by federal, state or local government. Harassment and discrimination provisions It will be unlawful discriminatory practice under the state Human Rights Law for an employer to engage in unwelcome sexual advances, requests for sexual favors, or other verbal or physical conduct of a sexual nature to a domestic worker when submission to such conduct is made a term or condition of employment, or used as the basis for employment decisions, or when it creates an intimating, hostile or offensive work environment. It will be unlawful to subject a domestic worker to unwelcome harassment based on gender, race, religion or natural origin where such harassment unreasonably interferes with his or her work performance by creating an intimidating, hostile or offensive work environment. The Bill of Rights opens the door for harassment suits by nannies, caregivers and other domestic workers based not only on the conduct of the employer, but also on alleged conduct by the children, elderly or infirm persons for whom they provide care, without regard to their maturity or mental stability. Unlike other protections under the state Human Rights Law that apply only to employers of four or more employees, protections for domestic workers apply to employers who employ one or more domestic workers. Wage and hour requirements The new Law also creates a new section of Labor Law, §170, which prohibits an employer from requiring domestic workers to work more than 40 hours in a week, or 44 if they reside in the home of their employer, unless they receive compensation at an overtime rate of at least one and one-half times the worker’s normal rate. Domestic workers will be entitled to one full day of rest, defined as “24 consecutive hours,” in each calendar week; however, domestic workers may waive the full day requirement voluntarily if the employee is compensated at the overtime rate for all hours worked on such day of rest. After one year of work with the same employer, all domestic workers shall be entitled to at least three paid days of rest in each calendar year. Other provisions The legislation also amends New York’s Worker’s Compensation Law and extends the rights to statutory disability benefits to domestic workers to the same degree as other workers. The law requires a study to be performed by the state’s Commissioner of Labor on the practicality of extending collective bargaining rights to domestic workers. What does it for employers? Individuals and families employing domestic workers should keep accurate records of the terms and conditions of employment for all domestic workers. Employers should maintain records concerning hours worked, break time, meals and rest periods, sleep time, frequency of pay straight and overtime rate of compensation, gross wages, any amounts deducted from those wages and the net compensation received by the domestic worker for at least six years. All complaints of discrimination received by domestic workers should be documented, investigated and remedied if there is any merit to the complaint. As New York law permits claims to be brought for unpaid overtime and other wages up to six years after they were earned, employers who fail to provide domestic workers with the requisite overtime pay may be sued several years after the employment relationship has ended. In addition to unpaid overtime or other wages, employers could be held liable for a domestic worker’s attorney’s fees, costs, interest and a penalty equal to 25 percent of the unpaid wages, as well as potential civil fines and criminal penalties. Employers should consult an employment attorney before Nov. 29 to ensure compliance with the new law. Download the Reprint from The Daily Record As always, if you have any questions, please feel free to contact us here or call us at 585.258.2800.

In this post-meltdown era, the news media and case reporters are full of stories about lawsuits by investors alleging fraud, breach of fiduciary duty and other misconduct by the people who managed their now-worthless investments. Litigators representing those investors have advanced both traditional and novel legal theories in support of their efforts to compel the responsible parties to pay for the losses. Although some lawsuits arise from exotic and sophisticated investment schemes, others involve a more traditional form of investment, the limited partnership. A limited partnership is an unincorporated association that can serve as the vehicle for straightforward or complex business ventures. A limited partnership often is used to put together an investment in real estate, for example. A person or entity intending to control the venture and serve as the general partner seeks out investors who become the limited partners. A limited partner’s expected return on his or her investment often is a combination of tax benefits related to pass-through losses in the venture’s early stages and a share of the profits. Under New York’s Revised Limited Partnership Act — applicable to limited partnerships formed after July 1, 1991 — a limited partner’s status is more like that of a corporate shareholder than that of a partner in a New York general partnership. Under RLPA §121-303(a), a limited partner is not responsible for the liabilities of the limited partnership unless he or she also is a general partner or participates in the control of the business. The limitation of liability provided by RLPA §121-303(a) can be a double-edged sword for a limited partner, because its bar against participation in the control of the business leaves him or her vulnerable to harm caused by the misconduct of an unscrupulous general partner. The relationships between the general partner, the limited partnership itself and the individual limited partners are addressed generally in RLPA, but the Act essentially defers to the limited partnership’s written agreement on governance issues, such as the sharing of profits and losses (§121-503), the sharing of distributions (§121-504), the withdrawal of a limited partner (§121-603), and the assignability of a limited partnership interest (§121-702). RLPA §121-108 authorizes a partner to lend money to, borrow money from, and transact other business with, the limited partnership. The RLPA also restricts a limited partner’s ability to obtain financial and operational information from the general partner. Section 99(1) of the original Limited Partnership Act afforded a limited partner the same rights as a general partner to “have on demand true and full information of all things affecting the partnership, and a formal account of partnership affairs whenever circumstances render it just and reasonable,” but the RLPA now makes it more difficult for a limited partner to stay informed of the status of his or her investment and the general partner’s activities. RLPA §121-106(b) provides a relatively restricted list of the information a limited partner is entitled to review as a matter of right, “subject to reasonable standards as may be set forth in the partnership agreement or otherwise established by the general partners.” In many ventures, the prospective general partner offers the potential limited partner a written agreement that restricts, to the maximum extent permitted by the RLPA, the limited partner’s rights of withdrawal, assignability and access to information. It is also often true that the general partner is more likely to engage in business transactions with the limited partnership — including borrowing money from the limited partnership — than the non-participating limited partners. The limited partnership agreements we see in our litigation practice make it extremely difficult to remove a general partner, generally specifying no grounds for removal short of fraud. In other words, a general partner bent on mischief often has the opportunity to misbehave under the belief he or she never will be punished. The best time for a limited partner to protect against potential general partner misconduct is when the investment is made. The limited partner’s attorney should insist that the limited partnership agreement require the general partner to provide limited partners with, at minimum, copies of annual tax returns. Knowledge is power, and returns contain key information about distributions received, assets bought and sold, and transactions in limited partnership interests. A general partner’s refusal to agree to share such information is a red flag that should not be ignored. Of course, a litigator asked to represent a limited partner in a dispute with a general partner often is presented with a onesided agreement of the type I’ve described. That means an uphill but winnable battle, especially when the general partner is highly motivated to block inquiry into his or her activities, and can use the limited partnership’s funds to pay lawyers, permitted by RLPA §121-1004, at least until judgment is entered establishing misconduct. The litigator may have to start with a proceeding under RLPA §121-106(b) to force the general partner to disgorge basic but critical business records such as tax returns and banking records. The documents enable litigators to follow the money and may support claims against the general partner based on the uncovered misconduct. A general partner is a trustee who owes the limited partnership and the individual limited partners the highest fiduciary duties. See RLPA §121-403(c) and Partnership Law §43(1). A general partner breaches those fiduciary duties by misappropriating or commingling funds or through self-dealing, and is liable for the harm caused by any breach. Evidence of a general partner’s breach of fiduciary duties would support an action for equitable relief, such as an accounting and the imposition of a constructive trust on any ill-gotten gains. It also would support a derivative action under RLPA §121-1002 or a dissolution proceeding under RLPA §121-802. A litigator should choose the form of proceeding and requested remedies based on the client’s objectives but, whatever the choice, proof of the general partner’s breach of fiduciary duties can be used as a powerful weapon for the protection of a limited partner’s investment. Download the Reprint from The Daily Record As always, if you have any questions, please feel free to contact us here or call us at 585.258.2800.

We litigators spend most of our time applying precedent and on rare, special occasions, shaping it. We are on the threshold of one of those rare experiences. In June 2009, the state Public Health Law was amended, as it pertains to claims against nursing homes for alleged violations of a resident’s rights, which could mark a sea-change in the test for the recovery of emotional harm in New York. The bill stated that it was intended to “clarify the grounds for liability claims against nursing homes.” Specifically, Public Health Law Section 2801-d was amended to specify that injuries for which a nursing home may be held liable under the statute include physical, emotional and financial harm to the patient. The amendments clarified that liability for such injuries is not solely limited to violations of Section 2803-c of the Public Health Law, which enumerates certain rights to nursing home residents (often called the Resident Bill of Rights). Proponents stated that the “bill would make it clear that ... that the right to sue applies to any injury to the patient by the nursing home.” Importantly, the statutory amendment does not require that a claim for emotional harm be linked to any physical injury, or be the result of intentional or outrageous conduct. What will it really mean in the context of historical precedent in New York governing claims for emotional distress? Historically in New York, there have been very limited bases for recovering damages for emotional distress. In the case of a negligent act causing emotional distress, the emotional injury had to be associated either with a physical injury caused by the defendant, or the plaintiff had to prove the defendant’s negligent conduct either unreasonably endangered or caused the plaintiff to fear for her physical safety. That burden often has not been fulfilled. To recover for intentional infliction of emotional distress, the plaintiff must prove that the defendant’s conduct was so outrageous in character, so extreme in degree as to go beyond all possible bounds of decency and be regarded as atrocious and utterly intolerable in a civilized community. That has been an almost insurmountable hurdle for most plaintiffs. For example, the fear of contracting rabies from a dog bite was not sufficient fear of physical suffering to warrant recovery for negligent infliction of emotional distress, and false information as to the dog’s vaccinations was not sufficiently outrageous to sustain a cause of action for intentional infliction of emotional distress. Fairman v. Santos, 174 Misc. 2d 85 (Sup. Ct. Queens Co. 1997). The negligent repair of a car that left the plaintiff stranded on highway was an insufficient allegation of fear for one’s own safety to warrant recovery for negligent infliction of emotional distress. Ford v. Village Imports Ltd., 92 AD2d 717 (Fourth Dept. 1983). An allegation that the plaintiff was raped by a television show’s employee failed to allege sufficient extreme and outrageous conduct to warrant recovery for either negligent or intentional infliction of emotional distress. Sheila v. Povich, 11 AD2d 120 (First Dept. 2004). The easier cases under the new amendment will be those involving emotional harm allegedly related to, and connected with, some physical injury. But what about those cases in which the only injury is emotional harm? What about insults to the resident’s dignity? Commonly, nursing home residents will complain that staff members were rude, slow, loud or neglectful, that the linens are soiled or that the food is unpalatable. Simultaneously, the vast majority of those residents also are being treated for depression, which I suspect will be the new synonym for emotional harm. Are those allegations, in the absence of any physical injury, sufficient to sustain claims for emotional harm under the statute? In any other context, the answer would be “no.” For example, false accusations to authorities — Chinese Consol v. Benev. Ass’n v. Tsang, 254 AD2d 222 (First Dept. 1998); Vardi v. Mutual Life Ins. Co. of New York, 136 AD2d 453 (First Dept. 1988) — telephone threats to harm someone’s career — Novak v. Rubin, 129 AD2d 780 (Second Dept. 1987) — and the use of religious, ethnic or racial slurs to denigrate a person — Graham v. Gilderland Central School District, 256 AD2d 863 (Third Dept. 1998) — have not been sufficiently egregious conduct to state a cause of action for intentional or negligent infliction of emotional distress. If we are to give credence to the proponent’s statement that the “bill would make it clear that ... the right to sue applies to any injury to the patient by the nursing home,” the historical high hurdles to establish a claim for emotional harm do not seem to be contemplated. How then shall a court assess a claim whose essence is an insult to one’s dignity? A 1997 case answered that exact question in the context of hospital treatment. The decision serves as an interesting model to analyze the very same questions that face the new nursing home cases. In Afentakis v. Memorial Hospital, 174 Misc.2d 962 (Sup. Ct. New York Co. 1997), the plaintiff alleged that a hospital had breached a terminal cancer patient’s right to dignity citing inattentive care, delays in treatment and a doctor’s thoughtless and offensive statements. No physical injuries were distinguishable from the ordinary discomfort attending a hospital stay. The plaintiff argued that injury to the decedent’s dignity should be sufficient to sustain the cause of action. The court disagreed. The issues that troubled the court in Afentakis undoubtedly will haunt the courts now trying to apply the new statutory basis for the recovery of emotional harm in nursing home claims. As Afentakis underscores, dignity is an extraordinarily difficult concept to define and measure. It is almost impossible for a court to dictate a standard of care relating to such an abstraction: “Unfortunately, ordinary human experience teaches that a certain unavoidable loss of dignity attends most illnesses, terminal and otherwise, both in and out of the hospital setting. An unsuitable expansion of liability would certainly result should courts attempt to distinguish between the ordinary assaults upon a patient’s dignity which stem from the loss of power and control which is all too often the corollary to illness, and the loss of autonomy produced by even a short hospitalization, from those occasioned by the failure of a hospital and its staff to maintain a certain level of caring, respect and consideration for the feelings of its charges. It would be unsuitable for courts to attempt to dictate a standard of care relating to such an abstraction and to the precise quantum of respect and consideration which should be accorded hospital[s] and their staffs, or to arbitrate the complex emotional response a patient’s terminal illness is likely to invoke in their caretakers.” How does one measure the relative loss of dignity a resident may have felt as a result of alleged delays in responding to her call bells, allegedly unpalatable foods, torn or soiled linens or the alleged rudeness that a resident perceives in a staff member’s tone of voice? How does a court distinguish between a lack of dignity that necessarily and naturally occurs as a result of becoming institutionalized, with all of its attendant losses of privacy, autonomy, power and control, from that which allegedly flows from negligent treatment? The proof of injury in the new emotional harm cases against nursing homes also will be tainted by the feelings of the residents’ representatives, which will force courts to attempt to discern how much of what a family describes is, in fact, what the resident felt, and how much is based on a transference of a family’s concern fora resident’s well being. Such proof is nearly impossible to weigh properly. It depends so much on speculation when it comes to what someone else must have been feeling or thinking, it is easily tainted by the understandable distress of the party’s representative as they watch a loved one’s health decline. Is it not, then, inherently unreliable? The courts will have to decide whether the new statutory basis to recover emotional harm should follow the tests ascribed to the traditional tort theories of either negligent or intentional infliction of emotional distress. Alternatively, the statutory amendment may be inviting the courts to create a brand new standard to be used for the recovery of emotional harm in nursing home cases. If the new standard is developed due to a perceived need to protect an otherwise vulnerable population, what is to prevent the standard’s spreading to parallel claims for other vulnerable populations? Have the flood gates been opened? For litigators in this field, all of those questions have yet to be shaped. I suspect that, 10 years from now, we may be talking about a whole new body of law on the subject. Download the Reprint from The Daily Record As always, if you have any questions, please feel free to contact us here or call us at 585.258.2800.

Our primary care practice is considering adding either a nurse practitioner or physician assistant. What are some of the legal considerations that would apply? As Americans focus on health care reform, physician practices continue to strive to provide quality primary care to their patients, in a timely and cost effective manner. Increasingly, patients are becoming more comfortable with seeing mid-level providers for their care. Primary care practices have found that using physician extenders can allow them to provide high quality patient care, treat patients in a timely manner, improve patient satisfaction and enhance the financial profitability of the practice. Nurse Practitioners The scope of practice of a nurse practitioner includes the diagnosis and treatment of illness. In the office setting, nurse practitioners may perform physical examinations, administer immunizations, write prescriptions, order and interpret laboratory tests and make referrals to other health care providers. Nurse practitioners have the time to address the patient’s health concerns while providing education regarding healthy choices and overall coordination of health care services. A nurse practitioner must practice under a written practice agreement with a collaborating physician. A collaborating physician may not supervise more than four nurse practitioners who are not located at the same premises as the physician. The practice agreement will establish practice protocols which reflect current medical and nursing practice, and set forth the scope of supervision. The practice agreement must address the referrals to and consultations with the collaborating physician, coverage for absence of either the nurse practitioner or collaborating physician, resolution of disagreements between the collaborating physician and nurse practitioner and periodic review of patient records by the collaborating physician. The review of patient records by the collaborating physician must occur on a timely basis, but no less often than every three months. The law does not require any specific numbers or ratios of patient charts to be reviewed by the collaborating physician. That decision is left to professional judgment and will vary based on the nurse practitioner’s experience and the collaborating physician’s knowledge of the nurse practitioner’s abilities and judgment. Our office recommends that the physician countersign and date the chart notes at the time of the supervisory review. While subject to the supervision of the collaborating physician, nurse practitioners practice independently. New York law does not require that medical orders, prescriptions or laboratory orders be countersigned by the collaborating physician. Physician Assistants New York law allows a physician assistant (PA) to perform medical services under the supervision of a physician, so long as the duties assigned to the PA are within the scope of practice of the supervising physician. Thus, in a primary care private office setting, the scope of practice for a PA is substantially similar to that of the nurse practitioner as discussed above. While the PA must be “continuously” supervised, unlike the case with the nurse practitioner, there is no requirement for a written practice agreement with practice protocols. The continuous supervision standard does not require that the supervising physician be physically present at the office while the PA is rendering medical services. However, the supervising physician must be immediately available to consult with the PA about patient matters, by telephone or other reliable means of communication. The supervision requirement for PAs differs from nurse practitioners in that there is no requirement for Continued on page 30... 30 The Bulletin chart review. From a risk management perspective, our office recommends that the supervising physician nevertheless periodically review and countersign selected patient charts to evidence professional supervision of the PA. New York law does not require that the supervising physician countersign medical orders, laboratory orders or prescriptions. Prescriptions must be written on the supervising physician’s prescription form and be signed by the PA first by printing the name of the supervising physician, then printing the name of the PA and then signing the prescription form followed by the designation “RPA” and the PA’s registration number. Note that a PA does not have the authority to write prescriptions for certain controlled substances. Additional Considerations Primary care practices that choose to employ nurse practitioners or PAs should have a thorough understanding of rules, regulations, policies and procedures for billing Medicare, Medicaid and the various private medical insurance companies. Doing so will allow the practice to maximize collections and profitability from these physician extenders, while minimizing the risk of claims denial or audits. Supervising or collaborating physicians should also be aware that they are personally liable for claims of malpractice against those physician extenders that they supervise. Even in the setting of a professional corporation, professional limited liability company or registered limited liability partnership, the supervising physician has the same liability as if he or she had personally committed the claimed act of malpractice. However, such claims may be covered by the physician’s available malpractice insurance coverage. In addition, the practice should consider separate malpractice insurance coverage for the physician extender. Download the Reprint from The April 2010 Edition of 'The Bulletin' by MCMS As always, if you have any questions, please feel free to contact us here or call us at 585.258.2800.