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.

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.

As the New York State Department of Environmental Conservation accepts public comments on proposed regulations to address Marcellus shale development, many local communities are beginning to weigh in on the issue. The DEC needs to finalize state regulations before it will issue permits to drill and extract natural gas from the Marcellus shale formation. Nonetheless, communities across the affected region of the state are beginning to act. The actions to date have taken the form of a temporary moratorium on Marcellus shale development through use of high volume hydraulic fracturing, as well as local zoning regulation of industrial development to ban the practice. Based on the substantial investment in leases, exploration and development costs, landowners and natural gas exploration companies are mounting legal challenges. There are significant legal questions regarding whether existing state law pre-empts local regulation of Marcellus shale development. Initially, the state regulates oil and gas development pursuant to the Oil, Gas and Solution Mining Law (OGSML) found at Article 23 of the Environmental Conservation Law (ECL). Section 23-0303(2) provides that the state’s oil, gas and solution mining regulatory program “supersede[s] all local laws or ordinances relating to the regulation of the oil, gas and solution mining industries; but shall not supersede local government jurisdiction over local roads or the rights of local governments under the real property tax law.” (emphasis added). Thus, the question of how much home rule authority municipalities will have in this area will depend upon the courts’ interpretation of this suppression provision of the ECL. In at least one instance a court has addressed the scope of the pre-emption provision in ECL Section 23-0303(2). In Matter of Envirogas, Inc. v. Town of Kiantone, 112 Misc.2d 432 (N.Y. S.Ct., Erie Co. 1982), aff’d 89 A.D.2d 1056 (4th Dept. 1982), lv. den., 58 N.Y.2d 602 (1982), the court invalidated a town zoning ordinance that required payment of a $2,500 compliance bond and a $25 permit fee for oil and gas wells as a result of the preemption provision of Section 23-0303(2). The court held that “where a state law expressly states that its purpose is to supersede all local ordinances then the local government is precluded from legislating on the same subject matter unless it has received ‘clear and explicit’ authority to the contrary,” Id. at 433. Consequently, the court found that Section 23- 0303(2) expressly “pre-empts not only inconsistent local regulation, but also any municipal law which purports to regulate gas and oil well drilling operations, unless the law relates to the local roads or real property taxes which are specifically excluded by the amendment.” The court rejected the town’s assertion that the bond and permit fees were aimed at addressing local roads since the ordinance did not apply to operators of other forms of heavy equipment such as farmers and contractors. Although the suppression provision of the OGSML has not been tested yet relative to Marcellus shale regulation, municipalities interested in enacting local ordinances are relying upon caselaw regarding the ECL’s treatment of surface mining regulation. However, there are key distinctions between the oil and gas statute and the statute covering surface mining. The state’s Mined Land Reclamation Law (MLRL) is set forth in Article 23, Title 27 of the ECL. The MLRL preemption provision differs significantly from that of the OGSML in that it provides that “this title shall supersede all other state and local laws relating to the extractive mining industry; provided, however that nothing in this title shall be construed to prevent any local government from: a) enacting or enforcing local laws or ordinances of general applicability ... or b) ... local zoning ordinances or laws which determine permissible uses in zoning districts,” ECL §23- 2703(2)(a) and (b). (emphasis added). As such, the statutory language differs materially in that the OGSML precludes local regulation, except relating to roads and taxes, while the MLRL permits local zoning regulation. In addition, the statutory purposes are distinct. The OGSML suppression provision was enacted in 1981 to address state-wide problems caused by attempts at local regulation which created a patchwork of regulations and enforcement problems affecting the oil and gas industry. Thus, DEC worked with the Legislature to enact a uniform regulatory regime exclusively administered by the DEC and removed local control. In contrast, the MLRL was aimed at creating a state and local partnership arrangement that recognized the importance of extraction of mineral resources, provided a DEC regulatory program, but acknowledged the importance of local regulation and zoning regarding the siting of surface mines as well as reclamation of mines. In the context of MLRL cases the New York Court of Appeals has held that a municipal zoning ordinance that precluded sand and gravel mines as a permitted use within the town’s zoning district did not relate to the mining industry, but rather “regulating the location, construction and use of buildings, structures, and the use of land in the [t]own,” See Frew Run Gravel Products, Inc. v. Town of Carroll, 71 N.Y.2d 126 (1987). After that decision the state Legislature amended the MLRL section to ensure that local zoning laws which determine permissible uses in zoning districts are outside the scope of pre-emption. In the subsequent case of Gernatt Asphalt Products v. Town of Sardina, 87 N.Y.2d 668 (1996), the Court of Appeals rejected the notion that the state’s MLRL preempted a town’s ability to determine that mining be eliminated as a permitted use within the community. Aside from a complete ban, some municipalities are enacting temporary moratoriums on hydraulic fracturing while they consider zoning changes. In general a local moratorium is warranted when: it is adopted in strict compliance with the procedures for enactment and amendment of zoning regulations; the moratorium does not exceed a reasonable time period; and the municipality makes legitimate efforts to update its comprehensive plan and consider amendments to zoning regulations. Several communities, including the Towns of Marcellus, Skaneateles and DeWitt have enacted moratoriums on hydraulic fracturing while further study and analysis is performed. Many other communities have revised their zoning codes to ban hydraulic fracturing. Given the substantial economic investment by gas exploration companies, zoning amendments that ban the practice are being met with legal challenges. In August 2011 Dryden, New York passed a ban. In September, Anschutz Exploration Company, which holds leases on approximately 22,500 acres in the town and has invested more than $5 million in leases and research, filed suit challenging the town’s action. The lawsuit asserts that the zoning ordinance is invalid and unenforceable because it prohibits the development of oil and gas which State law explicitly authorizes under Article 23 of the ECL. Essentially the gas company position is that OGSML supersedes local ordinances relating to natural gas drilling except two limited areas of jurisdiction relating to local roads and property taxes. The town has argued that the exercise of local zoning authority is a permissible action within the town’s home rule authority. However, the gas company has asserted that the exceptions carved out for zoning regulation by the courts related to surface mining do not apply in this instance and that the action is preempted by the OGSML. Regardless of the initial decision in Dryden and other challenges, the cases are likely to be appealed to the state’s highest court. Depending on the outcome of legal challenges, the State Legislature may need to address the role of local governments in regulating Marcellus shale development. 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.

Underberg & Kessler LLP is proud to announce that ten of its attorneys have been named to the 2013 edition of Best Lawyers in America®. Jim Coniglio, Pat Cusato, Steve Gersz, Ron Hull, Kate Karl, Larry Keller, Paul Keneally, Anna Lynch, Paul Nunes and Margaret Somerset are included in the 2013 edition under the following specialties: Jim Coniglio - Municipal Law Pat Cusato - Real Estate Law Steve Gersz - Closely Held Companies and Family Businesses Law Ron Hull - Environmental Law Kate Karl - Real Estate Law Larry Keller - Trusts & Estates Paul Keneally - Labor & Employment Litigation Anna Lynch - Corporate Law, Elder Law, Health Care Law Paul Nunes - Mass Torts Litigation/Class Actions–Plaintiffs, Personal Injury Litigation–Plaintiffs, Personal Injury Litigation–Defendants Margaret Somerset - Medical Malpractice Law–Defendants Best Lawyers® conducted its annual peer-review survey in which 39,000 attorneys cast 3.1 million votes on the legal abilities of other lawyers in their practice areas. Lawyers are neither required nor allowed to pay a fee to be listed, and are included solely based on the results of the peer review. As always, if you have any questions, please feel free to contact us here or call us at 585.258.2800.

In recent months, development of the natural gas resources in the Marcellus Shale formation across New York’s Southern Tier and Pennsylvania has exploded. The U.S. Environmental Protection Agency held a series of hearings in Binghamton in September regarding the scope of a new hydraulic-fracturing study. The Marcellus Shale formation is a black Shale formation deep underground in the Southern Tier, extending down through Pennsylvania, Ohio and West Virginia. The formation is estimated to hold between 168 and 516 trillion cubic feet of natural gas. By comparison, New York state residents use about 1.1 trillion cubic feet per year. Due to the depth and nature of the formation, however, horizontal drilling and hydraulic-fracturing techniques are required to access the gas trapped within the Shale. In simple terms, hydraulic-fracturing — or “fracking” — involves the placement of a well within the gasbearing zone, pumping a pressurized fluid (water and chemicals) into the rock, causing a fracture and fission, withdrawing the fluid and allowing the proppant (sand or beads) to remain in the fractures to prop open the Shale fractures so that the natural gas can be extracted. Although fracking is far from a new technique, the pace and magnitude of the Marcellus Shale gas development has caused the EPA and state agencies to take a cautious approach. In particular, in October 2009, Congress requested the EPA conduct a new fracking study to assess the environmental impacts of the process. A 2004 EPA study had determined no credible scientific evidence of any environmental risks from fracking. Although challenged at the time by environmental groups, fracking was exempted from federal regulation under the Safe Drinking Water Act’s underground injection control provisions, therefore the 2005 energy reform bill did not address the process. With the tremendous increase in Marcellus Shale gas development, the issue of fracking has landed in the political arena. Critics of gas development point to potential environmental issues such as air pollution, land-use development, water pollution and traffic matters. In New York, there are about 14,000 producing natural gas wells. To the south, large-scale well exploration and development has occurred in Central Pennsylvania. In Dimock, Pa., groundwater sampling has revealed the presence of certain industrial solvents used in the fracking process. Last year, residents in that area sued a mining company, claiming the operations caused the contamination of the groundwater. The migration of methane gas into groundwater supplies also is viewed as a concern. The pace of Marcellus Shale gas development in New York also has caused increased public focus on the fracking issue. New York’s Department of Environmental Conservation recently closed the public comment period on a Supplemental Environmental Impact Statement for horizontal drilling and hydraulic-fracking. The DEC administers New York’s well drilling permit program and requires detailed information on the operator, proposed well location and issues, groundwater protection and environmental compliance prior to issuance of permits. Although no cases of groundwater contamination associated with fracking have been documented in New York, the DEC effectively put the issuance of new gas well permits on hold as additional studies are conducted. Similarly, the state Senate adopted a moratorium on new permits, which if approved by the Assembly will halt the issuance of drilling permits until May 15, 2011. The scope of the EPA’s proposed fracking study includes: identification of potential transport pathways for contaminants into groundwater that may merit further assessment; infiltration from natural fractures or fractures created during the process; leakage from higher in the well, during or after operations due to improper construction, damage or abandonment; and surface leakage from storage pits and spills. At the outset, the gas industry disputes the risk of deep groundwater impacts since most fracking fluids are withdrawn after the injection and dealt with according to state and federal waste regulations, and the remainder left underground is separated from groundwater sources by impermeable strata. Naturally, environmental groups dispute those positions and want the EPA to issue stringent regulations. In September, the EPA held a series of four public hearings in the Binghamton area to solicit comments on the proposed study. The hearings brought out hundreds on both sides of the issues, including some unusual alliances. On the side of more intensive study and regulations were environmentalists, residents and groups such as the Natural Resources Defense Counsel and U.S. Rep. Maurice Hinchey, who co-authored the “FRAC Act,” which would subject fracking to EPA regulation. Conversely, the natural gas industry and trade groups such as the American Petroleum Institute and Independent Oil & Gas Association of New York are opposed to further efforts to delay or stop natural gas development efforts. The industry’s position is that the natural gas wells already are subject to intense state regulation, so there is no need for duplicative regulation by the EPA. The trade groups pointed to the financial impact of development in New York, anticipated to produce millions in drilling permit revenues, tax revenues and new jobs. Some estimates suggest the impact could be as many as 30,000 new jobs and $1.4 billion in annual economic impact. In what is termed the “Marcellus multiplier,” Penn State University study of the gas development now in progress in that state indicates that for every $1 gas producers spend, there is a $1.90 total economic impact. As a result of the potential economic boom for New York, labor unions, the New York-New Jersey African American Chamber of Commerce and other groups provided comments in favor of natural gas development. The EPA study likely will take a few years and may not be concluded until 2013. Given the billons at stake and the potential economic development potential, it remains uncertain whether the EPA will objectively analyze the scientific information and come up with a report that balances environmental protection with sound energy development. If BP’s Deepwater Horizon disaster, the extensive off-shore drilling moratorium and the EPA’s desire to impose regulatory restrictions on coal and energy are any indication, the EPA seems content to favor environmental protectionism over sound energy exploration and development irrespective of the economic problems caused by its regulatory decisions. 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 previously reported in this column, the New York State Department of Environmental Conservation is still weighing public comments and considering proposed regulations to address Marcellus Shale development. But now, many local communities are beginning to act on the issue. The DEC needs to finalize state regulations before it will issue permits to hydraulically fracture and extract natural gas from the Marcellus Shale formation. Nonetheless, communities across the affected region of the state are beginning to ban the practice. The actions to date have taken the form of temporary moratorium on Marcellus Shale development through use of high volume hydraulic fracturing, as well as local zoning regulation of industrial development to ban the practice. Based on the huge investment in development and leases, industry and landowners are challenging the bans, while public interest groups are supporting the local laws. Initially, the state regulates oil and gas development pursuant to the Oil, Gas and Solution Mining Law (OGSML) of the Environmental Conservation Law (ECL). Section 23-0303(2) provides that the state’s oil, gas and solution mining regulatory program “supersede[s] all local laws or ordinances relating to the regulation of the oil, gas and solution mining industries; but shall not supersede local government jurisdiction over local roads or the rights of local governments under the real property tax law.” (Emphasis added). However, there are key distinctions between the oil and gas statute and the statute addressing surface mining. The state’s Mined Land Reclamation Law (MLRL) is set forth in the ECL. The MLRL preemption provision differs significantly from that of the OGSML in that it provides that “this title shall supersede all other state and local laws relating to the extractive mining industry; provided, however that nothing in this title shall be construed to prevent any local government from: a) enacting or enforcing local laws or ordinances of general applicability ... or b) ... local zoning ordinances or laws which determine permissible uses in zoning districts,” ECL §23-2703(2)(a) and (b). (Emphasis added). As such, the statutory language differs materially in that the OGSML precludes local regulation, except relating to roads and taxes, while the MLRL permits local zoning regulation. Many communities have revised their zoning codes to ban hydraulic fracturing. The local actions have been premised on Home Rule authority and caselaw under the MLRL. In August 2011, Dryden, N.Y., passed a zoning ban. In September, Anschutz Exploration Company, which holds leases on approximately 22,500 acres in the town and has invested more than $5 million in leases and research, filed suit challenging the town’s action. In Anschutz Exploration Corp. v. Town of Dryden, Index No. 2011-0902 (N.Y. Sup. Ct. Tompkins Co.) the company alleged that the zoning ordinance is invalid and unenforceable because it prohibits the development of oil and gas, which state law explicitly authorizes under the ECL. The gas company asserted that OGSML supersedes local ordinances relating to natural gas drilling except two limited areas of jurisdiction relating to local roads and property taxes. The case is the first in the State to address whether OGSML preempts local zoning laws. On Feb. 21, the Tompkins County Supreme Court granted the town’s summary judgment motion and held that the local law is not preempted by the OGSML. The court followed Court of Appeals’ precedent in Matter of Frew Run Gravel Products v. Town of Carrol, 71 N.Y.2d 126 (1987) and Matter of Gernatt Asphalt Prods. v. Town of Sardina, 87 N.Y.2d 668 (1996), which found that local zoning of gravel mines was not pre-empted under MLRL. The court concluded that the statutory language of both the OGSML and MLRL were nearly identical. Specifically, the court declined to find any difference in the preemption provisions of the OGSML and MLRL or the purposes behind the two statutes. The court found that neither suppression clause contained clear legislative intent to preempt local control over land use and zoning. Finally, the court referred to decisions in Pennsylvania addressing a similar suppression provision which allowed local zoning bans on oil and gas operations. Similarly, on Feb. 24, the Otsego County Supreme Court issued a decision in Cooperstown Holstein Corporation v. Town of Middlefield, Index No. 2011-0930 (N.Y. Sup. Ct. Otsego Co.) upholding a town zoning law that declared “[h]eavy industry and all oil, gas or solution mining and drilling …” as prohibited uses. A dairy farmer that had leased 380 acres to a gas company challenged the zoning law. The court did not find preemption under the OGSML and wrote that there was no legislative intent in the statute to preempt local regulation. As in Anschutz, the court followed Matter of Frew Run under the MLRL to conclude that OGSML preempted only local regulation of the method and manner of gas drilling, but not local land use control. The court closely examined the legislative history of the OGSML. The court found that neither the statute nor the legislative history of the OGSML established that the Legislature’s language “relating to the regulation of the oil, gas and solution mining industries” was intended to limit the constitutional and Home Rule authority vested in municipalities to regulate local land use. The court concluded that “[t]he state maintains control over the ‘how’ of [natural gas development] procedures while municipalities maintain control over the ‘where’ of such exploration.” The existing uncertainty regarding the timing and scope of DEC’s proposed hydraulic fracturing regulations has now been compounded by a patchwork of local zoning barring the practice in some areas of the state. The gas company and property owner in both cases have appealed to the Appellate Division, Third Department. Regardless of the decisions at the Third Department, the cases are likely to be appealed to the state’s highest court. Depending on the outcome of legal challenges, the State Legislature may need to address the role of local governments in regulating Marcellus Shale development. However, Pennsylvania recently adopted legislation to allow hydraulic fracturing across the state and many local governments are challenging the legislation. While the future of Marcellus Shale development in New York remains uncertain, it is clear that both sides of the issue will explore all avenues to support their position. 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.

The New York State Environmental Quality Review Act was adopted in 1976 and requires that state and local agencies evaluate potential environmental impacts of projects prior to granting approval. Since enactment, it has served as the principle environmental planning tool for New York agencies and municipalities prior to decisions to fund, undertake or approve projects across the state. Although SEQR has been the focus of significant discussion and litigation since its enactment, the purpose of this article is merely to highlight some fundamental changes that have been proposed to the short and long Environmental Assessment Forms (EAF). The Department of Environmental Conservation issued proposed regulatory changes consisting of revised draft forms for public comment through April 8, 2011. The full EAF, or long form used for large projects, has not been significantly revised since 1978. The short EAF, used for smaller projects, was last subject to substantial revisions in 1987. The DEC’s proposed changes seek to incorporate refinements in the process gained from experience over the years. However, DEC also intends to include consideration of emerging environmental issues such as climate change, energy conservation, environmental justice, smart growth and pollution prevention. In terms of a basic overview, when a project applicant submits a land-use application for a new project it is generally accompanied by an EAF to provide information to the agency regarding the proposed action, site location and environmental resources. The agency must first determine whether the proposed action is subject to SEQR, using basic regulatory criteria: is the project included in the list of Type 1 actions (SEQR review required), unlisted, or listed as a Type 2 action (SEQR exempt); is there a potential for significant impact on the environment; and will the planning and design of the project benefit from SEQR review. In determining the significance of potential environmental impacts from a project, the SEQR regulations require agencies to identify and assess relevant areas of environmental concern in order to address impacts that are reasonably foreseeable. The reasonableness standard is key, since potential impacts which are not reasonably foreseeable and are speculative do not have to be addressed. The EAF forms are central to this process. The short form EAF is used for unlisted actions. The long form EAF is used for Type 1 actions, or larger projects that may require preparation of an environmental impact statement. The EAFs consist of the following: Part 1 — prepared by the project sponsor regarding background information on the proposed action; Part 2 — completed by the lead agency, serves to identify potentially significant adverse environmental impacts; and Part 3 — completed by the lead agency to support the agency’s determination of significance. In the event that the agency determines that there will be no significant impacts on the environment (negative declaration) the agency completes the record for reaching that determination and environmental review of the action is concluded. In the event that a positive declaration is issued by the agency, an environmental impact statement must be prepared to further evaluate potential environmental impacts of a project. The current version of the short form EAF consists of two pages and has three parts: Part 1 — Project and Sponsor Information; Part 2 — Impact Assessment; and Part 3 — Determination of Significance. The DEC’s revised form is four pages with expanded details in each section. Aside from format changes, there are a number of substantive changes that make the short form EAF significantly more detailed. A few of the key changes to Part 1 include additional questions regarding: public transportation and pedestrian accommodations near the site; whether the action maximizes use of energy efficient design or on-site renewable energy technology; whether the proposed action will connect to existing public water and sewer utilities; whether the proposed action is on or adjacent to an environmental justice community of concern as defined by the U.S. Environmental Protection Agency; whether the proposal will create new point source storm water discharges; whether the proposed action includes construction of on-site impoundments such as retention ponds, waste lagoons, etc.; and whether solid or hazardous waste has ever been stored on-site or on adjacent property. DEC has added similar questions to the Part 2 Impact Assessment that is prepared by the lead agency for the project. Among the additions, one new question asks the agency to determine whether “[t]he proposed action may create a substantial hazard to environmental resources or human health.” Finally, Part 3 of the new short form EAF will require the lead agency to discuss why each potential impact checked as a “yes” in Part 2 will not result in a significant adverse environmental impact. In particular, DEC’s form will require the agency to discuss in detail the impacts, mitigation measures included by the applicant, and an explanation of how the lead agency determined that the impact will not be significant. The revised Part 3 appears to place a much greater burden on the lead agency to discuss and explain each element of Part 2, which forms the basis for its decision. The DEC’s revisions to the long form EAF are similar to, but much more detailed than, the changes to the short form. The current version is 21 pages. The DEC’s revised EAF is 31 pages. Substantively, the long form is much more detailed than the current version. The DEC has added similar questions to Part 1 regarding climate change, environmental justice, renewable energy and impacts on existing infrastructure. In addition, DEC has added much more detailed sub-parts regarding existing questions on potential environmental impacts. For example, the revised form requests information about whether the project will create a new demand for water, anticipated daily use, capacity of the public system, and need for expansion of the system or district. In addition, Part 2, which is prepared by the lead agency, is now exceptionally detailed with new questions and sub-parts to existing questions to conform with the expanded Part 1. While updating the SEQR forms is certainly appropriate given the length of time since the last revisions, in reviewing the proposed EAF forms there are a variety of questions and concerns that are raised. While the SEQR process has been around for decades, many smaller municipalities and project sponsors still struggle with it under the existing framework. The proposed forms appear to transform the preparation process away from the project sponsor and agency to an engineering function. In addition, the level and extent of detail which will be required at the initial stage of project review will be significant, and hence the EAF will be much more expensive and time-consuming to prepare. Further, questions regarding climate change, environmental justice, energy conservation and similar issues, while part of public discussion, are rather amorphous and difficult for applicants and municipalities to quantify. The nature of many of the new questions may subject the SEQR process to further litigation because applicants will argue that the new and expanded considerations are speculative and not reasonably foreseeable based on the proposed action. Finally, due to New York’s current tax and regulatory climate, the state faces substantial problems attracting and retaining new business investment. If the revised SEQR EAF forms are adopted by DEC they will inevitably require substantially more time, review and expense for project sponsors and agencies and will only add to these problems. 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.

Jillian K. Farrar and Leah E. Tarantino have joined Underberg & Kessler LLP in Rochester, New York. Ms. Farrar is an associate in the firm’s Litigation and Creditors’ Rights Practice Groups, and will focus her practice in the areas of bankruptcy, collection and foreclosures. Prior to joining the firm, Ms. Farrar was an associate with Shapiro, DiCaro & Barak LLC. Ms. Farrar earned her B.A. from Vassar College, and her J.D. from Syracuse University College of Law. Ms. Tarantino is an associate in the firm’s Litigation Practice Group. She concentrates her practice in the areas of matrimonial and family law. Before joining Underberg & Kessler, Ms. Tarantino was an Assistant Commonwealth’s Attorney for Fairfax County, Virginia. Ms. Tarantino received her J.D. from Albany Law School, and her undergraduate degree from the State University of New York at Geneseo. As always, if you have any questions, please feel free to contact us here or call us at 585.258.2800.

Talk to small business owners, and one of their biggest fears is becoming embroiled in litigation against their will, and over which they have little control. An even bigger fear is when the small business’ adversaries are multi-million or multi-billion dollar corporations, with seemingly unlimited litigation budgets. Irrespective of the merits of the claim against the small business, it has no choice but to defend itself or it risks a default judgment that may very well put it out of business. However, going toe-to-toe with a multi-million dollar corporation through years of protracted discovery, motion practice and trial may very well put it out of business as well. Given these two undesirable options, what is a small business to do? Unfortunately, faced with the situation described above, the options are fairly limited. Again, the small business can neither afford a default judgment, nor can it engage in protracted litigation and a lengthy trial given its limited resources. Unless the large corporation is interested in discussing a settlement at a number the small business can afford (putting aside the merits of the claim), the only realistic option available to the small business may be a limited defense whereby it strategically allocates its litigation resources. At first blush, most attorneys would be loath to undertake this type of “limited defense,” as they would perceive (perhaps correctly) that a limited defense concomitantly provides a limited chance of success, and may subject the attorney to a malpractice claim if things turn out poorly for the client. However, many attorneys also have small business clients for whom a limited defense is the best option, so the attorney may wish to consider this unorthodox representation. While the limited defense strategy may be workable in some instances, before engaging in such representation an attorney is wise to take a number of steps to both manage the client’s expectations, as well as protect the attorney and firm from a potential malpractice claim. First, if the attorney agrees to accept the representation and employ the “limited defense” strategy, the retainer agreement needs to explicitly state that the client acknowledges and understands that were it not for the financial restrictions being imposed by the client, the attorney would not recommend the limited defense strategy, and would likely employ additional discovery devices and litigation tactics that could change the outcome of the litigation. The engagement agreement should further state that although the attorney will do everything he or she can to manage costs, there are certain aspects of litigation that are out of his or her control, and that costs may be incurred despite the best efforts to limit such costs. To that end, if the case is large enough to potentially put the client out of business, it is likely a large enough case to warrant significant discovery, depositions and potentially motion practice. Further, given the present reliance on technology, it is likely that there will be significant e-discovery issues that need to be addressed. The question then becomes, how best to represent the client and minimize the costs, while still providing an adequate, albeit “limited” defense. First, with respect to discovery, rather than blanket all parties with as much written discovery as possible, an attorney can specifically tailor his or her requests to only the most important issues that will ultimately affect the client’s case. While an attorney will have no choice but to respond to discovery served on him or her, and the client will simply need to accept that those costs cannot be avoided, the attorney may not need to go tit for tat with the unlimited resources of the opponent. Similarly, with respect to e-discovery and document production, many large companies engage third-party vendors to provide and store electronically-produced information — usually at a significant cost. While the small business certainly has obligations that it must adhere to as far as producing electronic discovery, it does not generally have an obligation to hire expensive third-party vendors, and may find it more cost effective to enlist its own employees in meeting its e-discovery obligations. Next, with respect to depositions, it may be possible to strategically pick which depositions to attend — particularly if it is a multi-party litigation. This would be especially true if depositions are not local, and attending them would not only involve the expense of the deposition, but travel and lodging costs. In the event that the attorney and client can be reasonably sure that their presence at the deposition is not critical to one of the penultimate issues in the case, simply ordering the transcript for the attorney to review may suffice. It should also be noted that, to the extent that the other party or their counsel is complaining about an aspect of the attorney’s participation in the discovery process (or even if they are not), it is worth ascertaining whether you and your client may find an ally in the judge who does not wish to perpetuate the David versus Goliath dynamic. While the judge certainly has an obligation to treat all parties in a fair and even-handed manner, he or she may be willing to either explicitly or implicitly assist the attorney and the client in leveling the playing field by relaxing or limiting the burden that litigation in general, and discovery in particular, places on the client. Throughout the entire process, the client must be kept explicitly informed of the status of the case, and candidly advised if the limited defense strategy is becoming unworkable. In the event this occurs, the attorney can then direct the client back to the engagement letter, which will have disclosed this risk at the outset. Not surprisingly, a good result for the client will obviate any fears on the part of both the attorney and the client about the desirability of such a strategy, whereas a bad result may lead to second-guessing, and in a worst-case scenario, a malpractice claim. While this risk cannot be completely discounted, a clearly defined engagement letter explicitly setting forth the risks and obtaining the client’s acknowledgement and consent, should render the likelihood of a malpractice claim remote. 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.

LLCs, which were created by the New York Limited Liability Company Law (LLCL), are hybrid business entities that combine the tax aspects of partnerships with the limited liability of corporations. The two basic principles underlying the LLCL are (1) LLC owners (members) have flexibility in structuring the LLC through its operating agreement, and (2) the LLCL provides default procedures for an LLC, which apply unless the operating agreement clearly provides otherwise. The LLCL is largely silent on the remedies available to a member facing another member’s refusal to cooperate in the management of the business, or worse yet, another member’s bad faith or intentional misconduct. As a result, judges and “business divorce” practitioners continue to wrestle with numerous questions about how to protect the rights of an LLC member from the misconduct of other LLC members. In some instances, the courts have created nonstatutory remedies derived by analogy from the Business Corporation Law (BCL), the Partnership Law and the common law, but in other instances the courts have denied aggrieved LLC members remedies which are not expressly provided in the LLCL. For example, in Tzolis v. Wolff, the Court of Appeals held that LLC members may sue derivatively, even though the LLCL does not expressly authorize such actions, applying the law of trusts, corporations and limited partnerships. Similarly, in Mizrahi v. Cohen, a 2013 decision by the Second Department, the court, citing general equitable principles, held that the aggrieved member was entitled to the judicial dissolution of the LLC, and that the member was entitled to an order authorizing him to purchase defendant’s interest in the LLC upon dissolution, even while acknowledging that the LLCL does not authorize such a buyout. Nevertheless, the courts have held firm to the express terms of LLCL §702, which addresses judicial dissolution. That section empowers a court to dissolve an LLC “whenever it is not reasonably practicable to carry on the business in conformity with the articles of organization or operating agreement.” In Matter of 1545 Ocean Avenue, LLC, the court analyzed the derivation of LLCL §702, the dissolution provisions of the BCL and Partnership Law, and §702’s “not reasonably practicable” standard. Although the member seeking dissolution in that case had alleged “deadlock” between the managing members arising from one of the member’s violations of the operating agreement, the court held that the member had to establish, in the context of the terms of the operating agreement or articles of incorporation, that: “(1) the management of the entity is unable or unwilling to reasonably permit or promote the stated purpose of entity to be realized or achieved, or (2) continuing the entity is financially unfeasible.” In its decision, the court cited Widewaters Herkimer Co., LLC v. Aiello, in which the Fourth Department held that allegations that the majority members breached their fiduciary duty to the aggrieved members and engaged in “unlawful or oppressive conduct toward them” were insufficient to plead the requisite grounds for dissolution under LLCL §702. Recent decisions show that the courts are holding fast to that position. In a February 2013 case, Doyle v. Ikon, LLC, a member who had been “expelled” from the LLC sued for dissolution, alleging that he had been “systematically excluded from the operation and affairs of the company.” The First Department reversed the Supreme Court’s order which denied defendants’ motion to dismiss and granted that motion, finding that allegations of expulsion and systematic exclusion were insufficient to establish that it was no longer “reasonably practicable” for the company to carry on its business; the court noted that the company had been able to carry on its business after plaintiff was expelled and that the company was financially feasible. In Matter of Nunziata, a July 2013 decision from the Queens Supreme Court, a member petitioning to dissolve an LLC alleged that the two managing members had: failed to allow him to participate or vote in business meetings; excluded him from all aspects and control of the business, to his financial detriment; and engaged in “oppressive conduct” toward him. The managing members cross-moved to dismiss the petition for failure to state a cause of action. The court noted that the operating agreement provided for the management of the LLC by the managing members and set forth a limited number of “Dissolution Events.” The court then found that the petition’s allegations that the aggrieved member had been “systematically excluded” from the company’s operations and affairs were insufficient to establish that it was no longer “reasonably practicable” to carry on the company’s business, because they did not show that the management of the business was unable or unwilling to reasonably permit or promote the stated purpose of the entity, or that continuing the entity was financially unfeasible. BCL §§1104 (deadlock) and 1104-a (oppression, fraudulent conduct, looting, waste or diversion of corporate assets) authorize an aggrieved shareholder to petition for judicial dissolution of a corporation in order to protect his interests. Partnership Law §63 authorizes an aggrieved partner to seek dissolution when another partner willfully or persistently commits a breach of the partnership agreement or when other circumstances “render a dissolution equitable.” Therefore, both statutes give an owner of a business a mechanism to extricate himself and his investment from that business upon a showing that the internal relationships between that owner and the other owners are dysfunctional and untenable. In sharp contrast, an owner of a business operated as an LLC has no statutory mechanism to extricate himself from a similarly dysfunctional and untenable internal relationship as long as the business can continue operating (to the outside world) on a financially feasible basis. While this anomaly exists, it is critical that LLC members take steps to control their own destinies and prevent a default to the LLCL, through well-crafted operating agreements which include provisions addressing management decision-making and withdrawal procedures such as buyouts and non-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.

David M. Tang has been named a 2013 recipient of the Rochester Business Journal's Forty Under 40 award.  The Forty Under 40 honorees are professionals younger than 40 who demonstrate leadership in the workplace and in the community. David is an associate in the firm's Litigation and Creditors' RIghts Practice Groups. As always, if you have any questions, please feel free to contact us here or call us at 585.258.2800.