Court Sets Aside County Commissioners’ Common Wage Determination

An unpublished Indiana Court of Appeals decision has cast doubt as to how municipalities may calculate the common wage scale for public construction projects.

In Board of Commissioners in County of Allen v. Northeastern Indiana Building Trades Council, the Court affirmed the judgment of the Allen Superior Court, which set aside the Allen County Commissioners’ decision to adopt the wage scale proposed by Associated Builders and Contractors, Indiana Chapter, Inc., (ABC) for a public works project. In Board of Commissioners in County of Allen v. Northeastern Indiana Building Trades Council, the court unanimously held that a union had associational standing to sue on behalf of the members of its constituent unions and that the trial court had subject matter jurisdiction to review the Commissioners’ decision. A 2-1 majority of the court also reversed the Commissioners’ decision that the adopted wage scale comported with the “common construction wage” in the county as required by Indiana Code § 5-16-7-1(d).

The Court of Appeals had previously held that the phrase “common construction wage” is defined as “the scale of wages that are most commonly paid in the community.” To support its proposed wage scale, which was below that paid by unionized contractors, ABC provided the Commissioners with the results of a wage survey that it sent to its member contractors and other non-union employers.

Although roughly 90 percent of contractors in Allen County are non-unionized, the court held that “it cannot be inferred that non-union contractors pay more employees at the most common non-union wage than do union contractors at the most common union wage.” The Court concluded that the survey could not accurately reflect the prevailing wage because it essentially excluded the unionized contractors, who likely paid higher wages.  The opinion was concerned with the fact that while most of the area’s contractors were non-unionized, it was unclear how many workers were employed by the unionized contractors and therefore how common the unionized wages actually were.

Despite the survey supporting the Commissioners’ decision, the Court of Appeals held that there was no substantial evidence supporting the common wage decision.

The court’s memorandum decision can be found at: http://www.in.gov/judiciary/opinions/pdf/06151101mgr.pdf  Read more here.

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Choice of Law After England’s Blue Sky One Case

England’s Blue Sky One case presents perplexing problems for bankers, aircraft operating lessors, airlines and their lawyers.[1]This note discusses the fallout from Blue Sky One, and explains how parties can address these problems in their affected aircraft financing deals.

The Problem

Following the Blue Sky One case, there is an issue as to whether an English law mortgage creates a valid security interest in an aircraft in certain situations. A valid security interest is created under English law without additional requirements only when an aircraft is located in England at the time of closing or where the location of an aircraft is unknown.[2]

In all other situations there are now complicated legal and practical risks to address before parties can be comfortable that an English law mortgage is effective. In summary, the requirements are as follows:

  • If an aircraft is outside England at closing, an English mortgage must be valid under the law of the jurisdiction where the aircraft is located in order to be effective.
  • If an aircraft is over international waters at closing, best practice is to ensure the mortgage is valid under the law of the jurisdiction where the aircraft is registered to ensure the mortgage is effective.[3]

These new requirements have cost, risk and timing implications for transactions using an English law mortgage. A best case scenario resolution addressing the new requirements is that local counsel in the jurisdiction where an aircraft is located or registered will be able to give a clean opinion confirming that the English law mortgage is valid under local law. At worst, local counsel will give an opinion containing assumptions or exclusions that push the risk of a mortgage being invalid back to the parties, or will not be able to give an opinion at all – potentially because the English law mortgage will not, in fact, be effective under local law (as was the case in Blue Sky One).

Whichever scenario applies, Blue Sky One means that using English law will now result in higher legal costs and potential timing and closing risk.  Consequently, lenders, lessors and airlines should question their counsel carefully to understand new risks that may exist, even where a local law opinion has been provided.

The Solutions

The issues with Blue Sky One can be side-stepped by having an aircraft mortgage governed by laws other than English law. New York law is an alternative to consider, with a developed body of case law, and courts and a legislature that openly induce commercial contracts to designate New York law.

A choice of New York law in a commercial case will receive nearly absolute respect in New York courts. Section 5-1401 of New York’s General Obligations Law provides that:

“The parties to any contract, agreement or undertaking…covering in the aggregate not less than two hundred and fifty thousand dollars… may agree that the law of this state shall govern their rights and duties in whole or in part, whether or not such contract, agreement or undertaking bears a reasonable relation to this state.”

The general rule in Section 5-1401 leaves little scope for the type of uncertainty created by Blue Sky One. If an aircraft is worth more than $250,000, a mortgage under New York law will validly create a security interest in it regardless of aircraft location.[4]

A second solution is to rely solely on a mortgage governed by the law of the jurisdiction where the aircraft is located or registered at closing.[5]This will be less desirable if local rules on enforcement are not as familiar or as effective as the laws of a “moneycenter” jurisdiction like New York. Taking only a local mortgage may also necessitate local counsel and local courts becoming more involved in the enforcement process, potentially reducing certainty and increasing enforcement risk for lenders.

It is worth noting that, if the debtor is located in a country that has adopted the Cape Town Convention, then the parties arguably have a broader choice for the mortgage’s governing law. The Cape Town Convention provides that, so long as the relevant contracting state has made the election under Article XXX(1), the transaction parties are free to choose the governing law of their agreements.[6]In this case, a New York law mortgage still would be a sensible choice, as this would give the parties the choice of law protections afforded by both The Cape Town Convention and New York law.

Conclusion

Following Blue Sky One, lenders taking English law mortgages over aircraft that are not located in England at closing must take additional steps to ensure that they have an effective security interest including confirming that the English law mortgage is valid under the law of the jurisdiction of the location of the aircraft or considering a New York law governed mortgage.

Ninth Circuit Finds Jurisdiction Over Foreign Corporation Based On Its Subsidiary’s Contacts in the United States

In the recent case of Bauman v. DaimlerChrysler Corp. (No. 07-15386 (9th Cir. May 18, 2011)), the Ninth Circuit expanded the use of agency theory” to impose personal jurisdiction over a foreign corporation doing business in the U.S. solely through its U.S. subsidiary. The court found jurisdiction based on the subsidiary’s contacts within California, even though the lawsuit was initiated by non-U.S. residents regarding acts allegedly committed in a foreign country that had nothing to do with the subsidiary’s contacts.

If this decision stands, it has the potential to affect any foreign company doing business in the U.S. through subsidiaries, even if those subsidiaries have nothing to do with the company’s alleged actions giving rise to the lawsuit.

In the decision, the Ninth Circuit held that personal jurisdiction existed over DaimlerChrysler AG (DCAG), a German company, based in part on its right to maintain control over Mercedes-Benz USA LLC (MBUSA), its wholly owned U.S. subsidiary. The court held that DCAG could be haled into court in California due to MBUSA’s contacts within California.

Background

The plaintiffs in Bauman are 22 Argentine nationals who allege that DCAG’s Argentine subsidiary, Mercedes-Benz Argentina (MBA), collaborated with the Argentine government during its “Dirty War” in order to break up the union at an MBA plant. The plaintiffs brought suit under the Alien Tort Statute and the Torture Victims Prosecution Act of 1991. 

Suit was brought against DCAG in the Northern District of California. Like many global companies doing business in the U.S., DCAG owns an American holding company, DaimlerChrysler North America Holding Corp., which in turn owns MBUSA. MBUSA is a Delaware company with its principal place of business in New Jersey, but it has a regional office in California, as well as other centers of operation located in California.

The relationship between DCAG and MBUSA is governed by a General Distributor Agreement which establishes requirements for MBUSA as the general distributor of Mercedes-Benz cars in the U.S. MBUSA is the single largest supplier of luxury vehicles to the California market, and MBUSA’s sales in California alone account for 2.4 percent of DCAG’s total world wide sales. DCAG did not dispute that MBUSA was subject to general personal jurisdiction in California.

However, DCAG did dispute that it was subject to personal jurisdiction in California. At the district court level, DCAG’s motion to dismiss for lack of jurisdiction was granted. Plaintiffs appealed to the Ninth Circuit, which reversed the district court’s holding.

Ninth Circuit’s Decision

The question before the Ninth Circuit was whether the district court has general personal jurisdiction (i.e. jurisdiction over any claims against DCAG, regardless where they arise) over DCAG through the contacts of MBUSA. The court recognized that the district court did not have specific personal jurisdiction over DCAG, since the plaintiffs’ claims did not arise from DCAG’s contacts with California. Instead, the court determined whether general jurisdiction was appropriate over DCAG.

First, the court considered whether DCAG had “the requisite contacts with the forum state to render it subject to the forum’s jurisdiction” by considering either “substantial” or “continuous and systematic” contact with the forum state. The real question was whether the court could impute MBUSA’s contacts in California to DCAG. To decide this, the Ninth Circuit said that courts can use the “alter ego” test or the “agency” test. Recognizing that the alter ego test was not met in this case, the court turned to the agency test.

The agency test is predicated upon showing the “special importance of the services performed by the subsidiary.” Specifically, the agency test is satisfied by a showing that the subsidiary functions as the parent corporation’s representative in that it performs services that are sufficiently important to the foreign corporation that if it did not have a representative to perform them, the corporation’s own officials would undertake to perform substantially similar services.

Further, the parent company must also exert, or have the right to exert, sufficient control over the subsidiary, though “not as much control as is required to meet the ‘alter ego’ test.”

The court held that MBUSA’s services were sufficiently important to justify personal jurisdiction over DCAG via the agency test. The court explained that “DCAG simply could not afford to be without a U.S. distribution system,” given the amount of cars sold in the U.S. and in California. Moreover, DCAG had the right to control MBUSA’s activities under the distributor agreement.

Second, the court analyzed whether the assertion of jurisdiction would be fair and reasonable under the circumstances of this case. Looking at several factors, the court concluded that it was reasonable to assert jurisdiction over DCAG.

Of importance, the court focused on DCAG’s purposeful interjection into the California market. The court looked at the importance of the California market to DCAG’s car sales and the fact that DCAG had initiated lawsuits in California to challenge clean air laws and to protect its patents. The court also found that DCAG was a large sophisticated company, therefore the burden to litigate the dispute in California was not enough to preclude jurisdiction.

The court also found Germany’s sovereignty concerns trumped by California’s interest in adjudicating important questions of human rights. Finally, the court expressed doubts that Argentina was an adequate alternative forum to address allegations involving the “Dirty War.”

Conclusion 

The importance of Bauman is that the Ninth Circuit’s use of the “agency” test makes it easier for foreign corporations to be sued in the U.S. based on the unrelated activities of an American subsidiary. Foreign corporations exercising control, or which have clauses in distribution or other agreements with their U.S. subsidiaries which allow them to control their subsidiary’s activities, should pay close attention to the court’s analysis in Bauman

However, Bauman’s importance may be limited depending on the Supreme Court’s approaching decision in Goodyear Dunlop Tires, S.A. v. Brown (No. 10-76), which raises similar issues regarding personal jurisdiction over a foreign company when the lawsuit does not arise from events in the U.S. It is possible that the Ninth Circuit views their “agency theory” as a way around any Supreme Court decision, but until Goodyear is decided, Bauman’s reach remains uncertain.

Texas Legislature Amends Statute on Choice of Law

On May 27, 2011, the Governor of the State of Texas signed into law amendments to the Texas choice-of-law statute that, effective September 1, 2011, will afford parties greater flexibility when choosing a governing law for many transactions involving at least $1,000,000.

The amendments expand and clarify existing statutory rules and include, among other things, an important change for syndicated loan and other multi-lender transactions, in that the amendments permit parties to a loan transaction to choose, as the governing law for the transaction, the law of any jurisdiction in the United States where a party to the transaction has an office, so long as the transaction also involves at least $25,000,000 of credit extended by at least three lenders.

These changes are contained in H.B. No. 2991, which amends the choice-of-law statute adopted by the Texas Legislature in 1993, later recodified in what is now Chapter 271 of the Texas Business and Commerce Code.  Under the statute, parties to a transaction involving at least $1,000,000 may, with certain exceptions, agree in writing that their agreements will be governed by the laws of a particular jurisdiction if the transaction bears a reasonable relation to the chosen jurisdiction. Since its original passage, the statute has set out five safe-harbor factors as to what ─ under Texas law ─ constitutes a reasonable and enforceable choice of governing law.  These safe harbors have never applied to certain types of transactions, such as those involving transfers of title to real property, methods of foreclosure, marriage, adoption and matters of inheritance, and H.B. No. 2991 does not change any of these exclusions from the coverage of the statute.

H.B. No. 2991 is intended to reflect modern business practice by adding to, and clarifying, the list of statutory safe harbors. In addition to the new safe harbor for multi-lender loan transactions noted above, H.B. No. 2991:

  • amends an existing safe harbor ─ in recognition of the fact that negotiations are often conducted by telephone and e-mail without in-person meetings ─ to clarify that the parties to a transaction may choose the law of a particular jurisdiction to govern their transaction if a substantial part of the negotiations relating to the transaction occurs in or from that jurisdiction and an agreement relating to the transaction is signed in that same jurisdiction by one of the parties,
  • clarifies that the statutory list of safe-harbor contacts is a non-exclusive list so that parties to transactions covered by Chapter 271 of the Texas Business and Commerce Code may also rely on other choice-of-law rules, such as those found in the Restatement (Second) of the Law of Conflict of Laws,
  • expressly authorizes parties to choose the law of the jurisdiction of formation of an entity to govern any transaction involving at least $1,000,000 that relates to the governing documents or internal affairs of that entity, such as a transaction involving:
    • a shareholder or other agreement among members or owners of the entity,
    • an agreement or option to acquire a membership or ownership interest in the entity,
    • the conversion of debt or other securities into an ownership interest in the entity, or
    • any other matter relating to rights or obligations with respect to the entity’s membership or ownership interests, and
  • clarifies that a choice of law may continue to apply to a transaction, notwithstanding changes in facts and circumstances (including changes in parties and amendments or restatements of agreements relating to the transaction), if the chosen law was reasonably related at the outset of the transaction.

H.B. No. 2991 leaves unchanged the following additional safe harbors contained in existing Chapter 271 for determining when a transaction bears a reasonable relation to a particular jurisdiction:

  • a party to the transaction is a resident of that jurisdiction,
  • a party to the transaction has the party’s place of business or, if that party has more than one place of business, the party’s chief executive office or an office from which the party conducts a substantial part of the negotiations relating to the transaction, in that jurisdiction,
  • all or part of the subject matter of the transaction is located in that jurisdiction, or
  • a party to the transaction is required to perform in that jurisdiction a substantial part of the party’s obligations relating to the transaction, such as delivering payments.

These amendments were part of a legislative package sponsored by the Texas Business Law Foundation, a non-profit organization founded in 1988 to support a favorable business climate in the State of Texas. The Foundation is currently chaired by Gail Merel, a partner of the Firm who also worked on drafting these amendments. Mike Jewesson, Counsel in the Firm’s Dallas office, serves as Secretary-Treasurer of the Foundation.