Lay of the Land: Challenges to Data Center Construction—Past, Present and Future [Podcast]
In this episode of Lay of the Land, we are joined by Paul Manzer, principal and data center market leader with Navix Engineering, to explore the evolving landscape of data center construction. We dive into the unique civil engineering challenges—from site selection to due diligence—and trace the evolution of these challenges from past limitations to present-day complexities like supply chain issues and legal hurdles.
Looking ahead, we discuss future trends driven by AI and emerging technologies, examining how legal strategies and engineering innovation can address these challenges. We provide key takeaways for developers and investors, emphasizing the critical collaboration between legal and engineering teams.
Recognition Agreements in Preferred Equity
When making a preferred equity investment behind senior mortgage debt, both the senior lender and the preferred investor will have a number of concerns. Under what circumstances may the preferred investor exercise remedies? Will the preferred investor be entitled to additional notice and time to effectuate a cure of a senior loan default? If these concerns sound familiar, it’s because these are the types of issues that we typically see addressed in intercreditor agreements between senior and mezzanine lenders. This article will provide an introduction to recognition agreements — which are roughly equivalent to intercreditor agreements in mezzanine loan transactions but usually differ from intercreditor agreements in several key ways.
For most preferred investors, recognition agreements are an essential component of the transaction and will typically be required as a condition to closing. Senior lender receptiveness to providing the preferred investor with typical mezzanine lender intercreditor rights varies. Some senior lenders will view preferred equity as “stealth” mezzanine debt and will resist. This article will explore some of the fundamental elements of recognition agreements that preferred investors will need to consider in every transaction.
Enforcement of Remedies
In preferred equity transactions, the preferred investor will reserve the right to exercise numerous remedies in the event of a default by the common equity investor. For example, the preferred rate of return may be increased during any period that a common equity default is continuing. However, in the case of a common investor default, the primary “hammer” that the preferred investor must wield is the right to take control of the underlying real property asset. Senior loan documents, however, typically prohibit changes of control without senior lender approval. The recognition agreement must provide a mechanism for the preferred investor to exercise its control rights without prior approval from the senior lender, subject to satisfaction of certain conditions precedent. The conditions will include, among other things, the requirement that the preferred investor provides supplemental or replacement senior loan guaranties from a creditworthy guarantor that satisfies minimum net worth and liquidity requirements, as well as the senior lender’s Know Your Customer (KYC) diligence.
The nature of supplemental or replacement guaranties that the preferred investor is required to deliver is often the subject of negotiation. Senior lenders will usually push to have the preferred investor deliver the same guaranties that were delivered at the closing of the senior loan by the common investor. Preferred investors are usually willing to deliver customary “bad boy” carve out guaranties and environmental indemnities but may push back on principal payment, completion, debt service and carry guaranties.
Rights of Cure
At a bare minimum, the preferred investor will want the recognition agreement to provide that, if there is a default under the senior loan, the preferred investor will receive notice of the default at the same time as notice is delivered to the senior borrower, and the same opportunity to cure as the senior borrower. Ideally, the preferred investor will have extended cure rights. In particular, for non-monetary senior loan defaults, the preferred investor will need sufficient time to exercise remedies and take control of the underlying real property asset in order to effectuate a cure. Extended periods of cure for monetary defaults are also desirable but may be limited in number (i.e., monetary defaults can only be cured by the preferred investor a limited number of times during the term of the senior loan).
Right to Purchase Senior Loan
In intercreditor agreements between senior and mezzanine lenders, in the case of a senior loan default, the mezzanine lender will typically have the right to purchase the senior loan prior to the senior lender completing a foreclosure or accepting a deed in lieu of foreclosure. The purchase right acts as a “safety valve” of last resort, providing the mezzanine lender the opportunity to call a halt to a foreclosure that would result in the total loss of its investment. Preferred investors should strongly consider pushing for similar rights in recognition agreements. Senior lender receptiveness to granting such a purchase option to preferred investors varies, with some senior lenders viewing the purchase right as simply an opportunity to delay foreclosure. A key point of negotiation will be whether the purchase price for the senior loan will include amounts above the principal amount of the loan and accrued interest at the standard rate (i.e., whether the purchase price will include default interest, late charges, prepayment premiums, yield maintenance, etc.).
Guaranties
Preferred investors often will require a “bad boy” carve out guaranty and environmental indemnity — and possibly other guaranties — from the same guarantor as the guarantor under the senior loan. The recognition agreement should address what happens when both the senior lender and preferred investor have claims against a “common guarantor.” Typically, the senior lender will require that the preferred investor’s claims against a common guarantor are subordinated to the senior lender’s claims, and any proceeds recovered by the preferred investor from a common guarantor must be turned over to the senior lender and applied against the senior loan obligations. Preferred investors will want the right to provide notice to the senior lender of preferred investor claims against a common guarantor, as well as the right to keep proceeds in the event that the senior lender fails to exercise claims against common guarantors within a specified period of time following the notice.
Other Provisions
Other considerations when negotiating recognition agreements include the following:
Subordination: The senior lender usually limits the right of the preferred investor to receive returns on the preferred equity while the senior loan is outstanding. Payments of preferred equity “principal” are usually not permitted prior to repayment in full of the senior loan. Distributions of cash flow to the preferred investor are usually permitted so long as the senior loan is not in default.
Permitted Transfers: Preferred investors will seek expanded “permitted transfer” rights beyond what the senior loan documents may permit for the senior borrower. In particular, preferred investors will want the right to transfer noncontrolling interests in the preferred equity without senior lender approval. Preferred investors may also want the right to transfer a controlling interest in the preferred equity to a “qualified transferee,” which may include a preapproved list of potential transferees. Senior lenders, concerned about who ultimately may control their borrower, may push back on the preferred investor’s transfer rights.
Modifications: The senior lender may prohibit modifications to the preferred equity documents without prior senior lender approval. Senior lenders will usually resist restrictions on modifications of the senior loan documents. Preferred investors, however, can rely on “major decision” provisions of the preferred equity documents, which will prohibit the common investor from entering into amendments to the senior loan documents without preferred investor approval.
HUD Updates FHA Loan Residency Requirements: Citizenship or Permanent Residency Now Required
The U.S. Department of Housing and Urban Development (HUD) has issued Mortgagee Letter 2025-09, which updates the residency requirements for borrowers seeking Federal Housing Authority (FHA) insured financing. These changes take effect on May 25, 2025, and require that the borrower be a U.S. citizen or a lawful permanent resident to qualify for FHA-insured mortgages.
Under the new rules, non-permanent residents no longer qualify, while lawful permanent residents must provide acceptable documentation, such as U.S. Citizenship and Immigration (USCIS) records, as part of the loan application to prove their lawful status. A social security card alone is not enough to prove immigration or work status. The streamlined refinance procedures also reflect these changes by removing references to non-permanent resident status, which means borrowers who want to refinance their FHA loans must meet the same requirements.
Overall, this shift by HUD may reduce the number of borrowers who can secure FHA loans in areas with substantial non-permanent resident populations, and it may influence both demand and supply in local real estate markets.
Green Commercial Leases
Green leases are emerging as a key component of commercial leasing, as both landlords and tenants in different industries place an increasing emphasis on sustainability and environmental impact.
A “green lease” is a commercial real estate lease agreement that focuses on environmental performance and sustainability practices, and aligns the environmental and financial goals of the parties. The parties to a green lease commit to work together to meet certain environmentally-sound goals, such as efficient energy consumption, waste reduction, water conservation and healthier air quality.
The benefits of green leases to both landlords and tenants include:
Cost savings resulting from reduced energy consumption, water conservation and efficiency measures such as energy-efficient HVAC systems, lighting an insulation;
Health benefits and increased productivity stemming from employees enjoying better air quality, use of non-toxic cleaning materials, temperature comfort and use of natural lighting;
Increased property value and marketability by demonstrating a commitment to the environment with green certifications or eco-friendly features, which leads to attracting and retaining tenants who value sustainability practices;
Positive long-term environmental impact of reducing a building’s carbon footprint by preserving natural resources and reducing waste;
Fostering collaboration between landlords and tenants by creating shared accountability for meeting common sustainability goals;
Supporting the building’s compliance with current and evolving environmental standards, such as reducing carbon emissions and meeting energy-efficiency standards; and
Potential for governmental incentives for sustainable building practices, which provide economic benefits for both parties.
Green lease provisions often include:
Data sharing and performance assessments clauses to allow landlords and tenants to track progress and identify areas in need of improvement with respect to sustainability goals;
Specific obligations for installation of energy efficient appliances and equipment, adherence to waste management practices and recycling programs, use of non-toxic cleaning materials and minimizing water consumption;
Cost sharing of capital improvements that reduce energy costs, ensuring that each party has an interest in the success of their joint sustainability efforts;
Requirements that tenant improvements align with sustainability goals, such as use of certain sustainable construction materials;
Establishment of communication channels for sustainability issues, such as designation of a point person or group for each party, a schedule of meetings and training programs;
Agreement of the parties to cooperatively strive toward meeting sustainability goals and to work together to identify new opportunities for conservation of natural resources throughout the lease term; and
Flexibility provisions that allow the parties to modify the lease to meet new legal requirements and incorporate new sustainability technologies and standards.
Green leases can have a particularly important impact in healthcare space. Hospitals and clinics consume enormous amounts of energy and have substantial carbon footprints as a result of medical equipment use and heating, ventilating and cooling needs. By promoting energy efficient measures, water conservation practices, better waste management practices, recycling programs and use of renewable energy sources, green leases in healthcare space can have a significant impact on the environment. Green leases also encourage natural lighting and better air quality, which can be particularly important in a hospital setting for both recovering patients and overworked healthcare providers.
As concern for the environment and sustainable practices continues to grow, green leases will play an increasingly significant role in commercial real estate. These leases offer significant financial, health and environmental benefits to the parties and foster collaboration between landlords and tenants. The result of green leases is the development of more sustainable buildings, which has a positive environmental impact on the broader global community.
Alaska Supreme Court Rules That “Total Pollution Exclusion” in Homeowners Insurance Policy Does Not Bar Coverage for Carbon Monoxide Poisoning
For decades, homeowners and other insurance policies have included broad pollution exclusions, often referred to as a “total pollution exclusion.” In a recent decision in Wheeler v. Garrison Prop. & Cas. Ins., No. S-18849 (Alaska Feb. 28, 2025), the Alaska Supreme Court held that a “total pollution exclusion” in a homeowners insurance policy did not apply to exclude coverage for injury arising out of exposure to carbon monoxide emitted by an improperly installed home appliance. Examining the breadth of the exclusion and applying the generally held principle that exclusions are to be construed narrowly, the court thus fulfilled the policyholder’s reasonable expectation of coverage for injuries resulting from the carbon monoxide exposure.
Background
A 17-year-old minor rented a cabin in Alaska and, during his tenancy, was found dead in the cabin’s bathtub. An autopsy and investigation by the deputy fire marshal determined that the tenant died of acute carbon monoxide poisoning caused by an improperly vented propane water heater installed in the same bathroom. Testing showed that the bathroom had accumulated high levels of carbon monoxide when the water heater was running.
The cabin owners’ homeowners insurance policy included a total pollution exclusion. The exclusion sought to bar coverage for, among other things, bodily injury or property damage “[a]rising out of the actual, alleged, or threatened discharge, dispersal, release, escape, seepage or migration of ‘pollutants’ however caused and whenever occurring.” The policy defined “pollutants” as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals, and waste.”
The cabin owners submitted a claim to their homeowners insurer, which denied coverage under the pollution exclusion. The insurer contended that any losses connected with the tenant’s death were excluded because carbon monoxide is a pollutant subject to the pollution exclusion. In denying coverage, the insurer declined to defend the cabin owners against a lawsuit brought by the tenant’s estate.
The owners signed a confession of judgment, which admitted that they negligently caused the tenant’s death. They also confessed to liability of $1,540,000 and assigned their right to seek coverage under the homeowners insurance policy from the insurer. The tenant’s estate then pursued recovery from the cabin owners’ insurer by filing suit in federal court.
The district court entered summary judgment for the insurer, holding that the tenant’s death was not covered under the cabin owners’ insurance policy. In support, the federal district court concluded that the Alaska Supreme Court’s prior decision in Whittier Properties, Inc. v. Alaska Nat. Ins. Co., 185 P.3d 84 (Alaska 2008), suggested that Alaska’s high court would interpret the pollution exclusion literally and conclude that the exclusion was unambiguous, precluding coverage. The district court further ruled that the owners could not have reasonably expected coverage for their tenant’s death because carbon monoxide fell within the definition of pollutant which was excluded under the plain language of the pollution exclusion.
The tenant’s estate appealed to the Ninth Circuit, which certified to the Alaska Supreme Court the question of how the pollution exclusion should be interpreted. The Alaska Supreme Court answered that question in its recent decision.
The Alaska Supreme Court Decision
The Alaska Supreme Court framed the certified question as follows: “Does the pollution exclusion in [the cabin owners’] insurance policy bar coverage for injury arising out of exposure to carbon monoxide by an improperly installed home appliance?” For several reasons, the court determined that a policyholder would reasonably expect coverage for carbon monoxide poisoning under the cabin owners’ policy and, therefore, the exclusion did not bar coverage for the submitted claim.
The court first distinguished the Whittier case on several grounds. That dispute, which involved gasoline leaking from a gas station into surrounding groundwater and soil, presented no ambiguity that gasoline was a pollutant under the insurance policy, and included evidence that the insured knew the policy did not cover damages arising from leaking gas tanks. In answering the certified question, the Alaska Supreme Court declined to simply follow the holding in Whittier and instead examined whether the cabin owners’ insurance policy created a reasonable expectation of coverage for the losses related to the carbon monoxide leak.
In performing that analysis, the court concluded that the pollution exclusion could reasonably be interpreted to cover liability from carbon monoxide poisoning from a water heater. The operative terms of the pollution exclusion—namely, “discharge, dispersal, release, escape, seepage, and migration”—are environmental terms of art relating to a pollutant passing from a container to the environment rather than the result of combustion such as was true in this claim with regard to carbon monoxide. Moreover, the subsections of the exclusion referencing “testing for, monitoring, cleaning up, removing, containing, treating, detoxifying or neutralizing, or in any way responding to, or assessing the effects of ‘pollutants,’” the court reasoned, further supported the policyholder’s reasonable expectation that the reach of the exclusion was limited to environmental pollution.
Finally, the court pointed to two other exclusions in the cabin owners’ insurance policy suggesting that the pollution exclusion did not apply to the type of carbon monoxide poisoning that led to the tenant’s death. Those exclusions applied to liability arising from exposure to lead paint or other lead-based products and exposure to asbestos. Although those exposures fell within the policy’s literal definition of pollutants, as well as the operative terms of the pollution exclusion regarding “discharge, dispersal, release, escape, seepage, and migration,” the insurer included those two additional exclusions, a point that helped confirm the true intent behind the exclusion. Accordingly, the specific exclusions for certain household pollutants, the court reasoned, supported a narrower interpretation of the pollution exclusion that it did not bar coverage for exposure to all toxic substances commonly found within a home.
Key Takeaways
Given the prevalence of pollution-related claims, there are several takeaways from the Alaska Supreme Court’s decision for policyholders to consider in navigating pollution exclusions in homeowners and many other insurance policies:
Facts and Policy Language Matter: No matter how broad an exclusion may appear on its face, whether an exclusion applies depends on a number of factors, including the specific policy language and the specific facts giving rise to the claim, not to mention the particular state’s law governing interpretation of the claim under the policy. In addition to the reasoning by the court here, a review of the “drafting history” of pollution exclusions shows that insurers, in seeking regulatory approval, testified that the exclusions were intended to preclude coverage for “true industrial pollution” and “would never be” applied to preclude claims like this one.
Consider Reasonable Expectations of Coverage: Even when the language of an exclusion, even a broadly worded total pollution exclusion, may appear unambiguous on its face, courts in many states may still consider the reasonable expectations of an insured to determine whether a policy exclusion applies. Not all jurisdictions place equal weight on the so-called “reasonable expectations” doctrine, so disputes over choice of law or venue may impact the relevance of the policyholder’s reasonable expectations.
Consider All Relevant Policy Language: Policy exclusions should not be interpreted in isolation. Rather, policies are read as a whole to interpret provisions in a manner where no language is interpreted in a way that renders other provisions superfluous or illusory. This is especially true when the dispute involves exclusions, as those provisions are construed narrowly and in favor of coverage.
Case-Specific Inquiry: Whether an exclusion bars coverage under an insurance policy ordinarily requires a case-specific inquiry, and prior decisions on the same or similar policy language are not always dispositive.
Veterans Affairs Ending Mortgage Rescue Program
On April 3, 2025, the U.S. Department of Veterans Affairs (VA) announced it will end the Veterans Affairs Servicing Purchase (VASP) program on May 1, 2025. This decision comes just shy of one year since the program’s inception. The VASP program was originally implemented as a rescue program to help veterans and their families after tens of thousands of veterans faced foreclosure due to the COVID-19 mortgage forbearance program ending.
After the VA abruptly ended its key pandemic-era mortgage relief program, which allowed veterans who were experiencing financial hardship to defer payments, around 40,000 veterans were left facing foreclosure. In response, the VA halted foreclosures for a full year while it worked to roll out the VASP program, which began accepting submissions May 31, 2024. According to the VA, the VASP program has been able to help over 17,000 veterans and their families obtain new, low-interest-rate, affordable mortgages and avoid foreclosure.
Despite the success of the program, the VA has declared that it is necessary to end the VASP program as the VA is not intended to be a loan restructuring service. However, veterans’ advocacy groups, housing advocates, and even mortgage company executives have all cautioned against ending the program. Although the program initially caused uncertainty among the mortgage industry, as advocates sought a permanent partial claims program to assist veterans facing hardship, industry executives believe ending VASP is not the solution at this time.
Industry groups, such as the Mortgage Bankers Association (MBA), argue that ending the VASP program will have an immediate and harmful impact on veterans. Elizabeth Balce recently testified before the House Committee on Veterans Affairs, on behalf of the MBA, to warn lawmakers of the severe risk associated with ending the program. Balce, who also serves as the executive vice president of Servicing at Carrington Mortgage Services, says despite problems with its initial implementation, “[w]ithout VASP, [the] VA would have foreclosed on tens of thousands of veterans” in the last year.
On April 3, 2025, following the VA’s announcement, Bob Broeksmit, president and CEO of the MBA, released a statement on VASP’s termination, urging the VA to immediately look into alternative loss mitigation options to help veterans. Broeksmit stated, “Halting the VASP program will increase the number of veterans facing foreclosure unless the VA and Congress implement a permanent partial claim option as soon as possible.” As of now, the VA has not announced plans for a program to replace VASP.
Foundational Legal Considerations for Mixed-Use Apartment Blocks
As mixed-use projects rise in urban centres and suburban areas across Australia, developers are responding to the preferences of millennials and downsizing retirees. These groups seek walkable communities that are close to essential amenities, driven by changing demographics and environmental trends. Local governments support these developments for their ability to reduce infrastructure costs, create job […]
The Third Time’s A Charm: Colorado Adds Nuclear Energy as a Clean Energy Resource
After considering similar legislation in two prior sessions, the Colorado General Assembly passed, and Gov. Jared Polis signed into law, House Bill 25-1040 which explicitly adds nuclear energy to the state’s statutory definitions of “clean energy” and “clean energy resource” for purposes of complying with Colorado’s carbon dioxide emission reduction requirements and applying for financial assistance under Colorado’s Rural Clean Energy Project Finance Program. In so doing, Colorado joins more than a dozen other states that consider nuclear power to be a clean energy resource under various state energy policies, and is consistent with the growing number of states taking legislative, regulatory, or policy steps to support or at least consider adding nuclear power to their energy mix.
Acknowledging Colorado’s projected growth in peak electricity demand and the potential energy supply, reliability, climate, and economic benefits of nuclear energy, including advanced reactors such as Small Modular Reactors (SMRs), the legislation expands the statutory definitions to include “nuclear energy, including nuclear energy projects awarded funding through the United States Department of Energy’s Advanced Nuclear Reactor Programs.”
Under Colorado’s carbon dioxide emission reduction statute, qualifying retail utilities in Colorado are required to submit to the Colorado Public Utilities Commission (CPUC) a plan detailing how they intend to reduce by 2030 carbon dioxide emissions associated with their electricity sales by 80 percent as compared to 2005 levels, and how they will seek to achieve 100% emission free electricity sales by 2050. For compliance purposes, the Statute incorporates the “eligible energy resources” that can be used to comply with Colorado’s separate Renewable Energy Standards (RES); these include recycled energy, renewable energy resources (wind, solar, geothermal, new small hydropower, and certain biomass), and renewable energy storage, however, nuclear energy is expressly excluded. Recognizing that not all clean energy resources may be considered renewable, the Statute also allows any other “electricity-generating technology that generates or stores electricity without emitting carbon dioxide into the atmosphere.” While this catch-all language arguably encompasses nuclear energy, HB25-1040 amends the statute to remove any doubt and emphasize the potential benefits of nuclear energy.
Colorado’s three largest electric utilities are in the process of implementing their respective CPUC-approved clean energy plan or electric resource plan that meets the state’s emission reduction requirements. While none of the plans presently include nuclear power, Colorado’s largest investor-owned electric utility, Public Service Company of Colorado (PSCo), has indicated it is open to considering nuclear energy resources in the future.
HB25-1040 also expands the types of energy that qualify for potential financial assistance through Colorado’s Rural Clean Energy Project Finance Program. The Program allows certain rural property owners to apply to their board of county commissioners for the issuance of tax-exempt private activity bonds to help finance the construction, expansion, or upgrade of a clean energy project having a capacity of no more than 50 MW and which is owned by and located on the property owner’s land. The electricity generated by such a project would be delivered to the cooperative electric association in whose service territory the project is located. Similar to Colorado’s RES, the Program defined “clean energy” to include only biomass, geothermal, solar, wind, and small hydropower resources as well as hydrogen derived from these resources. As such, only projects using these technologies were eligible for financial assistance under the Program. Now, small nuclear power projects are also eligible for financial assistance under the Program.
Colorado presently has no operating commercial nuclear power plants. From 1979 until 1989, Colorado was home to the Fort St. Vrain Nuclear Power Plant, a 330 MW(e) high temperature gas cooled reactor, owned and operated by PSCo. The plant was decommissioned in 1992 following a series of operational issues and portions of the plant were converted to a natural gas combustion turbine generating plant. The statutory amendments resulting from HB25-1040 do not mean that new nuclear power is coming to Colorado, but they do evidence a state policy environment more favorable to nuclear power and provide practical, incremental improvements that may incentivize utilities and landowners to consider developing nuclear power generating facilities in the state.
For example, PSCo has indicated that new nuclear generation is one possible option to replace the electricity and economic benefits of its Comanche-3 power plant located in Pueblo, Colorado and which is scheduled to retire by January 1, 2031. The ability to count nuclear energy toward PSCo’s carbon dioxide emission reduction obligations may be an additional consideration as PSCo evaluates this option. Furthermore, once advanced reactor designs progress from First-of-a-Kind to Nth-of-a-Kind, cost effective, deployable systems, some SMRs and microreactors could align well with Colorado’s Rural Clean Energy Project Finance Program and become viable power supply options for Colorado’s rural communities.
Ultimately, taking advantage of HB25-1040’s incremental improvements will also require sound legal and regulatory advice related to nuclear matters as well as siting, permitting, environmental, and numerous other issues. If you have questions concerning this legislation or the opportunities it may create, please reach out to the author of this alert or the Womble Bond Dickinson attorney with whom you normally work.
ANOTHER BIG VICARIOUS LIABILITY WIN FOR TCPA DEFENDANT: Nevada Court Holds Providing Scripts and Training Alone Insufficient for TCPA Agency Liability
Hi TCPAWorld! Another huge vicarious liability win for a TCPA defendant!
The United States District Court for the District of Nevada has dismissed with prejudice all claims alleged by Plaintiff Kelly Usanovic (“Usanovic”) against Americana LLC (DBA Berkshire Hathaway HomeServices Nevada Properties or “BHHS”). Kelly Usanovic v. Americana, L.L.C., No. 2:23-cv-01289-RFB-EJY, 2025 WL 961657 (D. Nev. Mar. 31, 2025). The court concluded that Usanovic failed to plausibly allege that BHHS could be held liable for unsolicited calls made by its affiliated real estate agents under federal agency law principles.
Kelly Usanovic filed a class action lawsuit in August 2023 against BHHS alleging violations of the TCPA. Specifically, Usanovic claimed BHHS agents repeatedly called her cell phone despite it being listed on the National DNC Registry.
Usanovic alleged that BHHS should be vicariously liable under the TCPA, arguing that the company had provided training materials encouraging agents to cold-call consumers using third-party vendors like RedX, Landvoice, Vulcan7, and Mojo—vendors who purportedly supplied phone numbers on the National DNC Registry. Usanovic alleged these materials showed BHHS’s control and authorization of agents’ unlawful calls, seeking to hold BHHS responsible via agency theories of actual authority, apparent authority, and ratification.
Well, Judge Richard F. Boulware II disagreed and granted BHHS’s motion to dismiss WITH PREJUDICE reasoning that vicarious liability under the TCPA requires establishing a true agency relationship under federal common-law agency principles.
The court found that although BHHS was alleged to have provided general scripts, training, and recommendations on dialers and vendors, these actions alone were insufficient to establish an agency relationship. Critically, the Court underscored that Usanovic failed to allege essential elements of agency, such as BHHS’s direct control over the agents’ day-to-day call activities, the agents’ working hours, or their choice of leads. Simply offering resources and optional training sessions does not establish the requisite control necessary for vicarious liability under the TCPA.
On actual authority, the Court concluded that merely providing guidance to agents does not demonstrate authorization or instruction to call numbers listed on the Do Not Call Registry.
Regarding apparent authority, the Court stated that Usanovic did not plead any statements from BHHS that could reasonably lead her to believe the agents were authorized to violate the TCPA. The mere identification of agents as affiliated with BHHS was deemed insufficient.
Finally, for ratification, the Court found no allegations that BHHS knowingly accepted benefits from agents’ unauthorized calls or acted with willful ignorance.
Thus, because Usanovic’s complaint lacked plausible facts to support any of these common law agency theories, the court dismissed the TCPA claims with prejudice—denying further amendment due to prior opportunities to correct these deficiencies.
There you have it! Another court ruling that knowledge of illegality is required for vicarious liability to attach!
Selling a Business: A Practical Guide for a Successful Transaction
This guide is designed to help business owners and executives navigate the process of selling a business. It provides an overview of the sale process and practical tips for achieving the best possible outcome and addresses common challenges encountered during deals.
For many sellers, a transaction will involve unfamiliar procedures and terms where a lawyer can provide valuable guidance. The better the key concepts are understood, the better equipped one will be to make informed decisions and achieve a favorable result.
Sale Process
The timeline for the deal will likely include the following steps:
Selecting a business broker who is right for the business.
The buyer presents a proposal letter or letter of intent.
The buyer prepares an Asset Purchase Agreement (APA) for the parties to negotiate.
The seller’s board of directors and shareholders approve the APA.
Both the buyer and seller sign the APA at or before closing.
Additional steps, such as obtaining real estate title insurance, finishing due diligence, and preparing closing documents.
At closing, the buyer pays the purchase price, and the seller transfers the business.
Letter of Intent
The selected buyer will produce a written proposal letter or letter of intent naming the price, transaction structure, and key terms. It should be written to state that it is nonbinding, meaning that everything remains subject to negotiating and signing a more detailed, definitive purchase agreement. The letter of intent will often include a binding agreement to negotiate exclusively with the buyer for a period of time.
Due Diligence
The buyer will often do a thorough business review including financial statements, contracts, employee compensation and benefits, real estate, and other key aspects. Though the process can be time-consuming, it is typically better to provide the requested information rather than contest its necessity.
Review of Governing Documents
Early in the process, the selling corporation should review its articles of incorporation, bylaws, and any shareholder (buy-sell) agreements. The seller should identify anything that could affect the transaction, such as rights of first refusals or super-majority vote requirements. An attorney can help with this.
Structure – Sale of Assets
Most business sales are structured as asset purchases. In this structure, the selling corporation transfers its assets to a buyer-controlled entity. The buyer can form a new corporation to purchase the assets or use an existing entity. The seller keeps its corporate entity and dissolves it after the closing. Buyers do this to avoid any known or unknown liabilities the corporation may have.
Transferred assets include owned real estate, equipment, furniture, accounts receivable, prepaid assets, the goodwill of the business, the name of the paper, all website addresses, etc. In most cases, cash is retained by the selling corporation.
Some working capital liabilities may also be transferred to the buyer, such as accounts payable. Bank debt and other long-term liabilities are typically not assumed by the buyer. Liabilities not assumed by the buyer are paid off at closing and remain an obligation of the selling corporation.
The other transaction structure is for the buyer to purchase the corporation or LLC.
Purchase Price
Larger companies purchasing smaller companies typically pay all cash. Often 5 to 10 percent of the purchase price may be placed in an escrow account with a bank for an agreed-upon period of time.
The purchase price is for the enterprise value of the business without regard to bank debt and other long-term liabilities. This is frequently referred to as selling the business on a cash-free, debt-free basis. The seller will need to pay off any bank debt or other long-term liabilities out of the purchase price. Additional liabilities may include deferred compensation payments and any severance obligations.
The purchase price often includes a “net working capital adjustment” as well. Net working capital is current assets (excluding cash) minus current liabilities. Net working capital varies daily as revenues are received, expenses are paid, and liabilities and prepaid assets are accrued.
When a business is sold, the buyer and seller will usually agree on a “net working capital target.” The target is intended to be a normal amount of working capital that should be there as of the closing. If the actual net working capital at the time of closing exceeds or is less than the target amount, then the purchase price is increased or reduced dollar for dollar.
The seller will want to be careful about selecting the net working capital target because any shortfall at closing will reduce the purchase price. Different types of businesses have different working capital profiles. So, it is important to make sure the working capital definition and target fit for the business.
Asset Purchase Agreement
The buyer will prepare a detailed APA listing of the assets being purchased and the purchase price.
The APA will include several representations and warranties from the seller such as:
The selling corporation will have all director and shareholder approvals needed to sell the business.
The assets being sold will be free and clear of all liens when the transaction closes.
The seller’s financial statements are accurate.
There are no material liabilities that have not been disclosed to the buyer.
The list of employees and their compensation is accurate.
If the representations are not true at the time of the closing, the buyer is not required to complete the transaction.
If the buyer discovers a representation is not true after closing, the buyer may have a claim against the seller. For example, if the seller represents that the equipment is free and clear of liens, and it turns out there is a lien, the seller would be responsible for paying off the lien. The purchase agreement will include limits and procedures related to how and when the buyer can make a claim against the seller.
The seller can protect themselves by including disclosure schedules within the APA documenting any problems or facts contrary to the representations. If disclosed before the closing, the buyer cannot make a claim after the closing. This is where the due diligence review benefits both the buyer and the seller.
The APA will include a list of covenants or promises. The seller will promise to operate its business in the ordinary course between signing and closing. The seller will also agree to negative covenants promising not to do certain major actions between signing and closing, such as entering into a new contract or making a large dividend.
Board of Directors and Shareholder Approval
The board of directors should review and approve the definitive APA before it is signed. If a board decides that a sale of the company is the best decision, the directors have fiduciary duties to make an informed decision in the best interests of the shareholders. Hiring a business broker and soliciting multiple bids for the business is considered the gold standard to get the best possible price from the sale. The directors should carefully review the deal terms and transaction documents. Directors should also include their lawyers in the board meeting and ask to walk through the key terms of the legal agreements. An attorney can help prepare board minutes that document the process followed and the reasons for the transaction.
The APA must also be approved by the corporation’s shareholders (by a majority of the outstanding shares unless there is a super-majority vote requirement). The shareholder meeting takes place either at or before the APA is signed or between the signing and the closing.
In addition to approving the sale of all assets, the shareholders will often vote to dissolve the corporate entity after the closing. During the dissolution process, the corporate entity turns its assets into cash, pays its liabilities, and then distributes the net proceeds to shareholders.
Dissenters Rights
Most states have a corporations statute that includes dissenters’ rights. Early in the process, an attorney should review the corporations statute and advise whether the transaction is exempt from the dissenters’ rights provisions. In most states, dissenters’ rights do not apply when assets are sold for cash, and the proceeds are distributed to shareholders within one year. If dissenters’ rights apply and the transaction is not exempt, a dissenting shareholder has certain rights to go through a process designed to determine the fair value of their shares.
Real Estate
If the seller leases real estate, the lease must also be reviewed. Oftentimes it will be necessary to receive the landlord’s consent before transferring the lease to the buyer. If the seller owns the real estate, then the real estate will be transferred at the closing.
Title insurance will be obtained to confirm that the seller owns the real estate and to identify any mortgages, easements, or other liens or encumbrances on the property. The buyer will expect all mortgages to be paid at closing, so it gets a clean title to the property.
Often the buyer will obtain a survey of the property to show the precise boundaries and the building’s exact location.
The buyer will also typically hire an environmental consulting firm to examine the real estate for any contamination or asbestos. A Phase I assessment involves a tour of the property, a look at the history of the property, and a determination of whether there are any recognized environmental conditions that may require further investigation. If it looks like there may be serious issues, the buyer may proceed to a Phase II assessment which involves taking soil samples and testing them for contamination.
The buyer may also get a building inspection to inspect the structure, HVAC systems, roof, etc.
Net Proceeds to the Seller
The corporation selling the business closes the transaction and receives the cash purchase price. Out of the purchase price, the seller must pay off its bank loans and other long-term debt. It must also pay its transaction expenses, which include the business broker fee, attorney fees, accountant’s fees, real estate title insurance, etc. Any net working capital adjustment will also affect the net proceeds to the shareholders of the selling corporation.
Early in the process, the seller’s Chief Financial Officer and outside accountant should prepare an estimate of what the net proceeds will be after payment of expenses and taxes.
Escrow Account
The buyer will often withhold between 5 and 10 percent of the purchase price. That money will be put in an escrow account for a period of time. If the seller has misrepresented the business to the buyer, the buyer will take money from the escrow account to make itself whole. If the buyer does not have any legitimate claims, the money will be distributed to the seller at an agreed upon date, often 12 to 18 months after the closing.
For sellers, one tactic is to negotiate a staged release of the escrow funds. For example, 50 percent is to be released to the seller six months after the closing, with the remaining 50 percent to be distributed to the seller 12 months after the closing.
Employee Transition to Buyer
In an asset sale, the employees are the seller’s employees before the closing, and the buyer’s after the closing. The buyer will typically do the same new employee intake paperwork that it would do for any new employee. Employees may be required to fill out an employment application, a form I-9 to verify employment eligibility, etc. Employees will enroll in the buyer’s benefit plans. If the seller has a 401(k), then arrangements will be made to terminate that 401(k) or transfer balances to the buyer’s 401(k) or to individual employee IRAs.
A buyer in an asset purchase is not required to hire all the seller’s employees. Sellers should ask buyers about their intentions as part of the negotiation process and consider severance obligations and policies for any employees not hired by the buyer.
The Closing
At closing, the final documents are delivered, the buyer pays the purchase price, and the business is transferred. Often it is a virtual closing that does not require people to be physically present. The lawyers arrange for documents to be signed and delivered. After the documents are signed, the parties and/or their lawyers will join a conference call, agree that everything is completed, and direct the buyer to transfer the purchase price.
After the Sale
After the closing, the selling corporation then enters a wind-down period that may take 3 to 12 months. The corporation must pay all its creditors.
Bumps along the way
Every deal comes with its frustrations, which can include:
The sale process is taking longer than expected.
The buyer’s due diligence review may seem intrusive. Responding to requests is time-consuming, and it may seem like the buyer is requesting the same information repeatedly.
The buyer may be slow to commit to the future role of key members of the seller’s management team.
The seller may become frustrated with the buyer’s focus on environmental or other risks that have never been an issue in the past.
The buyer may seem overly concerned about contracts and vendor relationships that have not caused issues before.
Some buyers have a smooth and well-thought-out transition process with good communication. Others may have poor communication and may seem haphazard and reactive. A buyer may also be distracted by other deals in the process.
Tips for a Successful Transaction
Here are some tips that can help achieve a better result for the company, employees, and shareholders:
Keep the sale process moving. The longer things drag on, the more likely a bad event will happen. Whether external like market trouble, or internal, like losing key employees or advertisers.
Stay focused on operating the business. A deal can be a huge distraction that negatively impacts operations and earnings. Employees may lose focus, and deteriorating earnings during a sale process can be problematic.
Plan ahead for third-party tasks and lead times – for example, environmental assessments, real estate surveys, obtaining consent from landlords, getting shareholder approval, and paying off bank debt or bonds.
Review employment agreements, deferred compensation arrangements, or bonus or profit-sharing plans with a lawyer.
Be careful with capital expenditures. Using working capital to buy equipment could negatively affect net working capital at closing, and consequently the purchase price.
Create complete, detailed, and accurate Disclosure Schedules. Good Disclosure Schedules reduce the risk of post-closing claims from the buyer, helping preserve the net purchase price.
Have a good strategy and process for announcing the deal to employees and customers.
Manage shareholder expectations. Net proceeds will be reduced by debts, taxes, and transaction expenses. Even after the closing, there will be a wind-down period before final distributions are made.
Consider severance pay for employees who are not hired by the buyer. Some companies pay special bonuses to employees in connection with the deal.
Acknowledge that key members of the management team may be conflicted, disappointed, or even outright hostile to the deal. It could mean changes to their title, responsibility, autonomy, compensation, or even their job.
Work with a bank early on regarding payoff arrangements for bank debt. If more complex financing, such as bonds, are in place, a lawyer can help navigate the complexities of this process.
Be mindful of vacation and travel schedules for key individuals involved in the process to plan ahead and avoid delays.
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