Pandemic-related legal risks that you can’t afford to ignore

Hosted by Neil Amato

These days, it’s tough to know the best next steps for organizations that are reopening to customers or employees — or considering doing so. Lee Terry, who practices corporate and securities law for the Denver firm Davis Graham & Stubbs, has advised organizations and CFOs for years on crisis management. Terry offers insight into the legal concerns that organizations are facing and this advice on future business planning: “You cannot rely on the same kinds of estimates and expectations that you have in the past.”

What you’ll learn from this episode:

  • The considerations involved in reopening an office or place of business.
  • Why such a reopening to employees and customers is one of several legal risks facing organizations.
  • How a company paying rent can ask a landlord for forbearance.
  • What Terry sees as potential emerging legal risks.
  • Why tried-and-true estimates and expectations are no longer reliable.

Play the episode below or read the edited transcript:


To comment on this podcast or to suggest an idea for another podcast, contact Neil Amato, a JofA senior editor, at Neil.Amato@aicpa-cima.com.


Transcript:

Neil Amato: Joined on the podcast by Lee Terry, an attorney who for the past 20 years has made crisis management for businesses his primary practice specialty. Lee has counseled clients large and small, public and private, as well as CPAs and their firms. Today we’re going to talk about the legal risks that could trip up organizations trying to emerge from the COVID-19 pandemic. Lee, thank you for being here today.

Lee Terry: Thanks for having me.

Amato: I’d also like to point out that Lee has been a regular speaker at the AICPA’s CFO Conference, so he’s definitely in tune to the things that CFOs and other accountants are thinking about. So, we’re going to start with one that, obviously, is on a lot of people’s minds. That is the risk of reopening the office during this time. From a legal standpoint, what should finance leaders be doing? What should they be thinking about?

Terry: Well, I mean, the first thing you have to think about is that the landscape is unsettled. No one has actually done what people have talked about, which is make it safe for employers to bring their employees back into an office where they might get infected. There are legal uncertainties as to whether or not, for example, workers’ compensation would apply to someone who contracted the coronavirus when they returned to the office.

More importantly, there are collateral damages, people who might contact the coronavirus or COVID-19 — whichever one we’re going to call it — from someone who contracted it at your office perhaps harmlessly and then gave it to someone who is not an employee. That suddenly means, now, that the employer is at risk for giving it to Grandma, which is not what we want to think about.

There are questions as to whether or not release forms should be used when people come in for this kind of reason. There are also questions about whether or not certain types of insurance would cover these situations besides the workers’ comp insurance. In particular, people are talking about what’s called EPL — employer practices liability insurance. This is a policy which is typically sold in a bundle along with a director’s and officer’s insurance policy and maybe an E&O and perhaps a fiduciary policy. A lot of your listeners will be familiar with that package.

So, there’s not really any certainty about this right now. There’s been some talk in Congress and elsewhere about the desirability of giving employers immunity from suit in order to encourage them to open up their offices. But that kind of immunity is — let’s just say — dangerous to negotiate and perhaps even more difficult to implement. So, I’m not convinced it’s going to ever happen. And I think that if it does happen, it will probably be so limited that it won’t be very valuable. So, that’s your first problem.

Your second problem is that taking reasonable steps like people are talking about doing right now, like, for example, taking the temperature of employees when they enter the office to ensure that they don’t unknowingly have the virus. That has privacy concerns, not to mention — believe it or not — the HIPAA law, the health privacy law. So, whether or not people can even agree even to have that done to them without their consent is something that may come into question.

I mean, I think there are hundreds of lawsuits like this already contemplated if not filed for people who are — believe it or not — either claiming they don’t want to come into the office because they don’t trust it to be safe, or secondly they won’t come back to the office because they don’t want their privacy intruded when they come back in. They aren’t willing to agree to the conditions — the kinds of waivers — that employers are reasonably asking for. It’s not easy.

Amato: No, none of this is. It’s totally new to everyone, so it’s kind of being made up on the fly. We’ve heard about payroll or personnel fraud related to coronavirus. What exactly is that and what do CPAs, CFOs, anyone in business, what’s their concern there?

Terry: Well, it’s a different kind of world we’re living in with all these remote employees taking advantage of their employers potentially. Or, actually, believe it or not, working for multiple employers at the same time since they don’t have to be physically present in one place. While that may sound like, well, more power to them if they can work for multiple employers. The truth is, of course, they’re not working much for any of them. We’re seeing much more of this virtual problem of payroll fraud in terms of working hours, in terms of working sufficiently, working for more than one employer, and things like that.

This is something that really more something to look for at this stage and just to be aware of that this is a possibility that was not there before. To me, it’s really an auditor issue.

Amato: Attorney confirmation letters during this crisis and unasserted claims — that’s an idea you put in my head. Tell me why you think that is a risk that people need to be worried about.

Terry: Well, the way the attorney inquiry letters work is that, pursuant to a treaty between the American Bar Association and I believe it might even be the AICPA, attorneys are not required to respond to requests for information concerning unasserted claims from auditors. So, if the auditor says, “Tell us about any pending litigation that’s out there. And, oh, by the way, tell us about any other unasserted claims that might happen.” Well, lawyers who know what they’re doing simply write back and say, “We aren’t telling you about any unasserted claims because our client in the letter that we got telling us to write back to you did not specifically identify any unasserted claims that we should identify or that we should tell you about. So, we aren’t telling you about it.”

So, this is sort of a normal give-and-take tension between lawyers and accountants and between lawyers and auditors. Auditors would love to know about, you know, “Gee, there’s a potential breach of contract here in our contract with the Acme Widget Company, but no one has said anything about it.” Well, that’s too bad. I mean, the attorney — even if the attorney knows about it — is not supposed to and doesn’t answer.

Well, during the coronavirus crisis that we are going through right now, there are dozens of those kinds of uncertainties. And if I’m the outside auditor for a company that has particular issues that might be out there, I might turn to my client and say, “Hey, I want you to have the attorney brief me not just on the claims that we have right now that — lawsuits that have been filed, or threatening letters have been received from, or regulatory investigations have been launched — I want you to tell him about everything that’s potentially out there.”

That gets to be a delicate deal. The auditor has to tell the client, “OK, I want you to instruct your lawyer to tell me about your problems with Payroll Protection Program loans.” You know, “I want you to have them give me the advice about that.” That is the kind of thing that can be done, but only if the auditor can get the client to instruct the lawyer to specifically describe certain unasserted claims. Normally, that just doesn’t happen very much. But these are not ordinary days.

Amato: “Landlord forbearance.” When I hear that phrase, I think of The Cheesecake Factory at the start of April, “Hey, we’re just not going to pay our rent.” Obviously, not everyone in the world can just say, “Hey, we’re not going to pay our rent.” Fill me in on the info you think organizations need to know on landlord forbearance.

Terry: Boy, I’ll tell you, this is something you just won’t believe. I heard today or yesterday (editor’s note: the episode was recorded in early June) that Starbucks is seeking rent forbearance because their business is down. Now, talk about the cash cow of cash cows in our country, Starbucks is saying they’re short of cash and can’t pay their rent. I don’t know how many locations they’re claiming that in. Frankly, in terms of their business, I don’t even see their business down that much, although I’m sure it is. People are no longer stopping by on their way to the office to get some. But they’ve been open pretty much the whole time for their takeout and delivery type stuff.

The point of this is that landlords have to — let’s start with the landlord perspective and then client perspective. First of all, the client should ask for forbearance and should try to give the best reasons possible for forbearance because, let’s face it, most clients don’t have the business or the cash flow that they used to have. They should not take a “demand” attitude. It should be more along the lines of, “Look, this is what’s going on. This is reasonable. Other people are doing it. I’m willing to talk to you about, for example, perhaps increasing the rent in a corresponding way a year or two down the road or extend the lease if you give me the forbearance now.” There are things a tenant can offer to make it more attractive to the landlord.

From the landlord’s perspective, the landlord has to — as I think I saw in one article, they said — “not be a jerk.” [laughs] The landlord has the right to not accept that. There’s a clause in a lease typically called a force majeure clause. Most force majeure clauses in leases — by the way, a force majeure clause says if there’s an act of war or natural disaster then the parties may be excused from performance. But most force majeure clauses in leases actually say, “Except if those things happen, you still have to pay your rent.” [laughs] That’s because leases are written by landlords; they’re not written by tenants.

But there’s also another doctrine called “The Impossibility Doctrine,” which is a common-law, legal theory by which many tenants, business tenants are going to their landlord and saying, “Hey, you know, we don’t have to pay because this is impossible for us to conduct our business because, for example, of a stay-at-home order. We can’t open our business.” Now it’s getting a lot harder to do that now as time has passed because most businesses are being allowed to open. But still, I think many businesses — certainly restaurants — can argue that as a practical matter, it’s still impossible. I can’t really operate with 25% occupancy. That’s not my business. I can’t make money that way.

Finally, though, there’s this really unusual complication of cities and even some states declaring these eviction holidays or refusals to enforce eviction orders for tenants not paying rent. Now those are largely in the residential context, but a number of commercial tenants have tried to claim their applicability as well. I don’t think they do [apply], but you have to look individually at each one to figure that out.

Needless to say, if the landlord is evicting individual residents and not businesses, that creates some pretty bad optics for the landlord.

Amato: These are some of the things that you’ve been thinking about. Obviously, no one can say, “Oh, we’re totally through this. It’s done.” There’s going to be more things that emerge that we don’t really have a handle on. What can you see kind of in the future as some emerging legal risks?

Terry: Well, I think that’s really the biggest issue. I think we have to expect that there are going to be some major pieces of litigation that are going to affect employers even if they’re not specifically a party to them. I mean, there’s going to be class actions of all sorts that clients and even accounting firms may find themselves dragged into unwillingly because of the incredible number of downturns that are going on simultaneously.

I think the biggest concern that you really have to have is you cannot rely on the same kinds of estimates and expectations that you have in the past. It is almost to the point where a prudent accountant, CPA, or auditor has to assume the worst in terms of third-party distress. Assume, for example, that you’re the CFO or the auditor for a firm which is actually doing really well. For example, a firm that sells boats, OK? Boats, believe it or not, the boat business is booming right now because apparently people are finding that going out on a boat with your group — your “pod,” I guess, is what they call them nowadays — is a great way to get out and be away from people and have a good time without touching. So, the boat business is doing great!

But I don’t think the CPA, or the auditors, or the CFO for these companies can just assume that things really are going that well. For example, I’m wondering whether or not there’s going to be an incredibly high default rate on these boats because of the fact that we have a 40% or something unemployment rate coming up. I don’t know what the number is going to be right now, but it’s 25. You have to assume that the other side of the transaction in this context is not necessarily going to fill its obligations.

So, that kind of forward thinking really needs to be done by accountants and auditors. They really need to be thinking what is likely to happen and what could happen. I’m afraid that because things are not going to go well, they should be thinking about some of those worse things.

Amato: That boat example is a really good one. Lee, in closing, anything to add on this topic?

Terry: Well, yeah. I regret to say this, but I’m afraid that I’m going to be pretty busy in the next six months to a year because I think that there’s going to be a lot of clients in crisis. I think that auditors and CFOs and controllers need to recognize that these types of situations, first of all, are going to be common — much more common than they have been in the past. That they don’t actually indicate that the companies who have these problems have done anything wrong or even that they’re not good companies. These are extraordinary circumstances. I think that they just need to be careful that, when they get into these kinds of crises, that they try to engage in some real management planning that is coolheaded, assumes the worst, and yet plans for the best.

Amato: Excellent. Thank you very much.

Terry: Thank you, Neil. It’s always good to talk to you. I hope that I never have to talk to you about these kinds of crises. I’ve had people say to me when they see me coming and they say, “Uh oh, something’s wrong.” But you know, it works out. We get it done, and I think most of your listeners will find the same thing. You just gotta hang in there, and be methodical, be careful, and keep your chin up.