DBTC Law Firm

Jack Butt

Rewarding Whistleblowers with Secrecy

The Internal Revenue Code has long rewarded whistleblowers who report tax fraud by providing them a percentage of taxes collected as their reward. Such whistleblowers are frequently jilted lovers or disgruntled or fired bookkeepers, administrative assistants, or other insiders who get financial reward and revenge by reporting their employers’ indiscretions. Confidentiality of the whistleblower can accompany the award. Such whistleblowing has, however, become its own “big business” along with questions of confidentiality.

Internal Revenue Code §7623(b) awards a percentage of collected proceeds from a whistleblower’s information as a reward to the whistleblower. Rule 345(a) of the Tax Court Rules of Practice and Procedure provides privacy protection for those people who are allowed to request anonymity from the court. The reasons for anonymity must be factually demonstrated.

While in a conventional case this could protect the employment of an ongoing employee who has reported his employer, a Federal Court of Appeals case decided on July 26, 2019 (124 AFTR 2d, 2019-5090) disclosed that whistleblowing had become big business, and with it new questions regarding confidentiality.

The case disclosed that the whistleblower was not a jilted lover, disgruntled employee, bookkeeper or insider, but rather a self-described “analyst of financial institutions” who derived from publicly filed records probable tax evasion. In that case, this professional whistleblower claimed that the corporation had evaded paying nearly $100 million in taxes. Of more interest, the decision reflected that this particular whistleblower had as many as 56 separate whistleblower reports pending before the Tax Court and the Internal Revenue Service, indicating that this was a large scale and potentially highly profitable enterprise. The Tax Court created a new label for this phenomenon, “a serial claimant” or “serial filer.”

The Tax Court held that because the whistleblower was not risking loss of employment, there was no need to ensure anonymity. The United States Court of Appeals reversed the Tax Court, advising that whether this whistleblower, or any other whistleblower, was a “serial filer” was irrelevant to whether they were entitled to confidentiality, and declared that there was no precedent for a public policy disfavoring anonymity for serial filers who rely upon publicly available information.

The case was returned to the Tax Court to consider whether the whistleblower had made a factually supported basis for protecting his identity.

 

The Patchwork Quilt of Liquor Laws in Arkansas is Indecipherable, But Is It Unconstitutional?

Anyone who has driven from town to town, county to county, through Arkansas discovers that they need to plan carefully where and how they might have a cocktail. Being six inches to one side or the other of a county or city line can make all the difference. This arbitrariness has not gone unchallenged.

White County, Arkansas, under the Arkansas legal framework of allowing each local government to decide whether to permit or prohibit the manufacture and sale of alcoholic beverages, has prohibited the same. Mr. Brennan, a Searcy resident, asserted that he wanted to open a liquor store, consume alcohol in restaurants, and purchase alcohol without having to travel outside his home county. He urged that the issue was a matter of safety in that he suffers an “unnecessarily increased risk of being involved in an alcohol-related, fatal crash” because he has to travel afar to legally imbibe. He also argued that in dry counties, drug related crime constitutes a greater threat to the public than in counties where the sale of alcohol is legal. Finally, he argued that there was no legitimate state interest in using the police power to impose “majority morality,” on those whose conduct does not harm others.

The Arkansas courts made short work of his arguments, finding that such law, so long as it had even the least rational basis at all to achieving any legitimate governmental objective under any reasonable conceivable fact situation, had a “rational-basis” and therefore would stand under well-established constitutional law principles which give authority to the legislature to make whatever laws they may, as long as they have any rational basis. Brennan v. White County, 2019 Ark. App. 146.

 

No Good Deed Goes Unpunished: When Trying to Help a Little Hurts a Lot

A landlord who had no legal obligation to do so, voluntarily fixed a trailer tenant’s refrigerator. Later that day, the tenant blew himself up lighting a cigarette because of a disconnected gas line in the trailer. Though the landlord in the first place had no obligation to repair the refrigerator, the possibility that he may have impacted the gas line when he did so, made him potentially liable for all those damages– perhaps best that the landlord had left well enough alone and let the tenant repair his own refrigerator!

Under Arkansas law, Arkansas Code Annotated §18-16-110, a landlord is not liable to a tenant for death, personal injury, or property damage caused by any defect or disrepair on the premises, unless landlord by specific agreement has agreed to correct or repair any such defects or disrepair, or the landlord has assumed, by conduct, a duty to maintain or repair the premises. In Hurd v. Hurt, 2017 Ark. App. 228, the landlord had no written leases with his tenants, but from time to time undertook at a tenant’s request, to make repairs. Consistent with that practice, at the tenant’s request, the landlord repaired the tenant’s refrigerator and later that day, the tenant in lighting a cigarette blew himself up. The cause of the explosion was determined to be a disconnected gas line. The landlord had not been requested to review or repair the gas line. However, the court ruled that since the landlord had undertaken to repair the refrigerator, he was obliged to do so in a reasonable manner, and whether that repair broke the gas line and that was an unreasonable effort to repair the refrigerator were questions that should be decided by the jury, rather than automatically exculpate the landlord. Had the landlord simply declined to make any repairs for the tenants, he would have had no liability for the gas line explosion, regardless of how it was caused.

 

Paying The Very Expensive Price Of Not Believing All Politics Are Local.

A much disputed election of officers in the Crittenden County, Arkansas, branch of the NAACP occurred in 2010. All of the incumbents were defeated and replaced. The National NAACP organization, backing the local incumbents, claimed in several written and spoken public declarations over many months that the election was void, refused to acknowledge the new officers, and denied the Chapter participation in the state convention — all to the prejudice of the local, disarrayed chapter. The Arkansas Court of Appeals recently upheld the Circuit Court’s decision which confirmed the elections and held the National NAACP organization in contempt of court, fining it $100,000 and charging it $20,000 in attorneys’ fees. Interesting points resulted about the effect of court injunctions on non-parties.

The continuing and significant efforts of the National NAACP organization in refusing to acknowledge the newly-elected officers and challenging the validity of the Chapter were brought into Circuit Court by the new officers. Initially, the National NAACP organization was not a party to the action and during that interim period, several orders, including injunctions, were issued confirming the validity of the newly-elected officers.

The Appellate Court held that even though the National NAACP organization was not a party to the suit at the time the injunctions were issued, nor had it become a party by the time many of their declarations of invalidity were made, any person or entity, regardless of whether they are a formal party to the litigation or not, is bound by the terms of an injunction if duly served with it. The National NAACP organization’s intermeddling with court-approved local affairs was severely sanctioned by the Circuit Court, and its decision was approved by the Court of Appeals. 207 Ark. App. 166, March 15, 2017.

Taking the Bait: Is it justifiable to rely on a bare statement that a toolbox is worth $150,000?

The old adage, “[i]f it seems to be too good to be true, it probably is,” is well worth considering the next time you make a large purchase. That advice would have come in quite handy for a woman and her son who paid an extra $100,000 for a parcel of real estate in order to purchase various tools that were located on the property.

Prior to selling the parcel of real estate, the seller told the purchaser’s son that sale included valuable tools that were located on the property. He represented that the tools were worth $150,000, but offered to sell them along with the real property for “only” an additional $100,000. Considering the offer to be a bargain, and without actually seeing the tools, the woman and her son took the bait – hook, line, and sinker. They made the purchase without any further investigation. However, after the woman and her son eagerly purchased the real estate and accompanying tools, they almost immediately discovered that the tools were actually only worth about $8,000.

As a result of their shocking discovery, the woman and her son pursued a lawsuit against the seller and alleged various causes of action that included fraud. Although there was little doubt that the seller knowingly misrepresented material facts and that the mother and son relied upon those misrepresentations in entering into the real estate purchase agreement, in order for the fraud claim to be actionable they also had to prove that they were justified in relying upon the misrepresentations. The trial court found that the son had justifiably relied upon the seller’s misrepresentations, and it granted him a judgment against the seller in an amount equal to the difference between the $100,000 that was paid for the tools and $8,000, the actual value of the tools. The Arkansas Court of Appeals upheld the trial court’s ruling, concluding that, although the son was familiar with tools and real estate transacting, he was not an “expert.”

While the Arkansas Court of Appeals upheld the judgment against the seller, two dissenting Arkansas Court of Appeals Judges warned that the majority had effectively done away with the requirement that reliance be justifiable in proving fraud. Citing Restatement (Second) of Torts §541 (1977), a legal treatise, the Judge reminded the majority that one “cannot recover if he blindly relies upon a misrepresentation the falsity of which would be patent to him if he had utilized his opportunity to make a cursory examination or investigation.” Despite the dissenting Judges’ admonitions, the majority’s ruling resulted in the son recovering a judgment against the seller in the amount of $92,000.

Even though the plaintiffs were successful in proving fraud and obtaining a judgment, they were unable to get the contract completely rescinded and they were prevented from recovering any attorneys’ fees that were expended in their various appeals. If there is one lesson to be learned from their misfortune, it is that if a deal appears to be so fantastic that it is almost unbelievable, it might be worth doing some preliminary investigation prior to biting into that shiny hook.

The Unexpected Serendipities From Not Cleaning Up the “Loose Ends” In A Divorce

Divorces are designed by law and intended by the parties to conclusively end their relationship with each other and separate their property so that each can go forward with their assets untethered from the marriage. Sometimes, the parties, their lawyers, and/or the law leaves some “money on the table” for the other spouse. This is, thus, a problem that could be cured by the legislature, the parties, and/or their lawyers – but probably will continue to happen to the unwary.

Our previous blog article (9/25/13’s “Too smart for their own good: unintentionally leaving everything to the just-divorced spouse“) discussed what can happen if the parties, while married, use the increasingly popular “revocable trust” in their estate planning and fail to revise both that trust, and their wills, upon divorce.  The Arkansas Court of Appeals, in Hudspeth v. Hudspeth, 2017 Ark. App. 30, has decided that the same can happen with life insurance. In that case, the husband had $60,000 of life insurance provided by his employer. The parties divorced, and the Separation Agreement gave to each party the “cash value” of their respective life insurance policies, and each of their own “basic benefit plans, special retirement supplements, and thrift savings plans,” and any right to claim “any survivor benefits under the other’s benefit plan as a surviving spouse.”

During their marriage, the husband had named the wife as the beneficiary of his life insurance. He did not change that upon divorce. Upon his death, his ex-wife made claim for it, and while the trial court found that the various general provisions recited above somehow removed the ex-wife as the death beneficiary, upon appeal, the Court of Appeals found that none of the above provisions specifically addressed the death benefit of life insurance.  The Court of Appeals confirmed that when insurance policies are not addressed in a divorce decree or property settlement, the rights of the designated beneficiary are determined in accordance with contract law without regard to the effect of a divorce between the insured and the beneficiary.  An ex-spouse named as a beneficiary in such a life insurance policy will be able to collect it.

“Good condition” is not a reliable warranty; “right to return for purchase price” is.

One would think when purchasing anything from an automobile to an appliance to equipment, that the assurances of the seller that the item is in “good and reliable” condition would be an effective warranty protecting the buyer. It is not. Make sure you get a written promise to return it for your purchase price if not satisfied.

The Arkansas Court of Appeals decided on November 9, 2016, the case of Epley vs. Gibson Auto Sales, 2016 Ark. App. 540. In that case, Ms. Epley bought a car from a used car dealer, Mr. Gibson. Mr. Gibson admitted that he told her the car was in good condition. After trying to drive it and dealing with multiple problems and repairs for over a year, she returned the car, claiming a breach of its warranty that it was in good condition. Testifying in her behalf was the person who had traded the car to the dealership, who said he had advised Mr. Gibson that in the car’s 110,000 miles, it had a long history of repairs and damage and, in the owner’s opinion, the car should be scrapped and used for parts. None of this, of course, was shared with Ms. Epley who instead was told by the dealer that the car was in “good condition.”

The Court found the assurance that the car was in “good” condition was a subjective term subject to interpretation by individuals as to exactly what that meant, and thus not a firm warranty. It was in the realm of permissible “puffing,” rather than an objective guarantee. In so ruling, it is now the law in Arkansas that any assurance that something is in “good” condition is for all legal and practical purposes, a legally worthless assurance.

Fortunately, the Court found that an oral promise had also been made that the car could be returned for the purchase price if the buyer was dissatisfied, so the disappointed new owner was afforded relief. It is always a dangerous thing to rely on an oral promise; though oral promises are usually “legal,” they can be very difficult to prove with certainty. The moral of this story is, ignore any assurances that some used property you are buying is in “good” condition, and get the written assurance of the seller that if you are not satisfied for any reason, you can return it for your purchase price.

The “terror” of no-contest clauses

Clients, seeing or hearing of bitter and expensive legal disputes in other families over estates, concerned about their own family engaging in such disputes after their death, or both, often seek to avoid that by requesting their attorney insert “In terrorem” (Latin– “about fear”) or “non-contest” provisions in their wills or trusts. Simple in concept, these clauses rarely serve the intended purpose and, as a recent decision of the Arkansas Court of Appeals demonstrates, can cause, as well as resolve, probate litigation.

Such a clause in a will or trust may read, “any beneficiary challenging the validity or distribution of this will or trust shall be disinherited and take nothing.” Clients do not realize the various ways that estate litigation can, and sometimes should, arise: Has the executor or trustee who controls the estate after the death of the client actually stolen from or been negligent with the assets of the estate? Was grandma competent, or because of age, senility, poor judgment and ungrounded fears, actually incompetent or under substantial improper influence when she signed such a will or trust giving her entire estate to Hari Krishna? Is the language of the will or trust truly so ambiguous that how it should be distributed is completely uncertain? Families and next of kin feel strongly and morally justified to set such wrongs right, but barring the door is a “no-contest” clause!

In a recent decision, the Arkansas Court of Appeals refused the request of one son to enforce an in terrorem clause against his brother because neither son abided by their mother’s wishes or the terms of the trust. Scott v. Scott, 2016 Ark. App. 390. Our courts have also generally ruled that when a challenger of a will prevails on whatever claim they have, the no-contest clause is deemed inapplicable. So, has it really accomplished anything? One must also realize that the sanction of taking nothing from the will or trust has no validity if the purported beneficiary is given nothing in the first place: a prodigal child is given one dollar in the will, but faces the sanction of losing “everything” if he challenges the will– really what does he have to lose? To make this work against a beneficiary to whom the client may want to leave little, the client will have to leave that beneficiary enough that he risks a significant forfeit if he does challenge the will.

In summary, most if not all of the claims against a will or its administration that a “no-contest” clause may stop can nevertheless be asserted, may prevail, and perhaps should prevail. That is not to say in very carefully considered circumstances, a properly and carefully conceived and drawn no-contest clause could effectively and substantially diminish the possibility of spurious estate litigation, but such a clause is almost never the simple, “cut out the bad apple” result that clients would presume when using one.

“How was your day at the office, honey?” “Don’t ask, you won’t believe it!”

The awesome sweep of federal law enforcement authority is often depicted dramatically in the movies. However, real life experiences demonstrate the overpowering reality of law enforcement when it intersects with the lives of ordinary citizens. Such was the seizure of the Mountain Pure water bottling facility in central Arkansas on January 18, 2012. This “wild west” story is an interesting interpretation of constitutional rights.

The Small Business Administration (“SBA”) and Internal Revenue Service (“IRS”) suspected that John Stacks, owner of Mountain Pure, LLC, and its 100,000 square-foot bottling facility in central Arkansas, had committed fraud in applying for disaster relief after a tornado allegedly damaged company property. So, on January 18, 2012, at 8:45 a.m., 35 federal and state law enforcement agents armed with search warrants arrived without prior notice at the plant with their sirens sounding and lights flashing. The agents wore ballistic vests, each carrying loaded handguns and secondary weapons. Upon their entry of the building, employees were pushed against a wall, threatened with pistols, gathered into the break room, had their cell phones confiscated, were detained there for the balance of the day with outside contact forbidden, and subjected to interrogation, while the 100,000 square-foot plant was scoured for evidence of the suspected fraud. It was a scared, unhappy, perplexed bunch of employees who were finally released to go home eight hours later at the end of their “work day.”

Some of the astonished and upset employees, believing their constitutional rights had been offended by these dramatic actions, sued. The United States District Court for the Eastern District of Arkansas, as affirmed by the United States Court of Appeals for the Eighth Circuit, ruled that these actions were reasonable under the Fourth and Fifth Amendments to the United States Constitution, did not violate the employees’ constitutional rights regarding search, seizure or interrogation, and thus gave no rise to any legal relief. Just another day at the office. Mountain Pure v. Cynthia Roberts, Eighth Circuit Court of Appeals, #15-1656, February 25, 2016.

It is an election year once again!

While the presidential race is now dominating the media outlets, if you watched any television in the last few months you undoubtedly know that two hotly contested races for positions on the Arkansas Supreme Court and Court of Appeals just concluded in this state’s March primary. The vast amounts of money which were spent by and on behalf of this year’s judicial candidates – and the often undisclosed source of those funds – have raised new questions about whether it is best to elect or to appoint our appellate court judges.

Arkansas is one of 22 states which elects its appellate judges. The Arkansas Supreme Court is comprised of a Chief Justice and six associate justices, all of whom are elected from the state at large to serve eight year terms. Twelve judges make up the Arkansas Court of Appeals, which typically hears cases in panels of three. Each of those judges is elected by constituents in the judicial district in which he or she resides and is also elected to serve an eight year term. These two appellate courts decide all of the appeals from the decisions of our 121 state circuit court judges. The only objective requirement for Supreme Court and Court of Appeals candidates to be elected is that they be licensed attorneys of this state for at least eight years immediately preceding the date of assuming office. No requirement otherwise exists by which to judge the intellect, experience, legal expertise, abilities, character or standing in the legal community for these candidates.

Voters often know the men and women running to serve as circuit judges in our state trial courts, who must live in the circuit they serve. However, those same voters usually know very little about the candidates for positions on our appellate courts. This is in large part a consequence of the Arkansas Code of Judicial Conduct, which is intended to ensure an independent, fair and impartial judiciary. Unlike political office-seekers, judicial candidates are prohibited by the Code of Judicial Conduct from speaking about their positions on specific issues, as such statements might be expected to affect the outcome of a matter pending or soon to be pending in court. That Code also prohibits judicial candidates from soliciting or accepting campaign contributions other than through a campaign committee. These “safeguards” to large degree backfire in practical effect.

Candidates for judgeships are not supposed to know who donates to their campaigns, so as not to be influenced by those donors in their judicial decisions. This mandate creates real problems in both the judicial races and subsequent service as judges. That a judge remain ignorant of election support, when a prominent lawyer or citizen hosted a large fund-raiser for the judge’s campaign, is not a realistic expectation. However, pretending to remain ignorant of that unavoidably obvious fact when such lawyer or citizen is then in that judge’s court precludes the judge from admitting any bias and allows him or her to adjudicate “fairly” those who clearly facilitated election to the judge’s current office and job.

These rules have also led to the infusion of so-called “dark money” – money spent by non-profit organizations which are not required to identify their donors. The result has been that millions of dollars are spent on judicial elections – much of it by out-of-state special interest groups – and that money typically takes the form of negative, attack-style advertising. It has been reported that more than $1.3 million was spent in TV ads in the two Arkansas high court elections which just concluded, which is more than double the amount of money previously spent on any Arkansas judicial election.

In short, judicial elections have become politicized, high-stakes contests, just like races for state governmental offices. Should Arkansas move to a new system of selecting its appellate judges? About half of the states employ a merit-selection system under which judges sitting on their highest courts are either appointed by the state’s governor or a panel of legislators or are nominated by non-partisan panels. In some states those judges then face periodic retention elections.

There is now a move afoot among Arkansas lawyers and in the Arkansas legislature to consider whether reforms should be made in our state. The Senate Judiciary Committee is studying whether there is support for putting on the November ballot a Constitutional amendment which would have justices appointed rather than popularly elected. Other legislators are working to propose legislation which would increase transparency by requiring disclosure from groups spending money on ads in judicial races. Yet, many lawmakers, as well as members of the Arkansas Supreme Court itself – including both of the candidates in the race for Chief Justice of the Supreme Court – have said that they favor retaining the present system of having the voters elect judges. Proponents of elected judges believe that competitive elections are the most democratic way to make judges accountable to the public they serve. Adherents of the appointment/retention system contend that this system greatly reduces the influence of special interest money and leads to the selection of better-qualified candidates.

There is also political pressure mounting that judges be specifically aware of who contributes to their campaigns, including all of the dark money, and combining that requirement with a mandate that such judge recuse and disqualify from those cases where any person or corporation involved has contributed more than a modest sum. Time will tell whether our current system will remain in place or whether Arkansas will decide to utilize some form of merit selection for our courts of last resort and make judicial election contributions more transparent and judicial disqualification more specific. What are your views?