FEATURED ARTICLES The Impact of 2020 on the 2021 Legislative Session By Barron Wallace, Peggy Christman and Andrew Prihoda
While 2020 continues to be one of the most challenging years on record, the events of 2020 may offer more challenges to the State of Texas in the upcoming 87th Legislative Session, scheduled to convene January 12, 2021. This article reflects our observations of certain issues, and it should be noted that it is written before the results of November 3rd election are known. The outcome of certain federal and state races could have additional material impacts. Regardless of the outcome of the election, it is safe to say that the Texas Legislature will be confronted with difficult issues that will require tough choices. Over the summer, the State Comptroller reported that the COVID-19 pandemic resulted in or contributed to declines in State sales and use tax revenues and oil prices. As a result, when the Texas Legislature returns it will likely face a revenue shortfall impacting the State’s biennial budget. While some early estimates projected a shortfall approaching $30 billion, more recent estimates indicate an amount closer to $10 billion. The first question the Legislature will have to tackle is how to balance the budget. Will the State’s leadership be willing to use the rainy day fund? How the Legislature will meet its growing education funding obligations under House Bill 3, enacted by 86th Legislature, which reduced school district tax rates and replaced lost revenues with State funding? Will the State be able to enact reforms or modifications to Senate Bill 2, enacted by the 86th Legislature, to drive further ad valorem tax relief? One of the House Ways and Means Committee’s interim charges in preparation for the 2021 legislative session was to consider possible methods of providing property tax relief, including identifying sources of revenue that may be used to reduce or eliminate school district maintenance and operations taxes, so that gives us some insight into their priorities. Given the foregoing, political subdivisions, including particularly school districts, will be watching closely to see what spending gets cut, and by how much. Without legislative action this session, chapter 313 tax abatements will expire soon. Reauthorizing and retooling this economic development tool will be front-and-center for next session. Since the adoption of House Bill 3, it was clear that the 2021 session would be critical to funding for school districts.
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The government’s response to the pandemic will likely remain a prominent issue when the Legislature convenes in 2021, so be on the lookout early and often for bills that address the current emergency, future emergencies, or both. Integral to such bills will be a debate on the scope of the emergency authority extended to certain local and statewide officials. Lawmakers may additionally seek to curtail the effects of disaster declarations, including revisiting provisions authorizing political subdivisions to revert to prior law following a disaster declaration (such as in Senate Bill 3 adopted in 2019). And to top it off, 2021 is a redistricting year. While this may be saved for a special session during the summer, if Republicans lose a significant number of seats in the House, this could be a very difficult issue to resolve. Additionally, given the projection for Texas to pick up additional seats in the federal Legislature, the outcome of the federal election may further impact redistricting. Beyond the substantive matters outlined above, we will have a new Speaker of the House during the 87th Legislative Session. The results of the election will have a significant impact on who emerges victorious in the Speaker’s race. It is also not yet clear how the 87th Legislature will conduct its business. For instance, we do not know whether lawmakers will attempt a “business as usual” approach during a pandemic or switch to virtual meetings. How will virtual hearings and other opportunities to weigh in on legislation be changed? It is clear that 2021 will offer a fair share of challenges during the 87th Legislative Session, but it may offer some opportunities as well.
FEATURED ARTICLES Revisiting Force Majeure and Other Contractual Considerations Amid COVID-19 By David Shargel, Matthew Nielsen and Steve Benesh
In addition to the tragic human toll that it has caused, the coronavirus pandemic has also wreaked havoc on businesses throughout world, leaving countless companies and individuals unable to perform their contractual obligations. While many businesses have reopened since our last client alert on this topic , others have experienced new interruptions amid new spikes in COVID cases. As a result, force majeure and its common law relatives—the doctrines of impossibility and frustration of purpose—remain poised to become a focus of business litigation for years to come. Force Majeure Once a party to a contract has made a promise to perform, it must fulfill its promise even where unforeseen circumstances, including an act of God, make performance burdensome, difficult, or more expensive. If the party fails to perform, it usually is responsible for damages to the other party. However, if the contract contains a force majeure provision, unexpected events could provide a defense to a party’s failure to perform. While it is tempting to assume that the global catastrophic effects of COVID-19 would easily invoke force majeure, the validity of the defense, which courts will narrowly construe, relies upon the specific language of the applicable force majeure provision and the factual circumstances of the parties’ contract. Simply put, because force majeure is a matter of contract, the language in the parties’ agreement determines when and to what extent force majeure will excuse performance in that particular contract. This is best illustrated by an examination of a typical provision that became the subject of a recent dispute involving a lease to operate a restaurant and catering facility at a state-owned park: It provides: If either State Parks or Lessee shall be delayed or prevented from the performance of any act required by this Lease by reason of acts of God, weather, earth movement, lockout or labor trouble, unforeseen restrictive governmental laws, regulation, acts or omissions, or acts of war or terrorism which directly affects the Licensed Premises and/or facilities and services of Jones Beach State Park, riot or other similar causes, without fault and beyond the reasonable control of the party obligated, performance of such act, including payment of all License Fees and R & R deposits due, shall be permanently excused for the period of the delay and the period for the performance of such act shall be extended for a period equivalent to the period of such delay, at which time all payments due shall be resumed.
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Like nearly every other force majeure clause, this example includes a list of triggering events that might excuse performance. Assuming a party claims that, during the peak of the coronavirus and the effects of government shutdown orders—or now with spikes in the virus potentially leading to new interruptions—it cannot perform its obligations, this clause might serve to excuse performance because it includes “unforeseen restrictive governmental laws” as a triggering event. But had that language not been included, the application of this type of provision to COVID-19 becomes far less clear. While the pandemic may seem like an act of God, courts have historically defined that term narrowly. Texas courts, for example, have long defined it as “accidents produced by physical causes which are irresistible; as, for example, winds and storms, or a sudden gust of wind, by lightning, inundations, or earthquakes, sudden death or illness.”1 Similarly, New York views an act of God as “an unusual, extraordinary and unprecedented event,” denoting “those losses and injuries occasioned exclusively by natural causes, such as could not be prevented by human care, skill and foresight.”2 As pandemic-related litigation unfolds it remains to be seen whether an inability to perform based on COVID-19 would be considered an act of God. Even if the illness itself is deemed an act of God, performance-impeding issues like restrictions on business openings may be labeled a human reaction to the virus, not the act of God itself. Other triggering events that may apply to COVID-related performance include the obvious—pandemics, epidemics and disease outbreaks—as well as events like labor shortages, where employees are not available to work due to stay-at-home orders or illness spread within a factory. The bottom line is that, in order to provide an effective defense, the force majeure provision must generally include a triggering event that applies to the COVID-related basis for nonperformance. Many force majeure provisions also include “catch call” language such as “or other similar causes,” as in the example provided above. Catch-all provisions must be interpreted within the context of the provision as a whole, and the legal maxim of ejusdem generis may apply: the catch-all will be interpreted to include only items of the same kind as those listed. Thus, a force majeure provision listing storms, earthquakes, floods “and similar events” may not be interpreted to include events related to COVID-19. On the other hand, some contracts provide more expansive catch all language, capturing any event outside of the reasonable control of the parties. Courts analyzing attempts to rely upon catch-all language, including in Texas and New York, may also consider the foreseeability of the triggering event.3 Given prior epidemics and pandemics, including the 2009 H1N1 pandemic, it remains to be seen how courts will determine the foreseeability of COVID-19. The presence of an applicable triggering event is only the first step in the process of determining whether a party has a valid defense to nonperformance. Unless the force majeure provision provides otherwise, courts generally require that performance be rendered impossible, and not merely more difficult or expensive. For example, a party obligated to manufacture a product may not be able to invoke force majeure where sourcing a component has been made more difficult, but not impossible, due to the pandemic. Issues of causation must also be considered, and language appearing in typical force majeure provisions stating that nonperformance must be “by reason of” or “caused by” requires a showing of direct causation. These issues aside, parties seeking to invoke a force majeure provision must carefully consider what performance is actually excused. For example, force majeure language in commercial leases will typically exclude the payment of rent, meaning that even amidst the occurrence of a triggering event, rent must still be paid. Parties must also think about what happens when the force majeure event ends. By way of illustration, the example provided above makes clear that performance is excused only during the “period of the delay.” Parties attempting to rely upon a force majeure provision must also follow any applicable notice provisions or risk losing the ability to invoke the defense. Depending upon the contractual language, force majeure provisions typically mandate that notice be provided within a certain period of time following the force majeure event, and some require that period updates on the force majeure condition be provided. In litigation arising from the effects of COVID-19, courts have already begun to tackle issues related to force majeure and impossibility. For example, in Palm Springs Mile Associates, Ltd. v. Kirkland’s Stores, Inc., a federal court in Florida cast doubt on a tenant’s ability to claim that a COVID-related force majeure event prevented it from paying rent, observing that “Kirkland . . . has failed to point to factual allegations in the complaint that show the government regulations themselves actually prevented Kirkland frommaking rent payments.”4 Similarly, in Future St. Ltd. v. Big Belly Solar, LLC, a Massachusetts court rejected an argument by a distributor of solar recycling bins that it could not perform its contractual obligations due to COVID-19.5 These cases highlight the
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need to establish causation between the force majeure event and the performance at issue. Alternatives to Force Majeure
Parties to contracts without force majeure provisions are not without a remedy, as the common law doctrines of impossibility and frustration of purpose may provide a defense to nonperformance. Impossibility is exactly as it sounds, and excuses performance where it has become objectively impossible. In addition, the impossibility must be the result of an event that was unforeseen and could not have been addressed by the contract. Similar to force majeure provisions discussed above, mere economic difficulty or burden is not enough to invoke impossibility. In some circumstances, applying these narrow standards to COVID-related nonperformance will be straightforward, as in the case of a vendor who was unable to provide event services on a specified date due to the government’s stay at home orders. But the analysis becomes murkier in other hypothetical scenarios, such as a purchasing party to a real estate contract who claims that shut down orders made a scheduled closing impossible. The seller may assert that the closing could have taken place virtually, or that the purchaser is now trying to escape a contract that has become an economic burden. Such factual issues are likely to be the subject of future litigations. It is worth noting that some courts also recognize the doctrine of impracticability, although there is little functional difference between impracticability and impossibility. Short of impossibility, frustration of purpose may also provide an avenue to relief. This doctrine, also narrowly construed, provides a defense to nonperformance where a change in circumstances makes one party’s performance virtually worthless to the other, frustrating the purpose of making the contract. As explained by one court, “the frustrated purpose must be so completely the basis of the contract that, as both parties understood, without it, the transaction would have made little sense.”6 Practical Considerations Based upon the nuances discussed above, parties seeking to invoke force majeure or common law doctrines to excuse performance should keep several practical considerations in mind: • Provide timely notice of the force majeure event, and consider doing so even if it is not required; • Communicate with the counterparty; • Maintain detailed records related to non-performance, including a timeline of events leading to the inability to perform, copies of relevant government orders and pronouncements, efforts to avoid the force majeure event or identify alternative means for nonperformance, and efforts to negotiate substituted performance. Similar steps should be taken by the party who will be defending against the invocation of force majeure: • Provide a timely response to any notice, and be sure to keep responses realistic, professional and performance-oriented, keeping in mind that any response will likely be filed with the court should litigation occur; • Keep detailed records relating to the nonperformance, including a timeline of events that may provide a counter-narrative, the availability of alternative means for non-performance and, perhaps most importantly, evidence of damages. Drafting Considerations Going Forward Parties currently negotiating contracts should also be sure to address the implications of the ongoing pandemic. Drafting considerations amid COVID-19 include: • Defining the triggering events to include (or exclude) events such as “disease”, “pandemic”, “epidemic”, “public health crisis” and “state of emergency”; • Avoiding overreliance upon “act of God”; • Considering the effect of doctrines like ejusdem generis; • Crafting language making it clear what will happen at the end of the force majeure event, including whether the event permits termination versus a temporary suspension of performance; and • Considering whether to address disruptions to supply chains, labor force and/or access to financing. To conclude, Bracewell’s litigation team has extensive experience representing clients in complex commercial disputes and arbitrations. Should you have any questions related to force majeure or other points from this article, please feel reach out to David Shargel , Matthew Nielsen or Steve Benesh .
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1 Morgan v. Dibble & Seeligson, 29 Tex. 107, 111 (1867). 2 Prashant Enterprises Inc. v. State, 206 A.D.2d 729, 730 (3d Dep’t 1994). 3 See, e.g, TEC Olmos, LLC v. ConocoPhillips Co ., 555 S.W.3d 176, 182 (Tex. App. 2018); Goldstein v. Orensanz Events LLC, 146 A.D.3d 492, 44 N.Y.S.3d 437 (2017). 4 Palm Springs Mile Associates, Ltd. v. Kirkland’s Stores, Inc. , No 20-21724, 2020 WL 5411353 (S.D. Fla. Sept. 8, 2020). 5 Future St. Ltd. v. Big Belly Solar, LLC, No. 20-CV-11020-DJC, 2020 WL 4431764, at *6 (D. Mass. July 31, 2020). 6 Crown IT Servs., Inc. v. Koval-Olsen, 11 A.D.3d 263, 265 (1st Dep’t 2004). FEATURED ARTICLES Tracking the Latest in Policy and Politics with Bracewell’s Policy Resolution Group We know that it can be hard to keep track of all the news coming out of Capitol Hill and the White House these days. Let your Bracewell colleagues in the firm’s Washington, DC-based Policy Resolution Group (PRG) break through the noise for you and for your clients. Over the last few months, the PRG team has provided regular updates on the latest in COVID-19 relief legislation from Congress. Now, with less than a month to go before Election Day, PRG is tracking the race and its implications with PRG Pulse, an up-to-the- minute multimedia resource on Election 2020. Pulse posts feature the perspectives of PRG’s government relations and strategic communications professionals as well as leading guest voices. The latest is a new article from PRG Principals John Lee and Anna Burhop that examines potential leadership shakeups in the 117th Congress. Pulse readers can also peruse polling insights from experts like Kristen Soltis Anderson , co-founder of Echelon Insights and author of The Selfie Vote and Sean Trende with RealClearPolitics. The PRG Pulse 2020 Post-Election Webinar on Wednesday, November 4, 2020 at 9 am CST. Join PRG for our award-winning political and policy analysis virtual event. The complimentary event will feature PRG lobbyists, attorneys and strategic communications professionals – as well as some special guests! Listen live and ask questions as our team of Washington insiders breaks down what the 2020 election results mean for stakeholders in industries from energy and environment to consumer product safety to trade. Click here to register and add to calendar. (Click “Register” at the bottom of the Webex.) For more, subscribe to PRG’s podcast, The Lobby Shop, on Spotify, Apple Podcasts, SoundCloud, Stitcher, or Google Play Music , and follow us on Twitter @PolicyRez.
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Victoria Ozimek | Partner, Austin
What is your specialty within public finance? I am a “103 lawyer,” which means I work on making sure that tax-exempt bonds are just that – tax-exempt. (Section 103 is the section of the Internal Revenue Code from which the tax-exempt status of bonds is generally derived.) I have worked on a wide variety of transactions, including bonds that financed everything from airports to zoos. Our 103 group also works with our clients on post-issuance compliance matters, responses to IRS audits, requests for private letter rulings from the IRS and requests for relief under the IRS’s voluntary closing agreement program. We also serve as special tax counsel in connections with certain financings where another law firm represents the client as bond counsel, but needs our tax expertise for one reason or another. What led you into practicing public finance law? The death of disco. My first career choice as kid was a disco dancer, but after hair bands hit the scene and the disco dancing opportunities dried up, I realized that I needed to
find a new dream. I’ve always enjoyed thinking about how societies function and what motivates certain behaviors, and the law is a big part of both. Once I was in law school, I learned about public finance and everything fell into place. I find it gratifying to work on deals that benefit the public, and putting together all the pieces of the puzzle (and there are many!) is an interesting challenge. As it turns out, the change in career aspirations from disco dancer to lawyer was for the best, as I have two left feet and no rhythm to speak of. What challenges do see ahead for public finance? Every time we think we have seen everything, something else pops up to prove us wrong. The COVID-19 pandemic has been a disruptor on so many different levels, changing the way we are working and completely upending the municipal bond market. Everyone is working in overdrive to make sure issuers are best-positioned to deal with what comes, and we are all spending a significant amount of time working with the federal regulators to address various compliance questions that have come up along the way. It’s also important to keep educating our legislators regarding the importance role that tax-exempt debt plays in supporting and building our communities. Despite the challenges times like this bring, it is heartening to see the industry work together towards common goals. How do you like to spend your free time? To counteract a deep fondness for cookies, I like to spend time moving around outside. Having taken a hiatus from the sport after my kids were born, I returned to rowing a few years ago and get out on the water with the Austin Rowing Club regularly. My family and I also do a lot of traveling when we can. Most recently, we checked Peru off the list. We went for Machu Picchu, but came back with so many other rich experiences we weren’t expecting, which, of course, is the best part of traveling.
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ATTORNEYS IN ACTION Bracewell Public Finance Partners Honored as 2020 Texas Trailblazers by Texas Lawyer Three Bracewell public finance partners have been named 2020 Texas Trailblazers by Texas Lawyer : E. Steve Bolden II, William Mahomes Jr. and Barron F. Wallace. They are among a select group of Texas-based lawyers honored this year for their positive and lasting influence in their firms, practices and communities. Bill Mahomes and Steve Bolden joined Bracewell’s Dallas office in 2019 as partners in the firm’s public finance group after working together at the minority-owned public finance law firm they founded 12 years ago. They are proud to serve as role models for younger lawyers. “When I started there were few opportunities for minority lawyers to work in larger firms. We’ve overcome barriers and our goal is to make sure those barriers are not still there a generation from now,” said Mahomes. The pair recently represented a large financial institution in a debt issuance by the Texas Public Finance Authority to help fund cancer research. The pricing was one of the first to occur since the onset of the COVID-19 pandemic. Barron Wallace, co-chair of Bracewell’s public finance practice, has played a central role in building one of the leading public finance practices in the United States. He advises clients on the financing of public improvement projects that create a sustainable infrastructure that empower communities and community members. “Whether financing green spaces or airports or roads, it’s immensely rewarding to see the results of your work and help solve community issues,” said Wallace, who is currently representing Memorial Park Conservancy in its $180 million plan to restore, preserve and maintain Memorial Park, one of the largest parks in the United States. Wallace holds leadership positions in several civic organizations in Houston, including board chairman of the Houston Parks Board. Jane Macon Honored at 2020 Texas Legal Awards Bracewell partner Jane H. Macon received a Lifetime Achievement Award from Texas Lawyer at the 2020 Texas Legal Awards on September 17. Macon, a partner in Bracewell’s San Antonio office, represents cities, counties, states and countries on public finance and administrative law, public and private partnerships, real estate, civil litigation and land use and development. Throughout her career, she has advised on some of the largest and most complex transactions in Texas and the United States. Macon served as San Antonio’s first woman city attorney from 1977 to 1983. She joined Bracewell in 2013. EVENTS The COVID-19 Vaccine: An In-Depth Discussion Exploring Emerging Legal Issues for Consideration by Employers In a time where employers face scrutiny with respect to the obligation to provide a safe working environment, the approval of a COVID-19 vaccine is certain to present employers with difficult decisions regarding workplace policies. In this recorded presentation , Bracewell lawyers Becky Baker and Bob Nichols examine the potential problems and questions employers are likely to face with the release of a widely available COVID-19 vaccine. NABL’s The Workshop On September 23-25, 2020, several Bracewell lawyers participated at NABL’s The Workshop: Virtual 2020. Victoria Ozimek participated on the “Tax Hot Topics” panel, Brian Teaff participated on the “Preparing to Deliver the Bond Opinion: Tax Due Diligence and Documentation” panel and Ed Fierro moderated the “Understanding the Role of Municipal Advisors” panel. Texas Association of School Board’s Council of School Attorneys Kelly Frels made a virtual ethics CLE presentation to the members of the Texas Association of School Board’s Council of School Attorneys entitled “Advice for Law Practice and Life” on October 16, 2020.
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UPDATES Since our last newsletter, our public finance team has distributed a number of federal securities and tax law updates as well as announcements and attorney commentaries. If you missed them the first time or would like to refresh your memory, we have compiled the most recent of our team’s updates here. FY 2021 Sequestration Reduction Rate for Direct Pay Tax Credit Bonds Set at 5.7% September 24, 2020 By Brian P. Teaff, Victoria N. Ozimek and R. Todd Greenwalt SEC Leaders Ask Municipal Issuers for Voluntary COVID-19 Disclosure May 7, 2020 By Paul S. Maco, Britt Cass Steckman, Edward Fierro and Shelby Harden IRS Relief for Governmental Issuers Seeking to Temporarily Buy Back VRDOs and Commercial Paper May 6, 2020 By R. Todd Greenwalt, Victoria N. Ozimek and Brian P. Teaff IRS Allows Telephonic TEFRA Hearings in Light of COVID-19 May 5, 2020 By R. Todd Greenwalt , Victoria N. Ozimek and Brian P. Teaff IRS Extends Due Date for First Quarter Form 8038 Filings April 15, 2020 By R. Todd Greenwalt, Victoria N. Ozimek and Brian P. Teaff Texas Governor Allows Temporary Suspension of Certain Open Meeting Statutes March 17, 2020 By Edward Fierro, Jonathan K. Frels and Barron F. Wallace New Law Repeals Parking Tax for Tax-Exempt Organizations January 8, 2020 By Brian P. Teaff and R. Todd Greenwalt
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DID YOU KNOW? • To have an event such as the COVID-19 outbreak considered as a force majeure event, a party should have the relevant provision to specifically include “pandemics,” “epidemics” or “disease.” • The principles behind the force majeure clause originated in a case in 1861 where an English court determined that circumstances beyond the control or fault of two contracting parties excused performance under their contract. An event organizer had contracted with a venue owner to rent a music hall and gardens for four days but an accidental fire destroyed the music hall. • The term “act of God” was first used in 1858 in Peter Simmonds’ Dictionary of Trade Products, where he states “Force- majeure, a French commercial term for unavoidable accidents in the transport of goods, from superior force, the act of God, etc.”
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