Home
Areas of Practice
Firm Profile
Attorneys & Staff
Newsletters
Employment
Directions
     
  Report From Counsel  
    Winter 2000  
   

DRIVE NOW, TALK LATER

While driving to a restaurant on a Saturday night, the driver dropped his cellular phone, bent down to retrieve it, ran a red light, and killed a motorcycle rider. However, the main target of the ensuing wrongful death action was the driver's employer, not the driver. Although the accident occurred outside of normal business hours, the plaintiffs alleged that the brokerage firm that employed the driver encouraged its employees to do business by phone in their cars any time of day, and that the driver was trying to call a client when his vehicle collided with the motorcyclist. The case was settled out of court and the plaintiffs received a substantial sum.

The fact that an employee is provided with a cellular phone or pager and is "on-call" at the time of an automobile accident may put the employee "on the job," even where the employee is not using a cellular phone when causing the accident. In one such case, a salesman caused an accident while driving home in the evening. The court found that the employee was acting in the scope of his employment primarily because he was required to carry a beeper and to use it to respond to customers' needs until 7:30 p.m.

For workers' compensation purposes, another court has held that a state employee was acting in the course of his employment when he was in an accident while driving home from work, despite a general rule that while commuting to and from work an employee is not acting in the course of employment. An exception to that rule was found because the employee was on call 24 hours a day and his vehicle was equipped with a cellular phone and a short-wave radio so that he could be contacted while in transit.

On-call status with a cellular phone will not necessarily mean that an individual is acting in furtherance of employment, but it will take significant countervailing facts for a court to avoid that conclusion. For example, a police officer was ruled to be acting outside his employment although he caused an accident while driving a police vehicle to respond to a page received by cellular phone. The court cited the overriding personal nature of the officer's actions based on several facts: (1) he was driving the vehicle back from a golf tournament that he had attended on his own time; (2) the accident was in a neighboring town where he had no authority as a police officer; and (3) he was intoxicated and unfit for duty.

These cases are especially significant for employers who expect their employees to be working the phones, or to be prepared to do so, virtually around the clock, and for whom driving time is regarded as just another good opportunity to conduct business. The cost of squeezing out this extra productivity may well be greater exposure to tort liability when the employee's concentration on business interferes with safe driving. Possible solutions include simply not reimbursing employees for cellular phone use and writing clear policies that will encourage employees to "drive now, talk later." Competent legal advice should be sought before such policies are implemented.

INSURANCE FOR HOME OFFICES

The familiar surroundings of a home office should not lull a homeowner into assuming that standard homeowner's insurance will also cover business-related injuries or accidents. In most cases it will not. When a computer used in the home office is stolen, the homeowner's policy is likely to exclude it from coverage as business property. If a customer or delivery person is injured on the property, homeowner's insurance by itself is likely to leave the homeowner exposed to liability.

The right insurance for a home office will depend on the size and nature of the business. If the business largely consists of an individual and his minimal computer-related equipment, the least expensive option also may be the most appropriate--a rider added to the homeowner's policy to cover normal business risks. A separate policy covering the business is more likely to be necessary where individuals regularly come to the home office or where expensive equipment or inventory is kept there. A third choice offered by some insurance companies is a special policy that covers both a home and a business run from the home. The policy can be tailored to cover the business property, wherever it is used, and to provide protection from business liability lawsuits and loss of income.

Some basic rules of thumb should be followed, regardless of the type of home office. For example, coverage for equipment and furnishings should be based on the full replacement cost, not just on the depreciation value, as is sometimes done in homeowner's policies. Whether a home-based business is organized as a sole proprietorship, a partnership, or a corporation, the insurance should be written to include the business entity, not just the individual homeowner, as an insured party.

SEXUAL HARASSMENT IN THE CLASSROOM

LaShonda, a fifth grader in a public school, was subjected to sexual harassment by a male classmate for many months. The boy attempted to touch LaShonda in a sexual manner, actually did so on at least one occasion, and repeatedly directed explicit sexual propositions toward her. After each incident, LaShonda complained to the supervising teacher. Eventually, three different teachers and the principal had been informed of the problem, but school officials took no disciplinary action against the boy, whose mistreatment of LaShonda continued until he finally pleaded guilty to sexual battery. By that time, LaShonda's previously high grades had dropped, she was unable to concentrate on her work, and she had written a suicide note.

LaShonda's mother sued the school board and other school officials under Title IX of the Education Amendments of 1972, which provides that a student may not be "excluded from participation in, be denied the benefits of, or be subjected to discrimination under any education program or activity receiving Federal financial assistance." Title IX is better known as the basis for providing equal educational and athletic programs for female students, but the U.S. Supreme Court used LaShonda's case to hold that Title IX can be the basis for a damages suit against school officials in cases of student-on-student sexual harassment.

LaShonda had a strong set of facts to support her claim, and the Court was careful to indicate that many less egregious situations could lead to a very different outcome. In the Court's words, "a constellation of surrounding circumstances, expectations, and relationships" determines whether gender-oriented conduct by one student toward another will amount to "harassment" that will support a Title IX lawsuit. Some basic considerations are the ages of the harasser and the victim and the number of individuals involved.

Students who are still learning how to interact appropriately with their peers often engage in insults, banter, teasing, shoving, pushing, and gender-oriented conduct that upsets the students on the receiving end, but simple acts of teasing and name-calling will not lead to a damages award under Title IX. The behavior must be so severe, pervasive, and clearly offensive that it denies the victim equal access to education. The Court also observed that it is highly unlikely that any one instance of one-on-one peer harassment will support a claim, and that peer harassment is less likely to violate Title IX's guarantee of equal access to educational benefits than is harassment of a student by a teacher.

Even the most outrageous harassment of one student by another will not lead to Title IX liability of school officials unless it occurs in a setting over which they have substantial control and in which they fail badly in fulfilling their duties. The officials must have actual knowledge of the harassment and show deliberate indifference to it. School administrators will still enjoy flexibility in dealing with peer harassment, and they will be exposed to Title IX damages liability only if their response is clearly unreasonable.

WHEN CALLING CARDS ARE CREDIT CARDS

A business's monthly bill for long-distance telephone services had charges totalling over $90,000 and included numerous overseas calls. An investigation confirmed that no employee had placed the calls or had authorized anyone to do so. While none of the business's five telephone calling cards was missing, it was clear that someone had stolen the number from one of the cards and gone on a calling spree. The business explained the situation to the long-distance service provider, but the provider eventually turned the matter over to an attorney for collection.

The long-distance provider sued its customer for breach of contract, alleging that the agreement and the applicable federal tariffs filed by the provider required customer liability for unpaid amounts and for finance charges for late payments and attorney's fees. The business argued that it owed only $50 because the calling cards were actually credit cards and were governed by the Truth in Lending Act. Part of the federal Truth in Lending Act is implemented by Regulation Z, which states that the liability of a cardholder for the unauthorized use of a "credit card" may not exceed $50.

The court ruled in favor of the business, pointing out that when the Federal Reserve Board amended Regulation Z to make it cover all credit cards issued for use in connection with extensions of credit, it had explained that "the vast majority of credit cards that are affected by this amendment are telephone calling cards." The Board further stated that coverage of telephone cards took on greater importance because of the millions of such cards that have been issued in recent years and the uncertainty as to what policies would be adopted by telephone companies to deal with unauthorized calls.

The Board defined "credit" in Regulation Z as the right to defer payment of debt or to incur debt and also defer its payment. Whatever other traits a telephone calling card may have, it allows the holder to obtain services and pay for them later. The court rejected the provider's characterization of its cards as merely serving as membership cards or as only providing the method for accessing services without any credit function.

The tariff filed by the provider with the Federal Communications Commission stated that a customer could avoid liability for unauthorized calls only for charges incurred after the customer notified the provider that authorization codes had been lost or stolen. While generally a tariff controls the terms of an agreement between the customer and the provider, the tariff could not change, and the court could not ignore, a federal consumer protection regulation like Regulation Z.

The icing on the cake for the business was the court's ruling that it was not even liable for the $50 allowed by Regulation Z because the provider had not notified users of the calling card that liability would not exceed $50.

ADVANTAGES AND DISADVANTAGES OF REVOCABLE LIVING TRUSTS

The revocable living trust has become such a popular estate planning tool that there is a danger that people are establishing them without thoroughly understanding all of the consequences of doing so.

Advantages

A revocable living trust entails an individual's transfer of assets to a trustee who is appointed in the trust instrument. The individual retains the powers to revoke or amend the trust, and he will normally receive the income generated by the trust for the period of his life. The chief advantages of such a trust are that (1) it establishes an estate plan for the individual ("settlor") while he is still living, thus securing professional management of his assets during his life, with a smooth transition at his death since, at that time, the trust will serve as the equivalent of a will; and (2) the cost and delay of probate are avoided because, unlike assets passing under a will, assets passing at death under a revocable living trust are not subject to probate. At the settlor's death, the trustee of a revocable living trust can continue his management of the assets without interruption and can start carrying out the trust's post-death directions without the need for notice or court approval.

Another advantage is gained if an individual owns real property outside of his home state and transfers it to a revocable living trust. If the individual died owning such property without having transferred it to a revocable trust, it would almost certainly be necessary for his executor to open what is known as an ancillary administration in the proper court of the state in which the out-of-state realty is located. Such action is not needed if the realty has been transferred to a revocable trust.

Steady management of the settlor's assets can be maintained where the settlor, who typically is the initial trustee, becomes incapacitated. The revocable trust can provide that the successor trustee is to assume his trustee status upon the settlor's incapacity. Such a provision can eliminate the need for a court proceeding and the appointment of a guardian. After the settlor's death, there would be no delay in the transfer of assets to the ultimate trust beneficiaries. Therefore, there would be no need for the beneficiaries to take actions such as hiring an attorney, filing court papers, or petitioning the court for temporary living expenses pending probate.

Disadvantages

Disadvantages associated with a revocable living trust primarily involve the formal changes that must be made in order to fund the trust. Because legal title to all of the property to be transferred to the trust must be in the trustee's name, stocks must be reregistered and title to promissory notes, real estate, partnership interests, and any other assets must be placed in the trustee's name even where the settlor is the initial trustee. Such a process can be burdensome.

Because the trust will be operated both during the settlor's life and after his death, it is likely that the total cost of an estate plan centered on a revocable living trust will exceed an estate plan that takes effect only at death. A professional trustee will usually charge on an annual basis, while an executor's fee will normally be a one-time charge. Of course, if the settlor acts as the sole initial trustee, trustee's fees could be greatly reduced.

A revocable trust does not alter the tax liability of the settlor or his estate. Since the settlor will normally be the income beneficiary of the trust, he will be taxed on that income. The settlor's power of revocation will cause the trust fund to be included in the settlor's estate for federal estate tax purposes. Thus, taxation is a neutral factor in deciding whether to execute a revocable living trust. Still, the numerous factors that do affect such a choice must be weighed carefully. The assistance of a skilled attorney is recommended.

LIKE-KIND EXCHANGES

Normally, capital gains are recognized and taxable upon the sale of property. The Tax Code provides an exception to this rule for certain exchanges of property. If all requirements are met, any gain from the exchange is not taxed, and any loss cannot be deducted. Gains or losses will not be recognized until the person who received property in the exchange sells or otherwise disposes of it. The most common type of nontaxable exchange is the exchange of property for the same kind of property, or like-kind exchanges.

To qualify as a like-kind exchange, the property traded and the property received must be both (1) qualifying property and (2) like property. Qualifying property must be held either for investment or for productive use in a trade or business. Typical examples include machinery, buildings, land, trucks, and rental houses. Like property refers to the nature or character of the property. Characteristics relating to the grade or quality of the property are immaterial. All real estate is like-kind to all other real estate, whether or not one or both of the properties are improved. Similarly, an exchange of personal property for similar personal property is an exchange of like property.

Because a straight swap of property is often impractical, the Tax Code allows deferred like-kind exchanges. If the transaction is structured properly, a person can sell one property, have the proceeds held for a period of time, and then use the proceeds to buy new property. The seller must identify the replacement property within 45 days of selling the relinquished property. Also, there must be acquisition of the replacement property within 180 days of the sale of the relinquished property, or the due date of the taxpayer's return for that year, whichever is earlier.

It is common to use a qualified intermediary in making a deferred exchange of like property. A qualified intermediary is a person who enters into a written exchange agreement to acquire one party's property and transfer it to a second party, and also to acquire replacement property from the second party and transfer it to the first party. The agreement must explicitly limit the first party's rights to obtain in any way the benefits of money or other property held by the intermediary. A qualified intermediary cannot be either an agent or a relative of the "exchanger."

There are special rules for like-kind exchanges between related persons. In this context, "related persons" include not only spouses, siblings, parents, and children but also a corporation in which an individual has more than 50% ownership, and a partnership in which an individual owns over 50% of the capital or profits. For a like-kind exchange between related persons, the ability to postpone tax liability for the gain from the exchange is lost if either person disposes of the property within two years after the exchange.

An exchange of like-kind property is only partially nontaxable if the taxpayer also receives money or unlike property in an exchange that produces a capital gain. In that case, the gain is taxable, but only to the extent of the money received and the fair market value of the unlike property.

In general, three basic factors may be considered in deciding whether a like-kind exchange will make sense. The exchanger should (1) receive property with a price equal or greater than that of the relinquished property; (2) have as much, or more, debt in the acquired property as in the property given up; and (3) take no cash out of the transaction. While these are good general guidelines, they are not a substitute for sound advice from an attorney familiar with all of the requirements for a valid like-kind exchange.

 
   
71 Maple Avenue • Morristown • New Jersey 07960 • Telephone: 973-631-1000 • Facsimile: 973-631-1111