2013 NNBW Business Law Guide

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Working TogeTher For nevada

www.swlaw.com

Snell & Wilmer is a full-service business law firm with more than 400 attorneys practicing in nine locations throughout the western United States and in Mexico.

With nearly 60 Nevada lawyers in over 30 practice groups, Snell & Wilmer has the breadth and depth of experience to be your strategic legal counsel.

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Kelly A. Evans Chad R. Fears Aaron D. Ford Alex L. Fugazzi Suellen Fulstone Charles E. Gianelloni Richard C. Gordon

Cynthia L. Alexander Robert Anderson Greg Brower Marek P. Bute Patrick G. Byrne Justin L. Carley Brian C. Cheney Justin R. Cochran

Joshua D. Cools Vaughn A. Crawford Krisanne S. Cunningham Patricia J. Curtis John S. Delikanakis Craig S. Denney M. Daron Dorsey Kelly H. Dove

Erin McMullen Samuel P. McMullen Leon F. Mead II Bob L. Olson Catherine M. O’Mara Casey G. Perkins Robin E. Perkins William E. Peterson

Jennifer R. Hargis Justin S. Hepworth W. Brian Hulse Ray C. Jones Nathan G. Kanute Michael A. Keller Robert R. Kinas Mark E. Konrad

Swen Prior Jacey Prupas Brian R. Reeve Karl O. Riley Daniel S. Rodman Amy M. Samberg Jay J. Schuttert Paul W. Shakespear

Mandy S. Shavinsky Amy F. Sorenson Michael D. Stein James M. Susa Alison Tashima D. Neal Tomlinson Jeffrey Willis Stephen B. Yoken

2 | business Law Guide 2013

Northern Nevada business Weekly | 3

from left: Brandon P. Johansson, Tracy M. O’Steen, James Patrick Shea, Scott D. Fleming

Prominent and well known in the business bankruptcy field,

James Patrick Shea and his team focus on bankruptcies, debtor and

creditor rights and commercial litigation. Now at Armstrong Teasdale,

the group joins proven and seasoned bankruptcy attorneys in the

firm’s offices in Las Vegas and Reno. Whatever financial challenges

your company may face, contact Armstrong Teasdale.

Las Vegas 702.678.5070 | Reno 775.322.7400 | armstrongteasdale.com

Strengthening

AssetsOur

Financial StructureS, reStructuring and Bankruptcy

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©2013 Sierra Nevada Media Group dba Northern Nevada Business Weekly. All rights reserved.Reproduction in whole or in part without written permission is prohibited. For reprint permission, please contact the publisher.

table of ContentsThe Business Argument for the Appeals Court 4

The Fraudulence of Bankruptcy 6

Beware the False Claims Act, Whistleblowers, and the Importance of Internal Investigations 7

Receiverships 8

Dealing with Partners 10

Nevada Water Rights 12

General Manager Rick CarpenterEditor John SeelmeyerAdvertising Sales C. Eli ZeiterBusiness Manager Inga SmithCirculation Director Keith Sampson

Reporters Rob Sabo Duane Johnson

U. Earl DunnAnne Knowles

Graphic Design Rob Fair

� | business Law Guide 2013

By Debbie Leonard

Conventional wisdom within Nevada’s business community has often held that the expansion of government services is not something that should

be supported. With regard to the creation of a court of appeals in Nevada, however, conventional wisdom could never be more wrong. In fact, Nevada’s business community would be wise to actively advocate on behalf of the proposal to create an appellate court, which will go before the voters in the November 2014 general election.A court of appeals is absolutely critical to cultivating a healthy, thriving business climate in Nevada. There are a variety of reasons why Nevada businesses should support the proposed appellate court.Topping the list is that with a court of appeals, business disputes can be settled much more quickly.Currently, the Nevada Supreme Court’s staggering caseload simply precludes the speedy disposition of appeals. Any Nevada business owner who has been involved in litigation understands the costs associated with the Nevada Supreme Court’s busy docket. Currently in Nevada’s court system, any appeal from one of the State’s 82 district court judges automatically goes directly to the Supreme Court. This results in a significant backlog of cases for the Supreme Court and an associated delay for Nevada’s businesses. In Fiscal Year 2012, 2,500 cases were filed in the Nevada Supreme Court. With just seven Supreme Court justices, that equates to nearly 365 cases per justice per year.Since the court sits in panels of three or seven justices, in reality, that number is at least three times higher, working out to three cases per justice per day every day of the year. This ratio is one of the highest caseloads of mandatory-review cases per justice in the country. Of all the types of appeals that go to the Supreme Court, civil cases, which include most business disputes, take the longest to resolve. Sixty-three percent of all civil appeals before the Supreme Court have been pending more than six months, and more than a third have been pending for more than one year. For a business that is waiting to free up capital, dissolve a relationship, or move on from a bad contract, that wait can mean the difference between success and failure. Another significant consequence of the Supreme Court’s heavy caseload is a lack of law to guide Nevada’s businesses in making prudent decisions.Written opinions

from the court serve as precedent, addressing issues as varied as employment matters, contract terms, real estate deals and everything in between.With the court consumed by the demands of hearing and deciding cases, the justices simply do not have time to write as many published dispositions as the State’s active business climate warrants. Although 2,500 cases were filed in the Supreme Court in Fiscal Year 2012, the court issued only 86 written opinions. That was up from 67 authored opinions in 2011 and 56 in 2010 but still remains inadequate to create the body of law necessary to guide Nevada businesses. As a result of this dearth of legal precedent, there is great uncertainty in many areas of Nevada law, leaving companies to guess regarding the possible outcomes of their business decisions.Nevada’s businesses deserve to operate with confidence thattheir investments in the State are supported by the law.The Nevada economy suffers when businesses expend significant time and resources only to learn that they guessed incorrectly. The proposed appellate court would alleviate the Supreme Court’s heavy burden with minimal fiscal impact.The proposal to be considered by the voters involves a “push-down” model.Under this model, appeals would be filed centrally with the Supreme Court and screened to either remain for consideration by the justices or pushed down to the court of appeals, depending on the issues presented. The court of appeals would address primarily what are known as “error correction” cases — i.e. those that do not present complex issues (such as driver’s license revocation appeals).There would be no new capital expenditures and no additional personnel costs beyond the three court of appeals judges and their staff.Administration would be centralized in the Supreme Court as it is currently.In developing this model, the justices of

the Supreme Court carefully crafted a proposal to expedite the appeals process with careful attention to the economic realities that Nevada currently faces. Convincing voters of the need for the appeals court is going to be a challenge, but approving the court is essential to improve our judicial structure and create a friendlier business environment in Nevada. It will not be easy, though, and this is not the first time it has been tried. In 2010, Nevada voters narrowly rejected a different proposal to create an appeals court. That proposal had very little infrastructure behind it in terms of campaign management and educating voters about the need for the court. The current proposal does not suffer from the same problems.Additionally, Nevada’s demographics have changed, and a new poll suggests that voters now favor the creation of an appellate court by a margin of 48 percent to 42 percent. The Nevada Supreme Court has recently assembled a group of lawyers to assist with the effort.This group of practitioners will be taking an active role in advocating for this measure’s passage by reaching out to business owners to explain the importance of the court of appeals.Additionally, most attorneys who serve in the Nevada Legislature have created a Political Action Committee that is dedicated to securing voter approval of the appeals court. That PAC is actively raising money to finance a voter education campaign, and there is great optimism that this effort will be successful. Making the case to the voters of Nevada that they should create the court of appeals must be a team effort if it is going to succeed, and business owners should add their voices to the chorus in advocating for its passage. ●

the business Argumentfor the Appeals Court

Of all the types of appeals that

go to the Supreme Court, civil cases,

which include most business disputes,

take the longest to resolve.

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By Debbie Leonard

Conventional wisdom within Nevada’s business community has often held that the expansion of government services is not something that should

be supported. With regard to the creation of a court of appeals in Nevada, however, conventional wisdom could never be more wrong. In fact, Nevada’s business community would be wise to actively advocate on behalf of the proposal to create an appellate court, which will go before the voters in the November 2014 general election.A court of appeals is absolutely critical to cultivating a healthy, thriving business climate in Nevada. There are a variety of reasons why Nevada businesses should support the proposed appellate court.Topping the list is that with a court of appeals, business disputes can be settled much more quickly.Currently, the Nevada Supreme Court’s staggering caseload simply precludes the speedy disposition of appeals. Any Nevada business owner who has been involved in litigation understands the costs associated with the Nevada Supreme Court’s busy docket. Currently in Nevada’s court system, any appeal from one of the State’s 82 district court judges automatically goes directly to the Supreme Court. This results in a significant backlog of cases for the Supreme Court and an associated delay for Nevada’s businesses. In Fiscal Year 2012, 2,500 cases were filed in the Nevada Supreme Court. With just seven Supreme Court justices, that equates to nearly 365 cases per justice per year.Since the court sits in panels of three or seven justices, in reality, that number is at least three times higher, working out to three cases per justice per day every day of the year. This ratio is one of the highest caseloads of mandatory-review cases per justice in the country. Of all the types of appeals that go to the Supreme Court, civil cases, which include most business disputes, take the longest to resolve. Sixty-three percent of all civil appeals before the Supreme Court have been pending more than six months, and more than a third have been pending for more than one year. For a business that is waiting to free up capital, dissolve a relationship, or move on from a bad contract, that wait can mean the difference between success and failure. Another significant consequence of the Supreme Court’s heavy caseload is a lack of law to guide Nevada’s businesses in making prudent decisions.Written opinions

from the court serve as precedent, addressing issues as varied as employment matters, contract terms, real estate deals and everything in between.With the court consumed by the demands of hearing and deciding cases, the justices simply do not have time to write as many published dispositions as the State’s active business climate warrants. Although 2,500 cases were filed in the Supreme Court in Fiscal Year 2012, the court issued only 86 written opinions. That was up from 67 authored opinions in 2011 and 56 in 2010 but still remains inadequate to create the body of law necessary to guide Nevada businesses. As a result of this dearth of legal precedent, there is great uncertainty in many areas of Nevada law, leaving companies to guess regarding the possible outcomes of their business decisions.Nevada’s businesses deserve to operate with confidence thattheir investments in the State are supported by the law.The Nevada economy suffers when businesses expend significant time and resources only to learn that they guessed incorrectly. The proposed appellate court would alleviate the Supreme Court’s heavy burden with minimal fiscal impact.The proposal to be considered by the voters involves a “push-down” model.Under this model, appeals would be filed centrally with the Supreme Court and screened to either remain for consideration by the justices or pushed down to the court of appeals, depending on the issues presented. The court of appeals would address primarily what are known as “error correction” cases — i.e. those that do not present complex issues (such as driver’s license revocation appeals).There would be no new capital expenditures and no additional personnel costs beyond the three court of appeals judges and their staff.Administration would be centralized in the Supreme Court as it is currently.In developing this model, the justices of

the Supreme Court carefully crafted a proposal to expedite the appeals process with careful attention to the economic realities that Nevada currently faces. Convincing voters of the need for the appeals court is going to be a challenge, but approving the court is essential to improve our judicial structure and create a friendlier business environment in Nevada. It will not be easy, though, and this is not the first time it has been tried. In 2010, Nevada voters narrowly rejected a different proposal to create an appeals court. That proposal had very little infrastructure behind it in terms of campaign management and educating voters about the need for the court. The current proposal does not suffer from the same problems.Additionally, Nevada’s demographics have changed, and a new poll suggests that voters now favor the creation of an appellate court by a margin of 48 percent to 42 percent. The Nevada Supreme Court has recently assembled a group of lawyers to assist with the effort.This group of practitioners will be taking an active role in advocating for this measure’s passage by reaching out to business owners to explain the importance of the court of appeals.Additionally, most attorneys who serve in the Nevada Legislature have created a Political Action Committee that is dedicated to securing voter approval of the appeals court. That PAC is actively raising money to finance a voter education campaign, and there is great optimism that this effort will be successful. Making the case to the voters of Nevada that they should create the court of appeals must be a team effort if it is going to succeed, and business owners should add their voices to the chorus in advocating for its passage. ●

Debbie Leonard is a Partner at McDonald Carano Wilson LLP in the firm’s Reno office. She is chair of the Nevada State Bar’s Appellate Litigation Section. Contact her through www.mcdonaldcarano.com.


By Glade L. Hall

the use of misrepresentation to obtain money or credit from another is rampant in our society today. Likewise, too many people expect to simply

discharge the resulting obligation to repay through bankruptcy. It is not that easy to do in Nevada. If a Nevada state court judgment can be obtained, there is a clear path to holding that state court judgment non-dischargeable. A recent case will illustrate. Girl meets boy online. Boy represents, in his online profile, that he is a wealthy and successful owner of two businesses and an astute and knowledgeable investor. Boy learns girl has substantial life savings. Boy convinces girl to entrust him to invest those savings. Boy takes the money, then claims he lost all of both his and her money in the stock market. Girl learns boy is unemployed, owns no businesses and claims to have no assets. Girl finds attorney and sues for misrepresentation (fraud). Fraud is a generic term used to describe employment of deception, artifice or trickery to obtain something of value unfairly. Courts have refused to pin it down to precise definitions because experience has shown that the minds of perpetrators are so inventive that judges want the liberty to find fraud in whatever form it takes. It’s like pornography, we know it when we see it. Nevada case law describes the general elements that must be present to find fraud. Applied to our demonstration case they are:

• Boy made a false statement;

• boy knew or believed that his representation was false, or that he had an insufficient basis of information for making the representation;

• boy intended to induce girl to act or refrain from acting upon the misrepresentation;

• girl justifiably relied upon boy’s representation;

• and girl sustained damages as a result.

Girl establishes these elements and obtains her Nevada state court judgment. Boy files bankruptcy. Federal bankruptcy law excepts debts from discharge which arise from false pretenses, fraud and false financial statements. To establish non-dischargeability as a result of fraud under, courts in the Ninth Circuit (our circuit) require proof of:

1. Misrepresentation, fraudulent omission or deceptive conduct by the debtor;

2. Knowledge of the falsity or deceptiveness of his statement or conduct;

3. Intent to deceive;

4. Justifiable reliance by the creditor on the debtor’s statement or conduct; and,

5. Damage to the creditor proximately caused by its reliance on the debtor’s statement or conduct.

If one does not already have a state court judgment, the existence of the facts conforming to these elements can be established by trial before the bankruptcy court. In our demonstration case, the trick was to make sure that when the state court made its findings of fact, the findings were adequate to meet the Ninth Circuit definition of fraud as well as the Nevada definition of fraud. If one does so, there is no question about the efficacy of the judgment. In our demonstration case, the state court judgment does makes the findings necessary to establish fraud under either the state or bankruptcy law definition of fraud. Federal courts, including bankruptcy courts, are required to give full faith and credit to state court judicial proceedings. This statutory requirement has been interpreted to mean that a federal court must give a state court judgment the same preclusive effect it would receive in that state.

Continued on page 14

the Fraudulence of bankruptcy

By Craig Denney and Greg Brower

Companies that do business with the federal government must be cognizant of potential liability under the False Claims Act. Civil litigation may be inevitable at times as a

result of occasional business disputes with suppliers, customers, former employees, or competitors. Companies, however, should be particularly cautious about litigation with the United States as the adverse party. The reasons may be obvious since the federal government has unlimited resources for litigation. The financial consequences under the FCA can be devastating to business operations. As such, companies should be familiar with the FCA, have internal controls and policies, and be prepared to promptly investigate allegations of wrongdoing when they arise. This is simply the cost of doing business with the federal government. FCA investigations and enforcement actions are frequent and have wide reach in most industries, including defense, energy, transportation, healthcare, and gaming. Any business with a government contract or that is receiving government funds as part of a project can have exposure under the FCA if wrongdoing occurs. For example, the Patient Protection and Affordable Care Act (colloquially known as “ObamaCare”) will result in the creation of health insurance exchanges that will offer insurance options and receive subsidies from the federal government for payment of premiums. Congress has ensured that the FCA will apply to fraud involving federal payments to such exchanges.

OvervieW OF the FALse CLAims ACt

The FCA was created during the Civil War because Congress was concerned that suppliers of goods to the Union Army were committing fraud on the military. The FCA provides that anyone who knowingly submits false claims to the government is liable for treble the government’s damages plus a penalty of $5,000 to $10,000 for each false claim. Under this statute, there is liability for any person who knowingly submits a false claim to the federal government, causes another to submit a false claim, or knowingly makes a false statement to induce payment of a false claim by the government. A person does not violate the FCA by merely submitting a false claim to the government (i.e. negligence). A person must have submitted, or caused the submission of, the false claim (or statement) with

knowledge of the falsity. Knowledge of false information is defined as:

(1) actual knowledge,

(2) deliberate ignorance of the truth or falsity of the information, or

(3) reckless disregard of the truth or falsity of the information.

A claim under the FCA is a demand for money or property made directly to the federal government or to a contractor, grantee, or other recipient if the money is to be spent on the government’s behalf and if the government provides any of the money demanded or if it will reimburse the contractor or grantee. The FCA allows private persons (known as “relators”) to file suit for violations on behalf of the government. Lawsuits filed by individuals in this manner are known as “qui tam” actions. Such lawsuits are filed in court under seal, and are served on the U.S. Attorney in the district where the action was filed and also on the U.S. Attorney General. The federal government must then investigate the allegations in the complaint, and then notify the court that it is proceeding with the action (generally referred to as “intervening” in the action) or declining to take over the action, in which case the relator can proceed with the action on its own. If the government intervenes in the qui tam action, it has the primary responsibility for prosecuting the action. When this occurs, the relator now has the proverbial 900-pound gorilla on its side of the litigation. Companies obviously do not want to be the defendant on the wrong side of FCA litigation due to the potential financial exposure.

WhistLebLOWer FiNANCiAL iNCeNtives

Central to the FCA is the financial incentive for private persons to report wrongdoing (or alleged wrongdoing). Often, the purported whistleblower is a former employee of the company. If the government intervenes in the qui tam action, the relator is entitled to receive between 15 to 25 percent of the amount recovered by the government.


Glade L. Hall serves as an Of Counsel member to Hutchison & Steffen. He has years of experience in business & commercial litigation, eminent domain, and administrative law and served as Deputy Attorney General for the Nevada Public Service Commission. He also served on the Board of Litigation for the Mountain States Legal Foundation. He can be reached at 775.324.6447.


By Glade L. Hall

the use of misrepresentation to obtain money or credit from another is rampant in our society today. Likewise, too many people expect to simply

discharge the resulting obligation to repay through bankruptcy. It is not that easy to do in Nevada. If a Nevada state court judgment can be obtained, there is a clear path to holding that state court judgment non-dischargeable. A recent case will illustrate. Girl meets boy online. Boy represents, in his online profile, that he is a wealthy and successful owner of two businesses and an astute and knowledgeable investor. Boy learns girl has substantial life savings. Boy convinces girl to entrust him to invest those savings. Boy takes the money, then claims he lost all of both his and her money in the stock market. Girl learns boy is unemployed, owns no businesses and claims to have no assets. Girl finds attorney and sues for misrepresentation (fraud). Fraud is a generic term used to describe employment of deception, artifice or trickery to obtain something of value unfairly. Courts have refused to pin it down to precise definitions because experience has shown that the minds of perpetrators are so inventive that judges want the liberty to find fraud in whatever form it takes. It’s like pornography, we know it when we see it. Nevada case law describes the general elements that must be present to find fraud. Applied to our demonstration case they are:

• Boy made a false statement;

• boy knew or believed that his representation was false, or that he had an insufficient basis of information for making the representation;

• boy intended to induce girl to act or refrain from acting upon the misrepresentation;

• girl justifiably relied upon boy’s representation;

• and girl sustained damages as a result.

Girl establishes these elements and obtains her Nevada state court judgment. Boy files bankruptcy. Federal bankruptcy law excepts debts from discharge which arise from false pretenses, fraud and false financial statements. To establish non-dischargeability as a result of fraud under, courts in the Ninth Circuit (our circuit) require proof of:

1. Misrepresentation, fraudulent omission or deceptive conduct by the debtor;

2. Knowledge of the falsity or deceptiveness of his statement or conduct;

3. Intent to deceive;

4. Justifiable reliance by the creditor on the debtor’s statement or conduct; and,

5. Damage to the creditor proximately caused by its reliance on the debtor’s statement or conduct.

If one does not already have a state court judgment, the existence of the facts conforming to these elements can be established by trial before the bankruptcy court. In our demonstration case, the trick was to make sure that when the state court made its findings of fact, the findings were adequate to meet the Ninth Circuit definition of fraud as well as the Nevada definition of fraud. If one does so, there is no question about the efficacy of the judgment. In our demonstration case, the state court judgment does makes the findings necessary to establish fraud under either the state or bankruptcy law definition of fraud. Federal courts, including bankruptcy courts, are required to give full faith and credit to state court judicial proceedings. This statutory requirement has been interpreted to mean that a federal court must give a state court judgment the same preclusive effect it would receive in that state.


Craig Denney is an attorney at Snell & Wilmer specializing in white collar defense. He is a former federal prosecutor and board certified in criminal trial advocacy. He can be reached at [email protected].

Greg Brower is a partner in Snell & Wilmer’s Reno and Las

Vegas offices, and co-chairs the firm’s white collar defense

and investigations practice group. He can be reached at

[email protected].

By Craig Denney and Greg Brower

Companies that do business with the federal government must be cognizant of potential liability under the False Claims Act. Civil litigation may be inevitable at times as a

result of occasional business disputes with suppliers, customers, former employees, or competitors. Companies, however, should be particularly cautious about litigation with the United States as the adverse party. The reasons may be obvious since the federal government has unlimited resources for litigation. The financial consequences under the FCA can be devastating to business operations. As such, companies should be familiar with the FCA, have internal controls and policies, and be prepared to promptly investigate allegations of wrongdoing when they arise. This is simply the cost of doing business with the federal government. FCA investigations and enforcement actions are frequent and have wide reach in most industries, including defense, energy, transportation, healthcare, and gaming. Any business with a government contract or that is receiving government funds as part of a project can have exposure under the FCA if wrongdoing occurs. For example, the Patient Protection and Affordable Care Act (colloquially known as “ObamaCare”) will result in the creation of health insurance exchanges that will offer insurance options and receive subsidies from the federal government for payment of premiums. Congress has ensured that the FCA will apply to fraud involving federal payments to such exchanges.

OvervieW OF the FALse CLAims ACt

The FCA was created during the Civil War because Congress was concerned that suppliers of goods to the Union Army were committing fraud on the military. The FCA provides that anyone who knowingly submits false claims to the government is liable for treble the government’s damages plus a penalty of $5,000 to $10,000 for each false claim. Under this statute, there is liability for any person who knowingly submits a false claim to the federal government, causes another to submit a false claim, or knowingly makes a false statement to induce payment of a false claim by the government. A person does not violate the FCA by merely submitting a false claim to the government (i.e. negligence). A person must have submitted, or caused the submission of, the false claim (or statement) with

knowledge of the falsity. Knowledge of false information is defined as:

(1) actual knowledge,

(2) deliberate ignorance of the truth or falsity of the information, or

(3) reckless disregard of the truth or falsity of the information.

A claim under the FCA is a demand for money or property made directly to the federal government or to a contractor, grantee, or other recipient if the money is to be spent on the government’s behalf and if the government provides any of the money demanded or if it will reimburse the contractor or grantee. The FCA allows private persons (known as “relators”) to file suit for violations on behalf of the government. Lawsuits filed by individuals in this manner are known as “qui tam” actions. Such lawsuits are filed in court under seal, and are served on the U.S. Attorney in the district where the action was filed and also on the U.S. Attorney General. The federal government must then investigate the allegations in the complaint, and then notify the court that it is proceeding with the action (generally referred to as “intervening” in the action) or declining to take over the action, in which case the relator can proceed with the action on its own. If the government intervenes in the qui tam action, it has the primary responsibility for prosecuting the action. When this occurs, the relator now has the proverbial 900-pound gorilla on its side of the litigation. Companies obviously do not want to be the defendant on the wrong side of FCA litigation due to the potential financial exposure.

WhistLebLOWer FiNANCiAL iNCeNtives

Central to the FCA is the financial incentive for private persons to report wrongdoing (or alleged wrongdoing). Often, the purported whistleblower is a former employee of the company. If the government intervenes in the qui tam action, the relator is entitled to receive between 15 to 25 percent of the amount recovered by the government.


beware the False Claims Act, Whistleblowers, and the importance of internal investigations


By Louis M. Bubala III and Bret F. Meich

As a creditor to or co-owner of a failing and mismanaged business, you are probably watching your investment or secured collateral disappear.

What can you do to preserve value in your investment? Receiverships are powerful tools for co-owners or creditors of failing businesses. A court-ordered receivership allows one to remove present management and install an independent manager to direct the day-to-day operations of the business, sell assets for the benefit of creditors, or wind-up the company’s affairs when there is a dispute among the shareholders. In the case of an ongoing business, a court-appointed receiver can act to turn the company around, preserving the assets and long-term viability of the business. A receivership presents creditors or minority owners with a unique opportunity to take control of the future of the business. Reorganization or liquidation most commonly occurs in bankruptcy. The problem with bankruptcy, however, is bankruptcy depends on the choice of management and agreement of the majority owners. These are the exact people that creditors and minority owners may be at odds with. Without management’s agreement to bankruptcy, the business will continue to operate at a loss — to the chagrin of creditors and minority owners. But a receivership allows them to initiate a court proceeding that results in the appointment of a receiver. The receivership action gives those out of power the ability to require a change in management, thereby providing a chance to reorganize or liquidate in an attempt to maximize the business’s economic value. Therefore, an organization and its equity members should be aware of a creditor’s or co-owner’s ability to obtain a receiver to manage the company over the objection of the company’s controlling owners and management.

A CreDitOr’s reAsONs tO AppOiNt OF A reCeiver A receiver can be a useful tool for protecting one’s interest in property. Frequently a receivership is initiated when a creditor files a court action seeking to enforce a judgment. In that case, a receiver may take possession of the property to satisfy the debt to the creditor.

A receivership may also be a way to limit one’s liability. For example, a receiver may be utilized to initiate a foreclosure sale on a property with potentially significant environmental hazards. Instead of risking liability by obtaining title to the property, a creditor can seek a court-appointed receiver to carry out the sale and satisfy the debt. A receiver can be useful where a creditor seeks to protect its collateral from being lost as a result of the company’s activities. Nevada law allows for the appointment of a receiver when it is shown that property subject to the creditor’s claim is in danger of being lost, removed, or materially injured. For example, the mismanagement or misconduct of a business’s leadership may irreparably damage a creditor’s interest in and rights to collateral. A receiver may also be appropriate when a company is insolvent, or in imminent danger of insolvency. Whether the company is cash-flow or balance-sheet insolvent, it might be in the best interests of the creditor to have a court-appointed receiver oversee the management or dissolution of the company, especially if the creditor is willing to provide additional financing for the ongoing operations of the business. There are many other bases for obtaining the appointment of a receiver under Nevada law, including fraudulent transfers of property and all other situations where receivers have been previously appointed on equitable grounds. Most commonly, receiverships arise from express provisions in an assignment of rents or under a power of sale in a deed of trust.

receiverships: resolving Disputes with management of a small business

A court-ordered receivership allows one to remove present

management and install an independent manager to direct the day-to-day

operations of the business, sell assets for the benefit of creditors, or wind-up the company’s affairs when there is a

dispute among the shareholders.


By Louis M. Bubala III and Bret F. Meich

As a creditor to or co-owner of a failing and mismanaged business, you are probably watching your investment or secured collateral disappear.

What can you do to preserve value in your investment? Receiverships are powerful tools for co-owners or creditors of failing businesses. A court-ordered receivership allows one to remove present management and install an independent manager to direct the day-to-day operations of the business, sell assets for the benefit of creditors, or wind-up the company’s affairs when there is a dispute among the shareholders. In the case of an ongoing business, a court-appointed receiver can act to turn the company around, preserving the assets and long-term viability of the business. A receivership presents creditors or minority owners with a unique opportunity to take control of the future of the business. Reorganization or liquidation most commonly occurs in bankruptcy. The problem with bankruptcy, however, is bankruptcy depends on the choice of management and agreement of the majority owners. These are the exact people that creditors and minority owners may be at odds with. Without management’s agreement to bankruptcy, the business will continue to operate at a loss — to the chagrin of creditors and minority owners. But a receivership allows them to initiate a court proceeding that results in the appointment of a receiver. The receivership action gives those out of power the ability to require a change in management, thereby providing a chance to reorganize or liquidate in an attempt to maximize the business’s economic value. Therefore, an organization and its equity members should be aware of a creditor’s or co-owner’s ability to obtain a receiver to manage the company over the objection of the company’s controlling owners and management.

A CreDitOr’s reAsONs tO AppOiNt OF A reCeiver A receiver can be a useful tool for protecting one’s interest in property. Frequently a receivership is initiated when a creditor files a court action seeking to enforce a judgment. In that case, a receiver may take possession of the property to satisfy the debt to the creditor.

A receivership may also be a way to limit one’s liability. For example, a receiver may be utilized to initiate a foreclosure sale on a property with potentially significant environmental hazards. Instead of risking liability by obtaining title to the property, a creditor can seek a court-appointed receiver to carry out the sale and satisfy the debt. A receiver can be useful where a creditor seeks to protect its collateral from being lost as a result of the company’s activities. Nevada law allows for the appointment of a receiver when it is shown that property subject to the creditor’s claim is in danger of being lost, removed, or materially injured. For example, the mismanagement or misconduct of a business’s leadership may irreparably damage a creditor’s interest in and rights to collateral. A receiver may also be appropriate when a company is insolvent, or in imminent danger of insolvency. Whether the company is cash-flow or balance-sheet insolvent, it might be in the best interests of the creditor to have a court-appointed receiver oversee the management or dissolution of the company, especially if the creditor is willing to provide additional financing for the ongoing operations of the business. There are many other bases for obtaining the appointment of a receiver under Nevada law, including fraudulent transfers of property and all other situations where receivers have been previously appointed on equitable grounds. Most commonly, receiverships arise from express provisions in an assignment of rents or under a power of sale in a deed of trust.

the pOteNtiAL pOWers OF A reCeiver

A receiver’s power is determined by the court. To aid a receiver’s management of a company, for example, a court order appointing a receiver frequently contains extensive provisions that give the receiver the ability to protect the assets of the company and control its ongoing business. The maxim “one size does not fit all” also applies to receiverships. While a receiver can have extensive power, a court may limit a receiver’s power to the circumstances of each dispute. In cases where a receiver takes control of a small- or medium-sized company, courts may grant the receiver the power to:

• take possession and control of the company’s property;

• collect all present and future revenues and proceeds arising from the company’s business;

• incur expenses and borrow money necessary to conduct the company’s business;

• employ new and terminate the employment of existing employees, managers, independent contractors and other personnel;

• commence a bankruptcy case on behalf of the company;

• surrender land and personal property, including secured collateral to a creditor; and

• implement a smooth procedure and accomplish the transition of assets to secured creditors in order to preserve value.

These powers are not exhaustive, and there are many other powers that a court can grant a receiver depending on the facts of each case.

WhAt tO DO iF A CreDitOr seeKs the AppOiNtmeNt OF A reCeiver

Business owners should be aware of a creditor’s ability to seek the appointment of a receiver. Because mismanagement alone is not a basis for a receiver, a creditor must have additional reasons to take such action, such as fraud, insolvency, or serious risk that company resources will be frittered away. Business owners managing solvent companies are unlikely to face the possibility of a receiver. It is more likely that a dispute between the business and one of its creditors results in the need to resolve the conflict by less expensive means than by receivership. A receivership can be costly to the business. While the expense of retaining a receiver may be a reasonable price to protect one’s collateral, its cost is also a reasonable basis to object to the appointment of a receiver. If, for example, a business’s monthly gross income does not justify the cost of a receiver and if the creditor is not willing to infuse capital to pay for the receiver, a court is not likely to appoint someone to run the day-to-day business of the company. That is one reason why receiverships often involve millions of dollars of assets and liabilities. Given that receiverships pose unique and complex issues for creditors and small business ownership and management, do not hesitate to get advice from legal counsel familiar with obtaining and defending against the appointment of a receiver. ●

Louis Bubala is a member of the Financial & Real Estate practice group at Armstrong Teasdale LLP. He can be reached at [email protected] or (775) 784-3212.

Bret Meich is a member of the Business Litigation practice

group at Armstrong Teasdale LLP. He can be reached at

[email protected] or (775) 784-3206.

Receiverships are powerful

tools for co-owners or creditors

of failing businesses.


By Austin Sweet

An age-old adage states: “Friends and business don’t mix.” The problem is that many people look for the same attributes in a business partner that

they look for in a friend. Friendships and partnerships are both built on trust, common interests, and common goals, and both tend to fail when any of those three factors diverge. Going into business with your friends is natural and has led to some very successful enterprises as well as some epic implosions. Properly organizing your business from the outset will help you successfully address partnership disputes in the future and avoid a scorched-earth dissolution of your business and friendship.

FOrmALize YOur busiNess reLAtiONship Many of the worst partnership disputes started with a handshake. “Handshake deals” are a trial lawyer’s dream because they inevitably lead to some confusion or discrepancy. We’ve all had that moment when we’re positive we’re right, and our spouse / friend / sibling is positive (s)he’s right. Neither person is trying to deceive the other but someone is simply wrong. The same thing happens in business and sometimes the stakes are much higher. These disputes can be avoided simply by formalizing your agreements in writing. “Handshake deals” may have been the Way of the West, but so were duels. Avoid duels. Another important reason to formalize your partnership is that, if you don’t, the law might do it for you. In Nevada, legal partnerships can be created unintentionally: if two or more persons carry-on as co-owners of a business for profit, they have created a legal partnership. Something as simple as pooling your money to buy and flip houses can create a legal partnership with a wide range of legal implications. Formalizing your business relationship will ensure that you remain in control of your partnership without unknown and unintended legal consequences.

ADDress the tOuGh QuestiONs eArLY Entrepreneurs are inherently optimistic people who sometimes have difficulty considering the possibility of getting into a major dispute with their friend and partner. This can lead to some partners never discussing the uncomfortable topic of what to do when something goes wrong.

A common problem arises when a mentor offers his/her apprentice a great partnership opportunity. Often the apprentice feels awkward addressing the mechanics of the arrangement or formalizing the relationship, fearing the mentor will take offense and withdraw the offer. This concern is often misplaced – a good mentor will appreciate your business savvy and be encouraged that you can handle the responsibility you’ve been given. If your partner still resists, it may be time to reconsider the business relationship. Partners with fundamentally different views on how a business should operate cannot run a successful business. Addressing and understanding these differences before it’s too late may save you both substantial frustration and money.

DeCiDe hOW tO resOLve Disputes beFOre theY hAppeN

Most business partners get along when the business starts and friends like to form 50/50 partnerships to give both partners equal rights and authority. However, 50/50 arrangements lead to stalemates: for example, your partner wants to sell now, but you want to hold for six more months. Absent some method to break the deadlock, this type of dispute can destroy an otherwise successful business. Ideally, business partners should avoid 50/50 relationships altogether. However, if you’re adamant about maintaining equal interests, establish a procedure early on for how disputes will be resolved. It is much easier to formulate a dispute resolution plan while all parties get along than to wait for a dispute to arise. Consider agreeing upon a mutually respected third-party (or group of people) whom is willing to informally hear both sides of your dispute and act as the tiebreaker. No partnership begins with disagreeable, untrusting partners, but some end with them. Planning for disputes before they happen will save substantial grief and money. If you don’t plan ahead, someone else (possible a judge) might end up making your decisions for you.

FOrmuLAte muLtipLe exit strAteGies All good business plans begin with an exit strategy, but things get much more complicated when partners are involved. What if your partner wants out before you do? Will you buy him out, or can he sell his interest to someone else? What if you don’t have the cash to buy him out? What if your partner dies? Will his children inherit his interest? If so, do you want to be partners with his children? Including clear and detailed buy-out provisions will help you prepare for unexpected contingencies, allowing one partner to smoothly exit the partnership without ending a longtime personal friendship. Create a “right of first refusal” to ensure that your partner’s share of the company does not get transferred to someone you do not want to do business with. Establish a payment plan in the event that you do not have the cash available to buy-out your partner’s interest. Be very clear about how the business will be valued and how payments will be made. Always have a primary exit strategy and operate your business with that goal in mind. However, preparing for the unexpected contingencies that come with adding partners to your business might save your business and your friendship down the road.

KNOW WheN eNOuGh is eNOuGh Ugly partnership dissolutions are like bitter divorces: both parties get emotional and take unreasonably stubborn positions on objectively silly issues. Like divorces, many of these disputes arise from minor disagreements that fester, grow, and eventually consume both sides. If you feel this downward spiral begin, simply utilize your well-planned exit strategy and get out before irreparable damage is done, either to your business or your friendship. ●

Dealing with partners:Avoiding partnership Disputes and preparing for a smooth exit

Friendships and partnerships are both built on trust, common interests, and common goals, and both tend to fail

when any of those three factors diverge.


By Austin Sweet

An age-old adage states: “Friends and business don’t mix.” The problem is that many people look for the same attributes in a business partner that

they look for in a friend. Friendships and partnerships are both built on trust, common interests, and common goals, and both tend to fail when any of those three factors diverge. Going into business with your friends is natural and has led to some very successful enterprises as well as some epic implosions. Properly organizing your business from the outset will help you successfully address partnership disputes in the future and avoid a scorched-earth dissolution of your business and friendship.

FOrmALize YOur busiNess reLAtiONship Many of the worst partnership disputes started with a handshake. “Handshake deals” are a trial lawyer’s dream because they inevitably lead to some confusion or discrepancy. We’ve all had that moment when we’re positive we’re right, and our spouse / friend / sibling is positive (s)he’s right. Neither person is trying to deceive the other but someone is simply wrong. The same thing happens in business and sometimes the stakes are much higher. These disputes can be avoided simply by formalizing your agreements in writing. “Handshake deals” may have been the Way of the West, but so were duels. Avoid duels. Another important reason to formalize your partnership is that, if you don’t, the law might do it for you. In Nevada, legal partnerships can be created unintentionally: if two or more persons carry-on as co-owners of a business for profit, they have created a legal partnership. Something as simple as pooling your money to buy and flip houses can create a legal partnership with a wide range of legal implications. Formalizing your business relationship will ensure that you remain in control of your partnership without unknown and unintended legal consequences.

ADDress the tOuGh QuestiONs eArLY Entrepreneurs are inherently optimistic people who sometimes have difficulty considering the possibility of getting into a major dispute with their friend and partner. This can lead to some partners never discussing the uncomfortable topic of what to do when something goes wrong.

A common problem arises when a mentor offers his/her apprentice a great partnership opportunity. Often the apprentice feels awkward addressing the mechanics of the arrangement or formalizing the relationship, fearing the mentor will take offense and withdraw the offer. This concern is often misplaced – a good mentor will appreciate your business savvy and be encouraged that you can handle the responsibility you’ve been given. If your partner still resists, it may be time to reconsider the business relationship. Partners with fundamentally different views on how a business should operate cannot run a successful business. Addressing and understanding these differences before it’s too late may save you both substantial frustration and money.

DeCiDe hOW tO resOLve Disputes beFOre theY hAppeN

Most business partners get along when the business starts and friends like to form 50/50 partnerships to give both partners equal rights and authority. However, 50/50 arrangements lead to stalemates: for example, your partner wants to sell now, but you want to hold for six more months. Absent some method to break the deadlock, this type of dispute can destroy an otherwise successful business. Ideally, business partners should avoid 50/50 relationships altogether. However, if you’re adamant about maintaining equal interests, establish a procedure early on for how disputes will be resolved. It is much easier to formulate a dispute resolution plan while all parties get along than to wait for a dispute to arise. Consider agreeing upon a mutually respected third-party (or group of people) whom is willing to informally hear both sides of your dispute and act as the tiebreaker. No partnership begins with disagreeable, untrusting partners, but some end with them. Planning for disputes before they happen will save substantial grief and money. If you don’t plan ahead, someone else (possible a judge) might end up making your decisions for you.

FOrmuLAte muLtipLe exit strAteGies All good business plans begin with an exit strategy, but things get much more complicated when partners are involved. What if your partner wants out before you do? Will you buy him out, or can he sell his interest to someone else? What if you don’t have the cash to buy him out? What if your partner dies? Will his children inherit his interest? If so, do you want to be partners with his children? Including clear and detailed buy-out provisions will help you prepare for unexpected contingencies, allowing one partner to smoothly exit the partnership without ending a longtime personal friendship. Create a “right of first refusal” to ensure that your partner’s share of the company does not get transferred to someone you do not want to do business with. Establish a payment plan in the event that you do not have the cash available to buy-out your partner’s interest. Be very clear about how the business will be valued and how payments will be made. Always have a primary exit strategy and operate your business with that goal in mind. However, preparing for the unexpected contingencies that come with adding partners to your business might save your business and your friendship down the road.

KNOW WheN eNOuGh is eNOuGh Ugly partnership dissolutions are like bitter divorces: both parties get emotional and take unreasonably stubborn positions on objectively silly issues. Like divorces, many of these disputes arise from minor disagreements that fester, grow, and eventually consume both sides. If you feel this downward spiral begin, simply utilize your well-planned exit strategy and get out before irreparable damage is done, either to your business or your friendship. ●

Austin Sweet is an attorney at Gunderson Law Firm, practicing business law directed at helping business owners stay protected and prosper. He can be contacted at (775) 829-1222 or [email protected].


By William J. McKean and Brian H. Schusterman

As the economy strengthens in northern Nevada and real estate development restarts, real property transactions likely will increase. In Nevada, like

most of the western United States, land without water is of limited value. If a person is contemplating purchasing undeveloped land, it is important to ensure that such land has adequate water rights for the land’s proposed use. The goal of this article is to provide potential purchasers of real property with a basic understanding of Nevada water law, particularly in connection with purchasing commercial real estate. In Nevada, all surface and ground water is owned by the people of the state. Pursuant to Nevada Revised Statutes Chapters 533 and 534, a person may obtain a right to use a certain quantity of the state’s surface or groundwater. To acquire a water right, a person must apply to the Nevada Division of Water Resources. Assuming that an application is granted, the NDWR issues a water right permit, which identifies several key components of the right to use the state’s water (e.g., the quantity of water authorized for use, the place of use, the point of diversion, and the manner of use). Each permit also contains two very important deadlines: when the diversion works must be constructed (e.g., a well), and the date by which the water must be placed to beneficial use. Failure to meet these deadlines (or obtain an extension of time from the NDWR), results in the cancellation of the water right. Once a water right is placed to beneficial use, such water right can be “certificated” or “perfected.” A certificated groundwater right must continue to be placed to beneficial use at least once every five years or it is subject to forfeiture. A permittee may modify the place of use, point of diversion and/or manner of use of a water right by filing an application, often referred to as a change application, with the NDWR. If the NDWR grants a change application, the NDWR issues a new permit and the permittee must, once again, comply with the procedures for the water right certification process set forth above.

NevADA DivisiON OF WAter resOurCes reGuLAtOrY stAtus

When acquiring an interest in a water right, one inherits the history of that permit all the way back to the permit’s base, or initial, right. The base right is the original appropriation permit. To fully understand the permit one seeks to obtain, one must research all of the permits back to the original base water right. Thus, before purchasing a water right, the purchaser should review the NDWR file for such right. During this initial phase of research, it is important to obtain water usage information to ensure that a given water right is not at risk of being forfeited.

reCOrD OWNership iN the OFFiCiAL COuNtY reCOrDs

Although it is important to understand who the NDWR recognizes as the owner of record for a given water right, it is not the NDWR’s records that confirm ownership of such right. Thus, an important step in assessing ownership of a water right is to search the real property records of the applicable county recorder (i.e., if the place of use or point of diversion is in Washoe County, the Official Records of Washoe County should be reviewed). In conducting a search of the county recorder records, deeds conveying water rights, as well as deeds conveying land to which the water is appurtenant must both be reviewed, as water rights can be conveyed either separately or with the land to which they are appurtenant. Unfortunately, Nevada’s historical and current requirements with respect filing requirements (i.e, whether water rights deeds need to be recorded in the official records of a given county or just filed with the NDWR) complicate ownership determination.

Nevada Water rights: An Overview for Commercial real property transactions

In Nevada, like most of the western United States, land without water is of limited value. If a person is contemplating purchasing

undeveloped land, it is important to ensure that such land has adequate water rights

for the land’s proposed use.


By William J. McKean and Brian H. Schusterman

As the economy strengthens in northern Nevada and real estate development restarts, real property transactions likely will increase. In Nevada, like

most of the western United States, land without water is of limited value. If a person is contemplating purchasing undeveloped land, it is important to ensure that such land has adequate water rights for the land’s proposed use. The goal of this article is to provide potential purchasers of real property with a basic understanding of Nevada water law, particularly in connection with purchasing commercial real estate. In Nevada, all surface and ground water is owned by the people of the state. Pursuant to Nevada Revised Statutes Chapters 533 and 534, a person may obtain a right to use a certain quantity of the state’s surface or groundwater. To acquire a water right, a person must apply to the Nevada Division of Water Resources. Assuming that an application is granted, the NDWR issues a water right permit, which identifies several key components of the right to use the state’s water (e.g., the quantity of water authorized for use, the place of use, the point of diversion, and the manner of use). Each permit also contains two very important deadlines: when the diversion works must be constructed (e.g., a well), and the date by which the water must be placed to beneficial use. Failure to meet these deadlines (or obtain an extension of time from the NDWR), results in the cancellation of the water right. Once a water right is placed to beneficial use, such water right can be “certificated” or “perfected.” A certificated groundwater right must continue to be placed to beneficial use at least once every five years or it is subject to forfeiture. A permittee may modify the place of use, point of diversion and/or manner of use of a water right by filing an application, often referred to as a change application, with the NDWR. If the NDWR grants a change application, the NDWR issues a new permit and the permittee must, once again, comply with the procedures for the water right certification process set forth above.

NevADA DivisiON OF WAter resOurCes reGuLAtOrY stAtus

When acquiring an interest in a water right, one inherits the history of that permit all the way back to the permit’s base, or initial, right. The base right is the original appropriation permit. To fully understand the permit one seeks to obtain, one must research all of the permits back to the original base water right. Thus, before purchasing a water right, the purchaser should review the NDWR file for such right. During this initial phase of research, it is important to obtain water usage information to ensure that a given water right is not at risk of being forfeited.

reCOrD OWNership iN the OFFiCiAL COuNtY reCOrDs

Although it is important to understand who the NDWR recognizes as the owner of record for a given water right, it is not the NDWR’s records that confirm ownership of such right. Thus, an important step in assessing ownership of a water right is to search the real property records of the applicable county recorder (i.e., if the place of use or point of diversion is in Washoe County, the Official Records of Washoe County should be reviewed). In conducting a search of the county recorder records, deeds conveying water rights, as well as deeds conveying land to which the water is appurtenant must both be reviewed, as water rights can be conveyed either separately or with the land to which they are appurtenant. Unfortunately, Nevada’s historical and current requirements with respect filing requirements (i.e, whether water rights deeds need to be recorded in the official records of a given county or just filed with the NDWR) complicate ownership determination.

Prior to 1995, there was no statutory requirement that a deed conveying water rights be recorded with a county recorder; there was only a statutory duty to file such deed with the NDWR. In 1995, however, the Nevada Legislature enacted legislation requiring water rights deeds to be both recorded with the county recorder and filed with the NDWR. These amendments provided clear direction on how water rights conveyances should be addressed going forward, but they did not apply retroactively. Therefore, when purchasing water rights, it is important to search both the applicable county recorder records and the records of the NDWR.

CONveYANCe DOCumeNts

Water rights, like real property, are conveyed by deed. The deed must be recorded in the county or counties in which the point of diversion and the place of use are located. Unlike real property, however, recording of the deed is not the final step in transferring ownership. In addition to recording the deed, a report of conveyance must be filed with the NDWR. A copy of the recorded deed and a completed abstract of title must accompany the report of conveyance filing (forms are available on the NDWR website). Once the report of conveyance is filed, the NDWR will review the forms and either reject or accept the filing. A rejection occurs if there is any defect in the chain of title based on the deeds on file with the NDWR (the NDWR will not research the county’s official records). Moreover, the NDWR cannot resolve title disputes; any title dispute must be resolved in state court. If the filing is accepted, the NDWR recognizes the new owner as the owner of record, and he or she has the ability to make various administrative filings with the NDWR and is also entitled to receive notifications from the NDWR related to the water right (e.g., notifications with respect to deadlines, forfeiture, or other administrative actions.).

Understanding the regulatory status of a water right, confirming ownership in the records of the county recorder and the NDWR, and making the necessary statutory filings, allows a potential purchaser of commercial real property to be better positioned to understand their investment. Given the complexities of Nevada water law, a potential purchaser of undeveloped land should consider seeking the advice and guidance of a water rights specialist in connection real property acquisitions to ensure that they obtain adequate water for the land’s proposed use. ●

Bill McKean is a shareholder in Lionel Sawyer & Collins’ Gaming and Regulatory Law Department, where his practice focuses on regulatory matters before local, state and federal government agencies.

Brian Schusterman is an associate in the Business Law Department of Lionel

Sawyer & Collins, where his practice primarily focuses

on commercial transactions, real estate and business

organizations.

Contact them through www.lionelsawyer.com.

In conducting a search of the county recorder records, deeds conveying

water rights, as well as deeds conveying land to which the water is appurtenant must both be reviewed,

as water rights can be conveyed either separately or with the land to which they are appurtenant. Unfortunately,

Nevada’s historical and current requirements with respect filing

requirements (i.e, whether water rights deeds need to be recorded in the

official records of a given county or just filed with the NDWR) complicate

ownership determination.

Accordingly, a doctrine called “collateral estoppel” is applied in dischargeability proceedings. In a recent noteworthy case, the Nevada Supreme Court made a tour de force through the pre-existing confusion in Nevada law concerning collateral estoppel. The court then clearly defined and fixed the elements necessary to support a claim of issue preclusion, which it equates to collateral estoppel. The elements are:

1. the issues must be identical;

2. the initial ruling must be final and on the merits;

3. the party against whom the judgment is asserted must be a party or be in privity with a party in the prior

4. the issue must have been actually and necessarily litigated.

As stated under bankruptcy law, where a state court judgment included affirmative findings of fraud, a debtor is collaterally estopped from re-litigating, in a discharge exception proceeding, issues decided in a state court action that resulted in a judgment in favor of a creditor. This collateral estoppel effect, now clearly defined by the Five Star Capital v. Ruby case, creates this preclusive effect in the bankruptcy court.

The U. S. Supreme Court has weighed in by holding that if, in the course of adjudicating a state law question, a state court determines factual issues using standards identical to those of the dischargeability statute, then collateral estoppel, in the absence of countervailing statutory policy, would bar re-litigation of those issues in the bankruptcy court. Simply stated, this means if your state court judgment makes the necessary detailed findings, when the person guilty of fraud attempts to discharge the judgment in bankruptcy, the bankruptcy court is bound to honor the state court findings. The state court findings cannot be re-litigated in bankruptcy court, and the judgment is not discharged in bankruptcy. This brings us back to our story. When boy files his bankruptcy, girl files an adversary proceeding in that bankruptcy followed by a motion for summary judgment. (Summary judgment is a quick and efficient remedy based on written points and authorities.) The motion was granted. Girl gets her money back and enough to pay her attorney. The moral of the story is, when you have been tricked into parting with money or credit, and the trickster won’t pay you back, hire a good lawyer and be patient. ●

bANKruptCY Continued from page 6

1� | business Law Guide 2013

If the government declines to intervene in the action, the relator’s share is increased to 25 to 30 percent. If DOJ intervenes and a financial settlement is negotiated, the relator stands to receive significant compensation and payment of its attorney’s fees. Under certain circumstances, the relator’s share may be reduced to no more than 10 percent. If the relator planned and initiated the fraud, the court may reduce the award. However, in one recent, highly publicized DOJ investigation of UBS Bank for tax evasion of offshore accounts in Switzerland, the purported whistleblower, Bradley Birkenfeld, actually participated in the wrongdoing, was prosecuted criminally, went to prison, and still received over $100 million from the government’s recovery for his report of the UBS false claims. The relator’s share is paid by the government out of the payment received by the government from the defendant. If a qui tam action is successful, the relator is also entitled to be reimbursed by the defendant for legal fees and other expenses of the action.

CiviL iNvestiGAtive DemANDs

When the Fraud Division of the Department of Justice (along with the U.S. Attorney’s Office in the district where the action is filed) conducts the investigation of the FCA allegations, DOJ may issue civil investigative demands for testimony and documents. This allows DOJ to conduct, in essence, a hybrid of civil discovery and criminal investigation of the false claims. Unlike a traditional deposition in civil litigation, however, CIDs do not

allow the defendant to be present to cross-examine the purported whistleblower or other witnesses that DOJ interviews and examines under oath.

iNterNAL iNvestiGAtiONs

A company under an FCA investigation should strongly consider conducting its own internal investigation of the allegations rather than simply wait and see what DOJ determines. Due to the fact that a company is not entitled to be present for CID oral examinations of witnesses, it may be beneficial for the company to gather all the facts and interview witnesses with the aid of outside counsel. This will enable the company to be objective in gathering facts and proactive in efforts to negotiate with DOJ on the allegations and merits of the alleged false claims. The FCA investigation and litigation may last as long as three to five years before settlement or trial. If wrongdoing is uncovered in the investigation, the company may opt to disclose the results of the internal investigation to the federal government with the hope of persuading DOJ not to intervene in the relator’s FCA complaint and also to avoid the imposition of treble damageWWs. Companies that conduct business with the federal government should understand the FCA and have a program in place to respond to and investigate whistleblower complaints when they arise. ●

beWAre Continued from page 7

A T T O R N E Y S A T L A N L A S V E G A R A N C I S C O

All business when it comes to law.

themus

g

Northern Nevada business Weekly | 1�

National reach.

Hometown roots.

www.hollandhart.com

Jim Newman, Partner775.327.3000 [email protected] 5441 Kietzke Lane, Second Floor, Reno, Nevada

Documents

2013 NNBW Business Law Guide