New Jersey Lawyer & Attorney : Stark & Stark Law Firm : New Jersey Law Blog

Driving under the influence or DUI can be a statutory disqualification event that prevents a registered representative from associating with a broker/dealer, and thereby preventing a registered represent from earning a living in the securities industry. It is not intuitive that a DUI incident is or should have any bearing on an individual's ability to be an effective securities salesman or have any bearing on that individual's ability to comply with the dictates of NASD Rule 2110 (requiring that a rep "observe high standards of commercial honor and just and equitable principles of trade"), the reader should appreciate the consequences of a DUI related incident. The National Adjudicatory Council denied a Broker/Dealer's Membership Continuance Application (or MC-400 Application) filed on behalf of Registered Rep, deciding that this Rep is statutorily disqualified from participating in the securities industry.

The disqualifying event was a 2002 DUI incident to which the Registered Rep pled guilty. He was also charged with related misdemeanor offenses, namely "aggravated, unlicensed operation of a motor vehicle". What is significant, here, is the fact that that this 2002 DUI was a felony - most DUI incident's are misdemeanors ... up to a point. This is the moral of this NAC decision. It is very important that a registered rep know or learn at what point that DUI misdemeanors become felonies in their home State or in the State where the DUI incident takes place.

Although there were other aggravating factors in this decision (such as customer complaints), the National Adjudicatory Council dwelt on the DUI incident as the fundamental reason for denying the Sponsoring Firm's MC-400 Application. The NAC, in fact, stated: "We have considered whether the particular felony at issue, examined in the light of the circumstances related to the felony, and other relevant facts and circumstances, creates an unreasonable risk of harm to the market or to investors. What makes this case particularly interesting and compelling is the fact that Registered Rep had completed intensive inpatient and outpatient programs. The NAC actually said that it was "impressed" with testimony given by individuals from the Court Intervention Project about Registered Rep's "successful rehabilitation and therapy". And, NAC said it was "impressed" that Registered Rep had been involved with Alcoholics Anonymous. Yet these two important factors failed to carry the day.

NASD Market Regulation recommended that NAC deny the MC-400 Application for two reasons: (1) the DUI at issue was a felony and therefore a serious offense and (2) Registered Rep was a "repeat offender". NAC agreed with NASD Market Regulation and denied the MC-400 Application, but it is not entirely clear from this decision whether it was the fact that the DUI was a felony or that Registered Rep was a "repeat offender" was the deciding factor. In fact, NAC suggested that Registered Rep simply had not been in rehabilitation long enough to determine whether fundamental change in Registered Rep's pattern of behavior to warrant to the conclusion that he can and would conduct himself in a responsible and compliant fashion in the securities industry. What is clear is that NAC shared NASD Market Regulation's concern that Registered Rep's continued participation in the securities industry would present an unreasonable risk of ham to the market or investors.

There are several lessons to be learned from this case. First, DUI is a serious obstacle to your career in the securities industry. Avoid making the mistake of drinking and driving. However, if you do take the risk and become a DUI offender, make sure that you know whether the DUI for which you are charged is a misdemeanor or felony in the State where the DUI incident occurs. In some States, the fact that your DUI incident is related to an accident could not only prevent the prosecutor from offering you a probationary and rehabilitation program as an alternative to going to trial, but could also trigger transforming a misdemeanor offense into a felony. This usually happens when the DUI related accident involves serious injury to a person. But realize that just injury - as opposed to "serious" bodily injury to a person can trigger a felony charge. Make sure you understand the subtleties of the criminal law in the State where the DUI incident takes place.

A final comment. DUI is becoming an increasingly familiar occurrence in our country; and, because the criminal laws and procedures in many States make it increasingly attractive for first-time DUI offenders to accept probationary and rehabilitation programs as an alternative to going to trial and conviction, most DUI violators readily accept a prosecutors offers without giving any thought to consequences. While a "no-brainer" for most individuals, securities professionals with NASD registrations should require more counsel from their criminal defense counsel than the recommendations usually offered. Press your counsel with questions that are relevant to you - a securities professional - and not simply relevant generally to every DUI defendant. Some States require you to plead guilty of DUI, allowing the court to suspend sentence pending completion of your probation and rehabilitation program, and then never impose sentence, effectively letting the DUI remain in limbo. Other States have a "diversion" program, where there is no entry of any plea of guilty: The DUI offender is automatically placed on probation, with his license suspended for a short period of time; and, if the DUI offender attends rehabilitation classes successfully, there is no judgment of guilt at all on the record. In other words, these options can be particularly attractive in the heat of the moment. But you do need to realize that there is trade-off for a subsequent DUI incident. Usually, a repeat offense results in mandatory prison time. But a repeat offense can make a subsequent DUI incident a felony. This has relevance for you, the securities professional. Make sure that you know or learn at what point a subsequent DUI incident becomes a felony. To assist you, it is recommended that you take a look at the "Subsequent Non-Injury DUI as Felony: State Statute Chart", put out by the National Traffic Law Center. In any event, the underlying NAC decision is worth reading. It is cited as In the Matter of the Continued Association of X as a General Securities Representative with The Sponsoring Firm, Redacted Decision, SD Decision No. 04005 (NAC, October 12, 2004).

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Getting divorced is one of the most stressful times in a person's life. Emotional issues such as custodial time with the children and who is at fault become inextricably bound with the financial issues of support and equitable distribution. There are many choices to be made at a time when perhaps you can't even think straight. One of those choices is whether to start legal proceedings in court and advance through litigation or try to settle the issues through mediation.

Divorce mediation is a process whereby the husband and wife attempt to reach a resolution of the issues involved in their case (outside of an adversarial process) with the help of a neutral third party. Many times the mediator is an attorney but his/her role is not to give legal advice but to facilitate discussions and explore options with the parties. It is the parties who come to an agreement. The mediator is not a judge and is not there to enter into the dispute or take sides. The mediator's role is the manage the conflict and maintain the process.

The first step in any mediation is to identify the issues. Most issues involved in a divorce case are financial such as child support, alimony, and equitable distribution of assets and debts. However, custody may also be an issue ripe for mediation. The parties must decide parenting time arrangements not only on a daily basis, but must also deal with holidays, vacations, education and medical issues.

In order to successfully mediate a divorce case, both parties must participate on a level playing field. Information is key to solving problems and if one party has most of the information, he/she must share that information fully and truthfully. Several sessions of a mediation may be used to gather financial information such as the value of each and every asset and debt as well as the incomes and future expenses of both parties. This information is shared and each issue is explored thoroughly with both parties offering suggestions on how best to resolve that issues. The mediator may also suggest options or alternatives for the parties' consideration.

Each party should consult with an attorney during the mediation process to become familiar with the law and how it applies to their case. Since the mediator does not give legal advice, it is imperative for the parties to seek that advice before entering into any agreement. It is far better to obtain that advice early on, then after the process is finalized.

When all of the issues have been resolved between the parties, the mediator drafts a Memorandum of Understanding which sets forth the parties' agreements. This document is not signed. Each party should then take it to their attorney to be reviewed and transformed into a Property Settlement Agreement.

There are several benefits to mediation as opposed to litigation. It is a non-adversarial process. The parties want to solve their problems and maintain their relationship, most often because of the children. Litigation tends to pit the parties, one against he other, with each digging in their heels and fighting to the death. Mediation is a gentler process. Further, it is private. Outside intervention is basically limited to the mediator although experts may be consulted to give advice. The mediation process will, in all likelihood, be less expensive than litigating the case and the process is faster because it is done on the parties' time line, not the court's.

Mediation is not right for everyone. It works best for those who recognize they have a dispute, agree on the need to resolve it, and want to actively participate in the process designed to settle their dispute.

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Stark & Stark's Investment Adviser Regulation group is pleased to announce that the latest Investment Adviser Compliance Update has been published and is available for download. The Fall 2005 edition covers topics including:

Registration Renewals / Annual Reviews
States Adopt SEC Policies and Procedures Rule
Required Rule 206(4)-7 Annual Review
Availability of RSS feed dedicated to Securities and Investment News

You can download a copy of the latest Investment Adviser Compliance Update here (PDF).

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Timothy Duggan, chair of the Bankruptcy & Creditor's Rights group, was interviewed in the October 24, 2005 edition of NJBIZ magazine. The interview, "Spotting the Snares in the New Bankruptcy Law," discusses the federal Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 that recently went into effect, which will make it harder for financially strapped consumers and businesses to get a fresh start by filing for bankruptcy.

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This case involves a taking of property pursuant to a judgment of repose which approved Mount Laurel's plan to meet its obligations to build 814 affordable housing units. The plan was incorporated into a judgment of repose entered December 3, 1997. Mount Laurel Township argued that the entry of the judgment of repose on December 3, 1997 was the appropriate date of valuation since it was the date upon which "action was taken by the condemnor which substantially affects the use and enjoyment of the property by the condemnee." See, N.J.S.A. 20:3-30(c). The property owner argued that the correct date of valuation was the date the complaint was filed on May 8, 2002. Since property values were rising between 1997 and 2002, the date of valuation would have a significant impact on the just compensation to be paid to the property owner.

The court reviewed the legislative history and cases interpreting section (c) of N.J.S.A. 20:3-30 and found that "substantial affect" upon the use and enjoyment of the property is occasioned when the "condemnor takes action which directly, unequivocally and immediately stimulates an upward or downward fluctuation of value and which is directly attributable to a future condemnation." In short, there must be a causal nexus between the increase or decrease in value of the property and the acts taken by the condemning authority. Without this casual link, subsection (c) does not apply.

In the Mount Laurel case, the court reviewed the judgment of repose and letters drafted by the Township's attorney. Of particular importance was the provision in the judgment of repose which states that the judgment is effective "unless modified by further order." In addition, the developer's attorney wrote to the condemnee's attorney advising him that it was possible that "none of defendants' land would be needed for the project." Further, the 1997 judgment was modified in June 2001 to reduce amount of property taken by Mount Laurel.

The court concluded that the record before the court not include any evidence that the increase in the property's value was due to the 1997 judgment of repose. In fact, the court found that it was undisputed that the increase was caused by inflationary circumstances. Since there was no causal nexus between the judgment of repose and the increase in the value of the property, the Appellate Division found that the proper date of valuation was the date of the filing of the complaint.

In rising markets such as the one we are confronted with today, property owners generally want a later date of valuation. However, there are certain exceptions (i.e., change in zoning) which may make it beneficial to use an earlier valuation date. Nevertheless, the proper valuation date should be discussed with your attorney and appraiser when developing your litigation strategy.

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Generally, after a divorce, a person loses the "spouse" status which would qualify he or she as a dependent under the other spouse's health insurance plan. At the beginning of your case, you should review your spouse's health insurance policy to confirm whether or not you will be qualified as a spouse for health insurance coverage after your divorce.

If your spouse's plan no longer considers you to be a "spouse" for health insurance coverage you may still be able to obtain coverage pursuant to a COBRA election. A COBRA election would require your spouse's employer to extend an option to you to purchase coverage in your old policy. You should contact your spouse's employer right away to find out the cost of the election and the time in which you will have to apply for coverage under COBRA because many employers require the application for COBRA to be made within days of your divorce judgment so you need to make sure you apply within the law's strict time requirements.

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This week's New Jersey Legal Update podcast will discuss the fast approaching deadline requiring that certain hedge funds register for regulation by the Securities and Exchange Committee.

This week's New Jersey Legal Update is presented by Dan Munley a member of the Firm's Securities group.

You can download the New Jersey Legal Update Podcast # 15 here.(14.5MB)

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In 2005, an insurance agent / financial planner / registered rep was suspended for sixty (60) days and fined $5,000 and ordered by NASD to re-qualify by examination for failing to disclose his outside business activities (OBAs). You may read and shrug your shoulders and ask the question, "what's so unusual about this?"

Unlike the usual OBA case, where the Registered Rep fails to disclose to his broker / dealer that he is involved in more exotic ventures like selling promissory notes issued by car dealerships or equity ownership interests in Mexican real estate ventures or shares in payphone investment contracts, this Rep sold to "non-proprietary insurance products", many of which were fixed insurance products. Your interest may be piqued, somewhat, but still you ask, "what's the big deal about this case?"

Consider these facts. This Rep started his "career" of "selling non-proprietary insurance products" when his Division Manager referred two neighbors to this Rep. The Rep interviewed the neighbors and prepared a plan that included both survivorship and term life insurance products that, NASD agreed, were appropriate to the customer's needs. The problem: The Rep's BD did not offer the survivorship product, and so the Rep sold the customers a survivorship product offered by an insurance company not affiliated with the Rep's BD. Significantly, the Rep's Division Manager attended the customer interview, and actually knew about the sale of this "non-proprietary insurance product" to the customer, and never mentioned to the Rep about the need to complete an OBA form before or after effecting the sale of outside insurance products.

Based on this experience, the Rep repeated this pattern of selling products that he believed were best suited his customer's needs. If "house products" were suitable, he sold these; if "non-proprietary products" were suitable, he sold these instead. As NASD explained, this Rep "put his clients' interest ahead of his own, often earning lower commissions on non-[proprietary] products than he would have been paid for selling the client an equivalent [proprietary] product." This Rep "disclosed fully to his clients the identity of the company whose product he was selling, and the features, benefits, and fees associated with those products." This Rep [never represented that [his BD] somehow endorsed his sales of non-[proprietary] products or that it approved any of the non-[proprietary] products." Finally, NASD admits that "none of [this Rep's] customers was harmed by his sales practices. To the contrary, his clients benefited from his actions by paying lower premiums, and he earned their trust and respect."

Another interesting fact in this case: This Rep's first sale of an outside product took place in 1989, but it wasn't until 1997 that his BD required its reps to disclose outside business activities on a corporate form - the form that required disclosure outside insurance products.

Yet another interesting fact in this case: This Rep never received his BD's client relations guide or compliance manual, which was supposed to have explained the firm's policy on outside business activities.

One more interesting fact: In 2001, this Rep's Branch Manager wrote a letter to the firm's Field Compliance Director, confirming that the Manager had conducted close review of this Rep's transactions, client files, and mail logs going back to 1998; and that, as a result of his review, he was aware of the magnitude of this Rep's sales of non-proprietary products and extent that these sales adversely affected the Rep's income (meaning, commissions were consistently secondary to the customer's best interests.)

Notwithstanding all of these compelling facts, this unfortunate Rep found himself having to defend himself in an enforcement proceeding that charged him with violating Rule 3030 - the NASD rule that requires Reps to disclose to their broker/dealers all outside business activities, even if these OBAs are not securities-related.

In reaching its decision, NASD had some very laudable things to say about this Rep. He "never attempted to mislead his supervisors about his outside business activities or conceal them." Since the inception of his employment with his BD, this Rep's Division Manager "encouraged him to seek the most appropriate products for each client, regardless of the provider." This Rep had "mistakenly confused outside business activity with selling away". (As a former compliance examiner, I can attest to the fact that discussions during annual compliance meetings confirm that reps are often confused about the difference between OBAs and "selling away".) NASD confirmed that this Rep testified credibly, "accepted responsibility", and "was contrite". Above all, none of this Rep's customers were injured; in fact, these "customers benefited from [his] outside business activities." And as a kind of testimonial to this Rep's integrity, NASD pointed out that "his concern for his customers adversely affected his own financial interests". Equally important, "there is no evidence of financial injury" to the Rep's company, admitted NASD.

So you ask: Don't any of these good things count for anything? The short answer is no, at least on the liability side of an enforcement case (they help, somewhat, to mitigate sanctions imposed.) OBA violations come close to being strict liability cases. In other words, if you fail to complete an OBA fully and accurately, NASD can find you liable - even if you are an otherwise exemplary professional in the securities industry. As NASD points out, "the purpose of the Rule is to give the firm a meaningful opportunity to review the representative's activity and determine the extent, if any, to which it should supervise his involvement." In other decisions, NASD has pointed out that the purpose of Rule 3030 is, not only to prevent harm to the investing public, but also to limit a firm's entanglements in legal difficulties that can result from unsupervised outside business activities, especially ones not even related to the securities industry. In other words, to protect a Broker Dealer from having to supervise an activity in which it has no expertise and to prevent the need for the BD to defend itself in a lawsuit that does not even involve its "bread and butter". Precisely because of these two risks to your Firm, all Registered Reps should take their firms' OBA policies very seriously. The penalties for not doing so can be severe.

You can read the entire case here.

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Thomas Giachetti, chair of the Securities Group authored "An Overview of External Transition Planning for the Registered Investment Adviser" which appeared in the September 2005 Charles Schwab Institutional Compliance Review.

To summarize the article in brief, the external transition process involves a number of components, including, from the outset, making sure that the selling and acquiring firms protect their most important asset, their client relationships. Without protection of the client relationships from departing and/or new employees, the seller or acquirer runs the risk of a potentially disastrous result. Coordination of the process (including due diligence) by and among each firm's professional advisors (e.g., CPAs, attorneys, management consultants, etc.) is also critical to a successful transaction. Prudent planning, comprehensive due diligence and the retention of experienced professional advisors will help ensure a successful external transition process.

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New Jersey's Department of Community Affairs recently adopted rules governing child-protection window guards. Under current New Jersey law, certain community associations and cooperatives are considered multiple dwellings and thus there has been speculation that these new rules will apply to those associations. However, the Chief of the Department of Community Affairs' Bureau of Housing Inspection recently put in writing that, "condominiums are still exempt from the regulations requiring the installation of child-protection window guards."

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Companies operating within the financial services industry as registered investment advisers must be cognizant of developments in federal and sate securities laws. Within the past year, the United States Securities and Exchange Commission (“SEC”) enacted Rule206(4)-7 under the Investment Advisers Act of 1940, which addresses compliance-related policies and procedures. During the past year, we have monitored regulatory examinations conducted by various securities bureaus, specifically relating to the Examiner’s review and evaluation of firm compliance policies and procedures. There appears to be a growing concern, that theses documents are not sufficiently tailored to the firm’s operations. In light of this concern, it has become increasingly important for all advisory forms to conduct an internal comprehensive review that compares the firm’s written documents with those procedures undertaken on a day-to-day operational basis.

An integral aspect of Rule 206(4)-7 compliance is the designation of a chief compliance officer (“CCO”) who is charged with the administration of all adopted policies and procedures. The CCO should conduct the aforementioned policy and procedure review to ascertain the adequacy and effectiveness of its implementation. The review must occur at least annually, but this presupposes that the foundation documents upon which the firm relies are consistent with the firm’s operations. While the exact policies and procedures to be addressed differ from one advisory firm to another, it is clear that the CCO who attempts to prepare compliance policies and procedures must consider the specific intricacies of the advisory firm itself. The individuals acting on behalf of the firm should begin by identifying both actual and potential areas of conflicts of interest, in addition to other compliance factors that create risk exposure. Most importantly, the final product must reflect that the firm undertook a reasonable attempt at preventing regulatory violations.

Since initial passage of the SEC Rule, many state advisors have expressed their preference to delay adoption of compliance policies and procedures until such time as required by the state(s) within which they are registered. Our office has anticipated that state securities bureaus would either adopt the SEC Rules or establish a comparable rule, and true to form, many states have in fact already adopted the SEC Rule. For both state and federal advisers who have yet to establish compliance policies and procedures, firm personnel should immediately conduct an internal evaluation and adopt appropriate internal procedures. To avoid heightened regulatory scrutiny and potential statutory violations, remedial action should occur prior to regulatory examination.

As with all regulatory requirements, it is extremely important to consult the Advisers Act directly and/or obtain counsel competent in this area for the full breadth of requirements and expectations. The investment advisory atmosphere has become exceedingly litigious, and it is absolutely imperative that registered investment advisers understand and satisfy their regulatory obligations.

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As of the end of October, the NASD will institute a new Form available through WebCRD. The new form, Form BR, is intended to disclose information pertaining to a firm's branch office(s). Many states have already issued releases on the matter, requiring submission of Form BR by certain broker-dealers and state registered investment advisers, and other states are currently considering the utility of the form. It is anticipated that submission of the new Form BR will require the concurrent payment of a filing fee. All firms are advised to contact counsel and/or the securities bureau for the state within which the firm is registered to ascertain the applicability of Form BR to that particular firm's circumstance and situation.

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Robert J. Durst, Chair of the Divorce Group, and T. Sandberg Durst, member of the Divorce Group, spoke at the American Academy of Matrimonial Lawyers Fall Forum in Atlantic City on September 29. Their presentation was on "The Imputation of Income in a Divorce Case."

Read more about the imputation of income here.

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Companies operating within the financial services industry as registered investment advisers must be cognizant of developments in federal and state securities laws. Within the past year, the United States Securities and Exchange Commission ("SEC") enacted Rule 206(4)-7 under the Investment Advisers Act of 1940, which addresses compliance-related policies and procedures. During the past year, we have monitored regulatory examinations conducted by various securities bureaus, specifically relating to the Examiners' review and evaluation of firm compliance policies and procedures. There appears to be a growing concern that these documents are not sufficiently tailored to the firm's operations. In light of this concern, it has become increasingly important for all advisory firms to conduct an internal comprehensive review that compares the firm's written documents with those procedures undertaken on a day-to-day operational basis.

An integral aspect of Rule 206(4)-7 compliance is the designation of a chief compliance officer ("CCO") who is charged with the administration of all adopted policies and procedures. The CCO should conduct the aforementioned policy and procedure review to ascertain the adequacy and effectiveness of its implementation. The review must occur at least annually, but this presupposes that the foundation documents upon which the firm relies are consistent with the firm's operations. While the exact policies and procedures to be addressed differ from one advisory firm to another, it is clear that the CCO who attempts to prepare compliance policies and procedures must consider the specific intricacies of the advisory firm itself. The individuals acting on behalf of the firm should begin by identifying both actual and potential areas of conflicts of interest, in addition to other compliance factors that create risk exposure. Most importantly, the final product must reflect that the firm undertook a reasonable attempt at preventing regulatory violations.

Since initial passage of the SEC Rule, many state advisors have expressed their preference to delay adoption of compliance policies and procedures until such time as required by the state(s) within which they are registered. Our office has anticipated that state securities bureaus would either adopt the SEC Rule or establish a comparable rule, and true to form, many states have in fact already adopted the SEC Rule. For both state and federal advisers who have yet to establish compliance policies and procedures, firm personnel should immediately conduct an internal evaluation and adopt appropriate internal procedures. To avoid heightened regulatory scrutiny and potential statutory violations, remedial action should occur prior to regulatory examination.

As with all regulatory requirements, it is extremely important to consult the Advisers Act directly and/or obtain counsel competent in this area for the full breadth of requirements and expectations. The investment advisory atmosphere has become exceedingly litigious, and it is absolutely imperative that registered investment advisers understand and satisfy their regulatory obligations.

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In the October 17th edition of the Trenton Times, Timothy Duggan, Chair of the Firm's Bankruptcy & Creditor's Rights group, comments on the rush to file before the new bankruptcy rules take effect.

Read the article here.

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This week's New Jersey Legal Update podcast will discuss the Bankruptcy Abuse Prevention and Consumer Act that goes into effect on Monday October 17, 2005. While the Act will mostly impact personal bankruptcy filings, there are also provisions that businesses such as retail chains and commercial landlords need to be aware of.

This week's New Jersey Legal Update is presented by Timothy Duggan, Chair of the Firm's Bankruptcy & Creditor's Rights group.

You can download the New Jersey Legal Update Podcast # 14 here.(10.5MB)

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The 2005 Bankruptcy Abuse Prevention and Consumer Act becomes effective October 17, 2005. The Act makes several very important changes in the Bankruptcy Statutes as they apply to divorce litigation.

Significant changes are made in the new law which affect property settlements, alimony and child support payments, or alimony and child support arrearages. The most significant change is that payment obligations under a property settlement agreement or divorce judgment are no longer dischargable in bankruptcy.

Previously, the Bankruptcy Court was compelled to make a determination as to whether equitable distribution or property settlement payments were "in the nature of support" or purely property settlement obligations. The determination of that issue led to delays in the payment of property settlement obligations and a great deal of costly litigation to determine the "true nature" of such obligations.

The new Act eliminates that "how many angels are on the head of the pin" distinction by providing that no property settlement obligation is any longer dischargable in a bankruptcy proceeding. The new Act also elevates alimony and child support obligations to a number one priority level in a bankruptcy proceeding. They are now given a priority raising them above even tax claims. The Act also prevents a debtor from obtaining ANY bankruptcy relief unless all past due alimony or child support claims are paid in full.

This reform is long overdue and will prevent disgruntled obligors under state divorce court judgments from voiding or delaying payment of their agreed upon or court ordered obligations.

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The October 12th edition of the New Jersey Star Ledger featured an article which discussed entrepreneurs who juggle two businesses at the same time. Rachel Stark, a Shareholder in the Business & Corporate group, who regularly advises clients with multiple businesses, provided commentary on the topic.

Read the article here.

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In the October 9th edition of the Bergen Record, Thomas Onder, a member of the firm's Bankruptcy & Creditor's Rights Group, comments on Stark & Stark's weekly New Jersey Legal Update podcast program.

Read the full article here.

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This week's New Jersey Legal Update podcast will discuss an employers right to monitor their employees use of the internet, email, voicemail and telephone.

This week's New Jersey Legal Update is presented by David Krulewicz a member of the Firm's Employment group.

You can download the New Jersey Legal Update Podcast # 13 here.(7.8MB)

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In San Remo Hotel, et. al. v. San Francisco, et. al., decided on June 20, 2005, the United States Supreme Court considered the "narrow question" of whether it "should create an exception to the full faith and credit statute [28 U.S.C. § 1738] . . . in order to provide a federal forum for litigants who seek to advance federal takings claims that are not ripe until the entry of a final state judgment denying just compensation." 125 S.Ct. 2491, 2501 (2005). In order to understand the Supreme Court's answer to this question, a brief discussion of the procedural history of this matter and related case decisions is warranted.

In this case, hotel owners filed suit, among other litigation, in federal court challenging the constitutionality of a hotel conversion ordinance (HCO), which required payment of a hefty fee upon conversion of residential rooms to hotel units, on grounds that it effected a taking without just compensation on its face and as applied. The federal district court issued summary judgment against the hotel owners holding that their facial takings challenge was untimely and that the as-applied takings claim was unripe under Williams County Regional Planning Comm'n v. Hamilton Bank of Johnson City, which stands for the proposition that takings claims are not ripe until a litigant, first, has exhausted all State remedies and failed to obtain "adequate compensation for the taking." 473 U.S. 172, 195 (1985). On appeal, the Ninth Circuit Court of Appeals reversed the district court holding that the facial constitutional challenge was ripe for adjudication, but opting to abstain from ruling upon this claim pursuant to Railroad Comm'n of Tex. v. Pullman Co., 312 U.S. 496 (1941) on grounds that a ruling by the state court on the hotel owners pending action for a writ of administrative mandamus could moot the federal questions. The Court of Appeals affirmed the district court's ruling that the as-applied takings claim was unripe due to the hotel owners' failure to pursue an inverse condemnation action in state court.

Following the Court of Appeals' decision, the hotel owners reactivated their state court action for writ of administrative mandamus and reserved their right to return to federal district court for adjudication of their facial takings claim pursuant to England v. Louisiana Bd. of Medical Examiners, 375 U.S. 411 (1964). However, the "petitioners advanced more than just the claims on which the federal court had abstained, and phrased their state claims in language that sounded in the rules and standards established and refined by this Court's takings jurisprudence." San Remo Hotel, 125 S.Ct. at 2497-2498.

At the conclusion of state court review, which resulted in a dismissal of the hotel owners' complaint, the hotel owners returned to federal district court to litigate the facial takings claim. According to the Supreme Court's procedural history of the case, the district court threw out the facial constitutional challenge based upon its being barred by the statute of limitations and the general issue preclusion doctrine, as encompassed by the full faith and credit statute, "[b]ecause California courts had interpreted the relevant substantive state takings law coextensively with federal law, [and therefore] petitioners' federal claims constituted the same claims that had already been resolved in state court." Ibid. at 2500. The Ninth Circuit Court of Appeals affirmed the ruling of the district court and the Supreme Court, after granting certiorari, affirmed.

The Supreme Court rejected the hotel owners' contention that they should be allowed to return to federal court to resolve their federal takings claims. The Court began its analysis by stating that "[o]ur holding in England does not support petitioners' attempt to relitigate issues resolved by the California courts." Ibid. at 2503.

Of course, the Supreme Court recognized that the petitioners' "ultimate submission" could not be disposed of by England alone, but rather required the Supreme Court to address the question of whether federal courts should apply ordinary preclusion rules to state-court judgments when a case, as here, is forced into state court by the ripeness requirement of Williamson County. The Supreme Court ruled against the hotel owners in disposing of this issue.

We have repeatedly held . . . that issues actually decided in valid state-court judgments may well deprive plaintiffs of the 'right' to have their federal claims relitigated in federal court. This is so even when the plaintiff would have preferred not to litigate in state court, but was required to do so by statute or prudential rules.

As such, "[f]ederal courts . . . are not free to disregard 28 U.S.C. § 1738 simply to guarantee that all takings plaintiffs can have their day in federal court." Ibid. at 2501-2502. Therefore, unless Congress shall express an "intent to exempt from the full faith and credit statute federal takings claims[,] . . . we [shall] apply our normal assumption that the weighty interests in finality and comity trump the interest in giving losing litigants access to an additional appellate tribunal." Ibid. at 2505.

The concurring opinion of the Supreme Court, written by the late Justice Rehnquist (deceased), severely criticizes the theoretical underpinnings and the practical application of Williamson County. According to Justice Rehnquist, "[i]t is not clear to me that Williamson County was correct in demanding that, once a government entity has reached a final decision with respect to a claimant's property, the claimant must seek compensation in state court before bringing a federal takings claim in federal court." Ibid. at 2508. Indeed, "[i]t is not obvious that either constitutional or prudential principles require claimants to utilize all state compensation procedures[]" and, therefore, "further reflection and experience lead me to think that the justifications for its state-litigation requirement are suspect, while its impact on takings plaintiffs is dramatic." Ibid. at 2509-2510. Justice Rehnquist concluded by calling upon the Court to "reconsider whether plaintiffs asserting a Fifth Amendment takings claim based on the final decision of a state or local government entity must first seek compensation in state courts." Ibid. at 2510.

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The October 3rd edition of the New Jersey Lawyer featured an article which discussed New Jersey's Schools Construction Corporation's (SCC) financial problems and how they have impacted property owners in the state.

In the article, Timothy Duggan, Chair of the firm's Condemnation group, commented on the issues facing the SCC and how they have affected a number of his clients.

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In the coming weeks, all investment advisers must begin the process of renewing notice filings (for federally registered investment advisers), state registrations, and investment adviser representative registrations. Generally, the renewal process involves electronic renewal filings, but there are some states which require hard copy submission as well as the completion of documents not available through the electronic filing system. Please notify our office at your earliest convenience so that we may effect a smooth renewals process for you. Please be advised that Stark & Stark will only automatically perform the renewals process for those clients who have indicated in writing that they wish for us to do so. If you would like us to effect the renewals process, and you have not previously so indicated, please let us know as soon as possible so that your renewal registrations/notice filings can be made in a timely manner. If you intend to complete the process on your own, please be mindful of the various processing deadlines imposed by the NASD.

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The October 3rd edition of the New Jersey Star Ledger featured an article which discussed how businesses are adopting the use of blogs.

The article, The Inc. blog - Companies learn the goodwill value of Web diaries, discusses Stark & Stark attorney Bruce H. Stern's Traumatic Brain Injury Law Blog.

You can read the article here.

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