Under the COVID-19 stimulus package, formally titled the Coronavirus Aid Relief and Economic Security Act (“CARES Act”), which the President signed into law on March 27, 2020, taxpayers who have been unable to carry back net operating losses originating after 2017 based on recent changes to the Internal Revenue Code (“IRC”) have been provided substantial relief.

Specifically, under newly enacted IRC § 172(b)(1)(D), taxpayers may now carry back net operating losses (NOLs) arising in any tax year beginning after December 31, 2017 and ending before January 1, 2021, to each of the 5 preceding tax years. This revision to § 172 expressly (if temporarily) revokes a provision of the Tax Cut and Jobs Act of 2017 (TCJA) which barred NOL carrybacks (instead allowing only NOL carryforwards) for most taxpayers.

Background

Prior to the TCJA, taxpayers were generally permitted to carry back NOLs (that is, the excess of deductible losses over gross income in a given tax year, subject to certain modifications) 2 years from the year of origination, and then carry them forward another 20 years.  The carryback or carryforward of NOLs potentially allowed taxpayers to use a current year loss to generate a refund of tax paid in an earlier or later year.  For a simplified example, assume that in Year 1 a taxpayer has taxable income of $100,000 and pays tax of $35,000 based on a flat tax rate of 35 percent.  In Year 3, the taxpayer generates an NOL of $50,000.  Under the pre-TCJA rules, the taxpayer could apply its $50,000 Year 3 NOL retroactively to Year 1, thereby reducing Year 1 taxable income to $50,000 and generating a refund of $17,500 (that is, half of the tax paid in Year 1).

The policy underlying NOL carrybacks and carryforwards is to smooth out the peaks and valleys of the business cycle and more closely align a taxpayer’s tax obligations with the taxpayer’s economic performance over an extended period of time.  If a taxpayer was very profitable in one year, but suffered losses in succeeding years, the taxpayer could carryback its NOLs to the profitable year and recoup some or all of the tax it had previously paid, thereby creating a truer picture of the taxpayer’s economic performance, and resulting tax obligations, over that period of time.

However, effective for the 2018 tax year and forward, the TCJA eliminated the ability for most taxpayers to carryback NOLs (although it did allow for unlimited NOL carryforwards, as opposed to the 20 year carryforward allowed under prior law).  The effect of the TCJA was especially harsh for taxpayers anticipating the carryback of losses arising in 2018 or 2019 to offset income and generate refunds of tax paid in prior years.  Moreover, in circumstances of a sharp economic decline, like the one the country may be facing, the ability to carry back NOLs is crucial because it is more likely that tax was paid in the immediate past, and it is less likely that tax (or a similar amount of tax) will be paid in the immediate future.  Therefore, the most effective refund-generation efforts will be retrospective rather than prospective.

CARES Act Changes

Under the CARES Act, notwithstanding the limitations of the TCJA, all taxpayers may carry back NOLs arising in tax years beginning after December 31, 2017 and before January 1, 2021 (which therefore includes calendar years 2018, 2019, and 2020) to each of the 5 previous tax years.  For instance, if a taxpayer generated an NOL in 2019, that loss can now be carried back to 2014 and then carried forward through 2015, 2016, etc. until the NOL is fully depleted, whereas under prior law the 2019 loss could only be carried forward to 2020, 2021, etc.  To the extent the taxpayer paid tax in those earlier years, the taxpayer may be able to file a refund claim (most likely through the filing of an amended return for the appropriate year) and recoup some of the tax previously paid.

Alternatively, a taxpayer may waive the five-year carryback with respect to NOLs originating in tax years beginning in 2018 or 2019, and choose instead to use an NOL going forward only.  This approach may be preferred by new businesses, businesses which expect an uptick in income in future years, or taxpayers who haven’t paid a substantial amount of tax during the 5-year lookback window.  The procedures and time limitations for making this election are set forth in IRS Rev. Proc. 2020-24.

Note that the TCJA generally limited NOL deductions to 80 percent of the taxpayer’s taxable income in the carryback or carryforward year with respect to NOLs arising after December 31, 2017.  Under the CARES Act modifications, the 80 percent cap is eliminated for carrybacks or carryforwards to tax years beginning prior to January 1, 2021.  However, the 80 percent cap remains effective for all NOLs carried forward to 2021 or later years, even if the subject NOL originated in 2018, 2019, or 2020.

The changes to IRC § 172 discussed in this blog are reminiscent of Congress’s response to prior economic downturns.  For instance, following the 2008 financial panic and subsequent decline in the U.S. economy, Congress extended the usual 2-year carryback to a period of up to 5 years for losses originating in 2008 or 2009.  One notable difference is that in the 2009 law, taxpayers were given the option of expanding the carryback period to 3, 4, or 5 years, whereas the CARES Act allows only a 5 year carryback period.

Summary

Unfortunately, after years of economic expansion, many individuals and businesses will suffer economically in 2020 due to the COVID-19 pandemic.  In addition to other relief measures passed by Congress, the changes to IRC § 172 outlined in this article will allow taxpayers who suffer economic losses in 2020 (or suffered them in 2018 or 2019) to recover some of the tax they paid in more prosperous times.  If you or your business have incurred net operating losses in 2018 or 2019, or anticipate incurring one 2020, you should discuss this opportunity with your tax professionals to ensure you maximize the benefits made available under the CARES Act.

Part III: UCC Excuses for Nonperformance

As the world continues to confront a prolonged battle with the coronavirus pandemic, the long-term impacts on business and contractual relationships become more and more visible. Business owners in countless industries may be faced with labor and supply shortages, as well as government intervention such as quarantines or emergency shelter-in-place orders, which will render non-performance of contractual duties ever the more likely. Despite the pandemic, contracts still remain valid and enforceable, and parties still face liability for breaching duties they owe pursuant to those contracts. However, those faced with the difficult decisions of how to fulfill contractual obligations in these unprecedented conditions may be able to excuse their performance under several doctrines of nonperformance. In this multipart series, the commercial litigation attorneys of FIDJ explore various doctrines which may excuse performance of contractual obligations.

In Part I of our series, we discussed the potential application of force majeure clauses to excuse nonperformance. In Part II, we discussed the common law doctrines of impossibility and frustration of purpose, which, depending upon the circumstances, may excuse contractual nonperformance. Part III of this series explores excuses for nonperformance which may be available to parties under the Uniform Commercial Code Article 2 (“UCC”) for contracts concerning the sale of goods.

Generally, domestic contracts for the sale of goods are governed by the Uniform Commercial Code as codified by the various states. Florida’s version of the UCC has been codified at Chapter 672, Florida Statutes. UCC § 2-615 (codified at Fla. Stat. § 672.615), titled “Excuse by Failure of Presupposed Conditions” codifies the doctrine of commercial impracticability and may provide sellers of goods relief from performance.

As the comments to 672.615 explain, the “section excuses a seller from timely delivery of goods contracted for, where his performance has become commercially impracticable because of unforeseen supervening circumstances not within the contemplation of the parties at the time of contracting.” Fla. Stat. § 672.615, cmt. 1. Section 672.615 provides in pertinent part:

Except so far as a seller may have assumed a greater obligation and subject to the preceding section on substituted performance:

(1) Delay in delivery or nondelivery in whole or in part by a seller who complies with subsections (2) and (3) is not a breach of her or his duty under a contract for sale if performance as agreed has been made impracticable by the occurrence of a contingency the nonoccurrence of which was a basic assumption on which the contract was made or by compliance in good faith with any applicable foreign or domestic governmental regulation or order whether or not it later proves to be invalid.

For Fla. Stat. § 672.615 to apply, the following conditions must be met.

First, the provision can apply to sale of goods contracts “except so far as a seller may have assumed a greater obligation” concerning the risk of loss of the goods. In instances where sellers contractually assumed the risk for loss in all instances, or have done so through the parties’ previous course of dealings, courts will more likely find that 672.615 does not provide an excuse to nonperformance. See Fla. Stat. § 672.615, cmt. 8.

Second, the occurrence of the event which prevented nonperformance must be either: i) “a contingency the nonoccurrence of which was a basic assumption on which the contract was made;” or ii) seller’s compliance with a supervening “applicable foreign or domestic governmental regulation or order.” Fla. Stat. § 672.615(1). In instances where “the contingency in question is sufficiently foreshadowed at the time of contracting,” 672.615 will not provide relief to sellers. Fla. Stat. § 672.615, cmt, 8. Of course, as with the previous doctrines discussed in this series, foreseeability is a fact intensive inquire and will vary depending upon the circumstances.

Third, the seller’s performance must be made “impracticable.” Fla. Stat. § 672.615(1). Sellers should note that the comments recognize the doctrine of “commercial impracticability” as distinct from common law doctrines of impossibility and frustration of purpose. Fla. Stat. § 672.615, cmt. 3. This is because the doctrine does not require impossibility of performance from the seller or buyer. However, while technically the commercial impracticability defense is an easier defense to assert, it is by no means a guaranteed win.

As comment 4 explains, “[i]ncreased cost alone does not excuse performance unless the rise in cost is due to some unforeseen contingency which alters the essential nature of the performance.” However,  “a severe shortage of raw materials or of supplies due to a contingency such as war, embargo, local crop failure, unforeseen shutdown of major sources of supply or the like, which either causes a marked increase in cost or altogether prevents the seller from securing supplies necessary to his performance, is within the contemplation of this section.” Fla. Stat. § 672.615, cmt. 4.

With regard “supervening” changes in the law which render performance impracticable, “governmental interference cannot excuse [nonperformance] unless it truly ‘supervenes’ in such a manner as to be beyond the seller’s assumption of risk.” Fla. Stat. § 672.615, cmt. 10.

We also note that even if a seller satisfies the conditions necessary under subsection one, excuse will only occur if a seller complies with subsections two and three of the statute. Subsection two requires that if a seller’s partial performance is possible, then a seller “must allocate production and deliveries among his or her customers…in any manner which is fair and reasonable.” Fla. Stat. §672.615(2). “An excused seller must fulfill his contract to the extent which the supervening contingency permits, and if the situation is such that is customers are generally affected he must take account of all in supplying one.” Fla. Stat. § 672.615, cmt. 11.

Finally, subsection three requires sellers to “seasonably” notice buyers that there will be delay or nondelivery and, when allocation is required under subsection (2), of the estimated quota made available for the buyer. Fla. Stat. § 672.615(3). The UCC defines seasonable notice as notice “taken at or within the time agreed or, if no time is agreed, at or within a reasonable time.” Fla. Stat. § 671.204(2). However, whether a time is reasonable depends on the nature, purpose, and circumstances of the action. Id. at (1).

Fuerst Ittleman David & Joseph was founded with a focus on serving the legal needs of domestic and international businesses of all shapes and sizes. Our commercial litigation practice group has decades of experience litigating a wide array of business disputes in state and federal courts as well as domestic and international arbitration panels. In addition, our corporate transactional team can assist your company with a full range of corporate legal services which can take you (and your company) from the initiation of your business plan through the daily operation of your now-thriving company. For more information contact us at 305-350-5690 or info@fidjlaw.com.

On March 25, 2020, the Third DCA issued its panel decision in Island Travel & Tours, Ltd. v. MYR Indep., Inc., 3D16-1364, 2020 WL 1451990, at *3 (Fla. 3d DCA Mar. 25, 2020), which reaffirmed application of the independent tort doctrine to bar common law tort claims in business litigation cases where there is already a contract between the parties.

The independent tort doctrine provides that “[w]here a contract exists, a tort action will lie for either intentional or negligent acts considered to be independent from acts that breached the contract.” HTP, Ltd. v. Lineas Aereas Costarricenses, S.A., 685 So. 2d 1238, 1239 (Fla. 1996). “It is only when the breach of contract is attended by some additional conduct which amounts to an independent tort that such breach can constitute [an actionable tort].” Elec. Sec. Sys. Corp. v. S. Bell Tel. & Tel. Co., 482 So. 2d 518, 519 (Fla. 3d DCA 1986).

In 2013, the Florida Supreme Court held that a related doctrine — the economic loss rule — was restricted to products liability cases and could not be used to bar general commercial tort claims. Tiara Condo. Ass’n, Inc. v. Marsh & McLennan Cos., 110 So. 3d 399, 408 (Fla. 2013).

In a concurring opinion, however, Justice Pariente distinguished the independent tort doctrine as still being a valid defense in cases outside the products liability area.

The majority’s conclusion that the economic loss rule is limited to the products liability context does not undermine Florida’s contract law or provide for an expansion in viable tort claims. Basic common law principles already restrict the remedies available to parties who have specifically negotiated for those remedies, and, contrary to the assertions raised in dissent, our clarification of the economic loss rule’s applicability does nothing to alter these common law concepts. For example, in order to bring a valid tort claim, a party still must demonstrate that all of the required elements for the cause of action are satisfied, including that the tort is independent of any breach of contract claim.

Tiara Condo., 110 So. 3d at 408 (Pariente, J., concurring with opinion joined by Lewis and Labarga, JJ.).

Technically, because Justice Pariente’s concurrence was not joined by a majority of the Court, some judges have interpreted the majority ruling in Tiara as having nullified the independent tort doctrine as well as the economic loss rule outside the products liability context. See USI Ins. Services LLC v. Simokonis, 15-CV-24337, 2016 WL 11547701, at *6 (S.D. Fla. Apr. 15) (“There is some disagreement among the district courts in this Circuit on whether the independent tort rule remains intact following the Tiara decision. Some courts have cited to Justice Pariente’s concurrence in determining or at least suggesting that the independent tort rule is still applicable notwithstanding the holding of Tiara.”); report and recommendation adopted, 2016 WL 11547699 (S.D. Fla. May 13, 2016).

It was not until 2017 that the Third District Court of Appeal in Peebles v Puig, 223 So. 3d 1065 (Fla. 3^rd DCA 2017), applied the independent tort doctrine for the first time since Tiara to reverse a jury verdict for commercial fraud (i.e., in a case outside the products liability context).

It is well settled in Florida that, where alleged misrepresentations relate to matters already covered in a written contract, such representations are not actionable in fraud. It is similarly well settled that, for an alleged misrepresentation regarding a contract to be actionable, the damages stemming from that misrepresentation must be independent, separate and distinct from the damages sustained from the contract’s breach. Both of these legal principles are rooted in the notion that, when a contract is breached, the parameters of a plaintiff’s claim are defined by contract law, rather than by tort law.

Peebles, 223 So. 3d at 1068 (citation omitted). The Peebles Court cited Tiara in a footnote, clarifying: “We do not evaluate this case under the economic loss rule.” Id. at 1068 n.4.

The Third DCA’s March 2020 decision in Island Travel reaffirms its commitment to apply the independent tort doctrine that it resuscitated in Peebles to bar tort claims in the commercial litigation context where there is an existing contract between the parties. Island Travel, 2020 WL 1451990, at *3 (“The only properly alleged misrepresentation simply has to do with Island’s failure to perform under the contract. It is a fundamental, long-standing common law principle that a plaintiff may not recover in tort for a contract dispute unless the tort is independent of any breach of contract.”).

The Court in Island Travel further noted that, although fraud in the inducement is generally considered to be an “independent” tort (because the misrepresentation that induces someone to enter into a contract is often unrelated to the obligations under the contract) the Plaintiff’s fraud claim in Island Travel was “clearly duplicative of its breach of contract claim [because Plaintiff] sought the exact same damages for both its fraud claim and its breach of contract claim.” Id. n.7 (emphasis added).

The takeaway: where a contract has been breached, a simultaneous common law tort claim lies only for acts deemed independent of those establishing the contract’s breach or for damages that are attributable to actions other than those that caused the breach of contract.

The litigation and corporate attorneys of Fuerst Ittleman David & Joseph have extensive experience handling complex matters throughout Florida and the United States and can assist with a full range of litigation, transactional, and compliance services from start-up to daily operations of your thriving business enterprise. Please contact us at 305-350-5690 or email us at info@fuerstlaw.com.

The spread of COVID-19 threatens to devastate South Florida’s economy, which relies heavily on its hospitality industry. The Miami Herald reported that as of March 18, the 150,000 hotel rooms in Miami-Dade County alone, plummeted from an occupancy rate of nearly 90 percent down to 20 percent. That number will likely approach zero as Miami-Dade County Mayor Carlos Gimenez ordered the closure of all non-essential business by March 19 at 9:00 p.m., and global travel restrictions are now in effect. These measures could last several weeks, at minimum, during an otherwise busy and profitable tourist season in South Florida. The losses to the hotel industry are expected to enter into the billions, and that does not include losses from related business, such as restaurants, bars, entertainment venues, and tour operators.

One of the only potential sources of recovery to Florida business owners may be from their insurers.  In this blog post, we review three applicable types of coverage commonly found in a business insurance policy.  Whether coverage is available will depend upon numerous factors, including the specific language of a company’s particular policy and the manner in which the courts interpret those policies.

Business Interruption Coverage

Business interruption insurance coverage is intended to protect companies against the loss of income from unexpected events that cause direct physical loss or damage.  Many standard business insurance policies do not define what constitutes a “direct physical loss” necessary to trigger coverage.  In the case of a typical disaster such as a fire or windstorm, determining whether direct physical loss or damage has occurred is generally simple, although the question of whether Hurricane Katrina caused mass flooding or wind damage became far more complex than usual.[1]  In the case of the spread of a virus such as COVID-19, this exercise is more complex.  However, a number of decisions indicate that the closure of a business due to COVID-19 may, in appropriate circumstances, constitute direct physical loss sufficient to trigger insurance coverage.

In 2005, a federal appeals court addressed the issue of whether a well contaminated by e-coli bacteria constituted a direct physical loss or property damage.[2]  The court noted that although the insurance policy did not define physical loss, it did define “property damage” as “physical injury to, destruction of, or loss of use of tangible property.”[3]  Under that standard, the court concluded that a direct physical loss or property damage could arise where the “functionality” of the property was “nearly eliminated or destroyed”, or where the property was rendered “useless or uninhabitable” as a result of the presence of the bacteria.[4]

In a foundational 1968 decision, the Colorado Supreme Court held that where gasoline infiltrated the soil in and around a building, causing it to become uninhabitable and highly dangerous to use, there was a direct physical loss within the meaning of an insurance policy.[5]  Importantly, the court rejected the notion that the physical loss or damage had to occur to the building itself, quoting the following reasoning from a California appeals court:

To accept appellant’s interpretation of its policy would be to conclude that a building which has been overturned or which has been placed in such a position as to overhang a steep cliff has not been ‘damaged’ so long as its paint remains intact and its walls still adhere to one another.  Despite the fact that a ‘dwelling building’ might be rendered completely useless to its owners, appellant would deny that any loss or damage had occurred unless some tangible injury to the physical structure itself could be detected.  Common sense requires that a policy should not be so interpreted in the absence of a provision specifically limiting coverage in this manner.[6]

         In a similar vein, courts have found a “direct physical loss” to have occurred where:

• homes were threatened by a future rock fall from an abandoned rock quarry, which had already caused extensive damage to neighboring homes;[7]
• there was a strong chemical odor from methamphetamine cooking by other tenants which odor entered into the insured’s leased home;[8]
• cat urine odor entered the insured’s condominium unit from a neighboring unit;[9]and
• asbestos was released into a building.[10]

In each of these cases, the court reasoned that the direct physical loss or property damage arose from the harm or risk of harm that rendered the subject property unusable or uninhabitable in some way.

From these cases, a compelling argument can be made that where the spread or potential spread of COVID-19 renders a business premises unusable or uninhabitable for a period of time, business interruption loss coverage may be triggered.  There are of course cases that do not follow the decisions referred to above, and the success of this argument will depend on applicable state law.  At present, we are unaware of any Florida court that has adjudicated an analogous claim.[11]

Aside from variations in state law, whether a business’s insurance policy covers losses arising from its inability to use its business premises will depend on the language of its specific policy.  Some policies may have language that requires damage to specific property.  Others may exclude coverage for claims arising from communicable diseases.[12] For these reasons, business owners must carefully review its policies and obtain proper legal advice concerning the availability of business interruption coverage.

Contingent Business Interruption

Many insurance policies also contain contingent business interruption coverage that applies to damage which not only affects the company’s own property but also that of third-parties, such as its customers, suppliers, and delivery personnel.  This coverage ordinarily requires the same direct physical loss or property damage to trigger coverage as under the standard business interruption coverage, with the key difference being that the loss or damage is sustained to the third-party’s property as opposed to that of the policyholder.  Again, the applicability of this coverage is policy specific and therefore requires a careful review of the policy and advice from a competent professional.

Government Authority Coverage

Insurance policies also routinely contain coverage for losses arising when an insured cannot access its own property because of an order made by a government authority, such as Mayor Gimenez’s recent order closing all non-essential businesses.

Under most insurance policies, the government authority must completely block access to the business premises for this coverage to apply.  For this reason, Mayor Giminez’s initial orders limiting businesses’ operations likely does not trigger this type of coverage.  However, Mayor Gimenez’s more recent order for the complete closure of all non-essential businesses likely does, subject to any applicable exclusions.

Preserve Your Claims

It is important that you take steps to immediately review all of your company’s insurance policies with competent professional advisors, notify your insurer of all of your claims, and keep track of all of your losses and expenses as a result of COVID-19.  Taking these steps may mean the difference between obtaining complete coverage for your losses or bearing the entirety of them on your own.

We are currently reviewing insurance policies on behalf of for our clients across North America in the hospitality, real estate, retail and manufacturing sectors in preparing to challenge insurers who deny claims for the substantial losses they are only starting to suffer.  If you have any questions concerning your potential policy coverage for business interruption losses, feel free to contact us at 305-350-5690 or info@fidjlaw.com

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[1]  State Farm v. United States, ex rel. Rigsby, 137 S.Ct. 436 (2016)

[2] Motorists Mutual Ins. Co. v. Hardinger, 131 Fed.Appx. 823 (3d Cir. 2005).

[3] Id., at 825.

[4] Id., at 826-827, citing Port Authority of New York & New Jersey v. Affiliated FM Ins. Co., 311 F.3d 226 (3d Cir. 2002).

[5] Western Fire Insurance Co. v. First Presbyterian Church, 165 Colo. 34 (1968).

[6] Id. at 40, quoting from Hughes v. Potomac Insurance Company, 199 Cal.App.2d 239 (1989) (emphasis added).

[7] Murray v. Sate Farm Fire and Cas. Co., 203 W.Va. 477 (1998).

[8] Farmers Insurance Co. of Oregon v. Trutanich, 858 P.2d 1332 (Or. Ct. App. 1993).

[9] Mellin v. N. Sec. Ins. Co., 115 A.3d 799 (N.H. 2015).  Notably, the court found that property damage included “not only tangible changes to the property that can be seen or touched” but also “changes that are perceived by the sense of smell and that exist in the absence of structural damage.”

[10] Port Authority of New York & New Jersey v. Affiliated FM Insurance Co., 311 F.3d 226 (3d Cir. 2002).

[11] In June of 2018, the District Court for the Southern District of Florida ruled that debris accumulating into a restaurant from neighboring road construction did not constitute direct physical loss or damages.  See Mama Jo’s, Inc. v. Sparta Insurance Company, 2018 WL 3412974 (S.D. Fla. June 11, 2018).  In so doing, the court did not decide whether to adopt a more “expansive definition” of the phrase “direct physical loss”, as set forth in the cases noted above.  Importantly though, the Court noted that even under the expansive definition, there was no such loss because the restaurant was not rendered uninhabitable as a result of the debris; it simply had incurred additional time and expense cleaning the debris.

[12] Following the SARS outbreak in 2003, many insurers began implementing such exclusions.