by Thomas C. Naquin, Senior Associate

I. Introduction

 Courts in Louisiana are split on whether or not comparative fault, a mechanism through which a party may effectively shift blame onto another party, applies to actions arising in contract, or merely to actions in tort. This split creates uncertainty in the law and should be resolved by the Louisiana Supreme Court when the issue again presents itself.

II. The Circuit Split

In 1996, in reforming Louisiana’s tort law scheme, the Louisiana Legislature amended and adopted the current version of Louisiana Civil Code article 2323.[1] Under its current construction, Louisiana Civil Code article 2323 creates a pure comparative fault system in Louisiana, providing in paragraphs A and B:

A. In any action for damages where a person suffers injury, death, or loss, the degree or percentage of fault of all persons causing or contributing to the injury, death, or loss shall be determined . . .. If a person suffers injury, death, or loss as the result partly of his own negligence and partly as a result of the fault of another person or persons, the amount of damages recoverable shall be reduced in proportion to the degree or percentage of negligence attributable to the person suffering the injury, death, or loss.

B. The provisions of Paragraph A shall apply to any claim for recovery of damages for injury, death, or loss asserted under any law or legal doctrine or theory of liability, regardless of the basis of liability.[2]

In the aftermath of the 1996 tort reform, courts have struggled with the language of paragraph B that applies comparative fault to “any claim for recovery of damages” made “under any law or legal doctrine or theory of liability, regardless of the basis of liability.”[3] The seemingly broad scope of article 2323 has led to a circuit split on the issue of whether comparative fault applies merely to delictual actions,[4] or to contractual actions as well.[5] Although the Louisiana Supreme Court has recognized the circuit split, it has yet to resolve it.[6] If and when the Louisiana Supreme Court does address the circuit split, the solution is clear¾comparative fault applies only in delictual actions.

III. The Resolution

In Hanover Insurance Co. v. Plaquemines Parish Government, the United States District Court for the Eastern District of Louisiana conducted a well-reasoned analysis of the application of comparative fault.[7] The Hanover court concluded that comparative fault applied only to delictual actions and, in doing so, provided two main reasons: (1) the Louisiana Supreme Court discussed, at length, the 1996 revision and referred only to tort law; and (2) the structure of the Louisiana Civil Code supports the notion that comparative fault applies only to delictual actions.[8]

A. Evaluating the Louisiana Supreme Court’s Discussion of the 1996 Revision

In Dumas v. State ex rel. Department of Culture, Recreation & Tourism, the Louisiana Supreme Court discussed the 1996 revision of Louisiana Civil Code article 2323.[9] The Supreme Court’s analysis of the 1996 revision made references only to tort law.[10] The Court observed that the amendment’s purpose was “to abolish solidary liability among non-intentional tortfeasors and to place Louisiana in a pure comparative fault system.”[11 The Court further characterized the amendments as “effect[ing] a total shift in tort policy.”[12] The opinion made no mention of the amendments altering other theories of recovery.[13] The Dumas court’s references to the 1996 amendments as changing tort law support the application of comparative fault to delictual actions only.[14]

B. The Structure of the Louisiana Civil Code

Further, a finding that comparative fault applies only to delictual actions has even greater support in the structure of the Louisiana Civil Code. Unlike statutes enacted in common law jurisdictions, “the articles of a civil code are carefully organized according to their subject matter.”[15] The Louisiana Supreme Court has long held that courts should construe Civil Code articles in accord with their subject matters.[16] It is imperative, then, to consider article 2323’s placement within the Louisiana Civil Code to interpret its meaning.

Notably, article 2323 is in Title V of Book III, addressing obligations that arise without agreement.[17] It is specifically located in Chapter 3, which houses Louisiana’s tort law.[18] Contract law, however, is in Title IV of Book III.[19] This placement suggests that drafters intended article 2323 to apply only to tort law.

A close examination of the Code further supports the conclusion that comparative fault applies only to delictual actions. Title IV of Book III contains rules governing the calculation of damages in contract cases.[20] Contractual provisions, in part, allow a court to reduce the damages one owes for breaching a contract in cases in which the obligee’s own negligence contributed to his damages.[21] The fact that the contract section of the Code contains its own set of rules regarding damages discourages importing a tort article into contract cases.

A provision in Title III of Book III, however, most strongly counsels against the application of comparative fault in contract cases. Article 1804 provides:

Among solidary obligors, each is liable for his virile portion. If the obligation arises from a contract or quasi-contract, virile portions are equal in the absence of agreement or judgment to the contrary. If the obligation arises from an offense or quasi-offense, a virile portion is proportionate to the fault of each obligor.[22]

Article 1804—unsurprisingly found in the general obligations provisions—provides that courts allocate damages in one manner among co-obligors to a contract and in a different manner among co-obligors to an offense or quasi-offense. Indeed, the comments to the article explicitly state that the allocation of damages “depend[s] on the source of the obligation.”[23] In light of the distinction article 1804 makes between damages in actions arising in contract and of those arising in tort, the legislature likely intended to create separate legal regimes governing the allocation of damages in contract and tort actions.

IV. Conclusion

 If and when the Louisiana Supreme Court resolves the current circuit split, it should adopt the reasoning of the Hanover court and hold that Louisiana’s comparative fault regime applies only to delictual actions. This conclusion is supported by both the purpose of the 1996 revisions and the structure of the Louisiana Civil Code.

_______________________________

[1] La. Civ. Code art. 2323 (2018).

[2] Id.

[3] Id.

[4] The following sources reject the application of comparative fault to contractual actions: Justiss Oil Co., v. Oil Country Tubular Corp., 216 So. 3d 346 (La. Ct. App. 2017), writ denied, 227 So. 3d 830 (La. 2017); Hoffmann v. B & G, Inc., 215 So. 3d 273, 282 (La. Ct. App. 2017); Hanover Ins. Co. v. Plaquemines Par. Gov’t, No. CIV.A. 12-1680, 2015 WL 4167745, at *4–6 (E.D. La. July 9, 2015); Dual Constr., Inc. v. City of Alexandria, No. 10–1039, 2011 WL 759604, at *3 (W.D. La. Feb. 24, 2011); Hollybrook Cottonseed Processing, LLC v. Carver, Inc., CIV.A. 09-0750, 2010 WL 1416781, at *1 (W.D. La. Apr. 1, 2010); Touro Infirmary v. Sizeler Architects, 900 So. 2d 200 (La. Ct. App. 2005); Merlin v. Fuselier Constr., Inc., 789 So.2d 710, 717 (La. Ct. App. 2001).

[5] The following sources appear to recognize that something resembling comparative fault can reduce contractual liability: Chevron U.S.A. Inc. v. Aker Mar., Inc., No. 03–2027, 2008 WL 594648, at *1 (E.D. La. Feb. 29, 2008), rev’d on other grounds, 604 F.3d 888 (5th Cir. 2010); Touro Infirmary v. Sizeler Architects, 900 So. 2d 200, 207 (La. Ct. App. 2005) (Murray, J., dissenting); Petroleum Rental Tools, Inc. v. Hal Oil & Gas Co., 701 So. 2d 213, 217–18 (La. Ct. App. 1997) (holding that “liability for the redhibitory ‘defect’ qualifies as ‘fault’ under Article 2323 A”); Frank L. Maraist & Thomas C. Galligan, Jr., Burying Caesar: Civil Justice Reform and the Changing Face of Louisiana Tort Law, 71 Tul. L. Rev. 339, 382 (1996) (“Given the breadth of the language of new Article 2323(B), comparative fault may apply not only to a tort action but to a contract claim (including redhibition), a property claim, and perhaps others.”) (emphasis added).

[6] Aucoin v. S. Quality Homes, LLC, 984 So.2d 685, 693 n.12 (La. 2008).

[7] Hanover, 2015 WL 4167745, at *5–6.

[8] Id.

9] Dumas v. State ex rel. Department of Culture, Recreation & Tourism, 828 So. 2d 530 (La. 2002).

[10] Id.

[11] Id. at 535 (emphasis added).

[12] Id. at 538.

[13] Id.

[14] See generally id.

[15] Hanover Ins. Co. v. Plaquemines Par. Gov’t, CIV.A. 12-1680, 2015 WL 4167745, at *5 (E.D. La. July 9, 2015). See generally Robert Anthony Pascal, Of the Civil Code and Us, 59 La. L. Rev. 301 (1998); James L. Dennis, Capitant Lecture, 63 La. L. Rev. 1003 (2003); Katie Drell Grissel, The Legal Fiction of “Clear Text” in Willis–Knighton v. Caddo–Shreveport Sales and Use Tax Commission, 67 La. L. Rev. 523, 525–40 (2007).

[16] Compare Citizens & Taxpayers of De Soto Parish v. Williams, 21 So. 647, 654 (La. 1897) with Pociask v. Moseley, 122 So. 3d 533, 540 (La. 2013).

[17] La. Civ. Code art. 2323 (2018).

[18] Id.

[19] See, e.g., id. art. 1906.

[20] Id. arts. 1994–2004.

[21] Id. art. 2003 (“If the obligee’s negligence contributes to the obligor’s failure to perform, the damages are reduced in proportion to that negligence.”).

[22] Id. art. 1804.

[23] La. Civ. Code Ann. art. 1804 cmt. b.

by Allena McCain, Senior Associate

Introduction

It is a deeply rooted tradition in Louisiana’s law of obligations that rights and effects of marriage are strictly personal.[1] A spouse is generally the only person with the capacity to enforce the rights and effects of marriage,[2] and an action to enforce a strictly personal right abates upon the death of either party.[3] In most circumstances, this restriction on the capacity to sue is merited and uncontested.

In a few instances, Louisiana courts allow narrow exceptions permitting the enforcement of a marital right by a successor; under such an exception, the action will survive the death of one spouse and may be continued by the decedent’s successor. One such instance is when a divorce is not finalized at the time of a spouse’s death, and the disposition of that spouse’s property hinges on whether he was married at the time of his death. A successor with an interest in the property subject to the divorce proceedings may continue the action until the judgment is finalized.[4]

A recent decision from the Louisiana First Circuit Court of Appeal potentially widened the narrow scope of this exception.[5] In re Succession of Buhler[6 may have a vast impact on the vitality and scope of Larocca v. Larocca,[7] allowing successors to continue the prosecution of divorce actions not yet finalized at the time of one spouse’s death in far more cases than the narrow language of Larocca—and even Buhler itself—suggests.

A Narrow Exception: Larocca v. Larocca

In 1990, the Louisiana Supreme Court recognized a child’s standing to continue the divorce action of her mother and stepfather when her mother died before the divorce judgment became final.[8] Isabelle Larocca died after a court granted a judgment of divorce and after an appeal had been filed, but before the appellate court finalized the judgment.[9] Lower courts dismissed the appeal, holding that the entire action abated on the death of Isabelle according to the strictly personal nature of the action for divorce.[10] The Louisiana Supreme Court reversed, finding that where property interests among successors were in question, the court could substitute the executrix of Isabelle’s estate as the plaintiff for purposes of obtaining a final judgment.[11]

In Larocca, the property interests at stake rested on an ancillary claim to rescind marital donations, as Mr. Carlo Larocca was alleged to be at fault for the divorce.[12] After Louisiana instituted no-fault divorce in 1991, the legislature repealed and amended the Civil Code articles allowing for rescission of marital donations from the spouse at fault.[13] Because the Louisiana Legislature subsequently amended the law governing marital donations, commentators doubted the lasting impact of the Larocca decision; the Court decided the case under law that, at the time of the decision, was no longer in effect.[14]

Reservations about the applicability of Larocca following the statutory revisions—making all marital donations irrevocable—were well-founded; courts cited Larocca only a handful of times in over two decades following its decision, and an appeals court overruled the sole case that directly followed its holding.[15] In early 2018, however, a new decision potentially changed the heritability of divorce actions.[16]

A Broader Application: In re Succession of Buhler

The Louisiana First Circuit recently decided In re Succession of Buhler, which revived, rejuvenated, and possibly reformed the heritability of divorce actions in Louisiana.[17] Mr. and Mrs. Buhler married for a second time in 2000.[18] During this marriage, on May 18, 2013, Mr. Buhler executed his last will and testament, leaving his entire estate to Mrs. Buhler.[19] In 2014, Mrs. Buhler filed for divorce, and the court rendered and signed the divorce judgment.[20] Mr. Buhler died before the delay for appeal had expired but after the Family Court of East Baton Rouge Parish rendered and signed the judgment.[21]

The court probated Mr. Buhler’s testament and named Mrs. Buhler executrix in accordance with the will.[22] Mr. Buhler’s daughter contested the will and the designation of Mrs. Buhler as the executrix; she claimed that the parties were divorced when Mr. Buhler died, and that Mrs. Buhler was no longer the proper executrix under Civil Code article 1068(5).[23] The district court revoked Mrs. Buhler’s designation as executrix and held that the divorce decree nullified all testamentary provisions in her favor.[24]

On appeal, Mrs. Buhler alleged that the divorce action had not yet become executory because the time for filing an appeal had not yet run.[25] Mrs. Buhler further argued that Larocca was inapplicable because the parties did not plead ancillary property rights within the divorce action.[26]

The court disagreed.[27] Because the dispositions in Mr. Buhler’s testament depended on the validity and enforceability of the divorce judgment, the court found substantial property interests at stake in the divorce judgment.[28] The divorce action did not abate at the death of Mr. Buhler, and Mr. Buhler’s daughter was allowed to continue the action to its finality.[29]

Lasting Implications of Buhler on Divorce Action Heritability and Succession Rights

In Larocca, the original parties filed the divorce appeal, and the appeal was pending before the court at the time of Mr. Larocca’s death.[30] Even if the result in Larocca continued to apply after the revision of the divorce articles in 1991, the cases in which this issue would arise would be limited. Using the reasoning of the Court in Buhler, however, the exceptions to the strictly personal nature of a divorce action appear to be much broader than scholars and practitioners have understood over the last few decades.

Importantly, most divorce actions have community property implications.[31] The death of either spouse before a court has the opportunity to determine these community property rights will almost always result in a substantial property interest that rides on the abatement or survival of the divorce action. Final adjudication of the pending divorce action will assist successors in determining the volume of the decedent’s estate and the value of the successor’s rights.

Moreover, a judgment of divorce retroactively terminates the community property regime between the parties.[32] Depending on the outcome of the divorce, a long-pending action prior to the judgment could severely impair or bolster a successor’s rights.

Although both Larocca and Buhler addressed actions with judgments prior to the death of a party—Larocca with an appeal pending and Buhler within the period for filing an appeal—courts could easily extend the reasoning of Buhler to apply to any divorce action that a decedent-spouse is pursuing at the time of his death. If future courts adopt the broad reasoning of Buhler without appropriately heeding its narrow application, Buhler’s progeny could continue to chip away at the longstanding tradition of strictly personal rights of marriage.

_________________________________________

[1] La. Civ. Code art. 1766 and cmt. c.

[2] Id.

[3] La Code Civ. Proc. art. 428.

[4] See, e.g., Larocca v. Larocca, 597 So. 2d 1000 (La. 1992); Canatella v. Canatella, 91 So. 3d 393 (La. Ct. App. 2012).

[5] See In re Succession of Buhler, 243 So. 3d 39 (La. Ct. App. 2018).

[6] Id.

[7] Larocca, 597 So. 2d 1000.

[8] Larocca, 597 So. 2d 1000.

[9] Id. at 1000.

[10] Id.

[11] In Larocca, the parties brought an ancillary claim for rescission of marital donations, which affected the property rights of the parties and, by succession, Isabelle’s heirs. Id. at 1004–05. When Louisiana instituted no-fault divorce in 1990, the legislature repealed and amended the Civil Code articles on rescission of marital donations.

[12] Id. at 1004–05. Prior to 1991, when a spouse was found at fault for the divorce, all donations made to that spouse were revocable upon divorce. Id. at 1004 (citing Fargerson v. Fargerson, 593 So. 2d 454 (La. Ct. App. 1992)).

[13] See Kenneth Rigby, Matrimonial Regimes: Recent Developments, 60 La. L. Rev. 405 (2000).

[14] Id.

[15] See McCann v. McCann, 77 So. 3d 997 (La. Ct. App. 2011), rev’d, McCann v. McCann, 93 So. 3d 544 (La. 2012).

[16] See In re Succession of Buhler, 243 So. 3d 39 (La. Ct. App. 2018).

[17] Id.

[18] Id. at 42.

[19] Id.

[20] Id.

[21] Id.

[22] Id.

[23] Id. La. Civ. Code art. 1608.

[24] Id. at 43.

[25] Id. at 46.

[26] Id. at 46–47.

[27] Id. at 48–49.

[28] Id.

[29] Id. at 49.

[30] See Larocca v. Larocca, 597 So. 2d 1000 (La. 1992).

[31] The default legal matrimonial regime is a community of acquets and gains. La. Civ. Code art. 2327.

[32] Id. art. 2375.

by Hillary Brouillette, Senior Associate

Introduction

“If you tell the truth you won’t have to remember anything”[1]—except the Sarbanes-Oxley and Dodd-Frank Acts, that is. For people who work in the financial industry, telling the truth about securities law violations within their workplace is not as clear-cut as Mr. Twain suggested. Specifically, to whom one should and must report violations of federal or state law in order to avoid resulting unemployment is much more complicated and less intuitive than remembering the truth.

I. Confusion for Whistleblowers under Sarbanes Oxley and Dodd-Frank

The Sarbanes-Oxley Act (“SOX”) and the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) provide incentives and protections for whistleblowers who report violations of federal securities laws.[2] But until the United States Supreme Court weighed in just last month, federal courts of appeals were split on the issue of to whom a worker had to blow his whistle—his boss, the Securities Exchange Commission (“SEC”), or both.[3] In Digital Realty Trust, Inc. v. Somers, the Supreme Court unanimously agreed that Dodd-Frank only protects employees who externally report information relating to securities law, including SOX, violations to the SEC.[4] Meanwhile, internal reports of the same violations may be protected by SOX, which is referenced as protected whistleblower conduct under Dodd-Frank.[5]

II. Background of Whistleblower Provisions under SOX and Dodd-Frank

Congress enacted SOX in 2002, largely in response to the collapse of Enron, with the goal of restoring public trust in financial markets.[6] Six years later, the financial crisis of 2008 invited Congress to impose more regulations that would increase accountability and transparency to ensure financial stability.[7] The Security Exchange Act of 1934 was amended by Dodd-Frank in 2010.[8] Recognizing that “whistleblowers often face the difficult choice between telling the truth and . . . committing ‘career suicide,’”[9] Congress included in Dodd-Frank “a new, robust whistleblower program designed to motivate people who know of securities law violations to tell the SEC.”[10] Congress also added an award program for whistleblowers who voluntarily give information to the SEC that leads to monetary sanctions against violators of securities law.[11]

The anti-retaliation protections for whistleblowers in each act are vital to the larger regulatory goals of detection and punishment of corporate misconduct and increased consumer protection. SOX protects corporate employees who provide information or assistance either to a federal regulatory or law enforcement agency, Congress, or any person with supervisory authority over the employee from discharge or employment discrimination for reporting information the employee reasonably believes is a violation of criminal fraud statutes, any SEC rule or regulation, or any federal law relating to fraud against shareholders.[12] The qualifications for whistleblower protection under Dodd-Frank are similar but not synonymous, although both acts often protect the same individuals for reporting misconduct. The exact variations and effects of which were at issue before the Supreme Court in Digital Realty Trust.[13]

III. The Confusion Behind Dodd-Frank’s Whistleblower Standards

Dodd-Frank universally defines a “whistleblower” as “any individual who provides . . . information relating to a violation of securities law to the Commission, in a manner established, by rule or regulation, by the Commission.”[14] The anti-retaliation provisions prohibit an employer from discharging, harassing, or discriminating against a whistleblower “because of any lawful act done by the whistleblower” in three circumstances.[15] First, “in providing information to the Commission in accordance with this section.”[16] Second, “in initiating, testifying in, or assisting in any investigation or judicial or administrative action of the Commission based upon or related to such information.”[17] And third, “in making disclosure that are required or protected under” SOX, the Securities Exchange Act of 1934, the criminal anti-retaliation prohibition at 18 U.S.C. § 1513(e), or “any other law, rule, or regulation subject to the jurisdiction of the Commission.”[18] The cross reference to SOX within the third category of qualifying conduct obviously led to confusion about how, and specifically to whom, an employee must report securities law violations in order to avoid discrimination.[19]

By cross referencing laws outside of Dodd-Frank, including SOX, this third category of behavior protects disclosures to agencies and individuals other than the SEC.[20] But internal disclosure directly conflicts with the definitional requirement of whistleblowers under the same section of Dodd-Frank. The confusion about whether an employee must make external reports to the SEC before his termination or discrimination was only furthered by the rules and regulations for the implementation of Dodd-Frank. Contrary to the text of Dodd-Frank, the SEC defined “whistleblower” differently for the award program and anti-retaliation protections of Dodd-Frank.[21] Under Rule 21F-2, an individual who “provide[s] the Commission with information . . . relat[ing] to a possible violation of the Federal securities laws” is a whistleblower for purposes of Dodd-Frank’s award program.[22] In a second definition, Rule 21F-2 defines whistleblower for anti-retaliation purposes as a person who “possess[es] a reasonable belief that the information you are providing relates to a possible securities law violation . . . and [y]ou provide that information in a manner described in” the three categories of conduct above.[23] This second definition expressly applies whether or not the person qualifies as a whistleblower under the award program.[24] Rule 21F-2 in conjunction with the statutory cross reference to internal reports independently protected by SOX means, according to the SEC, that an individual could get anti-retaliation protections as a whistleblower without reporting violations to the SEC.[25]

IV. The Supremes Provide a Narrow Definition for Whistleblowers under Dodd-Frank

Which definition and conduct qualified whistleblowers for Dodd-Frank protection was up in the air until the Supreme Court weighed in during February. In Digital Realty Trust, Inc. v. Somers,[26] the Court held that an employee must provide information to the SEC before his termination to be entitled to the anti-retaliation and award provisions of Dodd-Frank.[27] Digital Realty Trust terminated Paul Somers after he reported the company’s elimination of internal controls, a SOX violation, to Digital Realty’s senior management.[28] Because Somers did not seek the requisite administrative remedy within 180 days as required by SOX, his only chance at recovery for his allegedly retaliatory discharge was Dodd-Frank, which allows a whistleblower to initially file a complaint in federal court within a more lenient six-year limitation.[29] Unfortunately, Somers’s anti-retaliation claim under Dodd-Frank failed in a crucial way—he was not a whistleblower according to the language of the statute itself.

Even though Somers’s conduct—reporting SOX violations internally to his supervisor—is protected under both acts, Dodd-Frank only protects internal reporting by those who report “to the Commission” before their employers retaliate.[30] The Court rejected pressure to give deference to the SEC’s definitions in Rule 21F-2, unlike courts below, because “Congress has directly spoken to the precise question at issue.”[31] Similarly, the Court rejected arguments that shrinking the protection of Dodd-Frank from previous application and ordinary meaning to require external reporting to the SEC would lead to absurdity.[32] Quite simply, the Court pointed to the explicit definitions within Dodd-Frank for the answer and rejected a purposive approach that had previously allowed courts to reach more fair results.[33]

Conclusion: The Murky State of Whistleblower Protections

Now it is clear that an employee who only reports a securities law violation to an internal supervisor and is subsequently terminated or demoted is not a Dodd-Frank whistleblower, although he may be protected by SOX.[34] Under Dodd-Frank, a whistleblower must report suspected securities law violations to the SEC. Internal reporting, although not precluded, is not sufficient. The differences between the qualifications may not make much difference if whistleblowers act fast, but that requires enough of an understanding of these laws to comfort an employee in his decision to report misconduct to anyone at all. And the type of reporting may weigh heavily on the remedies available to whistleblowers.

Although both acts protect employees who report corporate misconduct, fraud, or violations of SEC rules or regulations from employer retaliation, they do not provide identical remedies or avenues of recovery for whistleblower claims.[35] Terminated whistleblowers may be entitled to “all relief necessary to make the employee whole,” including back pay with interest, reinstatement, and special damages resulting from discrimination and accompanying litigation costs under SOX, but must exhaust administrative remedies before heading to federal court.[36] A complaint must be filed with the Secretary of Labor within 180 days of the termination.[37] But an aggrieved employee may be able to avoid the 180-day deadline to file a complaint with the Secretary of Labor and immediately file a complaint for retaliatory discrimination in federal court if he is also protected from retaliation by Dodd-Frank.[38]

Where this leaves an employee under state law is less clear. For example, Louisiana’s “whistleblower” statute only protects an employee who advises his employer of a violation of state law in good faith.[39] Because violations of state Blue Sky laws are likely to also violate federal securities laws, whistleblowers may have claims under SOX, Dodd-Frank, and state whistleblower protections. Taking advantage of this opportunity requires an in-depth understanding of the qualifications of each statute and quick maneuvering. An employee needs to blow his whistle both internally and externally all before any employer discrimination, or risk the ultimate price for paying the truth—“career suicide.”[40]

[1] Thomas DeMichele, If You Tell the Truth, You Don’t Have to Remember Anything, Fact/Myth (Aug. 22, 2016), http://factmyth.com/factoids/if-you-tell-the-truth-you-dont-have-to-remember-anything/ (While this quote is widely attributed to Mark Twain, it is questionable whether he coined it. If the Twain connection is a myth, then the debate over its attribution to Twain proves the words of the quote) [https://perma.cc/A7M4-G6LE].

[2] 18 U.S.C. § 1514A (2018); 15 U.S.C. § 78u-6.

[3] See, e.g.,Asadi v. G.E. Energy (USA), 720 F.3d 620 (2013); Berman v. Neo@Ogilvy, L.L.C., 801 F.3d 145 (2015); Somers v. Digital Realty Trust Inc., 850 F.3d 1045 (2017).

[4] Digital Realty Trust, Inc. v. Somers, 138 S. Ct. 767 (2018).

[5] See 15 U.S.C. § 78u-6(h)(1)(A)(iii); 18 U.S.C. § 1514A(a)(1)(A)-(C).

[6] See Brooke Masters, Enron’s fall raised the bar in regulation, Fin. Times, Dec. 1, 2011,https://www.ft.com/content/9790ea78-1aa9-11e1-ae14-00144feabdc0 [https://perma.cc/PVY7-VSAL].

[7] 124 Stat. 1376.

[8] Digital Realty Trust, 138 S. Ct. at 773 (citing Lawson v. FMR L.L.C., 571 U.S. 429, ___ (2014)).

[9] Id. at 773–74 (quoting S. Rep. No.111-176, 111-112 (2010)).

[10] S. Rep. No. 111-179, p. 38 (2010).

[11] 15 U.S.C. § 78u-6(b)(1) (2018).

[12] 18 U.S.C. § 1514A(a)(1)(A)-(C).

[13] Digital Realty Trust, 138 S. Ct. 767.

[14] 15 U.S.C. § 78u-6(a)(6) (emphasis added); Digital Realty Trust, 138 S. Ct. 767.

[15] 15 U.S.C. § 78u-6(h)(1)(A)(i)-(iii).

[16] 15 U.S.C. § 78u-6(h)(1)(A)(i).

[17] 15 U.S.C. § 78u-6(h)(1)(A)(ii).

[18] 15 U.S.C. § 78u-6(h)(1)(A)(iii).

[19] Id.; see, e.g., Asadi v. G.E. Energy (USA), 720 F.3d 620, 624 n.6 (2013) (citing to Kramer v. Trans-Lux Corp., 2012 WL 4444820 (D. Conn. Sept. 25, 2012)); Nollner v. S. Baptist Convention, Inc., 852 F. Supp. 2d 986, 994 n.9 (M.D. Tenn. 2012); Egan v. TradingScreen, Inc., 2011 WL 1672066, at *4–5 (S.D.N.Y. May 4, 2011).

[20] 18 U.S.C. § 1514A; 15 U.S.C. § 78u-6.

[21] 75 Fed. Reg. 70488 (2010); 15 U.S.C. § 78u-6(j).

[22] 17 C.F.R. § 240.21F-2(a)(1) (2018).

[23] 17 C.F.R. § 240.21F-2(b)(1)(i)-(ii) (2018); 15 U.S.C. § 78u-6(h)(1)(A)(i)-(iii).

[24] 17 C.F.R. § 240.21F-2(b)(1)(iii).

[25] Compare17 C.F.R. § 240.21F-2(a)(1), with 17 C.F.R. § 240.21F-2(b)(1)(iii) . See also 80 Fed. Reg. 47829 (2015) (SEC reiterated that a providing information to the SEC is not a condition precedent to anti-retaliation protection of a whistleblower).

[26] Digital Realty Trust, Inc. v. Somers, 138 S. Ct. 767 (2018).

[27] Id.

[28] Id.

[29] Id.

[30] 15 U.S.C. § 78u-6(a)(6) (2018); 15 U.S.C. § 78u-6(h)(1)(A)(iii) (2018).

[31] Digital Realty Trust, 138 S. Ct. at 781–82 (quoting Chevron USA v. Natural Res. Def. Council, 467 U.S. 837, 842 (1984)).

[32] Id.at 767–77.

[33] Id.(citing Burgess v. United States, 553 U.S. 124 (2008) for the interpretive rule that a statute’s explicit definition must be followed regardless of any variations from ordinary meaning).

[34] Id.

[35] 18 U.S.C. § 1514A (2018); 15 U.S.C. § 78u-6.

[36] 18 U.S.C. §§ 1514A(b)(1), (c).

[37] 18 U.S.C. § 1514A(b)(2)(D).

[38] Id.

[39] La. Rev. Stat. § 23:967 (2018).

[40] Digital Realty Trust, Inc. v. Somers, 138 S. Ct. 774 (2018) (quoting S. Rep. No.111-176, 111-112 (2010)).

by Charles H. Martin, Senior Associate

Introduction

After nearly four years, Energy Future Holdings Corp. (“EFH”) is poised to finally exit bankruptcy.[1] EFH is a Dallas-based energy company that provides electric power generation, transmission, and distribution services in Texas.[2] According to its bankruptcy filing, EFH is the largest electric energy provider in Texas.[3] It, along with 70 of its subsidiaries, filed for Chapter 11 protection under the United States Bankruptcy Code in the Bankruptcy Court for the District of Delaware on April 29, 2014, to restructure nearly $49 billion in debt.[4]

Events Leading Up to the Bankruptcy Filing

Much of EFH’s debt resulted from the leveraged buyout (“LBO”) of its predecessor company, TXU Corp. (“TXU”), which was the largest in history at the time.[5] TXU was one of the most profitable utilities in the country prior to the merger.[6] Investors, principally KKR and Texas Pacific Group, invested $8 billion in equity and obtained commitments for another $37.35 billion in financing—not all of which was expected to be drawn or used at closing—to purchase TXU.[7] Investors purchased TXU using a reverse triangular merger, whereby an acquisition subsidiary created and owned by Texas Energy Future Holding LP merged with and into TXU, the surviving company.[8] TXU then changed its name to Energy Future Holdings Corp. and began transitioning the company into several indirect subsidiaries, including Texas Competitive Energy Holdings (“TCEH”)—which owns Luminant and TXU—and Oncor Electric Delivery Holdings Company LLC.[9] The LBO resulted in $31.5 billion new debt issued; it left EFH with approximately $41.3 billion in outstanding debt, with approximately $28.8 billion at the TCEH level.[10] EFH remained profitable after the acquisition, but decreasing natural gas prices decreased profitability and ultimately caused the company to file for bankruptcy protection.[11]

Plan of Reorganization

In a typical Chapter 11 reorganization, the debtor reorganizes its debt by extending the payment due date and reducing the total amount paid.[12] Larger reorganizations may, for example, also involve the sale of large assets with the sale proceeds going to creditors.[13] The debtor will file a plan of reorganization with the court[14] and some creditors, depending on whether or not the creditor’s claim is impaired or unimpaired,[15] will have the opportunity to vote to accept or reject the plan.[16] Once the plan has been accepted, the bankruptcy judge will confirm the plan.[17] Then, the debtor will execute the plan and exit bankruptcy.[18] The effect of confirmation, among other things, is to discharge the debtor of all debt incurred prior to confirmation of the plan.[19]

The bankruptcy judge confirmed EFH’s plan on February 27, 2018.[20] The final restructuring plan consists of two main phases, both of which are outlined below.

The First Phase: Discharging $33.8 Billion in Debt and Rising from the Ashes

The first phase of the restructuring occurred in August 2016.[21] EFH spun off its largest indirect subsidiary, TCEH, into a separate company.[22] The first lien debt, comprising approximately $24.38 billion in secured debt,[23] was converted into equity with the first lien debt holders receiving 427.5 million shares of TCEH common stock.[24] Through this transaction, which was tax free,[25] TCEH discharged approximately $33.8 billion in debt.[26] TCEH eventually renamed itself Vistra Energy.[27]

The Second Phase: Selling off to Sempra

The second phase of the restructuring entails the acquisition by Sempra Energy of EFH and its 80% stake in Oncor Energy Holding Company LLC for $9.45 billion in cash, plus debt assumed, for a total enterprise value of $18.8 billion.[28] The deal was subject to regulatory approval by the Texas Public Utility Commission (“TPUC”).[29] Sempra is the fifth suitor of EFH and its indirect subsidiary Oncor.[30] First, Hunt Consolidated (“Hunt”) proposed to acquire EFH in 2016 for $18 billion.[31] Hunt was unable to secure the necessary regulatory approval and the deal fell apart.[32] Second, NextEra Energy proposed to buy EFH for $18 billion, but this deal also fell apart.[33] Third, Berkshire Hathaway Energy (“BHE”) proposed to purchase EFH for $9 billion in cash.[34] After BHE made its bid, Elliot Management began raising capital to outbid BHE by $300 million for a total bid of $9.3 billion, marking the fourth bid.[35] Both bids, however, were unsuccessful and paved the way for Sempra’s bid of $9.45 billion in cash and $9.3 billion in debt assumed, which was similar to the BHE proposal.[36] The TPUC approved the Sempra deal at a March 2018 meeting.[37]

Conclusion

After completion of the second phase of its plan, EFH is poised to successfully restructure its balance sheet and exit bankruptcy. With the sale to Sempra, the company that entered bankruptcy effectively no longer exists.[38] Former creditors now own Vistra Energy, renamed from TCEH when it was EFH’s largest indirect subsidiary, and Sempra now owns Oncor and what remained of the debtor after the Vistra Energy spinoff. Through the spinoff and assumption of debt as part of the Sempra deal, approximately $43.1 debt was unloaded from EFH’s balance sheet.[39] The remaining cash from the Sempra deal will be sufficient to pay other creditors and the administrative expenses under the plan, including at least $600 million in legal and other professional fees.[40]

[1]See Order Confirming the First Amended Joint Plan of Reorganization of Energy Future Holdings Corp., Energy Future Intermediate Holding Co., LLC, and the EFH/EFIH Debtors Pursuant to Chapter 11 of the Bankr. Code, In re Energy Future Holdings Corp., No. 14-10979 (Bankr. D. Del. filed April 29, 2014).

[2]Public Utility Commission of Texas, EFH Bankruptcy FAQs pt. 1, at 1, https://www.puc.texas.gov/agency/topic_files/Energy_Future_Holdings_Bankruptcy_FAQs.pdf [https://perma.cc/KZ2M-NTEZ].

[3]Voluntary Petition at 6, In re Energy Future Holdings Corp., No. 14-10979 (Bankr. D. Del. filed April 29, 2014).

[4]Id.

[5]Peter Lattman, A Record Buyout Turns Sour for Investors, N.Y. Times, Feb. 22, 2012, https://dealbook.nytimes.com/2012/02/28/a-record-buyout-turns-sour-for-investors/ [https://perma.cc/JU59-XAZA]. A leveraged buyout is an acquisition of a company using borrowed money that is later secured with the assets of the company being acquired. Leveraged Buyout (LBO), Investing Answers, http://www.investinganswers.com/financial-dictionary/businesses-corporations/leveraged-buyout-lbo-961 (last visited March 9, 2018) [https://perma.cc/PDG5-RU7D]. In a typical LBO, the debt-to-equity ratio is 10% to 90%. Id. In some case, the acquiring company will secure financing through banks and private equity firms, and in other instances the acquiring company will secure financing through issuing bonds. Id. Because of the high debt to equity ratio, the bonds are not investment grade and are instead classified as junk bonds. Id.

[6]Lattman, supranote 6; Order Confirming the First Amended Joint Plan, supranote 2, at 53.

[7]TXU Corp., Definitive Proxy Statement at 8 (Form DEF 14A) (July 25, 2007).

[8]Id.

[9]Press Release, KKR, TXU Corp. Announces Completion of Acquisition by Investors Led by KKR and TPG (Oct. 10, 2007), http://media.kkr.com/media/media_releasedetail.cfm?releaseid=332996 [https://perma.cc/U7M6-3KYX]; Energy Future Holdings Corp., Annual Report, Exhibit 21(a), Subsidiaries of Energy Future Holdings Corp. (Form 10-K) (March 1, 2016), https://www.sec.gov/Archives/edgar/data/1023291/000102329116000017/efh-12312015x10k.htm [https://perma.cc/BP49-698K].

[10]Order Confirming the First Amended Joint Plan, supranote 2, at 44.

[11]Id. at 52. In 2015, natural gas-fueled generation accounted for approximately 53% of electricity generation capacity in Texas. Id. at 49. Accordingly, the price of electricity is tied to the cost of natural gas. Id. at 50. Between 2005 and 2008, natural gas prices were steadily increasing, thus the price of electricity was increasing, which increased the profitability of EFH and its subsidiaries. Seeid. at 51. But following improvement in fracking technology, natural gas prices started to decline until dropping to as low as $2.04 per MMBtu in May 2012. Id. at 52. The decrease in natural gas prices resulted in a decreased profitability of EFH and its subsidiaries. Id. at 52.

[12]Elizabeth Warren, et al., The Law of Creditors and Debtors 359 (7th ed. 2014).

[13]Id. at 360.

[14]11 U.S.C. § 1121(a).

[15]Seeid. at § 1124 (explaining that generally a claim is unimpaired when the plan “leaves unaltered the legal, equitable, and contractual rights” of the claimholder). If a claim is unimpaired, the claimholder is conclusively presumed to accept the plan. Id. at § 1124(f).

[16]Id. at § 1126.

[17]Id. at § 1129.

[18]Id. at § 350(a).

[19]Id. at §1141(d). In contrast, a Chapter 7 debtor who files a voluntary petition is discharged of all debt incurred prior to the filing, i.e. pre-petition debt. Seeid. at § 727(b) (“[D]ischarge under . . . this section discharges the debtor from all debts that arose before the date of the order for relief under this chapter . . . .”); § 301(b) (“The commencement of a voluntary case under a chapter of this title constitutes an order for relief under such chapter.”).

[20]Order Confirming the First Amended Joint Plan, supranote 2, at 1.

[21]Matt Chiappardi, EFH Gets Green Light for First Phase of Ch. 11 Exit, Law360, Aug. 26, 2016, https://www.law360.com/articles/833135/efh-gets-green-light-for-first-phase-of-ch-11-exit [https://perma.cc/82BM-KPCA]; Order Confirming the Third Amended Joint Plan of Reorganization of Energy Future Holdings Corp., et. al., Pursuant to Chapter 11 of the Bankr. Code as it Applies to the TCEH Debtors and EFH Shares Services Debtors at 1, In re Energy Future Holdings Corp., No. 14-10979 (Bankr. D. Del. filed April 29, 2014).

[22]Third Amended Joint Plan of Reorganization of Energy Future Holdings Corp., et. al., Pursuant to Chapter 11 of the Bankr. Code at 70, In re Energy Future Holdings Corp., No. 14-10979 (Bankr. D. Del. filed April 29, 2014).

[23]Disclosure Statement for the First Amended Joint Plan of Reorganization of Energy Future Holdings Corp., et. al., Pursuant to Chapter 11 of the Bankr. Code at 33, In re Energy Future Holdings Corp., No. 14-10979 (Bankr. D. Del. filed April 29, 2014). The first lien debt can be further broken down into the following: a $22.635 billion credit facility; $1.75 billion first lien notes; and $1.235 billion in commodity hedges and interest rate swaps. Id. at 33.

[24]Press Release, Texas Competitive Energy Holding Corp., TCEH Corp., Parent Company for Luminant and TXU Energy, Emerges from Chapter 11 as a Competitive, Well-Capitalized Company (Oct. 4, 2016), https://www.prnewswire.com/news-releases/tceh-corp-parent-company-for-luminant-and-txu-energy-emerges-from-chapter-11-as-a-competitive-well-capitalized-company-300338561.html [https://perma.cc/P665-R7YZ].

[25]Vistra Energy Corp., Annual Report at 48 (Form 10-K) (period ending Dec. 31, 2016), https://s21.q4cdn.com/410616722/files/doc_financials/annual/Vistra_2016-Annual-Report-Final.pdf [https://perma.cc/A63N-BV25].

[26]Id. at 49.

[27]History, Vistra Energy, https://www.vistraenergy.com/history/ (last visited March 8, 2018) [https://perma.cc/H65C-Q2HQ].

[28]Press Release, Sempra Energy, Sempra Energy Announces Agreement To Acquire Ownership Interest In Oncor (Aug. 21, 2017) https://www.prnewswire.com/news-releases/sempra-energy-announces-agreement-to-acquire-ownership-interest-in-oncor-300506912.html [https://perma.cc/RGU2-8L8G]; Disclosure Statement for the Joint Plan of Reorganization,supranote 16, at 12–14.

[29]See Order Confirming the First Amended Joint Plan, supranote 2, at 86.

[30]Jeff Mosier, Fifth time’s the charm? Sempra reveals details on its plan to win Texas electricity giant Oncor, The Dallas Morning News, Aug. 25, 2017, https://www.dallasnews.com/business/oncor/2017/08/25/fifth-times-charm-sempra-lays-plans-win-texas-electricity-giant-oncor [https://perma.cc/BZ4T-W9TU].

[31]Press Release, Hunt Consolidated, Inc., Hunt Consolidated, Inc. Consortium Selected by Energy Future Holdings As Plan For Bankruptcy Solution (Aug. 10, 2015) https://www.prnewswire.com/news-releases/hunt-consolidated-inc-consortium-selected-by-energy-future-holdings-as-plan-for-bankruptcy-solution-300125944.html [https://perma.cc/EY34-TDA3]. As part of the deal, Hunt proposed to split Oncor into two companies, with the first company owning the assets and the second company leasing the assets from the first company. Mark A. Davidson, Texas Oncor Buyout Approved – With Reservations, The National Law Review, March 24, 2016, https://www.natlawreview.com/article/texas-oncur-buyout-approved-reservations [https://perma.cc/Z555-FHVP]. The company owning the assets would be structured as a real estate investment trust (“REIT”). Id. Under a REIT structure, 90% of the REIT’s income must be paid to shareholders through dividends, and taxation of the REIT is passed through to shareholders. Id. This would result in an estimated $250 million in tax savings. Id.

[32]Id.

[33]See Vince Sullivan, EFH Says It’s Nearing Resolution of NextEra’s Plan Objection, Law360, Feb. 23, 2018, https://www.law360.com/articles/1015521/efh-says-it-s-nearing-resolution-of-nextera-s-plan-objection [https://perma.cc/EA2T-LTG3]. The merger agreement between NextEra and EFH provided for a $275 million termination fee. Id. After the deal fell apart, NextEra filed a claim against EFH for this fee. Id. The bankruptcy judge disallowed the claim, and NextEra appealed. Id. To resolve the issue, which was necessary for confirmation of the bankruptcy plan, EFH placed $275 million in a reserve fund pending resolution at the appellate level. Id.

[34]Michael J. De La Merced, Berkshire Hathaway Makes a $9 Billion Bid for Energy Future Holdings, N.Y. Times (July 7, 2017), https://www.nytimes.com/2017/07/07/business/dealbook/warren-buffett-energy-future-oncor.html [https://perma.cc/U964-E38Z].

[35]Jessica DiNapoli & David French, Elliott lawyer says third bidder may top Buffet’s Oncor bid, Reuters (Aug. 18, 2017), https://www.reuters.com/article/us-oncor-m-a/elliott-lawyer-says-third-bidder-may-top-buffetts-oncor-bid-idUSKCN1AY28Y [https://perma.cc/97JB-PS6F].

[36]Another Flop Means Warren Buffett Isn’t Having His Best Year, Fortune (Aug. 21, 2017), http://fortune.com/2017/08/21/warren-buffett-oncor-deal/ [https://perma.cc/PB8F-N3QA]; Scott Deveau, Noah Buhayar, & Matthew Monks, Oncor Is Buffett’s Latest Dealmaking Flop, Bloomberg (Aug. 21, 2017), https://www.bloomberg.com/news/articles/2017-08-21/berkshire-s-flop-on-oncor-adds-to-buffett-s-dealmaking-woes[https://perma.cc/R6X3-V63V]; Mark Curriden, A three-minute call and two multi-billion-dollar wire transfers: The end of Energy Future Holdings, The Texas Lawbook (March 14, 2018), https://www.bizjournals.com/dallas/news/2018/03/14/a-three-minute-call-and-two-multi-billion-dollar.html[https://perma.cc/KN4G-8QLS].

[37]Cara Salvatore, Regulators OK $9.5B Oncor Sale, Capping EFH Bankruptcy, Law360 (March 8, 2018), https://www.law360.com/articles/1020153/regulators-ok-9-5b-oncor-sale-capping-efh-bankruptcy [https://perma.cc/82C4-LQFX].

[38]Mark Curriden, A three-minute call and two multi-billion-dollar wire transfers: The end of Energy Future Holdings, The Texas Lawbook(March 14, 2018), https://www.bizjournals.com/dallas/news/2018/03/14/a-three-minute-call-and-two-multi-billion-dollar.html (“At 9:34 a.m., the sale of Oncor to Sempra was complete. At that same minute, Dallas-based Energy Future Holdings, which only two years ago was the largest power company in Texas with 8,900 employees, ceased to exist.”) [https://perma.cc/6L5F-CXGE].

[39]This calculation was reached by adding the $33.8 billion in debt that was discharged through the Vistra Energy spinoff to the $9.3 billion in debt that was assumed under the Sempra deal. Both aspects of the reorganization were discussed previously.

[40]Mark Curriden, Energy company’s bankruptcy generating Enron-sized legal fees, The Texas Lawbook, March 29, 2018, https://www.chron.com/business/energy/article/Energy-company-s-bankruptcy-generating-12789018.php [https://perma.cc/S235-WFAH]. EFH’s general counsel speculated that professional fees will hit $1 billion, making this bankruptcy one of the most expensive in history. Id.