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What Senate Bills 9 & 10 Mean for Attorneys in San Diego

October 12, 2021/in All Blog Posts, Corporate Litigation, Real Estate/by The Gupta Evans & Ayres Team

Unless you inherited your house from your grandmother (and keep a very very low profile), you know that the cost of real estate in California has been skyrocketing for decades.

Not even COVID could stop the real estate bubble, in fact, because many people didn’t want to move during the pandemic, it decreased the supply while the demand never slackened.

Immediately following the recent failed gubernatorial recall, Gavin Newsom put Senate Bills 9 & 10 on the CA Senate floor to help address the housing crisis in California.

As defined in a recent article in the NY Times:

“S.B. 9 allows duplexes to be built in most neighborhoods across the state, including places where apartments have long been banned.
S.B. 10 reduces environmental rules on multifamily housing and makes it easier for cities to add high-density development.”

Can you hear that? It’s the sound of people’s heads exploding.

San Diego is a big small town, you live here, you know. Neighborhoods as tony as Del Mar still have bungalows with beach views held onto by families who bought in the late ’60s and aren’t going anywhere. Housing prices have skyrocketed in the past 2 years with the median cost to buy a home topping $750K in 2021 and estimates saying the price will reach $1M next year.

So, What do Senate Bills 9 & 10 mean for attorneys in San Diego?

In theory, SB 9 would allow a family on an acre or 2 of land to build a casita, rent it out to a couple, make some income to pay their mortgage and in doing so also offset the housing shortage. In practice, developers are coming in, sweeping up family-owned properties and turning them into multi-unit rentals in areas like Clairemont Mesa and other suburban middle-class tracts that have not seen this kind of development since the 1950’s when they were first built up offering middle-income American’s a piece of the American dream.

SB 10 could allow more permitted buildings with less red tape to be built, easing the lengthy process of permits and ecological offsets to structures created in urban areas. Requirements for zoning changes can drive the cost of construction way up and delay projects that build housing in urban areas by months or in some cases even years which in turn raises the rent asked of those properties once they are complete. SB 10 should abate some of that and allow a streamlined route to more high-rise housing in areas like Hillcrest and UTC. In practice, those builders who began projects before SB10 will be at a disadvantage to those who are not required to adhere to the same rules, putting them at a competitive shortfall and potentially paving the way for lawsuits.

The US is a litigious society.

When we feel slighted, we sue. These new regulations in the San Diego housing market are sure to stir up their fair share of lawsuits, challenges, and infighting among developers and old school city residents.

Traffic, pollution, resources like grocery stores, schools, hospitals, urgent care clinics, gas stations, all will be affected by the tripling or more of the population in any one area. From a development perspective, the 2 bills go hand in hand very well allowing more units to be developed with less red tape and city interference.

So what should you beware of if your client is investing in a multi-family property newly allowed by SB’s 9 & 10?

How can you protect them from unnecessary litigation and headache down the road while still encouraging their CRE portfolio’s growth? One step you can take with little to no effort is to do a background check on the players involved. [WE CAN HELP WITH THAT]. If your search comes up with bankruptcies, charge-offs of debt, lawsuits for the past few decades, you’ll know the kind of person your client is getting in bed with and can triple-check those contracts to cut out any loopholes. On the other hand, if it comes back clear, it may just mean, they’re new at this game, so it’s probably still a good idea to check for loopholes in those contracts and investment disclosures.

Whether you fall on the side of the single-family homeowner who says, “not in my backyard” or the young couple looking to get their own place who wonder, “what can I afford?” or the developer who is looking to turn a profit and in doing so offset the housing shortage, SB 9 & 10 are sure to throw a cat among the pigeons in the San Diego Real Estate market for years to come.

The coming months and years are likely to be rife with lawsuits around these new developments. There are community boards that are adamant that their neighborhoods are not going to be the frontier of housing growth. It’s going to start somewhere and wherever it is, the changes are likely to be seismic and far-reaching.

FTC x Influencer: the FTC’s Rules on Influencer Marketing Disclosures

October 8, 2021/in All Blog Posts, Corporate Litigation/by John Ahn

The rise of social media has facilitated the birth of influencers, and over the past several years, influencer marketing has ballooned to become a multi-billion-dollar industry according to various sources. (See https://www.shopify.com/blog/influencer-marketing-statistics#7.) It comes as no surprise that the FTC has already extended advertising rules into the world of influencer and social media marketing. This article will explore the rules around influencer marketing, specifically on brand/influencer collaborations.

An Intro to Influencers

Influencers are individuals who generally have high social net worth and who have developed large social media followings. (Colgate v. Juul Labs, Inc. (N.D.Cal. 2019) 402 F. Supp. 3d 728, 742.) Influencers can be anyone from a professional athlete to a built-from-scratch social media sensation. However, whether your favorite influencer is an A-list celebrity or a stay-at-home dad who gained millions of followers by making comical TikTok videos, influencers share a key characteristic: they have the ability to greatly affect the purchasing decisions of their followers.[1]

An influencer’s ability to affect the purchasing decisions of followers boils down to relatability and authenticity. In essence, uploading content on social media is a type of disclosure of one’s personal life to the public. This in turn allows influencers to connect with the general public on a more personal level, which ultimately leads to an increase in followers. An influencer’s followers feel connected to the person they follow and are willing to trust this person’s words.

Influencer Marketing

Businesses have recognized the impact influencers have in the market and have continued to tap into these connections to create lucrative business opportunities. For instance, one frequently used method of marketing through influencers involves brand collaborations wherein businesses release limited edition products in collaboration with a popular influencer. You have likely seen the shorthand “x” to denote collaborations between brands: “Nike x sacai”, “adidas x Disney”, “Fendi x Versace”, etc. This moniker stylization can also be used for brand/influencer collaborations, e.g., “Brand x Influencer”.

Whenever a business decides to partner with an influencer on a marketing venture, it is important to be familiar with the FTC’s rules regarding disclosure. 16 C.F.R. Section 255.5 states that “[w]hen there exists a connection between the endorser and the seller of the advertised product that might materially affect the weight or credibility of the endorsement (i.e., the connection is not reasonably expected by the audience), such connection must be fully disclosed.” (16 C.F.R. § 255.5) “[I]nfluencers should clearly and conspicuously disclose their relationships to brands when promoting or endorsing products through social media.” (Ariix, LLC v. NutriSearch Corp. (9th Cir. 2021) 985 F.3d 1107, 1116; quoting Federal Trade Commission, FTC Staff Reminds Influencers and Brands to Clearly Disclose Relationship (Apr. 19, 2017), https://www.ftc.gov/news-events/press-releases/2017/04/ftc-staff-reminds-influencers-brands-clearly-disclose.) The reasoning behind this requirement is that the courts simply view influencer marketing as a form of advertising, and disclosure is necessary to prevent false, misleading, or fraudulent advertising.

Generally, disclosure is required if the connection is not reasonably expected by the audience. (16 C.F.R. § 255.5.) That said, disclosure isn’t always necessary. Section 255.5 includes several examples describing various scenarios where disclosure is not required by law. For instance, let’s say a food business ran an ad featuring an endorsement by an A-list celebrity and the endorsement regards only points of taste and individual preference. The celebrity’s compensation is likely ordinarily expected by viewers and so no disclosure is required. (Id.) The key here is that when assessing whether or not disclosure is required, a business should take into account whether a representation is being made by the endorser, whether the endorsement relationship is clear and conspicuous, and whether the connection should be reasonably expected by the audience.

Going back to our collaboration scenario, what happens with “Brand x Influencer”? Does the “x” between the names require additional disclosures by the influencer? In this specific situation, the answer is arguably “no”. It is well known in the industry that the “x” in, for instance, “Brand x Influencer” implies a collaboration between the brand and the influencer. It is also likely apparent to consumers that a collaboration generally implies a financial relationship if not a material connection between the Brand and the influencer. This arguably should be enough to make consumers aware of such relationship/connection, especially considering the “x” between names is commonly used to announce a collab (see examples above). In this instance, the audience should reasonably expect that both names on either side of the “x” will incur some sort of benefit, if not a financial one due to the clear and widely accepted implications. In short, “Brand x Influencer” should be enough of a disclosure to make consumers aware of the financial relationship between the two because the expectation of such a relationship is baked into the name via the “x” between the names.

If you plan on venturing into the world of influencer marketing, be sure to follow the FTC’s guidelines surrounding disclosure.

[1] Sometimes, this power can even influence stock prices of companies. For example, Cristiano Ronaldo, for all intents and purposes, is a mega influencer. During a press conference earlier this year, he moved a bottle of Coca Cola out of frame and instead, held up a water bottle and said, “Water!” in Portuguese. This immediately resulted in a $4 billion dollar drop in Coca Cola’s market value.

Author: John Ahn

An Offer You Can’t Refuse, Part II: No Cash, No Claim

August 6, 2021/in All Blog Posts, Corporate Litigation/by Jake Ayres

In a previous article, I discussed the often blurry line between permissible pre-litigation communications and constitutionally unprotected extortionate demands. However, one important dimension of the civil extortion universe was left unaddressed there—that is, no claim for civil extortion can lie unless the victim actually pays the extorter.

In much of the foundational precedent surrounding the issue of civil extortion, courts are primarily concerned with the first step of the anti-SLAPP analysis, wherein the defendant has the burden of proving that the speech at issue is protected. See, e.g., Flatley v. Mauro, 39 Cal. 4th 299, 320, 333 (2006). Under the anti-SLAPP statute’s two-step, burden-shifting framework, only when the defendant has made a prima facie showing that their speech is protected activity does the plaintiff then have the burden of proving a likelihood of success on the merits of their claim. Id. at 314. Flatley and nearly all of its progeny deal with scenarios where the defendant fails to meet their initial burden because their communications are held to be extortionate as a matter of law, and as a result, those courts did not reach the second step of the analysis—that is, whether the plaintiffs have viable claims for civil extortion.

If they had, most of those civil extortion claims would have been found lacking for the victim’s failure to pay.[1] Although extortionate demands may place communications outside of the protections of the constitution and the anti-SLAPP statute, merely receiving those communications does not on its own give rise to an actionable claim. See Fuhrman v. Cal. Satellite Sys., 179 Cal. App. 3d 408, 426 (1986), overruled on other grounds by Silberg v. Anderson, 50 Cal. 3d 205, 211 (1990). Although not termed an action for “civil extortion,” the California Supreme Court “has recognized a cause of action for the recovery of money obtained by the wrongful threat of criminal or civil prosecution.” Id. Because California only recognizes a cause of action for recovery of extorted money, would-be victims of an extortionate demand who do not pay do not have a cause of action for civil extortion.

Indeed, in an unpublished case, the California Court of Appeal rejected a claim for “attempted civil extortion” for this exact reason. Tran v. Eat Club, No. H046773, 2020 Cal. App. Unpub. LEXIS 5299, at *53-54 (Aug. 18, 2020). It is possible that a published case may take a different view, but allowing civil liability for “attempted” torts perhaps skirts too close to concepts of criminal liability.

In short, although an extortionate demand letter may not be entitled to constitutional protections as a matter of law, that does not mean, ipso facto, that the plaintiff has a viable claim for civil extortion. Indeed, without money changing hands, California law currently prohibits recovery of damages.

[1] Or, found lacking because the speech at issue would be protected by the litigation privilege, defeating the likelihood of success on the merits on the second step of the anti-SLAPP analysis. See Malin v. Singer, 217 Cal. App. 4th 1283, 1302 (2013) (holding that where demand letter was “protected by litigation privilege. . . . plaintiff [could not] establish a probability of prevailing where the litigation privilege precludes liability”).

Author: Jake Ayres

Networking Groups for Lawyers in San Diego

July 27, 2021/in All Blog Posts/by The Gupta Evans & Ayres Team

Lawyers need other lawyers. The truth is, we all specialize in our particular areas of expertise and our clients often come to us as their trusted advisor asking for help outside of those areas of expertise.

Having a robust network of talented, reliable and trustworthy lawyers makes us look great. Whether you’re just starting out or a partner in a firm we’ll share the groups and affiliations where we find the kind of partnerships that make us the go-to source for our past clients and great referral partners to our fellow members of the Bar.

ProVisors is a nationwide network of professionals who meet (at minimum) monthly to share resources and provide professional value and personal connection to fellow members.

As members of ProVisors, we know the caliber of professionals in this organization and rely on our fellow members for referrals both inbound and outbound.

ProVisors Events are a great way to meet smart, capable, trustworthy law professionals and quite a few other resources as well.

The San Diego County Bar Association’s mission is to connect lawyers and support their success and fulfillment. With regular events, the SDCBA provides ample networking opportunities to California Bar members.

From mindfulness and meditation to law updates and social events, this is a great resource for education and outreach.

Welcome entrepreneurs, innovators and disruptors. Imagine an organization that helps you achieve your full potential in your business and personal life through life-enhancing connections, shared experiences and collaborative learning.

Introducing the new Entrepreneurs’ Organization. Together we grow.

EO is a nationwide membership organization with a threshold of $1M in revenue (rolling) as its criteria for membership (among others). Their mentorship manifests in EOA, the pre-$1M companies’ networking group.

Vistage provides peer advisory groups across the US. Many of the Vistage chairs used to sit on major boards of Directors or ran larger companies and now dispense wisdom to their Vistage groups. Acquired by a Private Equity group in 2012 Vistage is a nationwide network of professionals across fields.

“Becoming a Vistage Member will help you grow your business faster than any other form of business and leadership development”

Of the 33,000 clubs worldwide, San Diego Rotary is the 4th largest! Boasting over 500 local members as the longest standing Rotary in San Diego, our club includes some of the city’s well known civic, business and community leaders who meet weekly for fellowship and service. Since 1911, San Diego Rotary has been providing San Diego’s leadership with an opportunity to connect with others toward the common goal of improving the community in which we work and live, as well as the world beyond.

The ACC San Diego Chapter serves the needs of in-house counsel in the San Diego metropolitan area

ACC San Diego vision is “Building connections among in-house counsel and their community to foster engagement, education and excellence in a dynamic and inclusive environment.”

ACC Events are a mix of virtual and in-person and focus on in-house counsel.

The Lawyers Club of San Diego’s mission is “To advance the status of women in the law and society.” Lawyers Club is committed to maintaining and enhancing our programming and services to our members. 2021 marks their 50th anniversary, so there are likely to be some exciting events as the date approaches.

Whatever your chosen networking group, from those with a broader reach, like Vistage and EO to those specific to lawyers, be sure to extend a hand to other practices, create the kind of connections that serve your clients and be that person who always knows just the right professional to fill any need.

Want to know what makes a great referral for us? We thought you’d never ask… READ ON

Low Chance of Survival: Scripps Health Data Breach and Negligence Causes of Action

July 26, 2021/in All Blog Posts, Corporate Litigation/by John Ahn

On April 29, 2021, Scripps Health (“Scripps”) suffered a ransomware attack in the unauthorized access of over 147,000 patients’ personal information. A few weeks later, Scripps announced the breach. As of writing this article, Scripps is still trying to determine the full extent of damage caused by the breach.

I previously wrote about the CCPA and California’s plaintiff’s rights in the event of a data breach. This article will explore California’s Plaintiff’s rights against healthcare providers in the event of a data breach.

Scripps is a private non-profit organization and one of San Diego’s largest healthcare providers. Scripps also processes the personal information of over 50,000 California residents. Scripps seemingly fits the description of a qualified business under CCPA 1798.140. However, the CCPA actually does not apply to Scripps for a few reasons.

First, Scripps is a non-profit private business, and the CCPA specially states that non-profit entities are exempt from this law. This also means that there can be no private right of action under the CCPA for those individuals who have been affected by this breach.

Second, because Scripps is a healthcare provider, it is required to abide by the Health Insurance Portability and Accountability Act (“HIPAA”) and Health Information Technology for Economic and Clinical Health (“HITECH”). Generally, all private businesses that conduct business in California and control data including personal information are subject to data breach notification laws under the Customer Records Act (Cal. Code. Civ. § 1798.82). Further, under California law, personal information includes “medical information” which is defined as any information regarding an individual’s medical history, mental or physical condition, or medical treatment or diagnosis by a health care professional.” (Cal. Code. Civ. § 1798.81.5.) However, HIPAA and HITECH are federally regulated. Given that Scripps is a healthcare provider defined by HIPAA and HITECH, California rules regarding breach notification generally play second fiddle to the federal regulations. In fact, 1798.81.5(e)(5) states that compliance with these federal laws “shall be deemed compliance with this section” regarding disclosure.

HIPAA and HITECH have tighter standards for breach notification than most state laws. Unfortunately, there is also no private right of action for HIPAA or HITECH violations, including widespread data breaches like the Scripps incident. (See Acara v. Banks (5th Cir. 2006) 470 F.3d 569, 571. “Every district court that has considered this issue is in agreement that the statute does not support a private right of action.”) This doesn’t necessarily preclude Plaintiff’s from filing lawsuits. In fact, Plaintiffs may be able to file lawsuits for damages resulting from violations of state laws.

For instance, Section 56.101(a) of the California civil code requires healthcare providers such as Scripps to preserve the confidentiality of medical information. (Cal. Code. Civ. § 56.101.) Any healthcare provider who negligently fails to preserve this confidentiality “shall be subject to the remedies and penalties provided under subdivisions (b) and (c) of Section 56.36.” (Id.) This seemingly opens the door for lawsuits against data breaches by healthcare providers. Indeed, there has been an increase in class action lawsuits involving data breaches by healthcare providers in California. However, the court in Sutter has made it more difficult to prove a breach of confidentiality under 56.101(a).

In Sutter, the court stated a plaintiff must allege that negligently released medical information was viewed by an unauthorized person. (Sutter Health v. Superior Court (2014) 227 Cal.App.4th 1546, 1557 [174 Cal.Rptr.3d 653] “No breach of confidentiality takes place until an unauthorized person views the medical information.”) In Sutter, Sutter Health had a computer stolen from one of its offices, wherein the computer contained medical records of over four million patients. (Id. at 1551.) The computer’s hard drive was password-protected but the files themselves were unencrypted. (Id.) The court briefly compared their facts to Regents, where the data thief stole both the encrypted information and the encryption key, clarifying that this was to “tantamount to leaving the files unencrypted.” (Id. at 1555, citing encryption Regents of University of California v. Superior Court (2013) 220 Cal.App.4th 549, 554 [163 Cal.Rptr.3d 205].) The facts in regents arguably show a more clear-cut case of the release of unencrypted personal information. However, the court in Sutter seemingly ignored any arguments of encrypted versus unencrypted. Instead, the court determined that, because there was no allegation that the released medical information had been viewed by an unauthorized party, there can be no breach of confidentiality. (Sutter at 1557.)

This was a critical blow to plaintiff’s rights because currently, HIPAA, HITECH, and California do not require breach notifications to include information of whether an unauthorized party has viewed the released medical records. Moreover, given that data breaches are mostly digital, it would be next to impossible for plaintiffs to determine whether an unauthorized party has viewed their personal information. Plaintiffs, then, are essentially forced to wait until they suffer actual injuries. However, by then, the damage done could be severe, long-lasting, or irreversible. As such, any plaintiffs currently engaged in class action lawsuits against Scripps may be in for a disappointment, especially for negligence causes of action under 56.101.

There may be other viable causes of action, but negligence is a big one. The healthcare industry spends billions of dollars on cybersecurity to eliminate the probability of negligence, and yet there have been nearly 800 breaches since the beginning of 2020. (ocrportal.hhs.gov.) This shows that even when careful, data breaches occur, which implies that negligence causes of action related to data breaches were likely already difficult to prove. Adding the requirement of “viewership” by an unauthorized party makes this obstacle that much more difficult to overcome. Still, one can only wait and see how courts will handle these new cases.

The Sphinx on Skunk: Justice Thomas Speaks Out(!) on the Inconsistent Enforcement of Federal Cannabis Prohibition

July 21, 2021/in All Blog Posts, Cannabis, Corporate Litigation/by Jake Ayres

They say that war makes for strange bedfellows. As it turns out, the war on drugs is no exception. In a recent opinion from the United States Supreme Court, conservative stalwart Justice Clarence Thomas rebuked the federal government’s “half-in, half-out” stance on state-legal cannabis, and strongly implied that said approach was untenable from a federalist perspective. This criticism of federal drug policy from the right—rather than the left—could be another omen that more cultural conservative objections to state-legal cannabis are yielding to federalism and economic concerns and could also signal a future bipartisan action to provide safer harbor to legal cannabis businesses.

In Standing Akimbo, LLC v. United States, 594 U.S. __ (2021), the Supreme Court, on June 28, 2021, denied certiorari to a medical cannabis dispensary in Colorado attempting to prevent disclosure of certain company records sought by the IRS. The dispensary was accused by the IRS of impermissibly using 280E of the Internal Revenue Code to deduct business expenses; as the law stands now, cannabis businesses, because they deal in a federally illegal substance, can only deduct the costs of goods sold.

However, in so doing, Justice Thomas took the opportunity to wag his finger at the inconsistency of federal enforcement of the illegality of cannabis: “[T]he Federal Government’s current approach to marijuana bears little resemblance to the watertight nationwide prohibition that closely divided Court found necessary to justify the Government’s blanket prohibition in Raich.” Id. A known advocate for federalist principles, he went on to note that “[i]f the Government is now content to allow States to act ‘as laboratories’ ‘and try novel social and economic experiments,’. . . then it might no longer have authority to intrude on ‘the States’ core policy powers . . . to define criminal law and to protect the health, safety, and welfare of their citizens.’” Id. (quoting Gonzales v. Raich, 545 U.S. 1, 42 (2005) (O’Connor, J., dissenting)).

Justice Thomas’s references to Raich (and Justice O’Connor’s dissent therein) is unsurprising given his own dissenting opinion in that case, in which he voiced similar concerns of federal commerce clause power overreach. Raich, 545 U.S. at 57 (Thomas, J., dissenting). In Raich, the majority held that the federal government had power under the commerce clause to regulate state-legal intrastate cannabis—that is, cannabis that is grown, distributed, and consumed within a state where it is legal. Id. at 22.

Justice Thomas opined that intrastate regulation in that context went beyond the federal government’s commerce clause powers, in that cultivation and consumption of medical cannabis entirely in California was not “commerce” nor interstate. Id. at 59. Moreover, although the majority substantially relied on Wickard v. Filburn, 317 U.S. 111 (1942) for the proposition that intrastate commerce that has a “substantial effect” on interstate commerce is within Congress’ regulatory power, Justice Thomas agreed with Justice O’Connor’s criticism of the majority’s reliance on Wickard. In Justice O’Connor’s dissent, she noted that, unlike Wickard, where the Court was presented with economic studies documenting the effects of personal intrastate wheat cultivation on the interstate wheat industry at large, there was no actual evidence that the small-scale medical cultivation and consumption by appellants had any “substantial effects” on interstate commerce. Id. at 53-54 (O’Connor, J., dissenting); id. at 67 (Thomas, J., dissenting). For his own part, Thomas criticized the majority’s apparent use of the Necessary and Proper Clause to hold that exercising federal police powers over intrastate legal cannabis cultivation was “necessary” to avoid a “gaping hole” in the Controlled Substances Act, id. at 21, reasoning that there was no evidence before the Court to suggest that failing to regulate intrastate cannabis cultivation and use would result in an inability to control interstate drug trafficking, id. at 63 (Thomas, J., dissenting), a criticism he alluded to in Standing Akimbo. 594 U.S. at __ (“A prohibition on intrastate use or cultivation of marijuana may no longer be necessary or proper to support the Federal Government’s piecemeal approach.”).

Indeed, these statements—from an eminent conservative, no less—could be a wake-up call for activist litigation to challenge the ruling in Raich, or for Congress to act to provide some measure of legalization or safe harbor to state-legal cannabis operators. As I have written previously, even if an impact litigant were to challenge Raich on its own rationale—without delving into the more academic discourse of Thomas’s dissent—such a challenge might bear fruit.

In reaching its final holding that Congress had a rational basis for concluding that intrastate cannabis cultivation would have a “substantial effect” on its ability to regulate interstate cannabis commerce, the Court in Raich explicitly premised its decision upon (1) difficulties distinguishing between state-legal cannabis and illegal cannabis grown elsewhere and (2) “concerns about diversion [of state-legal cannabis] into illicit channels.” 545 U.S. at 22. As more and more states legalize cannabis in some fashion—36 states have legalized adult-use cannabis, medical cannabis, or both—both of points one and two become weaker and weaker. That is, as to point one, as legal cannabis packaging becomes more regulated and sophisticated, the visible difference between legal cannabis and illegal cannabis becomes more and more obvious. As to point two, as more and more states legalize, it becomes less and less likely for legal cannabis to be “diverted” into illicit channels. For example, nearly the entire Pacific bloc of states—California, Oregon, Washington, Nevada, Arizona, and Colorado—have legalized medical and adult-use cannabis. Leaving aside state law prohibitions, legal cannabis moved throughout this region is very unlikely to result in “diversion” of legal cannabis “into illicit channels.”

Although whether this shot across the bow of the federal government’s cannabis enforcement regime will result in or motivate any lasting change—either judicially or legislatively—remains to be seen, the cannabis industry will likely view this statement of support from a somewhat unexpected source as a moral victory.

Meet Ajay Gupta – Founder

July 20, 2021/in All Blog Posts/by The Gupta Evans & Ayres Team

All the law updates in the world aren’t going to help you understand who we are and how we practice as well as a conversations with us. WIth life as busy as ever, we thought it would be nice to take a few minutes and introduce ourselves and talk about why we do what we do.

Meet Ajay Gupta.

A Michigan native, Ajay came to San Diego in 2002. He lives in La Jolla with his beautiful wife, two boys, and cat. Ajay spends almost all his free time with his family. They enjoy hiking Torrey Pines, biking in Coronado, and Saturday mornings at the Little Italy Farmer’s Market. His sports of choice are basketball and golf. Ajay can be seen at poker night every third Friday of the month.

Ajay graduated from the University of Michigan in 1997 and the University of San Diego School of Law in 2005. He opened his practice in 2008 and has been involved in real estate law ever since. Ajay’s practice focuses on civil litigation with an emphasis on bankruptcy and real estate matters.

Mr. Gupta has been recognized by SuperLawyers from 2015 through 2018, which is reserved for the top 5% of lawyers in the country. In addition, Mr. Gupta is one of 13 certified bankruptcy specialists in San Diego County and widely regarded as an authority in the area of real estate and corporate law.

Ajay takes a hands-on, holistic approach to working with clients. He enjoys working to find solutions that address not only the financial concerns of his clients but solutions that address the emotional aspects of their case as well.

Beyond the standard CV we asked Ajay a few more… personal questions. Here are his answers:

What do you do when you’re not working?
When I’m not working, I enjoy playing basketball and Poker. I love watching football and movies, as well as meditating.

If you were to look back from the age of 80 and tell yourself anything what would it be?
Get your MBA, not a Law Degree.

What’s one fact about your education or upbringing that few people know?
I’m a redneck at heart. I grew up in rural Michigan and used to snowmobile to my neighbor’s house, go ice fishing /bow hunting, and take my oversized Dodge Ram mud bogging for fun.

What are two things on your bucket list?
1. Take two months off work and go to Katmandu, travel Northern India, possibly Tibet
2. Drive to Alaska and Denali National Park

Keep your eyes on this space for AJAY’s video interviews coming soon.

Famous Bankruptcy Cases

July 13, 2021/in All Blog Posts, Bankruptcy/by The Gupta Evans & Ayres Team

As Bankruptcy LItigation attorneys, we see people from all walks of life whose circumstances have caused them to need bankruptcy protection. We work with companies who are seeking to be made whole in cases where their debtor has declared bankruptcy and we support business owners and individuals whose cases are bankruptcy adjacent, meaning that the filing of Chapters 11 or 7 has tangentially affected the shared financial interests of our clients.

At Gupta Evans and Ayres, we pride ourselves on knowing quite a bit about bankruptcy filings, but we did not know quite how many celebrities have filed for bankruptcy. The one on this list that was most surprising? Ulysses S. Grant, though his bankruptcy filing is not related to his statue being toppled in San Francisco in 2020, it was the result of other bouts of poor judgement on his part.

Here is a list of some of the most surprising celebrities to have filed for bankruptcy throughout modern history (Grant is the outlier).

Cindy Lauper: Before she Wanted to Have Fun, her band went bankrupt. She made a hasty and stable recovery.

T-Pain declared bankruptcy in the 90’s after out-of-control spending. He recently appeared on and won the Masked Singer and his finances seem to be on the mend.

Before LArry King sat in front of the colorful iconic dots and hosted his famous talk show he was accused of stealing $5K from his business partner. The charges didn’t stick but the stigma did and he declared bankruptcy in the late ’70’s.

Burt Reynolds lost a fortune over his career partly due to an expensive divorce and all those toupees. He declared bankruptcy in the 90s but went on to make such cult favorites as Boogie Nights. He was still active in the movie industry until his death.

Nicholas Cage doesn’t just make movies in VEgas, he lives life on the edge. After wild spending and unpaid tax bills Cage declared bankruptcy in the early 200’s. He seems to be managing just fine now with an estimated net worth of over $20 million.

Mike Tyson has made some questionable choices (face tatoos, tigers, ears…) but poor spending choices and a pricey divorce caused the fighter to file for bankruptcy in the early 2000’s. He has since founded a marijuana company in California and seems to be solvent once again.

Looking at the retrospective of celebrities who have weathered bankruptcy may cause those of us touched by Chapter 7 or 11 filings to cringe more than the average person. The truth is, it’s no laughing matter. While bankruptcy filings can be strategic tools to protect assets in dire circumstances, those same filings can reserve funds from those who are owed money. At Gupta Evans and Ayres, we are bankruptcy litigation experts. The intricacies of filings are our forte. If you or someone you trust is impacted by bankruptcy, don’t hesitate to reach out.

Want to see how we work? READ ON…

Chapter 420, Part II: Closing the Book on Cannabis-Adjacent Bankruptcy

July 7, 2021/in All Blog Posts, Bankruptcy, Cannabis, Corporate Litigation/by Jake Ayres

In a previous article, I discussed the potential impacts of a then-forthcoming decision in the case of In re United Cannabis Corporation, which had the potential to widen access to federal bankruptcy relief to cannabis-adjacent hemp businesses.

However, the In re United Cannabis case ended not with a bang, but with a whimper. On January 12, 2021, after approximately eight months of consideration, Bankruptcy Judge Joseph G. Rosania, Jr. of the District of Colorado issued a one-page ruling dismissing[1] the bankruptcy petition “pursuant to 11 U.S.C. § 1112(b) and . . . finding good cause.” In so doing, he snuffed out any hope that the District of Colorado could become a hub for hemp businesses that dabble in cannabis to successfully pursue chapter 11 bankruptcy.

Because the ruling does not provide any substantive reasoning for the decision, industry observers are left to speculate. One can only assume that the court found the evidence offered by the U.S. Trustee—namely, that the debtor was not nearly as removed from the cannabis arena as it purported to be based on the debtor’s website and marketing materials—credible enough to justify dismissal on the grounds that a plan of reorganization could not be untainted by federally illegal cannabis money. In so doing, the court left the fundamental question of how the 2018 Farm Bill’s legalization of hemp affects the availability of bankruptcy to businesses that have toes in both the cannabis and hemp pools. For the time being, the safer route—and the route perhaps favored by conventional wisdom—for businesses is to completely segregate their cannabis and hemp businesses, both on a practical and corporate/legal level.

The Bankruptcy Court for the District of Colorado’s declination to decide the issue raised by Way to Grow only illuminates other quirks in the current state of affairs for bankruptcy in the cannabis context. In particular, the ruling in United Cannabis displays the tension between how different bankruptcy courts have construed section 1112 vis-à-vis section 1129(a)(3).

Section 1129(a)(3) provides that a bankruptcy plan shall only be confirmed where, inter alia, “[t]he plan has been proposed in good faith and not by any means forbidden by law.” On its face, this statute would seem to preclude plans funded by federally illegal cannabis, given that those funds would be derived from a “means forbidden by law.” However, the Ninth Circuit disagreed in Garvin v. Cook Investments NW, SPNWY, LLC, 922 F.3d 1031 (9th Cir. 2019). In that case, the Ninth Circuit affirmed the Bankruptcy Court for the Western District of Washington’s confirmation of a chapter 11 plan for reorganization over the U.S. Trustee’s objection that one of the debtors was renting real property to a cannabis growing operation. Id. The Ninth Circuit parsed the language of section 1129(a)(3) quite narrowly, holding that that subsection “directs bankruptcy courts to policy the means of a reorganization plan’s proposal, not its substantive provisions.” Id.at 1033. The Ninth Circuit applied that interpretation to the case at bar, and found that although income funneled into the plan would ultimately be derived from a federally illegal source—the cannabis grower tenant—that had no bearing on whether the plan had been proposed in good faith. See id. at 1035-36. Importantly, the Ninth Circuit refused to rule on the argument that section 1112(b) mandated dismissal of the petition, concluding that “the Trustee waived the argument by failing to renew its motion to dismiss” after the Bankruptcy Court’s initial dismissal of a previous motion to dismiss with leave to renew at the plan confirmation hearing. Id. at 1033-34.

This literal interpretation of section 1129(a)(3) has been explicitly criticized in courts within other circuits. Indeed, the Bankruptcy Court for the Eastern District of Michigan sharply critiqued Garvin in dicta for its de facto affirmation of illegal conduct pursuant to a bankruptcy plan:

This Court does not necessarily agree with the Garvin court’s holding about § 1112(a)(3). And, respectfully, one might reasonably question whether the Garvin court should have refused to decide the § 1112(b) dismissal issue. That refusal, on waiver grounds, arguably is questionable, because it allowed the affirmance, by a federal court, of the confirmation of a Chapter 11 plan under which a debtor would continue to violate federal criminal law under the [Controlled Substances Act].

In re Basrah Custom Design, Inc., 600 B.R. 368, 381 n.38 (Bankr. E.D. Mich. 2019).

Moreover, the District Court of Colorado in In re Way to Grow, the very case that seemingly left the door open for United Cannabis in the first place, also criticized Garvin for unduly focusing on the “means forbidden by law” clause of section 1129(a)(3), rather than the “good faith” portion of the same. 610 B.R. 338.

As a result, there is an embryonic circuit split on the issue of interpreting section 1129(a)(3) as applied to cannabis business petitioners, with the Ninth Circuit in the minority and the Sixth and Tenth Circuits in the presumptive majority.

As fascinating as this may be on an academic level, for businesses in the cannabis industry, this circuit split will likely have little bearing on the ultimate issue of whether businesses that dabble in cannabis can obtain the benefits of federal bankruptcy. Reason being, section 1129(a)(3) is just one ground for dismissal on the basis of illegality. Garvin itself noted in its final paragraphs that there are plenty of other reasons to dismiss cannabis bankruptcies—not the least of which is section 1112(b). Garvin, 922 F.3d at 1036. Indeed, running an illegal business as part of a bankruptcy plan could conceivably run afoul of any number of the listed bases for “cause” under section 1112(b)(4), including but not limited to the “gross mismanagement of the estate” prong name checked by the court in Garvin.

The unceremonious dismissal of the petition in United Cannabis raises more questions than answers. Unless and until cannabis is descheduled, or some other form of federal reform occurs, the Bankruptcy Courts will be left to continue to battle it out over interpretations of section 1129(a)(3), comfortable in the knowledge that section 1112 provides a backstop for dismissing cannabis-funded petitions and plans. However, the issue raised in United Cannabis—whether a company that has cannabis-derived revenue can have a chapter 11 plan approved if the plan doesn’t require that revenue—remains tantalizingly unanswered for now.

[1] Curiously, the court styled the order as one “granting” the U.S. Trustee’s “Motion to Dismiss Chapter 11 Cases pursuant to 11 U.S.C. § 1112(b).” However, the U.S. Trustee never filed a Motion to Dismiss. Rather, the U.S. Trustee filed a response to the court’s own Order to Show Cause why the petition should not be dismissed—although, that response did raise section 1112(b) as a reason for dismissing the case.

Back to the Futile: California Court of Appeal Expands Breadth of “Futility Exception” to Prerequisites to Mandamus Claims in Land Use Cases

June 1, 2021/in All Blog Posts, Corporate Litigation/by Jake Ayres

A recent land use decision of the California Court of Appeal has eased one of the many burdens experienced by developers seeking to challenge a public entity’s permit denial. In an opinion by Judge Tangeman, the Second Appellate District reinforced the strength of the “futility exception” to the legal prerequisites in mandamus actions.

In Felkay v. City of Santa Barbara, 62 Cal. App. 5th 30 (2021), the Court of Appeal analyzed the futility exception and found it applicable under the circumstances to the judicial doctrines of ripeness and administrative exhaustion. The futility exception, generally speaking, is a doctrine that provides that where a decisionmaker has indicated that its mind is made up against the petitioner’s desired course of action, the normal procedural bars, such as administrative exhaustion, do not apply as they otherwise would.

In Felkay, petitioner and plaintiff Thomas Felkay purchased an oceanfront lot in the City of Santa Barbara (the “City”) located on top of a seaside bluff. Felkay wanted to develop a luxurious home on the property and applied for the relevant permits to the City’s planning commission (the “Commission”). Upon review by the Commission, it concluded that the proposed development was impermissible. Namely, because the bluff top’s elevation was deemed to be at 127 feet, the coastal restriction prohibited development at any elevation below that level (i.e. closer to the ocean), and the proposed development would take place below 127 feet, the project could not proceed as proposed. Moreover, the Commission also found that an alternative building site further uphill from the bluff top was untenable for geological reasons. Id. at 34-35.

Felkay then appealed the Commission’s decision to the City Council, while also arguing that the Commission’s decision amounted to a taking. The City upheld the Commission’s decision and found that there were other alternative uses to the property such that the Commission’s decision was not a taking. Id. at 35. Felkay filed a petition for administrative mandamus and complaint for inverse condemnation claims against the City. Id. at 36.

The court split the proceedings in two, starting with the writ proceeding and ending with the trial on the inverse condemnation claims. The court denied the writ, holding that the City’s decision was supported by substantial evidence and that Felkay had not introduced sufficient evidence to justify the City’s application of Public Resources Code section 30010, which authorizes development that would violate a coastal development restriction to avoid unconstitutional takings. As for the trial on the inverse condemnation claims, the court found that there had been a taking and awarded and the jury awarded Felkay $2.4 million in damages for the fair market value of the developed lot, along with a substantial attorney and expert fees. Id. at 36-38.

On appeal, the City challenged the trial court’s ruling on the inverse condemnation claims on three bases: (1) Felkay’s claim was not ripe; (2) Felkay had not exhausted his administrative remedies; and (3) Felkay waived his right to argue the section 30010 claims at trial because he did not raise them during the writ proceeding.

As for items 1 and 2 above, the court held that the futility exception applied to both. The City argued that, at a bare minimum, Felkay was obligated to submit an amended application for development before suing the City. However, according to the court, because the City had “made plain” that there was no way they would approve any development as envisioned because anything below or above the bluff top was unbuildable, Felkay was not obligated to submit an amended application. Id. at 40. As for the judicial exhaustion argument, the court held that because the parties had stipulated to try certain issues in the writ proceeding and reserve other issues for the inverse condemnation trial, the City’s argument failed. Indeed, the parties had agreed to reserve the section 30010 claim for the inverse condemnation trial, and any “failure” to raise that issue during the writ proceedings was by design. Id. at 41-43.

In short, the Felkay decision provides another example of when the futility expression excuses a project developer from having to go back to the drawing board before suing a public entity that denies development permit. That is, if there is “NO POINT [sic] in going back” to the decisionmaker with an amended application because it has “‘made plain’ it [will] not allow any development” on the relevant parcel, the prospective plaintiff’s claim is ripe and the exhaustion requirement is met.

Although the “futility exception” issue was the court’s focus in Felkay, perhaps the more interesting takeaway from it is that the trial court found—and the City apparently did not object to the finding—that Felkay had been deprived of “all economic use of the property” resulting in a “de facto taking,” even though the court acknowledged that the land was still usable for “recreation, parking, [and] views.” Id. at 35, 38. This suggests that “de minimis” economic uses of property do not negate a takings claim.

Similarly, another potential takeaway is that this underscores the lack of a due diligence component in inverse condemnation claims. The origin of the issue here is that Felkay originally thought the bluff top was at 51 feet, which opened up a greater area of his lot for development. Id. at 34. As it turns out, he was mistaken, and the City’s determination of the true bluff top elevation torpedoed his entire plan—although he ended up compensated handsomely for his trouble. This suggests that inverse condemnation claims do not take into account whether or not the plaintiff was mistaken, nor whether plaintiff could have reasonably discovered that mistake had he gotten a second opinion from a different surveyor prior to applying for his permit. Perhaps because of the constitutional nature of inverse condemnation claims, courts have never applied a judicial gloss to inverse condemnation claims to cut off rights to plaintiffs who could have discovered their lots were unbuildable prior to purchase.

At bottom, Felkay shows the risks for municipalities in uncompromising applications of their regulations to developers, and also shows the relatively deferential treatment inverse condemnation plaintiffs receive from courts with regard to the exhaustion requirement. Although any administrative law-flavored claim has hoops to jump through, Felkay has clarified the “futile” scenario where there is one less hoop.