As a result of the Coronavirus Aid, Relief & Economic Security (CARES) Act, the Federal Reserve has created the Main Street Lending Program (“Main Street” or “Program”) to provide up to $600 billion in financing for small and medium-sized businesses. The Program will operate three facilities: the Main Street New Loan Facility (MSNLF), the Main Street Priority Loan Facility (MSPLF), and the Main Street Expanded Loan Facility (MSELF). On May 27, the Federal Reserve Bank of Boston (FRB Boston), which is administering the Program on behalf of the Federal Reserve, released borrower and lender documents along with updated term sheets for each facility and a revised FAQ document for the Program. Please check the website of the FRB Boston for Program documents and FAQs. Main Street is expected to launch any day now.

1. Structure of the Program

Main Street is not a direct loan program from the Federal Reserve or the U.S. government, and loans under the Program will not be forgiven. Instead, the FRB Boston has set up a special purpose vehicle (SPV), funded in part by the U.S. Treasury, to purchase participations in loans originated by Eligible Lenders. An Eligible Borrower (described below) may obtain a qualifying loan from an Eligible Lender (described below), and the SPV will purchase a participation interest in the qualifying loan at par from the Eligible Lender. The participation by the SPV will be 95 percent in the case of the MSNLF and the MSELF, and 85 percent in the case of the MSPLF. The Eligible Lender that advances a loan under the Program is required to retain the remaining portion of the loan and the related risk (pro rata with the SPV’s participation interest) until the loan made under the Program matures or until neither the SPV nor a governmental assignee holds an interest in the loan, whichever comes first.

2. Who can make loans under the Program?

Generally, U.S. banks, savings associations, credit unions, and holding companies, including U.S. branches or subsidiaries of foreign banking organizations, can make loans under the Program. Nonbank financial institutions are not Eligible Lenders at this time, but the Federal Reserve may expand eligibility to them in the future.

Each Eligible Lender will use its own loan documentation, which should be substantially similar to the loan documentation it uses in the ordinary course of business, adjusted only as required by the Program. The Appendixes to the FAQ contain information on what must be included in the loan documentation.

3. Who can borrow under the Program?

The Program sets forth certain minimum criteria to be eligible to borrow under the Program. Each Eligible Lender will then apply their own underwriting standards to evaluate the financial condition of each business. Below is a list of some of the criteria to be an Eligible Borrower under the Program.

• The business was established prior to March 13, 2020.
• The business was created or organized in the U.S. (or under the laws of the U.S.) and has significant operations in, and a majority of its employees based in, the U.S.
• The business is a for-profit organization. Non-profits may be eligible in the future but are not currently eligible.
• The business, together with its affiliates, only participates in one of the Main Street facilities and does not participate in the Primary Market Corporate Credit Facility (PMCCF).
  • Note: Businesses that received support through the SBA Paycheck Protection Program (PPP) are eligible to receive a Main Street loan.
• The business has not received specific support pursuant to the Coronavirus Economic Stabilization act of 2020 (Subtitle A of Title IV of the CARES Act).
• The business is not an “Ineligible Business” according to Small Business Administration (SBA) regulations.
• The business meets at least one of the following two conditions: (a) has no more than 15,000 employees or (b) has 2019 annual revenues of no more than $5 billion.
  • Number of employees should be determined following the framework set forth in the SBA’s regulation at 13 CFR 121.106. The business will need to calculate the average total number of persons employed for each pay period over the prior 12 months, including all full-time, part-time, seasonal, or otherwise employed persons (but not volunteers or independent contractors). The business will also need to include those employed by its affiliates in accordance with the affiliation test set forth in 13 CFR 121.301(f) (1/1/2019 ed.).
  • Revenues may be determined one of two ways:
    • The business and its affiliates’ annual “revenue” per its 2019 GAAP audited financial statements.
    • The business and its affiliates’ annual receipts for the fiscal year 2019, as reported to the IRS, with “receipts” having the meaning used by the SBA in 13 CFR 121.104(a).
  • Most recent audited financial statements or annual receipts may be used if a borrower or one of its affiliates does not yet have audited financial statements or annual receipts for 2019.
• The business must be able to make all of the certifications and covenants required under the Program. See the term sheets for the three Main Street facilities and a summary below.

4. What are the terms of the Eligible Loans under the Program?

The main differences between the facilities are where they fit in with an Eligible Borrower’s existing debt, the allowed leverage of the Eligible Borrower, and the amount that may be borrowed.

• MSNLF: New loans that may be unsecured or secured, first or second lien. Available to Eligible Borrowers with lower leverage ratios.

• MSPLF: New loans that may be unsecured if the Eligible Borrower has no secured debt other than mortgage debt, otherwise they must be secured and meet certain collateral coverage tests. If the loans share collateral with other debt, they must be senior to or pari passu with that debt. Available to Eligible Borrowers with higher leverage ratios. May be used to refinance existing debt with lenders other than the Eligible Lender.

• MSELF: Loans made as an increase (or “upsize”) to an Eligible Borrower’s existing credit facility. They may be unsecured if the Eligible Borrower has no secured debt other than mortgage debt, otherwise they must be secured. If the underlying loan is secured, the upsize tranche must be secured on a pari passu basis with the underlying loan (or the term tranche, if there is both a term tranche and a revolving tranche). Available to Eligible Borrowers with higher leverage ratios.

5. What are the terms of the Eligible Loans under the Program?

The basic terms of the three facilities are as follows:*

Terms	MSNLF	MSPLF	MSELF
Term	4 years	4 years	4 years
Minimum Loan Size	$500,000	$500,000	$10 million
Maximum Loan Size	Lesser of: $25 million; or 4x 2019 adjusted EBITDA** minus existing outstanding and undrawn available debt****	Lesser of: $25 million; or 6x 2019 adjusted EBITDA** minus existing outstanding and undrawn available debt****	Lesser of: $200 million; 35% of existing outstanding and undrawn available pari passu debt; or 6x 2019 adjusted EBITDA*** minus existing outstanding and undrawn available debt****
Required Retention by Eligible Lender	5%	15%	5% of Upsized Tranche
Principal Repayment (Year One Deferred for All) (Includes capitalized interest)	1/3 at the end of year 2, year 3, and at maturity	15% at the end of year 2 and year 3, 70% at maturity	15% at the end of year 2 and year 3, 70% at maturity
Rate	LIBOR (1 month or 3 month) + 3%	LIBOR (1 month or 3 month) + 3%	LIBOR (1 month or 3 month) + 3%
Fees*****	1% to SPV; up to 1% to Eligible Lender	1% to SPV; up to 1% to Eligible Lender	0.75% to SPV; up to 0.75% to Eligible Lender
Security	Can be secured or unsecured, 1st or 2nd lien	Must be secured if Eligible Borrower has other secured debt (other than Mortgage Debt) Can be unsecured if no secured debt other than Mortgage Debt at origination If secured, “Collateral Coverage Ratio” at origination must be at least 200% or not less than the aggregate “Collateral Coverage Ratio” of all other secured debt (other than Mortgage Debt) Does not need to share collateral with other secured debt, but if it does, must be senior or pari passu with such other debt Must contain lien covenant/negative pledge (with baskets/exceptions) consistent with what Eligible Lender uses in ordinary course with similarly situation borrowers	Must be secured if Eligible Borrower has other secured debt (other than Mortgage Debt) Can be unsecured if no secured debt other than Mortgage Debt at origination Any collateral that secures the underlying loan must secure the upsized tranche on a pari passu basis (however, if the underlying facility includes a revolving tranche and a term tranche, the upsized tranche only needs to share collateral with the term tranche on a pari passu basis) Must contain lien covenant/negative pledge (with baskets/exceptions) consistent with what Eligible Lender uses in ordinary course with similarly situation borrowers
Special Features/Requirements	Cannot be contractually subordinated Eligible Borrower can incur additional debt after receiving	Cannot be contractually subordinated Can be used to refinance existing debt owed to other lenders (not the Eligible Lender)	Cannot be contractually subordinated Loan being upsized must have been originated on or before April 24, 2020 and have at least 18 months remaining before maturity (maturity may be extended at time of upsizing to satisfy 18-month requirement)

*Please review specific features of the three facilities in the respective term sheets.
** Adjusted 2019 EBITDA must be calculated using a methodology the Eligible Lender previously required to be used for adjusting EBITDA when extending credit to the Eligible Borrower or to similarly situated borrowers on or before April 24, 2020 (must be a method used recently and if multiple methods used, must use most conservative).
*** Adjusted 2019 EBITDA must be calculated using the methodology the Eligible Lender previously required to be used for adjusting EBITDA when originating or amending the underlying loan on or before April 24, 2020 (must be a method used recently and if multiple methods used, must use most conservative).
**** Calculated as of the date of the loan application.
*****The SPV will pay the Eligible Lender 0.25% of the principal amount of its participation annually for servicing.

6. What are the other requirements and restrictions of Eligible Loans?

• If an Eligible Borrower has outstanding loans with the Eligible Lender as of December 31, 2019, such loans must have an internal risk rating equivalent to “pass” in the Federal Financial Institutions Examination Council’s supervisory rating system on that date.
• Eligible Lenders are expected to conduct an assessment of each potential borrower’s financial condition at the time of application.
• In addition to other certifications required by statutes and regulations, the following certifications and covenants will be required from Eligible Borrowers:
  • The Eligible Borrower will be prohibited from prepaying principal and interest on any other debt until the Eligible Loan is repaid in full. This restriction does not include a refinancing permitted in connection with a MSPLF, repaying lines of credit in the normal course of business, taking on and repaying certain normal course debt, such as inventory or equipment financing, or refinancing maturing debt, but it does include a prepayment triggered by taking out the Eligible Loan if more than de minimus. The Eligible Borrower must commit to not seek to reduce or cancel any committed lines of credit.
  • The Eligible Borrower must certify that it is unable to secure “adequate credit accommodations from other banking institutions.” This does not necessarily mean that no credit is available but can mean that the amount, price, or terms of credit available are inadequate. Borrowers are not required to demonstrate that credit has been denied by other lenders or document the inadequacy of available credit.
  • The Eligible Borrower must have a reasonable basis to believe that, as of the date of origination of the Eligible Loan and after giving effect to such loan, it has the ability to meet its financial obligations for at least the next 90 days and does not expect to file for bankruptcy during that time period.
  • The Eligible Borrower must commit that it will follow compensation, stock repurchase, and capital distribution restrictions that apply under the CARES Act, except that an S corporation or other tax pass-through entity may make distributions reasonably required to cover its owners’ tax obligations in respect of the entity’s earnings.
  • While the Eligible Loan is outstanding, each Eligible Borrower must make good-faith efforts to maintain payroll and retain employees, giving consideration to its capacities, the economic environment, available resources, and the business need for labor. However, Eligible Borrowers are still eligible to apply for Main Street loans if, as a result of COVID-19, they have already laid-off or furloughed workers.

7. What role will the SPV have?

Initially, the SPV’s interest will be a participation (one that is transferable with, in most situations, the Eligible Lender’s consent). Under certain circumstances, the SPV will be able to elevate its interest from a participation to an assignment. However, it is not expected that the SPV will exercise such right as a matter of course, including if a loan is distressed or in workout, but will exercise it only where (i) the interests of the Eligible Lender and the SPV differ, or (ii) the loan is one of the larger loans in the SPV’s portfolio of participations.

Eligible Lenders will have the option to fund the Eligible Loan upfront and submit the required documents to sell a participation to the SPV no later than 14 days after the closing of the Eligible Loan. Alternatively, an Eligible Lender may extend an Eligible Loan but condition its funding on receiving a binding commitment from the SPV to purchase a participation. Once a binding commitment is received, the Eligible Lender would be required to fund the Eligible Loan within 3 business days and the SPV would fund the participation within 3 business days of receiving notice of such funding from the Eligible Lender.

8. What about asset-based borrowers?

While asset-based borrowers are not generally evaluated on the basis of EBITDA, it remains the key underwriting metric for the Program. The Federal Reserve and the Treasury Department will evaluate potentially adjusting eligibility requirements for asset-based borrowers.

9. How long will the Program be in effect?

All participations must be purchased by the SPV by September 30, 2020.

If you have any questions regarding the Main Street Lending Program, please reach out to Erin Simmons or Stephanie Block-Guedez.

The COVID-19 pandemic has forced unprecedented shutdowns in businesses across the country. Following closely on the heels of this upheaval is a growing list of class action lawsuits from consumers whose plans were canceled or drastically scaled back in the era of social distancing, as well as from investors unhappy with companies’ performances in the shaken global market. Class actions often arise in situations where a large number of people or entities are negatively impacted in a similar way by the same event. In these situations, the class action mechanism allows for the possibility of bringing many related claims in one action, thereby aggregating the damages sought by multiple plaintiffs into one suit and drastically increasing a company’s exposure. Although the full scope of these lawsuits in the wake of COVID-19 remains to be seen, a few categories of class action lawsuits already filed offer some hints at what’s to come.

Event & Ticket Cancelation

Stay-at-home and social distancing orders have forced the cancelation of many events that involve large public gatherings, including concerts, cruises, flights, and sporting events. Ticket sellers have had to decide between offering refunds or rainchecks, and many have chosen the latter. As evidenced by recent complaints against Ticketmaster and StubHub, some consumers would have preferred refunds and filed suit in reaction to these decisions. Hansen, et al. v. Ticketmaster Entertainment, Inc., No. 3:20-cv-02685 (N.D. Cal. Apr. 17, 2020); McMillan, et al. v. StubHub Inc., No. 3:20-cv-00319 (W.D. Wis. April 2, 2020).

Memberships

In a similar category of suit, companies that offer ongoing access to services in exchange for recurring or flat fees (like gyms, recreational facilities, and ski resorts) have been sued by consumers alleging dues should have been suspended or refunded when their access ended. Members of 24 Hour Fitness sued the fitness chain, alleging they were charged full monthly fees despite the fact the gyms closed in mid-March. Labib, et al. v. 24 Hour Fitness USA, Inc., No. 4:20-cv-02134 (N.D. Cal. Mar. 27, 2020). Likewise, season pass holders sued Vail for retaining the fees from season pass sales despite closing its resorts indefinitely in March, although some of the suits were dropped after Vail announced it would give credits to pass holders based on the number of days they were able to ski. McAuliffe v. Vail Corp., No. 1:20-cv-01176 (D. Colo. Apr. 27, 2020); Clarke v. Vail Corp., No. 1:20-cv-01163 (D. Colo. Apr. 24, 2020); Faydenko v. Vail Resorts, Inc., No. 20-cv-01134 (D. Colo. Apr. 22, 2020); Han v. Vail Resorts, Inc., No. 20-cv-01121 (D. Colo. Apr. 21, 2020); Hunt, et al; v. Vail Corp., No. 4:20-cv-02463 (N.D. Cal. Apr. 10, 2020).

Higher Education

As colleges transition to online learning, students and their parents begin to wonder why they should be required to pay for room and board when the dorms and dining halls remain shuttered. For example, a class action recently filed in Arizona alleges the Arizona Board of Regents improperly retained fees for the cost of on-campus services when students were not allowed on campus. Rosenkrantz, et al. v. Arizona Board of Regents, No. 2:20-cv-00613 (D. Ariz. Mar. 27, 2020).

Securities

Right behind the consumer lawsuits driven by disrupted businesses are suits from investors unhappy with attendant drops in share prices. Although such suits may come from a number of different angles, the primary hook for the investor suits filed thus far has been allegedly false and misleading statements companies made in the lead-up to the pandemic. A class of shareholders in Norwegian Cruise Lines, for example, sued the company for making optimistic statements in February about their expected financial performance despite the developing COVID-19 outbreak. Douglas v. Norwegian Cruise Lines, No. 20-cv-21107 (S.D. Fla. Mar. 12, 2020).

As the above examples illustrate, any negative impact, however small, on a large number of people may give rise to a class action lawsuit. Such cases bring a host of unique procedural and strategic considerations, including fighting class certification and managing class related discovery in an efficient and effective way. These suits are only likely to increase as the impacts of COVID-19 continue to be felt, and companies should consider engaging experienced class action counsel early on to help them navigate these complex and unique issues.

If you have any questions, please contact Jennifer Allen or Kyle Holter.

The Environmental Protection Agency (“EPA”) is proposing to give the regulated community a more active role and voice in developing, modifying, and potentially withdrawing EPA’s significant guidance documents. The proposed rule, titled “EPA Guidance; Administrative Procedures for Issuance and Public Petitions” (“Proposed Rule”), was published in the Federal Register on May 22, 2020. The Proposed Rule is intended to provide “procedures for developing and issuing guidance documents and to establish a petition process for public requests to modify or withdraw an active guidance document.”

EPA guidance documents—which can be in the form of interpretive memoranda, policy statements, manuals, bulletins, advisories, etc.—are legally non-binding methods of clarifying existing obligations and providing information to assist regulated entities in compliance with EPA regulations. In the past, however, EPA has arguably utilized these guidance documents to effectively create new regulatory requirements outside of the normal notice-and-comment process. Currently, EPA guidance documents are not subject to the Administrative Procedure Act’s notice-and-comment requirements; are not required to meet any specific set of criteria; or be published on a specific webpage. Such issues may create difficulties for regulated entities to monitor these documents. To address these topics, the Proposed Rule purports to ensure that “EPA’s guidance documents are: developed with appropriate review; accessible and transparent to the public; and provided for public participation in the development of significant guidance documents.”

Notably, this action implements, in part, President Trump’s October 2019 Executive Order 13891, “Promoting the Rule of Law Through Improved Agency Guidance Documents” (“Executive Order”). A central principle of this Executive Order is to clarify that guidance documents should explain existing obligations only; they should not be a vehicle for implementing new, binding requirements on regulated entities. Moreover, the Executive Order seeks to establish a method for allowing thorough public review of “significant guidance documents” prior to issuance.[1]
The Executive Order also seeks to make guidance documents more accessible to the public by requiring each federal agency to “establish or maintain on its website a single, searchable, indexed database that contains or links to all guidance documents in effect from such agency or component.” The EPA Guidance Documents portal was created on February 28, 2020 and purports to “provide links to all of EPA’s guidance documents.”

The Proposed Rule closely tracks the objectives of the Executive Order. Among other things, the Proposed Rule:

• Defines “significant guidance document” using the same four categories as the Executive Order;
• Requires EPA to publish a notice in the Federal Register announcing a new draft significant guidance document and provide a 30-day public comment opportunity prior to issuing the final guidance document;
• Requires EPA to publish a notice in the Federal Register announcing the proposed modification or withdrawal of an existing significant guidance document and provide a 30-day public comment opportunity before finalizing the modification or withdrawal of such a document;
• Creates a set of criteria that every guidance document must contain, including a summary of the guidance and a list of activities impacted by the guidance; and
• Provides the public with an avenue to request modification or withdrawal of existing guidance documents.

The Proposed Rule presents an opportunity for stakeholders to actively participate in the creation, drafting, and finalization of guidance documents that have significant impacts on regulatory obligations and compliance with EPA regulations. Specifically, affected entities can provide written comment on proposed guidance documents to highlight potential shortcomings or negative impacts of such guidance. Such comments potentially allow for affected entities to influence a guidance document before relying on the documents for compliance assistance.

The Proposed Rule also presents an opportunity for stakeholders to petition EPA for the modification or withdrawal of an active guidance document. The petition must, among other things, provide an explanation of the interest of the petitioner in the requested action; specify of the text that the petitioner request be modified or withdrawn; provide suggested text for EPA to consider; and provide a rationale for the requested modification or withdrawal. EPA will have 90 days to respond to the request, with a possible one-time extension.

The Proposed Rule will be open for public comment until June 21, 2020. EPA states that it is soliciting comments “on whether the issuance of a modification to an active significant guidance document or the withdrawal of an active significant guidance document should be announced via the Federal Register and subject to a 30-day public comment period, or if other means of public engagement, such as the EPA’s Guidance Portal or other Agency website, could be used to announce such actions.”

The Environmental Group of Davis Graham & Stubbs LLP handles air quality regulatory, transactional, and litigation matters for its clients in the oil and gas and other industry sectors. Please contact Randy Dann, Will Marshall, or Kate Sanford if you would like to discuss this development further or any other air quality matters of concern to your company.

[1] The Executive Order defines a “significant guidance document” as: (1) a document that would “have an annual effect on the economy of $100 million or more, or adversely affect the economy, a sector of the economy, productivity, competition, jobs, the environment, public health or safety, or governments or communities in a material way”; (2) a document that would “create a serious inconsistency or otherwise interfere with an action taken or planned by another agency”; (3) a document that would materially alter the budgetary impact of entitlements, grants, user fees, loan programs or the rights and obligations of recipients thereof”; or (4) a document that would “raise novel legal or policy issues arising out of legal mandate, the president’s priorities, or the principles of Executive Order 12866”—an executive order issued by President Clinton in 1993 titled “Regulatory Planning and Review.”

In the days leading up to the announcement of COVID-19 pandemic-related stay-at-home orders, many Americans bought abnormally large quantities of toilet paper, among other necessities. This universal hoarding trend may have come as no surprise to veterans of oil and gas reserve-based lending, who have likely seen other examples of how anticipated scarcity breeds hoarding behavior. When the price of oil craters to levels that make production uneconomical, many producers with reserve-based credit facilities are incentivized to draw down as much cash as they can under their credit facilities in an attempt to shore up their liquidity. As grocery stores impose per-customer quotas to curb the hoarding of toilet paper and other essentials, lenders are turning to a trusted strategy to limit the hoarding of cash by oil and gas borrowers.

Background

Cash hoarding, and the anti-cash hoarding provisions that seek to counteract it, are recurring phenomena in reserve-based lending facilities (facilities where credit availability is tied to the value of a borrower’s oil and gas reserves, expressed as a “borrowing base” amount). Prior to the COVID-19 pandemic and the related collapse in demand for oil worldwide, the most recent surge in popularity of anti-cash hoarding provisions occurred during 2015 and 2016. When a severe (and/or prolonged) downturn in commodity prices appears, biannual borrowing base redeterminations – typically conducted by lenders in the spring and fall – threaten to shrink borrowers’ access to available credit at precisely the time they need it most in order to withstand the downturn. Reduced cash flows incentivize borrowers to draw down their revolving line of credit as much as possible to protect against a potential liquidity crunch. Lenders use the borrowing base redetermination process to limit such actions by borrowers, offering a bargain: amend your credit agreement to add anti-cash hoarding provisions, often along with a number of other concessions to the lender group, such as increased interest rate margins and tighter financial covenants, and, in return, the lenders will either maintain the borrowing base at its current level or agree to less of a reduction based on the underlying value of the borrowing base assets. This trend is currently playing out on a daily basis in the public filings of oil and gas companies disclosing their spring borrowing base redeterminations, along with concurrent amendments to their credit facilities that include the addition of anti-cash hoarding provisions.[i]

The current round of anti-cash hoarding amendments seems to have been partially touched off by the bankruptcy filing of Whiting Petroleum, announced on April 1, 2020. Whiting has reported that at the time of the bankruptcy filing, it held $585 million in cash. Since most reserve-based credit facilities are now generally secured by all of the borrower’s assets, including its cash, Whiting’s lenders likely have lien priority with respect to this $585 million. But it seems probable that restricting Whiting’s ability to draw down the full amount of its revolver would have been preferred by its senior lenders as compared to holding a secured claim in the bankruptcy.

Anti-Cash Hoarding Provisions: A Primer

Anti-cash hoarding provisions in credit agreements typically have three main components: (1) a condition precedent to future advances of loan funds, (2) a mandatory prepayment, and (3) a “cash balance” or “excess cash” definition that is used in the first two components.

The first component – the condition precedent to future advances – prevents borrowers from obtaining loan funds if it would result in the borrower’s cash balance exceeding a designated threshold. The threshold is set well below the amount of the borrowing base that would otherwise limit the availability of loan funds. In effect, a portion of the borrowing base becomes available only for purposes other than sitting on the borrower’s balance sheet.

The second component – the mandatory prepayment – caps the amount of cash that can be held on the borrower’s balance sheet, with any excess over that cap being required to go toward paying down the borrower’s outstanding loans. Unlike the first component, which only interferes with the borrower’s use of loan proceeds, the mandatory prepayment provision reaches cash that the borrower may have separately obtained from its operations or other sources. The prepayment threshold is tested frequently, as often as daily, to keep a tight leash on cash hoarding. The limitation on the borrower’s cash balance is sometimes structured as a flat dollar cap, sometimes as a percentage of the borrowing base or aggregate lender commitments, or sometimes as a hybrid of both concepts. Sometimes the mandatory prepayment only applies when a revolver utilization threshold is exceeded.

The third component is the defined term used to measure the borrower’s cash balance, which typically carves out a number of categories of cash that are exempt from the foregoing tests. The “cash balance” definition is where borrowers subject to anti-cash hoarding provisions have the opportunity to create flexibility for their anticipated cash management needs. Common carve-outs, often subject to durational limits, include:

• cash restricted or set aside for the purpose of meeting royalty obligations, taxes, payroll, or employee benefit payments;
• proceeds of permitted debt offerings that will be used to redeem other debt;
• refundable purchase price deposits held in escrow under purchase and sale agreements; and
• amounts subject to issued checks, initiated wires, or ACH transfers.

Beyond these three main components, anti-cash hoarding provisions may also include other variations, such as additional reporting obligations or negative covenants that flatly prohibit a borrower’s cash balance from exceeding a designated threshold at any time.

Additional Considerations for Borrowers

a. Lender voting. Reserve-based credit agreements are typically syndicated among a group of bank lenders, and typically provide that certain types of amendments to the credit agreement require 100% consent of all the lenders, while other types of amendments require only a majority or two-thirds vote. Amendments that are minor or that benefit the lenders usually require a majority vote, while amendments that are more material or that may negatively impact a lender’s economic interests usually require a 100% vote. Consistent with this principle, an amendment adding strictly anti-cash hoarding provisions should only require a majority lender vote.

Given the boom-and-bust nature of the oil and gas industry, many borrowers presently accepting the addition of anti-cash hoarding provisions to their credit agreements will also be looking to the future as to what it will require, from a lender voting perspective, to get rid of those same anti-cash hoarding provisions in the future. Borrowers should be aware that, while adding anti-cash hoarding provisions now may only require a majority lender vote, subtracting them in the future is likely to require a 100% lender vote because the removal would be taking away an economic benefit from the lenders. This means that a single holdout vote in the lender group could block the borrower from returning to an unrestricted cash management environment after commodity prices have improved. The holdout lender(s) may have motivations for blocking the removal of anti-cash hoarding provisions that have nothing to do with the borrower’s finances. While “yank a bank” provisions (whereby the borrower can replace a non-consenting lender with a new, consenting lender so long as the new, consenting lender pays off the non-consenting lender) are designed to provide a work-around in this context, they require a willing substitute lender in order to be useful, and they may involve the payment of additional fees or expenses.

b. “Cash balance” carve-outs. When negotiating anti-cash hoarding provisions, borrowers should consider all of the contexts in which they may need to hold cash on their balance sheet during the loan term – including any such contexts that may be unique to their particular business and thus not accounted for in publicly available anti-cash hoarding precedents – and should seek carve-outs from their “cash balance” definition to exempt those contexts from the new cash hoarding tests. For example, if a borrower has a large contingent obligation – such as a surety bond indemnity obligation – for which it needs to set aside cash without actually paying that obligation within a short period of time, it may need a specific carve-out for that purpose. If a borrower plans to refinance other indebtedness during the loan term, it should consider whether the exemptions from the “cash balance” definition provide enough flexibility to accommodate the possible timing and funds flow of such a transaction.

Conclusion

Anti-cash hoarding provisions in reserve-based credit agreements, like per-customer quotas for essential products, will hopefully go away soon. The provisions added during the 2015–2016 period were eventually taken out. Until then, borrowers should understand market practice and the trade-offs involved in adding these provisions to their credit agreements.

Should you have any questions concerning this topic, please contact Kristin L. Lentz or Taylor M. Smith.

[i]
Two examples of this trend can be accessed at the following links:

https://www.sec.gov/ix?doc=/Archives/edgar/data/1594466/000119312520121977/d923030d8k.htm

https://www.sec.gov/ix?doc=/Archives/edgar/data/1486159/000148615920000033/oas-20200424.htm

As Colorado businesses begin to reopen, what COVID-19 personal protective gear is required? Do businesses, workers, and customers need to don masks, face coverings, and gloves? The answers are complicated by the fact that the state, counties, and cities have promulgated a myriad of rules and orders as Colorado transitions out of “stay at home” and into “safer at home.”

Public Health Order 20-26

On April 22, 2020, the Colorado Department of Public Health and Environment (“CDPHE”) issued the statewide
Public Health Order (“PHO”) 20-26. It requires all employees working in “critical businesses” or performing “critical government functions” in “close proximity” to other employees or the public to wear appropriate “face coverings.” A face covering must cover an employee’s nose and mouth. In addition, if the face covering moves while the employee is working, then it must be replaced with a face covering that does not need to be as frequently adjusted. This is to reduce the frequency of an employee touching their face. Routinely or consistently coming within six feet of other workers or the public is considered to be in “close proximity” to others.

These rules also apply to workers preparing or handling food for sale, as well as those working in skilled nursing facilities, assisted living residences, and intermediate care facilities.

PHO 20-26 advises employees of critical businesses or those performing critical government functions to wear gloves if they handle goods or come into contact with customers. Those working in food and childcare must use disposable gloves as is required by existing regulations. Employees are also required to wear gloves while cleaning equipment and surfaces.

Face coverings are not required for those for which a face covering would inhibit their health.

Those individuals who fail to comply with PHO 20-26 may be subject to penalties, including a fine of up to $1000.00 and imprisonment in the county jail for up to one year.

Safer-at-Home and Public Health Order 20-28

The statewide stay-at-home order expired on April 26, 2020. It was replaced by the statewide “safer-at-home” order. Among other things, the order directs employers to provide reasonable accommodation to employees living with children and those vulnerable to COVID-19 to the greatest extent possible by promoting remote work options and flexible schedules.

The safer-at-home order also directed CDPHE to publish PHO 20-28, which expands many of the protective gear rules in PHO 20-26. For instance, all business and government employers must provide appropriate protective gear, such as masks, face coverings, and gloves to employees. Additionally, employers must encourage customers to use face coverings. The order also includes rules for masks.

Many of the protective gear rules are further delineated according to industry:

Limited Healthcare Settings

Employees in limited healthcare settings, such as acupuncture, physical therapy, athletic training, optometry services, chiropractic care, and speech language pathology services, must wear medical-grade masks at all times. Customers and patients must wear, at a minimum, a cloth face covering. Employers in this category must have access to adequate Personal Protective Equipment (“PPE”) to sustain two weeks of work without needing to conserve PPE. Employers looking to reuse PPE must follow the Centers for Disease Control and Prevention’s guidance.

Personal Services

“Personal services” refers to services and products that are not necessary to maintain one’s health, safety, sanitation, or essential operations of a business or residence. This includes moving services, dog grooming, barbers, car and home repair services, stylists, massage therapists, and cosmetologists, to cite a few examples. Both employees and customers must wear, at a minimum, a cloth face covering or medical-grade mask at all times. Only services that allow a customer to keep their mask on are permitted. Disposable masks may be provided to customers but don’t expect to be offered a free mask, as some businesses are charging their customers $10 or more for a face mask prior to being permitted entry into the business.

Retail

Retailers must provide face coverings and gloves to all employees. Employees without face coverings may not perform work that requires interaction with the public or coworkers.

Office-Based Businesses

While office-based business may resume at 50% of their in-office occupancy, PHO 20-28 directs that office-based employers require employees to use gloves and masks when interacting with customers. Employers must also encourage customers to wear face coverings.

Non-Critical Manufacturing

Employers of manufacturing operations of no more than ten employees must require employees to wear face coverings or masks. Employers must also require essential visitors to wear masks or face coverings. In addition, employers are required to encourage employees to wear face coverings while using public transportation or carpooling to and from work.

The enforcement of PHO 20-28 is left to local authorities. Failure to comply could result in jail time, fines, and professional discipline.

The Local Response

In the wake of the state’s adoption of a safer-at-home order, several counties and cities adopted their own rules on personal protective gear. These rules are often more stringent than statewide rules, especially as they pertain to face coverings. Here are several examples:

City of Denver

The City of Denver announced its own face covering rules on May 1, 2020, effective May 6, 2020. Unlike the state rules, the order provides a detailed definition of a “face covering” and prohibits a certain type of mask that makes it easier to breathe. The order, with certain exceptions, also requires that all members of the public, including children ages 3 and up, wear a face covering when:

1. they are inside, or in line to enter, any retail or commercial business;
2. obtaining healthcare services;
3. waiting for or using public or private transportation, including buses, rail, taxis, ride-sharing vehicles, or private car services; or
4. driving with passengers in the vehicle.

The Denver order requires not just employees, but contractors, owners, and volunteers to wear face coverings. Businesses must take reasonable measures to remind customers and the public to wear face coverings. This could include posting signs. Furthermore, businesses are required to take all reasonable steps to prohibit members of the public not wearing face coverings from entering the business. Removal of a customer from a business for refusal to wear a face covering may be required.

Face coverings are not required for individuals in personal offices as long as members of the public do not regularly visit. However, individuals are required to use face coverings when six feet from a coworker, when visiting with a customer or client, and where coworkers and the public are regularly present. This includes hallways, conference rooms, and restrooms.

Failure to comply with this order may result in a civil penalty of up to $999.00. Unlike most other statewide and local public health orders, which generally expire within 30 days of issuance, Denver’s order will continue “until further notice.”

City of Fort Collins

Fort Collins Emergency Rule and Regulation No. 2020-15
defines a face covering as “a uniform piece of material that securely covers a person’s nose and mouth and remains affixed in a place without the use of one’s hands. Face coverings may include . . . bandanas, medical masks, cloth masks, and gaiters.”

Face coverings are required in any enclosed public area, local facilities, public transportation, or any other public indoor area where individuals cannot adequately maintain six feet or more of separation. Businesses in these situations are required to display signage that informs the public about the face covering requirements. Signs should be displayed in a prominent area on the property.

All employers must require and make reasonable efforts to provide face coverings to employees, volunteers, and workers if they work in an area where face coverings are required. However, several exceptions apply – most notably, children under the age of 10 in childcare facilities and customers of banks and pawnshops. Unlike the rules in Denver, those in an office setting are not required to wear a face covering where they do not have face-to-face interactions or share workspaces with others.

City of Aspen

Resolution No. 40 mandates that all individuals wear face coverings when entering and while inside a place of business or mode of transportation open to the public. In addition, face coverings must be worn in indoor areas where people are unable to maintain adequate social distancing. Aspen stipulates the same exception for office workers as Fort Collins but exempts children under the age of 2.

San Miguel County

San Miguel County was the first county in Colorado to enact rules
requiring protective gear. All retail employers must provide face coverings and gloves to employees. Unlike Denver, San Miguel County only advises businesses to encourage customers to wear face coverings while on the premises. Those working in limited healthcare settings, such as physical therapy, must wear medical-grade masks and gloves. Administrative workers, however, must wear a face covering, but may remove the face covering when more than six feet from others. Businesses that provide services with close personal contacts, such as hairdressers and massage therapists, must wear face coverings and gloves. Careful handwashing may act as a sufficient substitute where gloves are not appropriate.

Larimer County

Larimer County’s Public Health Order, issued on May 3, 2020, requires all employees who come into contact with the public to wear a face covering. Members of the public entering or in line to enter any business must use a face covering. Those with medical conditions in which wearing a mask would interfere with their health are exempt. Children under the age of 2 are also exempt.

Boulder County

Boulder County’s May 2, 2020 Notice takes a different stance. The notice requires that each person in Boulder County wear a face covering whenever they are outside their residence and unable to maintain social distancing of at least six feet. The county takes an expansive view of a “residence,” as here, the term includes both real property where an individual resides and motor vehicles used for personal use by an individual or members of the same household.

It is recommended that businesses operating in Colorado understand both existing state and local rules and regulations involving personal protective gear. Rules may change drastically between different cities and counties and are likely to change rapidly as the situation unfolds. Attentiveness will be key to maintaining compliance for your business as Colorado continues to reopen its economy.

If you have any questions, please contact Clark Reeder or Laura J. Riese.

The Paycheck Protection Program and Health Care Enhancement Act (PPP Enhancement Act) was signed into law on April 24, 2020 and amends certain terms of the Paycheck Protection Program (PPP) established by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). Prior to the enactment of the PPP Enhancement Act, the funds originally made available for the PPP had been exhausted. However, the PPP Enhancement Act has made available an additional $310 billion in funding (bringing the total to $659 billion) for potentially forgivable loans under the PPP. Furthermore, to improve the program’s accessibility to small businesses that may not have relationships with large banks, $60 billion of the additional funding for the PPP has been reserved for applications through insured depository institutions with less than $50 billion of assets, credit unions with less than $50 billion of assets, and community financial institutions.

The U.S. Small Business Administration (SBA) resumed its acceptance and processing of PPP applications submitted by participating lenders on April 27, 2020, following the appropriation of additional funds for the program.

Recent Guidance Regarding PPP:

We previously circulated a legal alert outlining the general terms and conditions of the PPP (available here), a legal alert summarizing certain answers by the SBA to frequently asked questions relating to the PPP (available here) and a legal alert highlighting guidance for individuals with self-employment income (available here).

The SBA and the U.S. Department of the Treasury (Treasury) have continued to provide guidance regarding the PPP. The recent guidance includes an interim final rule issued by the SBA on April 24, 2020 regarding requirements for promissory notes, authorizations, affiliation, and eligibility (April 24th IFR); an interim final rule issued by the Treasury on April 28, 2020 regarding a criterion for seasonal employers (Treasury IFR); an interim final rule issued by the SBA on April 28, 2020 regarding disbursements of PPP loans (April 28th IFR); additional published answers to frequently asked questions regarding the PPP (FAQ Guidance); and a document
outlining how various types of businesses should calculate their maximum PPP loan amounts. We have summarized some of the recent guidance below.

Certification Regarding Need for PPP Loan. Both the FAQ Guidance and the April 24th IFR discuss the certification in the borrower application for a PPP loan that states that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”

The FAQ Guidance states: “Although the CARES Act suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere … borrowers still must certify in good faith that their PPP loan request is necessary … taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business. For example, it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification.” While the FAQ Guidance originally addressed this point in the context of public companies, later FAQ Guidance made clear that private companies are held to the same standard.

The April 24th IFR provides a limited safe harbor with respect to the certification discussed above. To the extent that a business obtained a PPP loan prior to the issuance of the April 24th IFR “based on a misunderstanding or misapplication of the required certification standard” but repays the loan prior to May 7, 2020, the SBA will deem the business to have made the certification regarding need for a PPP loan in good faith.

Eligibility of Hedge Funds and Private Equity Firms. The April 24th IFR provides that hedge funds and private equity firms are ineligible to receive PPP loans because their business is primarily investment or speculation driven. However, a portfolio company of a private equity firm may be eligible for a PPP loan, subject to the same requirements that apply to any potential borrower. Among other eligibility requirements, the portfolio company must meet the relevant size standard (after giving effect to applicable affiliation rules, summarized by the SBA here) and be able to certify on the loan application that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”

Involvement in Bankruptcy Proceedings. The April 24th IFR makes clear that a business will be ineligible to receive a PPP loan if the business or the owner of the business is the debtor in a bankruptcy proceeding, either upon the submission of the business’s application for a PPP loan or at any time before the loan is given. An applicant is required to notify the lender and request cancellation of the PPP loan application if the applicant or the owner of the applicant becomes the debtor in a bankruptcy proceeding before the loan is disbursed.

Loan Documentation. Consistent with earlier FAQ Guidance, the April 24th IFR provides that a lender may use either the form of promissory note provided by the SBA or its own promissory note to document PPP loans. In loan documentation for a PPP loan, a lender may require that a borrower agree to any terms and conditions that are not inconsistent with the CARES Act, published SBA or Treasury guidance, or the lender application form.

Participation in Employee Stock Ownership Plans. The April 24th IFR states that a business’s participation in an employee stock ownership plan (ESOP) does not create an affiliation between the business and the ESOP for purposes of the PPP.

Compensation Included in Payroll Costs.
The FAQ Guidance clarifies that “the cost of a housing stipend or allowance provided to an employee as part of compensation” is included in payroll costs. “Payroll costs include all cash compensation paid to employees, subject to the $100,000 annual compensation per employee limitation.”

Determining an Employee’s Principal Place of Residence. The FAQ Guidance suggests that employers use IRS regulations (26 C.F.R. § 1.121-1(b)(2)) as a resource in determining whether a particular employee’s principal place of residence is in the U.S. for purposes of the PPP.

Counting Employees. The FAQ Guidance highlights the different measure of employees for purposes of determining PPP loan eligibility versus for purposes of loan forgiveness under the CARES Act. For eligibility purposes, each individual “employed on a full-time, part-time, or other basis” is counted as an employee. By contrast, the number of “full-time equivalent employees” is the measure that impacts potential loan forgiveness.

Calculation of Maximum Loan Amount.
The SBA has provided a document (available here) that details how various types of businesses (e.g., self-employed individuals with and without employees, partnerships, and corporations) should calculate their maximum PPP loan amounts. This resource also identifies certain documentation that may be used to substantiate an applicant’s maximum loan amount and clarifies that limited liability companies “should follow the instructions that apply to their tax filing situation” to determine their maximum loan amounts.

Seasonal Employers’ Calculation of Maximum Loan Amount. The Treasury IFR permits seasonal employers to determine their average monthly payments for payroll based on any consecutive 12-week period between May 1, 2019 and September 15, 2019, in order to calculate their maximum PPP loan amounts. The interim final rule also provides that a seasonal employer in operation for any 8-week period between May 1, 2019 and September 15, 2019 will be deemed to have been in operation on February 15, 2020 for purposes of the PPP.

Disbursements of PPP Loans. The April 28th IFR provides that a lender must make a single, full disbursement of a PPP loan within a specified amount of time (typically 10 calendar days) after loan approval. A borrower may not receive multiple disbursements in order to delay the covered period relating to loan forgiveness.

If you have any questions regarding the Paycheck Protection Program, please reach out to Jeff Brandel or Lauren Roberts.

As restaurants, hotels, and other food supply businesses have closed or cut back their operations in response to the novel coronavirus pandemic, the demand for milk and other dairy products has decreased. According to dairy industry estimates, restaurant closures and other disruptions have left suppliers with up to 10% more milk than can be used or sold. As a result, farmers across the country with milk and other dairy products they cannot sell have been forced to dispose of the excess as waste. There are news reports of these producers breaking eggs, dumping milk down the drain or on the ground, or disposing of this excess product in manure pits or holding ponds.

While it may be tempting to simply open the taps and dump excess milk down the drain or on the ground, that would be as illegal as it is to dump excess beer down the drain – a fact which has been recognized by large breweries now dealing with the problem of what to do with millions of gallons of beer that is going stale due to COVID-19 related stadium, concert, and festival cancellations. Numerous state and federal laws regulate the disposal of dairy waste, and any unpermitted disposal of dairy waste in drains, waterways, or even on land runs afoul of these laws.

For instance, in Colorado, there are two primary programs at the Colorado Department of Public Health and Environment (CDPHE) that regulate the disposal of dairy waste at farms and other dairy production facilities: (1) the Water Quality Control Division (“water division”), which oversees the regulation of discharges of pollutants to state waters pursuant to its federally delegated authority to administer the federal Clean Water Act (CWA) in Colorado; and (2) the Hazardous Materials and Waste Management Division/Solid Waste Unit (“solid waste unit”), which oversees the regulation of the solid waste storage and disposal activities at these facilities pursuant to its authority under the federal Resource Conservation and Recovery Act (RCRA). Most states have similar programs, and in states where there is no delegated authority under one or both of these programs, the U.S. Environmental Protection Agency (EPA) has jurisdiction over these facilities.

The Colorado Water Quality Control Act, implemented by the water division, prohibits the discharge of any pollutant through a point source (e.g., a pipe, ditch, channel, conduit, etc.) into state waters (e.g., rivers, streams, lakes, ponds, groundwater, etc.). See C.R.S. § 25-8-501. Milk and other forms of dairy waste are considered pollutants under these laws and cannot be discharged either directly into a state water or indirectly through stormwater runoff from the land into state waters. The reason for this is that when large volumes of milk break down in waterways, it creates a high biological oxygen demand (BOD) that can kill fish and other species living in these waters. As a result, if milk producers open up their holding tanks and let milk run out onto the ground, and that milk makes its way through a storm drain, ditch, or even a small natural channel to a state water, either directly or indirectly through stormwater runoff, the producer could be subject to significant fines for an unpermitted discharge or even criminal enforcement actions.

These products also cannot be dumped down the drain because this same water quality program regulates the discharge of non-domestic waste into publicly owned treatment systems (e.g., municipal sewer systems) under the “pretreatment” program requirements. See C.R.S. § 25-8-508. These requirements are designed to ensure that non-domestic wastewater, when discharged into a public sewer system, receives some level of “pretreatment“ so that the receiving treatment plant is not overwhelmed and can effectively and safely remove the volume and type of pollutants it receives.

Even disposal directly on a farmer’s land is regulated by the state solid waste unit. Milk and other dairy products are considered “solid waste” under the state solid waste regulations. As such, land disposal of these products is prohibited except at a site that has received a “certificate of designation” as a solid waste disposal facility from the applicable local government. See C.R.S. § 30-20-102. While the statute allows a person to dispose of his or her own personal solid waste on their own land, the disposal must still comply with the state solid waste rules and cannot result in the creation of a public nuisance. Id. In the case of commercial dairies, this exception does not apply. Moreover, the risk of creating a nuisance from any large quantity land disposal is high, as the off-gassing from the milk breakdown process can create a strong stench that impacts nearby landowners and communities. Additionally, land disposal creates a risk of an unpermitted discharges to state waters as discussed above.

While EPA issued an enforcement discretion policy in March 2020 providing that the agency would exercise enforcement discretion in certain circumstances for noncompliance with certain environmental laws that result from the COVID-19 pandemic, it is unlikely that the policy would provide leniency for the illegal dumping of dairy waste. As an initial matter, the policy does not apply to violations of waste disposal requirements under RCRA and equivalent state laws. In addition, the policy requires regulated entities to make every effort to comply with all applicable requirements and to work with governing state agencies to find solutions to the compliance concerns. In Colorado, the state has made it clear that it will work with the regulated community to find legal, workable solutions to environmental problems that arise during the pandemic. And with respect to excess milk and other dairy products, producers always have the option to transport excess supply to licensed solid waste disposal facilities rather than dumping these products on the ground.

If you have any further questions, please contact Laura Riese or Michelle DeVoe.

In the last two weeks, three major developments occurred that will significantly affect regulation under the Clean Water Act (CWA), the primary federal law regulating wetlands and water quality nationwide. These developments—coming from both the courts and federal agencies—will significantly affect how the CWA may hereafter be applied.

• First, a U.S. District Court in Montana issued a sweeping decision under Section 404 of the CWA that purports to invalidate and enjoin the use of Nationwide Permit 12 (NWP 12), the widely-used general CWA § 404 permit for construction of pipelines and other utility lines across regulated waterbodies, for all projects anywhere in the country.

• Second, the Trump Administration published its long-anticipated “Navigable Waters Protection Rule” in the Federal Register, defining what constitutes Waters of the United States (WOTUS) that are regulated under the CWA, which is narrower in scope than both the 2015 rule promulgated by the Obama Administration and the pre-2015 rule now in effect.

• Third, the Supreme Court issued a decision in County of Maui, Hawaii v. Hawaii Wildlife Fund, et al. (No. 18-260) in which the majority held that a CWA discharge permit is required where “the addition of the pollutants through groundwater is the functional equivalent of a direct discharge from [a] point source into navigable waters [i.e., WOTUS].”

Each of these developments could have far-reaching implications for operators regulated under the CWA. In general terms, the 2020 Rule (assuming it withstands anticipated legal challenges) is seen as favorable for industry and other regulated entities, while the two judicial decisions are perceived as problematic for such entities. Each development is described in more detail below.

District Court Vacates CWA § 404 Nationwide Permit 12

On April 15, 2020, the federal District Court in Montana ruled in Northern Plains Resource Council v. Army Corps of Engineers, involving a challenge to the Keystone XL pipeline, that the U.S. Army Corps of Engineers’ (Corps) failed to properly consult with the appropriate wildlife agencies under the Endangered Species Act (ESA) when it issued CWA § 404 Nationwide Permit 12 (NWP 12). The court vacated use of NWP 12 for this project until the Corps and the Environmental Protection Agency (EPA) satisfy applicable ESA consultation requirements, but deferred whether the Agencies also failed to satisfy other environmental laws (e.g., CWA § 404 and the National Environmental Policy Act). This ruling specifically halts the Keystone XL pipeline project but also purports to enjoin future use of NWP 12 under Section 404 of the CWA for any project across the entire country.

The U.S. has asked the Court to clarify that its decision applies only to the XL Pipeline or only in Montana, and a ruling on that request is expected soon. The U.S. and XL proponent will likely also seek to appeal the Court’s ruling to the Ninth Circuit, both on its scope and basic conclusions, but such an appeal is likely at best to take several months.

NWP 12 is a streamlined general 404 permit that authorizes certain activities required for the construction, maintenance, repair, and removal of utility lines and associated facilities
within a WOTUS, including “any pipe or pipeline for the transportation of any gaseous, liquid, liquescent, or slurry substance, for any purpose.” The vast majority of pipelines, gathering lines, electric lines, and other utilities constructed in or across regulated WOTUS have been authorized under this streamlined permit. Thus, invalidation of this widely used permit could have significant impacts on the energy and utilities industries, among others. Much will depend, however, on: (a) whether this decision is either limited by the District Court or, if not, will be upheld on appeal; (b) whether the Agencies, if necessary, will be able to duly satisfy ESA requirements (among others, e.g., NEPA and CWA); (c) whether courts consider the ruling to have any effect outside Montana; and (d) if it stands, how the Agencies ultimately will interpret and implement the decision.

For now, the Corps has suspended all use and approvals of NWP 12 nation-wide, until the scope and validity of this ruling can be resolved. The Corps has put on hold roughly 360 pending notifications from entities seeking approval for pipelines and other projects under NWP 12, according to Corps spokesman Doug Garman on April 23^rd. The Trump administration is expected to challenge the ruling in the near future, but use of NWP 12 would appear to be unavailable until this matter is resolved, unless the Corps changes its interim position.

The ruling is prospective only, so projects that have already commenced or been completed under NWP 12 and/or that have received notification from the Corps (following preconstruction notification) that the project is authorized to proceed under NWP 12 arguably will not be impacted. On the other hand, projects that have not commenced or completed construction, are not under contract for such construction, and/or have not received Corps authorization may need to evaluate and obtain CWA § 404 authorization through other avenues, such as under other NWPs or individual 404 permits. Unless this ruling is overturned or limited, or the Corps can satisfy these demands for ESA consultation, it is also expected that other NWPs will be challenged on these same grounds.

2020 “Navigable Waters Protection Rule” Finalized

On April 21, 2020, the long-expected final “Navigable Waters Protection Rule” (2020 Rule) was published in the Federal Register. The 2020 Rule redefines the nature and scope of “WOTUS”—i.e., the waterbodies the Agencies have authority to regulate under the CWA. This serves as the Trump Administration’s final step in replacing the Obama Administration’s definition of WOTUS set forth in the 2015 Clean Water Rule. The 2020 Rule will go into effect on June 22, 2020, unless the rule is judicially challenged and stayed by one or more federal courts. Judicial challenges to the rule are expected. But judicial responses to such challenges—e.g., whether a stay will be issued, whether challenges will be upheld at the district or circuit level, and whether challenges will result in inconsistent state-by-state rulings—are more uncertain and complicated. As a result, operators potentially subject to regulation under Section 404 or any other CWA program should carefully evaluate whether and to what extent this 2020 Rule or the pre-2015 framework may be in effect in at a given time.

The 2020 Rule closely aligns with the four-justice plurality opinion authored by Justice Scalia in Rapanos v. United States, 547 U.S. 715 (2006), and would cover fewer waters than either the 2015 Clean Water Rule or the pre-2015 rules now in effect. Generally, the 2020 Rule identifies four categories of waters that will be regulated: (1) the territorial seas and traditional navigable waters; (2) perennial and intermittent tributaries to those waters; (3) lakes and ponds, and impoundments of jurisdictional waters; and (4) wetlands that are adjacent and connected by a surface flow to jurisdictional surface waters. The rule also identifies 12 specific categories of waters or features that are expressly excluded from regulation, including groundwater, which sets up for a potential clash with the new Supreme Court ruling described below.

Among other things, if it takes effect, the 2020 Rule will eliminate or reduce the regulation of:

• Ephemeral water and drainages (which will affect many areas in the West);
• Wetlands with no surface connection to regulated surface waters;
• Interstate waters; and
• Certain ditches.

Additional information and analysis on the 2020 Rule are provided in Davis Graham’ January 27, 2020 legal alert.

SCOTUS Expands Scope of CWA to Certain Discharges to Groundwater

On April 23, 2020, the Supreme Court issued its decision in County of Maui, Hawaii v. Hawaii Wildlife Fund, et al. The 6-3 majority opinion held that CWA NPDES permitting requirements apply not only to direct discharges from point sources to regulated surface waters, but also to discharges of pollutants that “indirectly” reach navigable waters (e.g., after traveling through groundwater) when the discharge is “the functional equivalent of a direct discharge from the point source into navigable waters.” Op. at 18 (emphasis added). Justice Kavanaugh filed a concurrence, and Justices Thomas (joined by Gorsuch) and Alito filed dissenting opinions.

The majority rejected a test applied by the Ninth Circuit, which held that CWA permitting requirements apply when pollutants are “fairly traceable from a point source to a navigable water.” Id. at 3. In establishing the “functional equivalent” test, the majority indicated that determining when a discharge to groundwater (or other indirect discharge) requires an NPDES permit must be determined on a case-by-case basis by applying multiple factors, including (but not limited to): (1) transit time, (2) distance
traveled, (3) the nature of the material through which the pollutant travels, (4) whether the pollutant is diluted or chemically changed as it travels, (5) the amount of pollutant entering the navigable waters relative to the amount of the pollutant that leaves the point source, (6) the manner
by or area in which the pollutant enters the navigable waters, and (7) the degree to which the pollution (at that point) has maintained its specific identity. Id. at 16. “Time and distance will be the most important factors in most cases, but not necessarily every case.” Id. Going forward, the impact and application of this decision will be fleshed out by lower court “decisions in individual cases,” and EPA guidance (e.g., via “grants of individual permits, promulgation of general permits, or the development of general rules”). Id. at 17.

This decision will have little effect on CWA permitting in states that have NPDES delegation because most have broader definitions of regulable “State Waters,” which often include groundwater. That said, it will affect the CWA citizen suit provision, other non-delegated federal programs, and non-delegated or fully-delegated states.

Also, of note, Justice Breyer stated that the Court did not award “Chevron deference” to EPA’s interpretation of the statute. The Chevron doctrine historically has provided a framework for when courts will defer to an agency interpretation of the law, requiring that judicial deference is appropriate where the agency’s interpretation is not unreasonable and where Congress has not spoken directly to the issue. See Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 468 U.S. 837 (1984). Justice Breyer declined to apply Chevron in this instance because “[n]either the Solicitor General nor any party has asked us to give … Chevron deference to EPA’s interpretation of the statute,” and “to follow EPA’s reading would open a loophole allowing easy evasion of the statutory provision’s basic purposes [which is] neither persuasive nor reasonable.” Id. at 12. All nine justices, including the three dissenters, agreed with this conclusion. Whether this decision results in a weakening of the Chevron doctrine remains to be seen; but, if that is the case, the Maui decision could have implications for administrative law that stretch far beyond the CWA and environmental law generally.

The Environmental Group of Davis Graham & Stubbs LLP works to ensure compliance, minimize potential exposure to environmental liability, and win cases when litigation arises. Please contact Mave Gasaway or Zach Miller if you would like to discuss these CWA developments or other water quality matters of concern to your company.

On April 21, 2020, the Bureau of Land Management (BLM) released two sets of interim guidance intended to provide relief for operators of federal oil and gas leases during the COVID-19 emergency. One set of guidance relates to suspensions of operations or production on federal leases. The second set of guidance relates to reductions of royalty rates on federal leases.

Suspensions of Operations or Production

BLM’s Interim Guidance for Lease Suspension Requests During the COVID-19 National Emergency (“Interim Suspension Guidance”) outlines how federal lessees may obtain suspensions of operations or production under section 17 of the Mineral Leasing Act (MLA) because of the COVID-19 pandemic.

What are suspensions of operations and suspensions of production?

Section 17 of the MLA allows BLM to suspend operations or
production when the lessee is prevented from operating on or producing from the lease by matters beyond its reasonable control (i.e., force majeure). 30 U.S.C. § 226(i). By contrast, section 39 of the MLA allows BLM to suspend operations and production on federal leases in the interest of conservation. 30 U.S.C. § 209.

A suspension of operations postpones the operational obligation of a lease and temporarily tolls the running of the lease term to prevent the lease from expiring during the suspension. A suspension of production postpones the production obligation of the lease to prevent it from expiring during the suspension.

How does the COVID-19 emergency affect a lessee’s ability to obtain a lease suspension?

BLM may only grant suspensions of operations or production when the lessee is prevented from operating on or producing from the lease by reasons of force majeure. 43 C.F.R. § 3103.4-4(a). The Interim Suspension Guidance specifies “COVID-19 pandemic social distancing orders and travel restrictions imposed by the federal, state, or local government, or the pandemic otherwise causing the unavailability of personnel, contractors or equipment needed to conduct operations” as force majeure reasons that justify a suspension of operations. Likewise, the Interim Suspension Guidance specifies “COVID-19 pandemic social distancing orders and travel restrictions” as force majeure reasons that justify a suspension of production. Importantly, the Interim Suspension Guidance only addresses operational difficulties as a basis for suspensions and does not address low commodity prices.

How long will a COVID-19 related suspension last?

COVID-19-related suspensions will terminate one year from the approval date or when the operator resumes operations, whichever is earlier.

Does COVID-19 provide a basis for section 39 suspension of operations and production?

Section 39 of the MLA authorizes suspensions of operations and production in the interest of conservation and not as force majeure. The Interim Suspension Guidance provides, however, that if BLM is experiencing unusual or unreasonable processing delays to complete the environmental review, analysis, or consultations for an application for permit to drill because of the COVID-19 emergency, BLM may direct or consent to a suspension of operations and production in the interest of conservation.

How does an operator apply for a COVID-19 related suspension of operations or production?

Whereas suspension requests are usually filed with BLM field offices, the interim guidance directs that lessees file COVID-19 suspension requests with the state office managing the lease(s). At a minimum, the application must include:

• Lease number(s) and applicable federal unit or communization agreement;
• Expiration date of lease(s) and/or Held by Production Date;
• Current lessee(s) and operating rights owners; and
• A full statement of the circumstances that render the suspension necessary because of the COVID-19 emergency. This must include supporting evidence of COVID-19’s direct impact(s), such as efforts to get personnel or service providers to the lease to conduct operations and their unavailability.

Additionally, other application requirements in BLM’s regulations and Manual 3160-10 – Suspension of Operations and/or Production (Rel. 3-150 Mar. 13, 1987) continue to apply. For example, the application for suspension must be executed by all operating rights owners.

How quickly will BLM issue a decision on a COVID-19 related suspension request?

The Interim Suspension Guidance directs BLM to process all suspension requests within five business days and will notify the operator of its decision within five business days.

Which leases are subject to the Interim Suspension Guidance?

The Interim Suspension Guidance only applies to federal oil and gas leases and does not apply to Indian tribes’ oil and gas leases.

Royalty Relief

Recognizing “an extreme situation due to the pandemic,” BLM’s Interim Guidance for Royalty Rate Reduction Requests for Oil and Gas Leases during the COVID-19 National Emergency (“Interim Royalty Reduction Guidance”) addresses operators’ ability to obtain reductions in the royalty rate on federal leases due to low oil prices and operational difficulties imposed by COVID-19.

What is a royalty reduction?

The MLA allows BLM, for the purpose of encouraging the greatest ultimate recovery of oil and gas and in the conservation of natural resources, to “waive, suspend, or reduce” the royalty rate on a federal oil and gas lease when “necessary . . . to promote development” or when the lease “cannot be successfully operated” under its current terms. 30 U.S.C. § 209. BLM’s regulations specify the requirements of an application for royalty relief. 43 C.F.R. § 3103.4-1.

How do the COVID-19 emergency and market conditions affect an operator’s ability to obtain a reduction in royalty rates?

With the Interim Royalty Relief Guidance, BLM will allow royalty rate reductions in an effort to avoid premature well abandonment that would otherwise be caused by the COVID-19 pandemic.

How much will BLM reduce the royalty rate?

The Interim Royalty Relief Guidance does not specify a particular rate; however, it uses the example of a reduction from 12.5 percent to 0.5 percent. This example suggests that BLM will consider requests to significantly reduce royalty rates.

How long will a COVID-19 related royalty rate reduction last?

Approved temporary royalty rate reductions will terminate one year from BLM’s approval of the application.

How does an operator apply for a COVID-19 related royalty rate reduction?

The operator/payor must file an application for a temporary royalty rate reduction with the BLM state office managing the lease(s). The application must include the following:

1. All regulatory requirements of 43 C.F.R. 3103.401(b), including, but not limited to, information about the lease(s), status of wells, statement of expenses and operating costs for the lease(s), and agreements with the holders of lease interests other than the U.S. to a reduction in royalties.

2. Specific information relating to hardship caused by the COVID-19 pandemic:

• Self-certification statement with supporting documentation from the operator that the lease(s) would be capable of production in paying quantities without the circumstances caused by the COVID-19 pandemic; and
• A simple economic analysis table showing the lease(s) is uneconomic at the current royalty rate but would be economic with the requested reduced royalty rate. This table must include: the relevant market oil price, current royalty rate for each lease, production capability, and operating cost for each lease.

3. The requested temporary royalty rate for each lease. BLM provided the example of reducing a royalty rate by 12.5% to 0.5%.

Operator/payor should mark trade secrets or other priority data such as operating costs as “confidential/proprietary.”

How quickly will BLM issue a decision on a COVID-19 related request for royalty relief?

BLM’s Interim Royalty Reduction Guidance states that BLM will process royalty relief requests within five business days and will notify the operator of its decision within five business days.

What relief does the Interim Royalty Reduction Guidance not address?

The MLA allows BLM to waive, suspend, or reduce the rental or minimum royalty on federal leases based on the same criteria as royalty rate reductions. See 30 U.S.C. § 209; 43 C.F.R. § 3103.4-1(a). The Interim Royalty Reduction Guidance, however, does not address modifications of rentals or minimum royalties.

Which leases are subject to the Interim Royalty Relief Guidance?

BLM’s Interim Royalty Reduction Guidance only applies to federal oil and gas leases and does not apply to Indian tribes’ oil and gas leases.

Operators/payors also may apply for temporary royalty rate reductions for Class II reinstated leases using the process described below.

If you have any further questions, please contact Katie Schroder or Courtney Shephard.

With the outbreak of the novel coronavirus (COVID-19), lawyers must reconsider the logistics of various proceedings that normally occur in person. Stay-at-home orders have shuttered courthouses and workplaces, and travel may be prohibited or at least undesirable. Social distancing has become a legal and public health imperative.

During this time, one way for lawyers to avoid disruption in discovery is to begin conducting depositions by remote means. This allows the deposition to proceed even though the witness(es), participating counsel, and other necessary individuals are not in the same room.

Federal and State Law on Remote Depositions

Pursuant to Federal Rule of Civil Procedure 30(b)(4), the parties “may stipulate—or the court may on motion order—that a deposition be taken by telephone or other remote means.” Under the rule, “remote means” can be either audio, audiovisual, or stenographic.

Similar state rules authorize the use of remote depositions by stipulation or court order. For example, Colorado Rule of Civil Procedure 30(b)(7) allows parties to “stipulate in writing or the court may upon motion order that a deposition be taken by telephone or other remote electronic means.” Under the rule, the stipulation or court order “shall include the manner of recording.”

One of the biggest hurdles lawyers face when conducting remote depositions is involving court reporters to capture testimony. Both Federal Rule of Civil Procedure 30(b)(5)(A) and Colorado Rule of Civil Procedure 30(b)(4) state that, unless the parties stipulate otherwise, the parties must conduct depositions “before an officer appointed or designated” pursuant to Rule 28. The stipulation exception in these rules provides flexibility. It not only allows the parties to agree to the officer’s remote participation, but also allows them to agree that remote video depositions be conducted by a person who is not a notary. For such a stipulation, neither the federal rules nor the Colorado rules require court approval; however, parties should always consult local rules to see if courts or judges have other preferences or requirements.

Recently, several state supreme courts have issued emergency orders that relax requirements of in-person proceedings. For example, by Executive Order, dated March 27, 2020, Colorado Governor Polis has temporarily authorized the use of real-time audio-visual communication to carry out notarizations, subject to consent rights of parties. In response, on March 30, 2020, the Colorado Secretary of State issued detailed temporary guidelines and rules to implement the Governor’s authorization. Among them, the notary must be currently commissioned, and both the notary and signer must be physically located in Colorado; the process must be recorded and stored for 10 years; the notary’s certificate must indicate that the notarial act was performed using audio-video technology; and the remote notarization system used must “be sufficient to enable the notary public to verify the identity of the remotely located individual . . . and that [each participant is] viewing the same record.”

Practical Considerations

COVID-19 poses real challenges to the ability to conduct in-person depositions: An important witness may be in self-quarantine; another may be a member of an at-risk population, such as nursing home residents; or, perhaps, the individual lives in a major city with travel restrictions, such as New York or San Francisco.

Of course, being physically present with a witness is still the best way for an examiner to experience and evaluate body language, tone, and emotion. Because of this, counsel should aim to incorporate video where possible, and limit the use of phone conferences for remote depositions. A video can be especially important if a witness is particularly evasive or hostile—a problem that emphasizes the need for selecting high-definition technology that allows the parties to see facial expressions and body language.

If the parties choose to proceed remotely, it is important that they establish mutually agreed-upon, realistic plans for the deposition. For example, parties may need to agree to amend any deposition notices sent prior to the COVID-19 outbreak to include the possibility of remote audio-video. The parties should also discuss technology choices, audio and video quality standards, and how to proceed if technology fails. Other special considerations include the use of court reporters, document sharing, and resource sharing.

1. Court Reporting

A deposition transcript will benefit from accuracy if the court reporter and deponent are in the same room. With restrictions surrounding COVID-19, however, this may not be possible. If local rules require the deponent and court reporter to be in the same room, parties should consider stipulating on the record that all parties waive this requirement, or should seek leave of court.

If the parties have stipulated to the remote participation of the court reporter, for example, that person will need to participate by videoconference, administering the oath and keeping the stenographic record remotely. Some online legal platforms, such as Veritext and Esquire Deposition Solutions, have begun to issue programs for reporting remotely. These platforms provide certified stenographers who have been trained in remote reporting, thus eliminating the need for any of the deposition attendees to be physically present in the same room. Along with swearing-in the witness, marking exhibits, and performing read-backs, the remote court reporters also provide transcripts in real-time, so attorneys can refer to the transcript during the testimony.

2. Document Sharing

Apart from the in-person requirements for court reporters, remote examining also poses challenges for document sharing. In a remote deposition, the parties have a few options. The first is to send physical exhibits to the deponent’s location in advance. The risk here is obvious, as it provides an adverse witness an opportunity to review documents prior to the deposition. Another option is to embrace electronic exhibits. During the deposition, a party can share each new document as it is marked by sending it to other participants as a PDF attached to an email. This may be necessary if the parties are using a free, Internet-based audio-visual platform, such as Zoom or Google Hangouts, which allows for conferencing but does not always permit exhibit and document sharing in real-time. During a Zoom conference or another web-based videoconferencing tool, all that is necessary is that everyone involved be connected to the deposition. The court reporter can circulate an invite to each participant to join the Zoom videoconference when the remote deposition is ready to begin. Each participant can see the deponent and choose to participate either by computer or by calling into a toll-free telephone conference line.

Free internet-based tools, such as Zoom, pose limitations for remote depositions. With Zoom, the connection is not as secure as a private share sent over an encrypted site, and, if using the free version, parties must send exhibits in advance. Certain subscription levels and tools will permit parties to load documents in a chat screen, but those documents will remain accessible to the witness after the deposition concludes. For these reasons, parties should consider investing in professional deposition-specific tools. While these come with increased costs, they offer the easiest and most secure way to connect and share exhibits. These platforms often also include computer technicians and IT support.

For example, professional services allow parties to introduce exhibits electronically from a secure and private exhibit share during videoconferencing. Such programs have built-in solutions for presenting, submitting, marking, and downloading exhibits. These services allow parties to upload multiple exhibits simply by dragging and dropping files into a secure space. These systems also give examining attorneys full control over their exhibits, allowing them to send documents in real-time instead of providing them in advance.

3. Resource Sharing

Normally, the party noticing the deposition should make arrangements for other parties, including the court reporter, to participate in the deposition. To access platforms such as Veritext, parties do not need to download or install software. All they need is a secure, encrypted web connection through their web browser. As with Zoom conferencing, the court reporter provided by Veritext will send an invitation to participants and a link to the deposition. Using a professional web-based tool eliminates the need for both sides to the litigation to purchase and download software. For services such as Veritext, most programs offer a pay-per-deposition rather than subscription-based price plan. Expenses can be allocated properly to each party.

Conclusion

While COVID-19 continues to loom, and interstate and face-to-face interviews are limited, attorneys might also recalculate which witnesses they need to depose and how many should be deposed. They should also strive to test their technology before the deposition and to plan for backups and troubleshooting if it fails. Finally, with any technology that depends on an internet connection, there is always a risk of security and data breaches. To mitigate this risk, the parties should consider choosing a business-class videoconferencing service that does not depend on free or slower internet connections.

For the foreseeable future, attorneys and parties will be required to limit in-person contact. With planning, communication, and testing, however, it is possible to move forward with a scheduled deposition and proceed through discovery by transitioning to videoconference platforms.

If you have any further questions, please contact Dave Holman or Elise Reecer.