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.

It goes without saying that the coronavirus pandemic has rattled the economy; as a result, businesses are facing difficulties honoring contracts. This Davis Graham legal alert focuses on contracts for the sale of goods—generally governed by Article 2 of the Uniform Commercial Code (“UCC”)—and some UCC provisions that may arise in these uncertain times.

First, parties should consider whether performance under the goods contract has become “impracticable” due to COVID-19 or the various government orders instituted as a result of the pandemic. Under UCC § 2-615, a seller’s inability to deliver goods as agreed is not a breach of the contract if (1) its ability to do so “has been made impracticable” because of unforeseen events or compliance with an applicable government law; and (2) it properly notifies the buyer.[1]
Where only a part of the seller’s capacity to deliver is affected, it “must allocate production and deliveries among his customers . . . in any manner which is fair and reasonable.”[2]
Whether the seller has satisfied these requirements is generally an issue of fact decided by a jury (or, if acting as factfinder, the court).[3]

As drafted, this section appears to apply only to sellers. However, both the UCC Official Code Comments and some courts indicate that buyers may invoke § 2-615 to excuse performance.[4]

But no matter the party asserting the defense, a mere increase in cost or collapse in the market is unlikely to constitute impracticability.[5]
Parties suffering generally from the bad COVID-19 economy are not automatically excused from honoring their contracts. Rather, an impracticability defense should invoke a specific circumstance such as “a severe shortage of raw materials or of supplies due to a contingency such as . . . unforeseen shutdown of major sources of supply or the like.”[6]

There may also be challenges asserting impracticability where the parties’ contract has already allocated the risk of nonperformance in some way. For instance, the Tenth Circuit analyzed whether the buyer’s performance was excused under a “take-or-pay” contract.[7]
In such a contract, a buyer may perform in either of two ways: It may “take” specified amounts of product or “pay” the seller a penalty.[8]
Relying on “settled law” that “the impracticability of one alternative” is not an excuse if “performance by means of the other alternative is still practicable,” the Tenth Circuit held that the impracticability of the buyer’s duty to take did not automatically absolve it of its duty to pay.[9]
However, the court’s decision leaves open the possibility that a buyer could be excused from both obligations if unforeseen events or compliance with a government law renders both obligations impracticable.

In addition to impracticability, COVID-19 and related economic difficulties might trigger these other UCC Article 2 provisions:

• UCC § 2-502 – Buyer’s Rights upon Seller’s Insolvency.

Under this section, [10]
a buyer may recover goods if the seller becomes insolvent and certain other circumstances are present. The UCC says a buyer or seller is insolvent if the party has (1) ceased to pay its debts in the ordinary course of business, (2) cannot pay debts as they become due, or (3) is bankrupt as defined by federal bankruptcy law.[11]
The goods sought to be recovered must generally be “identified,”[12]
meaning that the goods have been designated or set aside as the ones to be delivered to the buyer.[13]

• UCC §§ 2-702 and 2-705 – Seller’s Rights upon Buyer’s Insolvency.

On the flip side, a seller who discovers that a buyer has become insolvent may refuse delivery of goods (except where the buyer pays in cash)[14]
or halt the delivery of goods possessed by a shipper or bailee.[15]
The seller should be sure to give reasonable notice to the shipper or bailee.[16]
This section should also protect a shipper or bailee who complies with a seller’s demand to stop shipment, giving the shipper a defense in any suit by the buyer.[17]

• UCC § 2-712—Cover.

Under this section, if the seller fails to deliver the contractual goods, the buyer may “cover” by purchasing substitute goods and seeking from the seller the difference in price and related damages.[18] Nonetheless, the buyer should be wary of “upgrading” or purchasing goods superior to those contemplated in the contract. If an equivalent product is available, a buyer is unlikely to recover the full cost of cover for an upgraded product.[19]
Notably, however, the UCC says that, “[f]ailure of the buyer to effect cover within this section does not bar him from any other remedy.”[20]
That may be good news for buyers who would find it difficult to secure substitute goods in a challenging market but bad news for sellers who are potentially exposed to greater buyer-side damages.

• UCC § 2-716—Replevin.

Where the seller fails to deliver, the buyer may be able to retrieve the goods in lieu of damages if the goods are “unique” or “other proper circumstances” support retrieval.[21]
Generally, the goods must be identified (as discussed above) and cover must be “reasonably unavailable.”[22]
Unique goods may be those that are “specifically designed” for the buyer.[23]

• UCC § 2-609—Right to Adequate Assurance of Performance.

When a seller or buyer experiences “reasonable grounds for insecurity” with respect to the other party’s performance, “the other may in writing demand adequate assurance of due performance.” Until the party “receives such assurance,” the party “may if commercially reasonable suspend any performance for which [it] has not already received the agreed return.”[24]
Whether there are “reasonable grounds for insecurity” is ultimately a question for the factfinder and thus an issue that presents some risk for a party demanding assurances.[25]

It is also imperative to adhere to the statute’s other requirements for demanding assurances of performance. In Scott v. Crown, the court observed that there were “serious problems with the timing, form, and content of Seller’s demand for assurances of performance.”[26]
Although there were reasonable grounds for insecurity, the seller suspended performance after orally demanding assurances (rather than in writing) and did not specify that he was demanding assurances of performance. As a result, the court construed seller’s suspension of performance as an anticipatory reputation of the contract,[27]
giving the buyer the right to cancel the contract and pursue other remedies.[28]

* * *

This illustrates the various rights available to buyers and sellers of goods confronting COVID-19 and related uncertainties. But with those rights come certain traps for the unwary. Davis Graham & Stubbs LLP’s attorneys have experience litigating UCC disputes from inception through trial and are well positioned to advise parties on how to exercise their rights under the UCC without falling into any of those traps.

Please contact Ben Strawn or Gabrielle Robbie if you have further questions on this topic.

[1] U.C.C. § 2-615; see also C.R.S. § 4-2-615 (Colorado UCC).

[2] U.C.C. § 2-615(b); see also C.R.S. § 4-2-615(b).

[3] 1 White, Summers, & Hillman, Uniform Commercial Code § 4:22 & n.11 (6th ed.) (almost all courts consider impracticability an issue for the trier of fact and collecting cases); see Cliffstar Corp. v. Riverbend Prod., Inc., 750 F. Supp. 81, 87 (W.D.N.Y. 1990) (“The court finds that the question whether [seller]’s allocation to [buyer] was ‘fair and reasonable’ is one of fact to be decided by the jury.”).

[4] U.C.C. § 2-615, cmt. 9; C.R.S. § 4-2-615, cmt. 9; Golsen v. ONG W., Inc., 756 P.2d 1209, 1220 (Okla. 1988) (Kauger, J., concurring) (observing that Idaho, Illinois, and Iowa courts have applied § 2-615 to buyers).

[5] U.C.C. § 2-615, cmt. 4; C.R.S. § 4-2-615, cmt. 4.

[6] Id.

[7] Int’l Minerals & Chem. Corp. v. Llano, Inc., 770 F.2d 879 (10th Cir. 1985).

[8] Id. at 885.

[9] Id.

[10] See also C.R.S. § 4-2-502.

[11] U.C.C. § 1-201(23).

[12] 1 White, Summers, & Hillman, Uniform Commercial Code § 7:37 (6th ed.).

[13] Matter of CSY Yacht Corp., 42 B.R. 619, 621 (Bankr. M.D. Fla. 1984) (yacht buyers were not entitled to recover yacht materials under UCC § 2-502 because there was no evidence that the materials were set aside or designated for buyers’ yacht).

[14] UCC § 2-702; C.R.S. § 4-2-702.

[15] UCC § 2-705; C.R.S. § 4-2-705.

[16] UCC § 2-705(3)(a); C.R.S. § 4-2-705(3)(a).

[17] See Stephen A. Hess, 3 Colo. Prac., Methods of Practice § 88:15 & n. 7 (“It is not necessary for the bailee to establish that the stoppage was rightful. Merely establishing that the seller had in fact stopped the delivery of the goods will suffice.”).

[18] U.C.C. § 2-712; C.R.S. § 4-2-712.

[19] Nartron Corp. v. Amway Corp., No. 201487, 1999 WL 33435058, at *2 (Mich. Ct. App. Oct. 12, 1999).

[20] U.C.C. § 2-712, cmt. 3 (“[C]over is not a mandatory remedy for the buyer. The buyer is always free to choose between cover and damages for non-delivery . . . .”).

[21] U.C.C. § 2-716; C.R.S. § 4-2-716.

[22] U.C.C. § 2-716, cmt. 3.

[23] Colorado-Ute Elec. Ass’n, Inc. v. Envirotech Corp., 524 F. Supp. 1152, 1159 (D. Colo. 1981).

[24] UCC § 2-609(1); C.R.S. § 4-2-609(1).

[25] Scott v. Crown, 765 P.2d 1043, 1046 (Colo. App. 1988).

[26] Id.

[27] Under U.C.C. § 2-610, where one party notifies the other by words or actions that it will not perform, the other party may bring a breach of contract action even though the performance is not yet due. See also C.R.S. § 4-2-610 (same).

[28] Scott, 765 P.2d at 1046.

The Paycheck Protection Program (PPP) established by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) has made available up to $349 billion in potentially forgivable loans to small businesses for the payment of payroll costs and certain other expenses. We previously circulated a legal alert outlining the general terms and conditions of the PPP (available here) and a legal alert summarizing certain answers by the U.S. Small Business Administration (SBA) to frequently asked questions relating to the PPP (available here). Note that, as of the date of this legal alert, the $349 billion originally made available for the PPP has been exhausted, and Congress may not appropriate additional funds for the program. The SBA has announced that it is unable to accept new applications at this time for the PPP or the Economic Injury Disaster Loan COVID-19-related assistance program but that Economic Injury Disaster Loan applicants who have already submitted their applications will continue to be processed on a first-come, first-served basis.

On April 14, 2020, the SBA issued an interim final rule (the Interim Final Rule) that addresses the eligibility criteria for certain PPP loan applicants and requirements for certain pledges of PPP loans. The following is a summary of the provisions of the Interim Final Rule that relate to individuals with self-employment income.

Individuals with Self-Employment Income who File a Form 1040 Schedule C:

Eligibility. Individuals with self-employment income are eligible for PPP loans if:

• They were in operation on February 15, 2020;
• Their principal residence is in the United States; and
• They filed, or will file, a Form 1040 Schedule C for 2019.

Maximum Loan Amounts. The Interim Final Rule provides two methodologies for self-employed individuals who file a Form 1040 Schedule C to calculate their maximum loan amounts. One methodology applies to self-employed individuals with no employees, and the other applies to self-employed individuals who have employees.

Permitted Use of Proceeds. PPP loan proceeds may be used by self-employed individuals who file a Form 1040 Schedule C for:

• Replacement of owner compensation (based on 2019 net profit, as more particularly described in the Interim Final Rule);
• Payroll costs for employees whose principal residence is in the United States;
• Mortgage interest payments (but not prepayments or principal payments) on any business mortgage obligation on real or personal property (e.g., mortgage interest for a warehouse purchased for the business or interest on an auto loan for a vehicle used to perform the business); business rent payments (e.g., for a warehouse used in the business or a vehicle used to perform the business); and business utility payments (e.g., cost of electricity for a warehouse used in the business or gas used driving a vehicle used to perform the business); provided that the self-employed individual must have claimed or be entitled to claim a deduction for such expenses on his or her 2019 Form 1040 Schedule C in order to use the PPP loan proceeds to cover such expenses during the eight-week period following receipt of the loan; and
• Interest payments on other debt obligations incurred before February 15, 2020.

Loan proceeds may also be used to refinance an SBA Economic Injury Disaster Loan received between January 31, 2020 and April 3, 2020.

In any event, at least 75% of the PPP loan proceeds must be used to cover payroll costs.

Loan Forgiveness: Loan forgiveness will depend in part on amounts spent during the eight-week period following receipt of the loan on:

• Certain payroll costs (which exclude compensation in excess of $100,000 on an annualized basis for each employee);
• Replacement of owner compensation, limited to eight weeks’ worth of 2019 net profit, excluding certain sick or family leave equivalent amounts for which a credit is claimed under the Families First Coronavirus Response Act; and
• Interest on mortgage obligations on real or personal property incurred before February 15, 2020, rent payments on lease agreements in force before February 15, 2020, and utility costs under service agreements dated before February 15, 2020, in each case to the extent deductible on Form 1040 Schedule C.

The amount eligible for forgiveness may be reduced if employee headcount and compensation levels are not maintained, if applicable. Furthermore, at least 75% of the forgiven amount must be attributable to payroll costs.

Additional Guidance for New Businesses. The SBA intends to publish additional guidance for individuals with self-employment income who were in operation on February 15, 2020 but not in 2019 and who will file a Form 1040 Schedule C for 2020.

Partnerships and Their Partners:

Partners in a partnership may not apply for their own PPP loans as self-employed individuals. Instead, the partnership may apply for a PPP loan and report the self-employment income of its general active partners (up to $100,000 annualized per such partner) as a payroll cost. A limited liability company filing taxes as a partnership is treated as a partnership for this purpose.

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

Amidst the ongoing coronavirus crisis, Wyoming has enacted House Bill 14, which amends Wyoming’s involuntary pooling provisions under Wyo. Stat. Ann. § 30-5-109. We have prepared a summary of this new legislation, which will become effective on July 1, 2020.

House Bill 14 amends Wyoming’s involuntary pooling procedure under Wyo. Stat. Ann. § 30-5-109 in four ways by: (1) limiting the time period that any issued pooling order is effective under certain circumstances; (2) providing for a royalty interest to be paid to non-consenting unleased mineral owners; (3) reducing the risk-penalty applicable to unleased non-consenting owners; and (4) allowing a non-consenting mineral owner to elect to participate as a working interest owner under the order upon payout of the applicable risk-penalty.

1. Expiration of Issued Pooling Orders – House Bill 14 amends Wyo. Stat. Ann. § 30-5-109 by adding a new subsection (f) that provides that “[a] pooling order issued under this subsection shall expire twelve (12) months after issuance if the person authorized to drill and operate a well fails to commence operations within twelve (12) months of issuance of the pooling order.” Under this new provision, any pooling order issued by the Wyoming Oil and Gas Conservation Commission (“WOGCC”) will expire one year after being issued if an oil and gas operator fails to commence operations to drill a well within the pooled unit. This addition encourages oil and gas operators to commence operations within a pooled unit in a timely manner.

2. Royalty Interest for Unleased Owners During Penalty Period – House Bill 14 amends Wyo. Stat. Ann. § 30-5-109 by adding a new subsection (h) that provides that while the operator is recovering its costs to drill the well(s), the unleased, non-consenting mineral owner will be entitled to a cost-free royalty interest that is equal to the greater of (i) 16% or (ii) the acreage weighted average royalty interest of the leased tracts within the drilling unit. Previously, unleased mineral interest owners who were forced pooled did not receive any royalty interest while the operator was recovering its costs and expenses of drilling and completing a well.

3. Penalty Calculations for Leased versus Unleased Mineral Owners – House Bill 14 amends Wyo. Stat. Ann. § 30-5-109 by adding a new subsection (g)(ii) that reduces the risk penalty for unleased non-consenting mineral owners. Prior to House Bill 14 being enacted, Wyo. Stat. Ann. § 30-5-109 subjected all non-consenting parties to a risk penalty of up to 300%. The amended statute reduces the amount of risk penalty imposed on non-consenting mineral owners who are not subject to a lease or other contract for oil and gas development as follows: (i) for the first well drilled under a pooling order a 200% risk penalty, and (ii) for each subsequent well drilled under the pooling order a 150% risk penalty.

4. Election to Become a Working Interest Owner – House Bill 14 amends Wyo. Stat. Ann. § 30-5-109 by adding a new subsection (j) that, after payout of the applicable risk penalty, allows a non-consenting mineral interest owner who initially chooses to receive a royalty interest to elect to participate under the pooling order as a working interest owner. Within 30 days after recovering its costs and expenses of drilling, the operator is required to send notice to the non-consenting mineral owner offering the owner the opportunity to elect to either i) participate as a working interest owner under the order, or ii) continue to receive the royalty interest outlined above. If the non-consenting owner elects to become a working interest owner under the order, then that party’s share of costs and expenses would be deducted from its share of revenue and the balance paid to the non-consenting owner.

For more information on these changes or House Bill 14 generally, please contact Greg Danielson or Jessica Fredrickson.

On April 10, 2020, the U.S. Environmental Protection Agency (“EPA”) issued its Interim Guidance on Site Field Work Decisions Due to Impacts of COVID-19 (COVID-19 Field Work Guidance), which addresses decision-making related to continuing, pausing, or reducing ongoing field work activities at EPA-led cleanup sites during the COVID-19 (novel coronavirus) pandemic. This guidance applies, but is not limited to, cleanups being conducted under the Superfund (or Comprehensive Environmental Response, Compensation, and Liability Act) program; the Resource Conservation and Recovery Act (RCRA) corrective action; Toxic Substances Control Act (TSCA) PCB cleanup provisions; the Oil Pollution Act; and the Underground Storage Tank (UST) program.

In sum, the new guidance states that EPA will make decisions to suspend or delay cleanup site field work on a case-by-case basis, an approach that balances EPA’s priorities to protect public health and safety during the COVID-19 pandemic while maintaining the agency’s ability to prevent and respond to environmental emergencies and imminent threats posed by these sites. The guidance also explains that decisions to continue, reduce, or pause on-site field work will be made in accordance with relevant provisions of any existing agreements or enforcement instruments that normally govern unforeseen events warranting delays in complying with performance obligations (e.g., modification of schedules, force majeure). Finally, the guidance encourages EPA staff to use this time as an opportunity to make progress on non-field work tasks that can be done virtually, such as settlement negotiations with potentially responsible parties (PRPs) and drafting cleanup decision documents and site progress reports.

EPA’s press release accompanying the guidance recommends that “Superfund site teams cancel or postpone in-person public meeting events, door-to-door visits, and other site-related face-to-face interactions to be consistent with” COVID-19 related guidance issued by the CDC and other federal and state officials. EPA stated that it has already “reduced or paused on-site construction work at approximately 34 EPA or PRP-led Superfund National Priority List sites, or 12% of all EPA sites with ongoing remedial actions, due to the evolving situation with COVID-19.” A more detailed description of the guidance, as well as other relevant considerations, is included below.

The COVID-19 Field Work Guidance follows a similar guidance document that EPA released on March 29, 2020, describing its enforcement discretion policy under other environmental statutes (e.g., the Clean Air Act and Clean Water Act) as a result of the ongoing pandemic. The COVID-19 Field Work Guidance also supplements the Office of Land and Emergency Management Considerations and Posture for COVID-19 Pandemic document dated March 19, 2020, and provides additional criteria to be considered for Emergency Response, Superfund Removal/Remedial/Federal Facilities, RCRA Corrective Action, and leaking underground storage tank (LUST) cleanups when determining whether site field work should begin, continue, or be suspended. With the issuance of the COVID-19 Field Work Guidance, EPA now has put in place temporary pandemic policies for all of the agency’s environmental regulatory programs.

General Guidance & Factors to Consider for Site Field Work Decisions

The new guidance is consistent with common-sense based approaches that have already been made at a number of cleanup sites by EPA and state-equivalent agencies due to coronavirus concerns. Case-by-case decisions on whether to continue, reduce, or pause field work will either be made unilaterally by EPA Regional offices or in response to “requests from outside parties (e.g., states, tribes, local governments, other federal agencies, potentially responsible parties, property owners, etc.) for extensions or delays in performance.” Such decisions to modify or suspend work activities will be considered for all phases of response activities: “pre-construction, construction, and post-construction.” And although the guidance directly applies to EPA-led sites only, EPA suggests that the regions share the guidance with their state counterparts, as similar issues and decision-making will occur at state-led sites.

In making decisions, EPA regions are encouraged to consider whether federal, state, tribal, or local health declarations (e.g., shelter-in-place orders) are in effect, in addition to “the safety and availability of work crews, EPA, state or tribal staff; the critical nature of the work; logistical challenges (e.g., transportation, lodging, availability of meals, etc.); and other factors particular to a site.”

The COVID-19 Field Work Guidance lists the following “site-specific factors” that should be part of EPA’s decision regarding whether response actions will begin, continue, or be reduced, paused, or resumed:

• State, tribal, or local health officials have requested particular site operations or types of operations that would pertain to particular sites be suspended.
• Site workers have tested positive for or exhibited symptoms of COVID-19.
• Sites where there may be close interaction with high-risk groups or those under quarantine, such as work inside homes.
• Sites where contractor field personnel are not able to work due to state, tribal, or local travel restrictions or medical quarantine.
• Sites where social distancing is not possible.

The guidance also includes a non-exhaustive list of factors EPA will consider in making these decisions. The list includes:

• Whether failure to continue response actions would likely pose an imminent and substantial endangerment to human health or the environment, and whether it is practical to continue such actions. This may be, but is not limited to, the following types of sites or site activities:
  • Superfund and oil spill emergency responses, CERCLA time critical removal actions, and other sites with ongoing or a threat of imminent acute or direct human exposures that would compromise public health (e.g., where EPA or PRP supplies alternative drinking water supplies).
  • Sites where prevention of exposures that pose an imminent threat to public health and welfare and the environment, such as response actions to prevent a catastrophic event (e.g., mine blow outs), preventing contaminated groundwater plume expansion that may affect drinking water sources, preventing releases to waterbodies that are likely to have adverse effects on downstream communities (e.g., treatment of acid mine drainage); on-site security or activities necessary to prevent unauthorized access to sites; and disposal of materials off-site (e.g., mine waste).
• Whether maintaining any response actions would lead to a reduction in human health risk/exposure within the ensuing six months (e.g., residential site work with current exposures to residents or active remediation, such as operating water treatment facilities, are prioritized and are more likely to continue utilizing procedures to protect both the public and site workers).
• Whether activities that would not provide near-term reduction in human health risk could be delayed, suspended, or rescheduled to a future date. This may include things like periodic monitoring, routine sampling activities, field sampling for remedial investigation/feasibility study (RI/FS) work, and active remediation of otherwise stable conditions.

Existing Agreements & Enforcement Instruments Will Govern Requests & Decisions to Delay Performance Obligations

EPA cautions that decisions to extend or pause work obligations because of COVID-19 “do not operate to supersede or amend [existing] enforcement instruments.” Rather, case-by-case decisions to extend or pause work obligations will be made in accordance with the terms of applicable enforcement instruments. Such enforcement instruments often contain provisions allowing for adjustments to schedules to be made at the discretion of EPA’s project manager and/or “force majeure” provisions. The guidance advises PRPs to consult these instruments “for directions on providing the requisite notice and other information described in the provisions” related to a requested extension, delay, or suspension.

The force majeure provisions of these cleanup agreements, which are most typically invoked for events like natural disasters (e.g., wildfires, floods, or hurricanes) and work strikes, often require the settling party to notify EPA of an unforeseen circumstance out of its control that may result in a delay of its performance obligations. The settling party’s notification generally must detail what work will be delayed and the duration of the delay, as well as identify what measures the party has taken to avoid or minimize the delay. For COVID-19, there is inherent uncertainty as to when routine activities will resume. Thus, “EPA intends to be flexible regarding the timing of the notices” and “to make these determinations promptly.”

Opportunity to Focus Efforts on Non-Field Site Work

EPA suggests that, to the extent project teams can coordinate remotely during this time, this work should continue along with virtual agency communications via online teleconference, webinars, etc. Activities unrelated to field work and contact with the public are expected to continue. For example, EPA suggests this situation presents an opportunity to make progress on activities like negotiations between the parties on settlement agreements and administrative orders; drafting cleanup decision documents, workplans, and progress reports; and maintaining compliance with obligations such as financial assurance.

Next Steps When Site Work Is Paused

The process for getting cleanup work back on schedule post-pandemic is less fleshed out in the COVID-19 Field Work Guidance. It says that “[i]f a decision is made to temporarily reduce or suspend field work, Regions will continue to monitor site conditions and plan the logistics for resuming field work as soon as possible when appropriate.” EPA does, however, note that it will update this guidance as the COVID-19 situation evolves.

Davis Graham attorneys are looking at the COVID-19 Field Work Guidance—as well as related federal, state, and local guidance documents and directives—carefully and will continue to closely monitor this evolving situation in coordination with EPA project managers and others as the agency updates its COVID-19-related guidance documents and makes site-specific decisions related to this issue. Although the COVID-19 Field Work Guidance and related guidance documents should offer some comfort to PRPs that certain non-essential field work requirements will be relaxed during this time, parties should strive to satisfy all other existing obligations and do what they can to protect their employees and contractors, the public, and the environment.

If you have any questions regarding the EPA’s interim guidance documents or how it may affect a particular cleanup site or your business, please contact Mave Gasaway or Lucas Satterlee.

The Paycheck Protection Program (PPP) established by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) makes available up to $349 billion in potentially forgivable loans to small businesses to assist those businesses in paying payroll costs and certain other expenses. We previously circulated a legal alert that outlines the terms and conditions of the PPP.

The Small Business Administration (SBA) has recently published a document providing answers to frequently asked questions relating to the PPP. The SBA intends to update the document on a regular basis. Below we highlight some of the guidance provided therein as of the date of this legal alert.

Eligible Borrowers:

Businesses eligible to receive PPP funds include the following, to the extent operating on February 15, 2020:

• Small businesses, nonprofits, veterans organizations, and tribal business concerns:
  • with 500 or fewer employees whose principal place of residence is in the U.S.;
  • with more than 500 employees if the business meets an applicable employee-based size standard established by the SBA for the primary industry in which the business operates; or
  • in the hotel and food services industries, which fall under NAICS code 72, with 500 or fewer employees per physical location;
• Sole proprietors, self-employed individuals, and independent contractors; and
• Businesses that qualify as “small business concerns” under the Small Business Act

The size standard that must be met for a business to qualify as a “small business concern” is either the employee-based or revenue-based size standard established by the SBA for the primary industry in which the business operates or the SBA’s alternative size standard as of March 27, 2020. The alternative size standard requires that both (1) the maximum tangible net worth of the business be not more than $15 million and (2) the average net income after Federal income taxes (excluding any carry-over losses) of the business for the two full fiscal years before the date of the loan application be not more than $5 million.

Aggregation with Affiliates:

It is the applicant’s responsibility to apply the SBA’s affiliation rules (summarized by the SBA here) to determine all of its affiliates, as well as the aggregate employee headcount of the applicant and its affiliates, before submitting a PPP loan application.

Breaking Affiliation with a Minority Owner:

Under the SBA’s affiliation rules, a minority owner of an entity is deemed to be an affiliate of that entity if the minority owner can prevent a quorum or otherwise block action by the entity’s board of directors/managers or by the entity’s owners. However, the SBA has made clear that if the minority owner irrevocably gives up those rights, it will no longer be deemed an affiliate of the entity for purposes of the PPP (assuming no other relationship creates affiliation under the SBA’s affiliation rules).

Use of a Payroll Provider:

Employees of an eligible borrower that uses a Professional Employer Organization or other payroll provider will not be considered employees of the payroll provider. In connection with its PPP loan application, an applicant may provide a lender with payroll documentation prepared by the applicant’s payroll provider indicating wages and payroll taxes that such payroll provider reported to the IRS with respect to the applicant’s employees.

Certain Exclusions from “Payroll Costs”:

$100,000 per Employee Limit: The definition of “payroll costs” under Section 1102 of the CARES Act excludes the compensation of an individual employee in excess of an annual salary of $100,000. The SBA has clarified that this exclusion applies only to cash compensation and not to non-cash benefits.

Federal Payroll and Income Taxes: Payroll costs do not include the employer’s share of federal payroll taxes. Payroll costs do include, and should not be reduced by, an employee’s share of federal payroll taxes and any income taxes required to be withheld from an employee.

Amounts Paid to Independent Contractors: Any amounts paid by an applicant to an independent contractor or sole proprietor should be excluded from the applicant’s calculated payroll costs. Independent contractors and sole proprietors may be eligible to apply for their own PPP loans.

Time Period for Determining Average Payroll Costs and Number of Employees:

To calculate their maximum loan amounts, applicants may use payroll cost data either from the previous 12 months or from the 2019 calendar year. Seasonal businesses may instead refer to the period from either February 15 or March 1, 2019 to June 30, 2019, and new businesses may instead refer to the period from January 1, 2020 to February 29, 2020.

The same time periods may be used to calculate the average number of employees of an applicant and its affiliates, to determine whether the applicant is eligible for a PPP loan based on number of employees. Alternatively, an applicant may use the average number of employees per pay period for the most recent 12 completed calendar months prior to the date of the loan application, or for each pay period during which the applicant was in operation in the case of new businesses.

Time Period for Determining Loan Forgiveness:

The amount eligible for loan forgiveness will be determined based on a borrower’s eligible costs over the eight-week period beginning on the date the loan is funded.

Date of First Disbursement of a Loan:

A lender is required to make the first disbursement of a loan no later than ten days after the date of loan approval.

Authorization to Sign Application and Make Certifications Therein:

A single authorized representative of an applicant may sign the PPP loan application on behalf of the applicant. However, by doing so, this person is representing to the lender and the U.S. government that he or she is authorized to make the certifications set forth in the application, with respect to both the applicant and each owner of 20% or more of the applicant’s equity.

Loan Documentation:

The SBA has provided a standard form promissory note that may be used by lenders in connection with PPP loans. Alternatively, lenders may use their own promissory notes.

Effect of Updated Guidance:

No action need be taken by an applicant or lender based on updated guidance from the SBA after the submission of the applicant’s PPP loan application. However, an applicant may revise its loan application if the loan has not yet been received, in order to reflect updated guidance from the SBA.

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

On April 2, 2020, the U.S. Small Business Administration (SBA) issued an interim final rule regarding its implementation of the Paycheck Protection Program (PPP) contained in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) signed into law on March 27, 2020. The PPP makes available up to $349 billion in potentially forgivable loans to small businesses to assist those businesses in paying certain expenses, including payroll costs. On April 3, 2020, the SBA issued an additional interim final rule addressing the affiliation rules applicable to the PPP.

Small businesses, nonprofits, and sole proprietorships are currently able to apply for and receive loans through SBA qualified lenders. Independent contractors and self-employed individuals can begin to apply for and receive loans, beginning on April 10, 2020, through SBA qualified lenders.

The PPP program is open until June 30, 2020, or until funds made available for the program are exhausted. Due to the limited availability of funds, eligible businesses and individuals that desire to take advantage of the program should apply as quickly as possible. The interim final rule issued on April 2, 2020 describes the availability of the loans as “first-come, first-served.”

Eligible Borrowers:

Eligible borrowers include the following, to the extent operating on February 15, 2020:

• Small businesses, nonprofits, veterans organizations, and tribal business concerns:
  • with 500 or fewer employees whose principal place of residence is in the U.S.;
  • with more than 500 employees if the business meets an applicable employee-based size standard established by the SBA for the industry in which the business operates; or
  • in the hotel and food services industries, which fall under NAICS code 72, with 500 or fewer employees per physical location; and
• Sole proprietors, self-employed individuals, and independent contractors.

Generally, in determining the number of employees of an applicant, all employees of the applicant’s affiliates will be counted. Stock ownership, control rights, common management, and identity of interests are among the factors taken into account to determine whether persons are affiliates under applicable SBA rules. However, the SBA’s affiliation standards are waived for small businesses that:

• are in the hotel and food services industries, which fall under NAICS code 72, and have 500 or fewer employees;
• are franchises in the SBA’s Franchise Directory; or
• receive financial assistance from small business investment companies licensed by the SBA.

The SBA has published a summary of the affiliation rules applicable to PPP loans, which is available here.

How to Apply:

Borrowers must apply for a PPP loan through an existing SBA lender or through any participating federally insured depository institution, federally insured credit union, Farm Credit System institution, or depository or non-depository financing provider approved by the SBA. Interested businesses and individuals should consult their existing lender or bank as to whether it is participating. Visit www.sba.gov for a list of qualified SBA lenders.

Applicants must complete the PPP loan application, which is available here on the SBA website, and submit the application with the required documentation to an approved lender that is available to process their application by June 30, 2020.

Applicants will need to provide lenders with:

1. payroll and tax documentation;
2. a list of the applicant’s owners with a greater than 20% ownership stake;
3. if the applicant or any owner is an owner of any other business or has common management with any other business, a list of such other businesses and a description of the relationship; and
4. details of any SBA Economic Injury Disaster Loan received by the applicant between January 31, 2020 and April 3, 2020.

Any Economic Injury Disaster Loan received by an applicant between January 31, 2020 and April 3, 2020 that was not used for payroll costs will not affect the applicant’s eligibility for a PPP loan. If an applicant received an SBA Economic Injury Disaster Loan between January 31, 2020 and April 3, 2020 that was used for payroll costs, the applicant’s PPP loan must be used to refinance the Economic Injury Disaster Loan.

An eligible borrower may not receive more than one PPP loan.

Certain Terms of the Loans:

• Loans will be made by qualified lenders, not directly by the SBA.
• Loans carry a 1.0% fixed rate.
• Loans have a two-year term and may be prepaid without penalty.
• No collateral is required.
• No personal guarantee is required.
• Loan payments will be deferred for six months.
• No requirement that applicants try to obtain some or all of the loan funds from other sources.

Amount Available to Be Borrowed:

Applicants can borrow up to 2.5 times their average monthly defined payroll costs (which exclude compensation in excess of $100,000 on an annualized basis for each employee) for the applicable period (in most cases, the last year) plus the amount of any SBA Economic Injury Disaster Loan received after January 31, 2020 and refinanced under the PPP, subject to a $10 million cap.

Permitted Use of Proceeds:

Loan proceeds may be used to pay:

• The following payroll and benefit costs for employees whose principal place of residence is in the U.S.:
  • Certain salary, wages, commissions, or tips, except any compensation paid to an employee in excess of an annual salary of $100,000;
  • Employee benefits, including costs for vacation, parental, family, medical, or sick leave; allowance for separation or dismissal; payments required for the provision of group health care benefits including insurance premiums; and payment of any retirement benefit; and
  • State and local taxes assessed on compensation;
• For a sole proprietor or independent contractor: wages, commissions, income, or net earnings from self-employment, capped at $100,000 on an annualized basis; and
• Interest payments on mortgage obligations, rent payments, utility payments, and interest payments on any other debt obligation incurred before February 15, 2020.

Loan proceeds may also be used to refinance an SBA Economic Injury Disaster Loan received between January 31, 2020 and April 3, 2020.

In any event, at least 75% of the PPP loan proceeds must be used to cover payroll costs.

Loan Forgiveness:

Loan amounts may be forgiven to the extent that:

• The loan proceeds are used, over the eight weeks after receiving the loan, to cover certain payroll costs (which exclude compensation in excess of $100,000 on an annualized basis for each employee or independent contractor), interest on mortgage obligations that existed before February 15, 2020 (but not payments of principal), rent under lease agreements that were in force before February 15, 2020, and utility costs for services that began before February 15, 2020;
• Employee and compensation levels are maintained; and
• Not more than 25% of the forgiven amount is for non-payroll costs.

Borrowers can submit a request for forgiveness to the lender that is servicing the loan. The request must include documents that verify the number of full-time equivalent employees and pay rates, as well as the payments on eligible mortgage, lease, and utility obligations. Borrowers must certify that the documents are true and that the forgiveness amount was used to keep employees and make eligible mortgage interest, rent, and utility payments. The lender must make a decision on the forgiveness within 60 days. The interim final rule issued on April 2, 2020 states that the SBA will issue additional guidance on loan forgiveness.

Borrowers must repay any amount not forgiven in accordance with the terms of the loan.

Reduction of Loan Forgiveness:

Loan forgiveness will be reduced if:

• Full-time equivalent employee headcount is decreased; or
• Salaries and wages are decreased by more than 25% for any employee who made less than $100,000 annualized in 2019.

Re-Hiring:

To avoid a potential reduction of the amount forgiven, borrowers have until June 30, 2020 to restore employment and salary levels for any changes made between February 15, 2020 and April 26, 2020.

Required Certifications in the Application:

The application for a PPP loan requires the applicant, or the authorized representative submitting an application on behalf of the applicant, to certify to a number of statements, including the following:

• The applicant is eligible to receive a loan under the rules in effect at the time the application is submitted that have been issued by the SBA implementing the PPP (the Rules).
• The applicant (1) is an independent contractor, eligible self-employed individual, or sole proprietor, or (2) employs no more than the greater of 500 employees or, if applicable, the size standard in number of employees established by the SBA in 13 C.F.R. 121.201 for the applicant’s industry.
• To the extent feasible, I will purchase only U.S.-made equipment and products.
• The applicant is not engaged in any activity that is illegal under federal, state, or local law.
• Any SBA Economic Injury Disaster Loan received by the applicant between January 31, 2020 and April 3, 2020 was for a purpose other than paying payroll costs and other allowable uses loans under the Rules.
• Applicants that are individuals authorize the SBA to request criminal record information about them.
• Current economic uncertainty makes the loan necessary to support the applicant’s ongoing operations.
• Funds will be used to retain workers and maintain payroll or to make mortgage, lease, and utility payments; and I understand that if the funds are knowingly used for unauthorized purposes, the federal government may hold me legally liable, such as for charges of fraud.
• Loan forgiveness will be provided for the sum of documented payroll costs, covered mortgage interest payments, covered rent payments and covered utilities, and not more than 25% of the forgiven amount may be for non-payroll costs.
• During the period beginning on February 15, 2020, and ending on December 31, 2020, the applicant has not and will not receive another loan under this program.
• The information provided in the application and supporting documents and forms is true and accurate in all material respects.
• Acknowledgment that the lender will calculate the eligible loan amount using required documents submitted.

If you have any questions, please contact Jeff Brandel or Lauren Roberts.

A reality of the COVID-19 pandemic is that many businesses are facing unexpected difficulties complying with their contracts. Do pandemics such as the spread of COVID-19 excuse parties from their contractual obligations? The answer is maybe, via a force majeure clause in the parties’ contract.

“Force majeure”—French for “superior force”—refers to an unexpected and uncontrollable event or effect that prevents one from honoring a contract. The term can include acts of nature, such as floods and hurricanes, and acts of people, such as strikes and wars,[1]
but does not generally include mere economic hardship.[2] For example, a force majeure provision might state:

No party shall be liable or responsible to the other party, nor be deemed to have defaulted under or breached this Contract, for any failure or delay in fulfilling or performing any term of this Contract, when and to the extent such failure or delay is caused by or results from acts beyond the impacted party’s reasonable control, including, without limitation, the following force majeure events: (a) acts of God; (b) flood, fire, earthquake, or pandemic; (c) war, terrorist threats or acts, riot, or other civil unrest; (d) government order or law; (e) actions, embargoes, or blockades in effect on or after the date of this Contract; (f) action by any governmental authority; (g) national or regional emergency; (h) strikes, labor stoppages or slowdowns, or other industrial disturbances; (i) shortage of adequate power or transportation facilities; and (j) other similar events beyond the reasonable control of the impacted party.

Ultimately, the types of events that constitute force majeure depend on the contract’s specific language.[3]
To illustrate, in Gillespie v. Simpson, the Colorado Court of Appeals accepted a geothermal lessee’s argument that the government’s refusal to issue permits for the development of geothermal wells until certain regulatory actions occurred constituted a force majeure event, excusing the lessee from paying rent to the lessor. This was the case even though the lessee was actually able to pay rent—and did so—during the duration of the force majeure event. The contract defined force majeure as any action by the state that interferes with the lessee’s rights. The court reasoned that the interference was “obvious in that the lessee [wa]s deprived of an opportunity to generate income by development of the [wells] for payment of the rentals. Accordingly, it held that the lessee was entitled to a rent credit equal to the amount of rent paid during the force majeure event.[4]

One aspect that is not always clear from the language of the force majeure provision is the extent to which a party must be rendered unable to perform due to the force majeure. In Ergon-W. Virginia, Inc. v. Dynegy Marketing and Trade, the Fifth Circuit analyzed a natural gas clearinghouse’s claim that recent hurricanes constituted a force majeure preventing the clearinghouse from fulfilling its contractual obligation to supply plant managers with gas.[5]
In doing so, the Fifth Circuit rejected the plant managers’ argument that the clearinghouse’s “physical capacity to continue supplying gas” and ability to “purchase gas on the spot market” prevented it from invoking the force majeure clause, which required that parties be “rendered unable” to perform.[6] A contrary interpretation, the Fifth Circuit reasoned, “would make the force majeure provisions essentially meaningless because it would mean that a seller could never invoke force majeure so long as there was some gas available anywhere in the world, at any price.”[7]

In a similar vein, jurisdictions are split regarding how to construe the scope of force majeure clauses in “take-or-pay” contracts—contracts requiring a buyer to take specified amounts of product or pay the seller a penalty. Some jurisdictions have explicitly or implicitly concluded that a force majeure excusing the buyer’s obligation to “take” also excuses the buyer’s obligation to “pay.”[8]
This is so even though the force majeure does not make it impossible for the buyer to pay the penalty.[9]
Other jurisdictions—including the Tenth Circuit—have concluded that a force majeure clause excusing the buyer from taking the product will not excuse the buyer from paying the penalty.[10]

All this is to say that parties should examine their existing contracts and consult with in-house or outside counsel to see if those contracts include a force majeure clause that may cover coronavirus—especially if the pandemic is impacting the parties’ contractual obligations. Parties should pay attention to any requirements that the party provide evidence of impacts or information, along with a notice that the party is invoking the force majeure clause, or that the party mitigate damages incurred as a result of the force majeure event. Going forward, parties should consider insisting that their contracts include epidemic or pandemic as a force majeure event in case performance becomes impossible due to COVID-19. Parties struggling to honor their contractual obligations might also consider a mutual solution, such as negotiating a contractual amendment to move performance to a time after the health crisis has passed.

Davis Graham & Stubbs LLP’s attorneys have experience litigating commercial contracts containing force majeure clauses. Please contact Shannon Stevenson or Gabrielle Robbie if you have further questions on this topic.

[1] Black’s Law Dictionary, “FORCE MAJEURE” (11th ed. 2019).

[2] 30 Williston on Contracts § 77:31 (4th ed.).

[3] Id.

[4] 588 P.2d 890, 892 (Colo. 1978).

[5] 706 F.3d 419, 422 (5th Cir. 2013).

[6] Id. at 424 n.5.

[7] Id.

[8] See, e.g., Atlantic Richfield Co. v. ANR Pipeline Co., 768 S.W.2d 777, 781–82 (Tex. App. 1989); Sabine Corp. v. ONG Western, Inc., 725 F. Supp. 1157, 1169–70 (W.D. Okla. 1989).

[9] Sabine Corp., 725 F. Supp. at 1170 (reasoning that if the force majeure clause did not excuse the obligation to pay, the intended effect of such clause—to excuse performance under the contract due to unforeseen events—would be rendered “nugatory”).

[10] Int’l Minerals & Chem. Corp. v. Llano, Inc., 770 F.2d 879, 885 (10th Cir. 1985) (“It is settled law that when a promisor can perform a contract in either of two alternative ways, the impracticability of one alternative does not excuse the promisor if performance by means of the other alternative is still practicable. [The contract] does not compel a different result; it would at most excuse [the buyer] from its duty to ‘take,’ not from its duty to ‘pay.’”); see also Am. Soil Processing Inc. v. Iowa Comprehensive Petroleum Underground Storage Tank Fund Bd., 586 N.W.2d 325, 333, 334 (Iowa 1998) (concluding that a force majeure provision is inconsistent with the risk allocation provisions typical in a take-or-pay contract).