Trickle Down Economics and Trickle Up Inflation – 7 Major Business and Real Estate Law Developments

Blog No 157

December 6, 2022

By Mack W. Borgen

Author (7 Books): The White Binder – Your Personal Data and Information Book (2022); The Writings of a Lifetime (2021); Dead Serious and Lighthearted – The Memorable Words of Modern America (Three Volumes) (2018-2019); and The Relevance of Reason – The Hard Facts and Real Data about the State of Current America (2 Volumes) (2013). As advertised in The New York Review of Books. Recipient of Eight National Book Awards

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Trickledown Economics and Trickle-Up Inflation

Trickledown

 Trickledow

 Trickledo

  Trickled

   Trickle

    Trickl

    Trick

   (!) 

Many Americans believe that the accelerating extent of our country’s wealth disparity must be addressed. Partly, this is because in the past 40 years, an estimated $50 Trillion Dollars has shifted from the “Bottom 90%” of the population to the top 1% wealthiest Americans. It would seem that trickle-down economics, the self-serving fad of the early 1980s and Friedman’s University of Chicago School of Economics, has steadily generated a trickle-up source of profits – for many American corporation and for an ever-smaller percentage of Americans. 

Trickle-Up Inflation 

Inflation, just like wealth disparity, has hurt most Americans. It has increased our cost of living and simultaneously diminished the buying power of our wages and salaries.

Evidence of such inflation is everywhere, but it is most vividly and visually presented to us each day as we drive by the post price signs at gas stations. With that in mind, we should look with disdain upon the less-advertised reality that oil companies (under the clever cover of inflation) have dramatically increased their prices and have booked massive profits.

In a nine-month period in 2021, four of the largest oil companies (Exxon, Chevron, Shell, and BP) recorded $174 Billion in profits with record distributions to shareholders and, in the case of a few companies, record share buybacks. We can have our “drill-baby-drill” fights next weekend, but for now we should be concerned about corporations using the cover of inflation to artificially increase their product prices. 

Recent Business, Contract, and Real Estate

Cases and Developments

General Sources: Daily or Periodic Judicial and Legislative Reports from various sources including the California Lawyers Association Daily Reports, the CLA’s Monthly Business Law News, and Announcements and Press Releases from the (California) State Attorney General’s Office. 

1. Employment Law – California Privacy Rights Act (CPRA) – More Changes Effective January 2023 – Important Pending Legislation. Very summarily, the CPRA grants California consumers heightened rights and control over their personal information. This legislation is in addition to the previously-enacted California Consumer Privacy Act, and it provides rights to both individuals and employees in California. For example, the new rights of California employees include (a) their right to notice regarding the types of personal information their employer collects, sells, or discloses, and (b) the right of employees to correct or rectify the personal information. Because of the substantial changes in many aspects of California employment law, it is recommended that certain employers (especially those with over 15- and 50- employees) have their employment file and information practices checked by a qualified California employment law counsel at least once every two to three years. Such an internal audit, even if it is “capped” at six- to -ten hours, could save employers burdensome and costly noncompliance penalties and audits. 

2. Corporations – New Indemnifications for Corporate Officers. Delaware has made it permissible for corporate organizational documents to be even more favorable to corporate officers. Pursuant to a new provision of the Delaware General Corporation Law, corporations are now authorized to include a provision in their certificate of incorporation limiting the liability of corporate officers for monetary damages. Previously, this type of provision under Delaware law was only available to corporate directors. Under the new law, corporate officer liability cannot be fully eliminated (e.g., liability for the dangerously vague standards such as for breaches of duty of loyalty or acts not in good faith), but corporations can eliminate certain types of monetary liability such as for an officer’s “breach of a duty of care.”

3. Real Estate PACE Loans. The word “PACE” stands for “property assessed clean energy,” and PACE financing is a fast-growing source of potential capital to developers and property owners throughout the US. PACE loans may be available to both commercial and residential property owners, and oftentimes such loans can provide low-rate, long-term financing to address the upfront costs of certain types of “environmentally-friendly” improvements. Examples of typical projects which may qualify for PACE financing include (i) energy-efficient heating, (ii) ventilation and air-conditioning upgrades, (iii) lighting, insulation, windows, and solar heating systems. 

4. The Advisable Use of Board-Certified Counsels in Certain Circumstances. Certain areas of the law are becoming more and more detailed and require more and more specialized, focused expertise. In retaining or recommending counsel, it is sometimes advisable to focus upon counsels with certain certifications. The theory is that such board-certification provides a degree of assurance of the lawyer’s expertise. Some believe that there may be too many certifications programs which, in turn, both dilutes the usefulness of the certifications and confuses the client. For example, board certification is now offered by eight national private organizations with eighteen programs accredited by the American Bar Association. This is in addition to the many robust state programs such as those of California and Texas. Nevertheless, when trying to identify a highly qualified attorney within a reasonably narrow area of the law, such certification can be useful because to obtain such certification the attorneys may need to have as much as five years’ experience and must pass a rigorous examination in the subject specialty area. 

5. Contracts – The Use of Contractual Risk Transfers. Especially in the context of commercial property development, the parties (owner, general contractor, etc.) face numerous risks resulting from accidents, injuries, negligence, bad weather, or even some acts of God. The careful use of contractual risk provisions can materially protect your client and the project. Such al risk transfers are achieved through the use of contractual obligations which expressly pass on the defined potential risk(s) to another party. Examples of such risk transfer provisions include indemnification agreements or provisions, waivers of subrogation, the affirmative obligation of third-parties (such as general contractors) (i) to obtain additional insured endorsements so that the owners are contractually indemnified by the general contractor and (ii) to identify such party as an “additional insured” under the contractor’s insurance policy. 

6. Direct IRS Audits of Multi-Member Partnerships. Under the landmark changes in 2018, the IRS can directly audit – and now is auditing – certain large partnerships and many multi-member LLCs. This can now be done rather than  separately auditing the partners or members. After such audits, the IRS can assess tax, interest, and penalties directly against such entities. There is a provision whereby not-so-large partnerships can exercise their right to opt-out of the comprehensive audit regime (the “CPAR”). As a part of any partnership or LLC formation or possibly thereafter on an annual basis, it should be determined by the entity’s tax counsel or advisor whether it is feasible and advisable for the new entity to opt-out of the CPAR. 

7. Buy-Sell Agreements. Far too often the governance documents of corporations, partnerships, or LLCs, do not incorporate critical buy-sell provisions. This can be a serious and consequential oversight. Buy-sell provisions provide the mechanism whereby a person (or entity in certain circumstances) can exit in the instance, as the case may be, of an individual’s retirement, death, disability divorce, or employment termination. More specifically, majority owners do not want to be stuck with a minority partner who is not making meaningful contributions to the company or, worse still, is interfering with the successful operation of the business. Conversely, well-drafted buy-sell provisions allow minority owners to have an opportunity to monetize their minority interests. Without such redemption or exit provision, a minority investor may be stuck for years holding an illiquid, unmarketable interest in a company or business. Also of note is that the ideal time for negotiating these buy-sell arrangements is at the time of the entity’s formation. This timing is usually preferable because it, in a way, almost assures a certain balance amongst the parties because they do not know at that time to whom the provisions may eventually apply – themselves as withdrawing sellers or themselves as purchasing buyers.

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