Well, it is that time of year again -- time to make the yuletide gay.  It is a time when friends who are dear to us gather near to us once more.  Unlike the familiar holiday song, however, our troubles may only be as far away as the county courthouse if we fail to exercise ordinary care during the holiday season when planning and hosting holiday parties.  This is indeed the time of year for celebration and for being thankful for another successful year, or simply o have survived another year.  In either case most of us have a lot to be thankful for and much to celebrate.  Of course, one way to celebrate is to throw a party.  And what is a party without the availability of alcohol?  Whether entertaining friends and family or, if you are an employer, hosting the annual office Christmas party, if you throw a party and decide to serve alcohol to your guests or employees, you will do well to consider the concept of social host liability.

So what am I talking about?  Suppose, for example, a gentleman you know comes to your holiday party and has a few drinks, stays long enough to chitchat with most of your many guests, and bids you a happy and joyous holiday season before getting behind the wheel of his car for the long drive home.  On the way home this person causes a horrible automobile wreck, seriously injuring a third party.  Said third party then sues you for those serious injuries because you provided the alcohol which impaired the driver, knowing he would drive his vehicle in am impaired state on a public street.  You have just been introduced to the concept of social host liability.  Right about now you are probably asking yourself if you could possible be responsible for the injuries sustained to the third party.  It is a fair question, one that deserves a straightforward answer, but it is also a legal question and like many legal questions, I must give you instead a very lawyerly response:  the answer is yes, maybe.

In the 1992 case of Hart v Ivey, the North Carolina Supreme Court held that a social host can be liable for serving alcohol to a guest who then drives on a public highway and injures a third party.  An individual, a business entity, and organization or an employer can be a social host.  In Hart the social host served alcohol to a guest who was under the age of eighteen.  The minor guest left the party and drove home.  On his way home his car collided with another vehicle, causing serious injury to a third party.  The third party then sued the minor guest, as well as the social host, for damages sustained as a result of the collision.  He contended that the social host negligently served an alcoholic beverage to a person whom the social host knew or should have known was under the influence of alcohol and would drive an automobile on public streets shortly after consuming the alcoholic beverage.  The Court applied a standard negligence analysis and stated that he "law imposes on every person who enters upon an active course of conduct a positive duty to exercise ordinary care to protect others from harm, and calls a violation of that duty negligence."  What does that mean?  Simply put, negligence is defined as being a breach of a duty owed to a particular person and injury to the person that is actually and proximately caused as a result of the breach of duty.  The injurious result must be reasonably foreseeable from the negligent conduct.  The Court concluded in the Hart case that the social host was "under a duty to the people who travel on the public highways not to serve alcohol to an intoxicated individual who was known to be driving."

What do we glean from the Hart case?  Namely, that the three elements a person must prove to prevail under a social host liability theory are as follows:

(1)  serving alcohol to a person;

(2)  when the social host knew or should have known the person was intoxicated; and

(3)  when the social host knew the person would be driving shortly after consuming the alcohol.

Now that I have put a damper on your holiday spirits and a real crimp in your holiday party plans, perhaps I could recommend a few pointers to reduce your anxiety about going forward with the big bash.  Of course, the most effective way to avoid social host liability altogether is simply not to serve alcohol in any shape, form or fashion at your holiday party.  I understand that some may think a policy of alcohol abstinence is not very realistic or desirable and, therefore, such a policy may not be widely embraced, but non-alcoholic punch is a sure way to avoid social host liability.  Other suggestions that may, and I stress may, reduce your liability if you serve alcohol at your party include the following:

(1)  Before the party, provide incentives for your guests to carpool and appoint a designated driver who remains sober;

(2)  Hire someone to serve the drinks or have a person you trust act as barkeep, so that the person can keep an eye on your guests, mindful of the fact that you have a duty not to serve to those you know are intoxicated;

(3)  Resist any impulse to go around filling the glasses of your guests, choosing rather to let them request a refill;

(4)  Offer a variety of non-alcoholic beverages as an alternative to alcohol and serve lots of protein on your menu because foods high in protein absorb alcohol faster;

(5)  Incorporate mental and physical agility games into your holiday festivities, games such as Jenga, which provide an incentive for guests to stay sober and tend to steer guest traffic away from the bar;

(6)  Stop serving alcohol at least one hour before the party is scheduled to end and never under any circumstances offer a guest "one for the road"; and

(7)  Finally, if you recognize that someone is intoxicated, do not allow the intoxicated person to drive.  You can offer to call the person a cab or offer to drive the person home (assuming you are sober) or to spend the night, but do not take no for an answer.  Remember, a court may hold you liable for injuries to third parties caused by guests to whom you have provided alcoholic beverages if you know the person is intoxicated and allow the person to drive anyway.  So, if the need arises, take your guest's keys.

Although Hart did not specifically address the issue, it stands to reason that an employer could be liable if an employee has too much to drink at an office holiday party and then negligently operates a vehicle.  It should be further noted that an employer may also be liable for serving alcohol to an employee at an employer-sponsored, employment-related function if the employee leaves the function and drives on a public highway and injures a third party.  Under the latter theory, employers are held to a much higher standard known as the doctrine of respondeat superior, which stands for the proposition that the employer will be vicariously liable for the negligent acts of the employee if those negligent acts were committed within the course and scope of the employment relationship, even if the employer exercised ordinary care in the supervision of the employee.  It is important to point out that under the doctrine of respondeat superior, the employer does not necessarily have to know or have reason to know that  the employee was intoxicated or impaired if the employee is within the course and scope of the employment relationship.

The North Carolina Supreme Court has addressed the issue of social parties as they relate to the employer/employee relationship in the 1995 case of Camalier v. Jeffries.  In Camalier, an employee of the Raleigh News & Observer attended a retirement party for another employee at the home of the publisher.  The employee drank several cocktails before driving home.  On his way home the employee ran a red light and collided with another vehicle, causing serious injury and later death to a third party.  Both the employer and the employee were sued for negligence.  The Court held that the employer was not responsible under a social host liability theory because there was no evidence that the employer knew or should have known the employee was intoxicated or "believed that he was intoxicated at the time he was server alcohol at the party."

In Camalier, the Court further held that the employer was not liable under the doctrine of respondeat superior by distinguishing between an event that is an employment related function from a party that is merely an employer sponsored function.  Employers planning holiday parties where alcohol will be served should be mindful of this distinction.  If you are an employer planning to host a party this holiday season where alcohol will be served, take steps to reduce your potential liability by incorporating the following factors into party planning:

(1)  Do not hold the party on company premises;

(2)  Do not hold the party during normal business hours -- you may even consider scheduling the party on a weekend;

(3)  Do not require employees to attend the party;

(4)  Do not require employees to work if they choose not to attend;

(5)  do not compensate employees for the time they spend at the party;

(6)  Do not make a record of employee attendance; and

(7)  Do not allow any employee to engage in any work related activities during the party.

This is the time of year for giving thanks and for celebrating our many blessings.  It is also a time for building lasting memories by gathering together with people we love, friends and coworkers.  If you are planning to host a holiday party, choose to celebrate responsibly by following the precautions suggested above and have yourself a merry little Christmas, a happy Hanukkah and a joyous Kwanza.

R.L. Bit Pressley is employed in the Litigation Section of Smith Debnam Narron Wyche Saintsing & Myers and may be reached at (919) 250-2173 or by email at bpressley@smithdebnamlaw.com. 

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Strange Results Abound in High Tech Bankrutpcies

The high profile bankruptcies of large technology firms such as Global Crossing and WorldCom have dominated the business news this year.  They are not alone.  Hundreds of technology companies, both large and small, have sought refuge in the bankruptcy courts over the past several months.  In 2001 alone, over 500 e-commerce companies either shut down or declared bankruptcy, leaving behind creditors and investors who naively believed that e-commerce companies were worth the billions of dollars they poured into them.  The bankruptcy courts and lawyers are left to decide how traditional laws apply to these new misfits of the business world. 

Shaped by the emergence of the internet as a viable business tool, these high tech companies tend to rely heavily on intangible assets, such as information technology products, and have very little in the way of tangible assets.  Many of these companies have developed their own technologies, while others have chosen to license technologies developed by others.  These information technology assets are often protected by intellectual property laws.  This special protection is mainly found in the form of patents, trademarks and copyrights.  The rights to intellectual property are often the most valuable assets of a high tech company.  Such rights are typically managed through leases, licenses, and sales contracts.

One of the advantages of bankruptcy is that it gives a debtor the ability to better manage its executory contracts.  Executory contracts are those that involve continuing performance, such as the lease for space in a shopping center.  A bankrupt debtor is generally allowed to continue those executory contracts that are advantageous, and to reject those that are not.  For example, a bankrupt retailer might be allowed to continue with the leases on its stores in shopping centers where it operates profitably and to reject, or walk away from, those shopping center leases where business is not going well.

For financially troubled companies whose business models rely on more traditional assets, the ability to assume or reject contracts is one of the key reasons to seek protection in the bankruptcy courts.  for the high tech firm whose business model relies heavily on contracts for the use of assets protected by intellectual property laws, however, the right to simply assume or reject its contracts is severely limited.

Intellectual property licenses are generally treated as executory contracts under the Bankruptcy Code.  One might then assume that a high tech company in bankruptcy would be able to pick and choose which of its intellectual property licenses it would like to honor on a going forward basis.  Nothing could be farther from the truth.  The Bankruptcy Code greatly restricts the ability of the debtor to terminate contracts under which it licenses its intellectual property to third parties.  The third party will retain the right to continue using the licensed technology throughout the term of the license, as long as it continues to honor the terms and restrictions of the license.  This will be true even in the context of an exclusive license which the bankruptcy e-commerce company would otherwise be able to terminate and possibly license to another customer at a higher price.

A very similar problem exists in the reverse situation, where the bankrupt company wishes to continue using intellectual property it licenses from another.  Keep in mind that when a company files for bankruptcy protection, a new entity, either a trustee or a debtor-in-possession, is formed to operate or liquidate the business for the benefit of creditors.  Consider the result for a high tech company that depends on patented technology it licenses from another under a nonexclusive patent license.  If the company files for bankruptcy protection, the trustee or debtor-in-possession wil need to continue using the patented technology.  Since patent law prohibits assignment of a nonexclusive patent license, the bankruptcy entity may not be able to use the key technology.  While such a result certainly seems illogical at first blush, the courts are split as to whether a nonexclusive patent can be assumed by the debtor-in-possession or its trustee.  Thus, depending on the jurisdiction in which the bankruptcy proceeding is filed, the debtor may not be able to assign key intellectual property involved, a company entering bankruptcy could lose the right to even assume an intellectual property license it was using prior to the bankruptcy filing, potentially hampering the value of other intellectual property assets of the company and in turn the enterprise itself.

A high tech company contemplating bankruptcy needs to take a careful look at its key technology.  If that technology is protected by intellectual property law, the company will need to consider how that technology will be treated under bankruptcy law.  If the company faces a situation where it may not be able to assign key technology to a trustee or debtor-in-possession, management will need to consider whether alternatives for reorganizing or liquidating the company outside of bankruptcy should be pursued.

Jerry T. Myers the firm's managing partner and the section head of the Creditors' Rights Retail section.  He can be reached at 919-250-2133 or by e-mail at jmyers@smithdebnamlaw.com.

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Don't Proceed Against that Guarantor Just Yet

A good credit policy should be designed to protect your business in the event that a customer fails to pay his or her bills.  One proven method to accomplish this is to have a guaranty agreement signed, especially if the customer has a poor credit history or is a new customer with no prior relationship with you or your company.  The assumption is, of course, that if your customer defaults and is unable to pay his or her debts, you have the option to pursue the guarantor for the debt.  Your right to proceed against the guarantor is severely restricted, however, in certain bankruptcy settings as a result of the co-debtor stay provided by the United States Bankruptcy Code in Chapter 13 bankruptcy cases.

Dealing with individual customers, in contrast to business customers, usually means that your guarantor will be a friend, parent or other relative of your customer.  The Bankruptcy Code provides that if an individual files a Chapter 13 bankruptcy containing a debt that is guaranteed or secured by someone else, the creditor is prohibited not only from pursuing the debtor for payment of the debt, but also from pursuing the guarantor as well.  Before you may exercise your collection rights against the guarantor, you must first obtain permission from the Bankruptcy Court.  There are certain requirements that must be met before the Court will grant such relief.

The co-debtor stay does not apply to all Chapter 13 debts.  The debt must be a "consumer" debt, which is defined as a debt incurred for personal, family or household purposes.  Therefore, if your customer incurred the debt for business rather than for personal use, it may not be considered a "consumer" debt, in which case the co-debtor stay would not be applicable.  In addition, the co-debtor stay does not protect a guarantor who becomes liable on the debt as a result of the guarantor's business - for example, a surety or bonding company.

It should be remembered that the co-debtor stay does not relieve the guarantor of liability on the debt, but rather postpones his obligation to pay, and your right to collect, until your customer's bankruptcy is completed.  The guarantor remains liable for any amount unpaid by your customer during the bankruptcy plan.  Once the bankruptcy case is closed, dismissed, or converted to a Chapter 7 or Chapter 11, you may proceed against the guarantor as if the bankruptcy had not been filed.

The Bankruptcy Code does not distinguish a guarantor from a co-signer, so the co-debtor stay applies equally to both.  In addition, for those businesses that deal with agricultural customers, there is a co-debtor stay that applies to individuals that seek to reorganize family farms under Chapter 12 of the Bankruptcy Code.

A guaranty agreement can be a useful tool for today's business and is highly recommended, especially for new customers or if the credit requested by the customer is more than you feel comfortable extending.  However, remember that if your customer files for bankruptcy protection, there are certain provisions of the United States Bankruptcy Code that may affect your ability to pursue the guarantor.  To be safe, we recommend that you refer all questions to your attorney or call our firm for assistance.

Jeff D. Rogers is a partner in the Creditors' Rights section of the firm and can be reached at 919-250-2112 or by e-mail at jrogers@smithdebnamlaw.com.

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