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Friday
May302003

Oregon Crisis in the Making

Burglary of commercial buildings, fire bombing automobile lots, possession of heroin, writing bad checks and identity theft have all been effectively decriminalized in Oregon. This is a result of a 12% decrease in the courts for the last four months of the State of Oregon's current two-year budget. It is proposed that Oregon courts absorb what amounts to an additional 50% reduction. Only certain violent felonies and child custody cases would be heard. No action will be taken on civil cases. This would have substantial adverse effects on your business and the Oregon economy. Effects that few have considered.

This issue of LegalBriefs will attempt to succinctly describe the current problem, the effect of the cuts today and some of the implications of proposed cuts. I then will suggest preventative strategies you should employ now to protect your affairs in event the state fails to adequately fund its courts.

  • Temporary Income - Permanent Spending *

The Oregon media has been full of stories relating to Oregon's "budget crisis." According to the state's economists, Oregon had a few years of capital gains income that was much higher than normal. The state acted as if this income would continue indefinitely. It increased spending permanently to match the temporary increase in tax revenue.

The phenomena described by the state's economist is very visible on graphs of tax revenue. For many years, tax revenue increased at a fairly consistent rate. Then, for a few years, there was a spike in tax revenue from capital gains income. Future projections were based upon this higher level. If you look at where tax revenue is today, even with the economic down turn, it fits very nicely on the original curve. If we had saved the significant increase in tax revenue rather than spend it, we would not have the budget problems we have today.

Then, when you throw in problems with the structure of the Public Employees Retirement System (PERS) and the PERS board's use of faulty actuarial assumptions, the State of Oregon has a serious budget problem.

What are the funding priorities? What claimed implications are true and what are attempts to scare the public into voting for a tax increase? When politicians call smaller increases in spending a cut, what is to be believed? These are legitimate questions.

  • 28,000 Criminals Go Free *

Obviously, a 12% cut in the court's funding during the last four months of the current budget has meant a reduction in judicial services. Fortunately, the affects of those service reductions are not yet obvious to most citizens. That, however, is likely to change soon.

The 12% reduction has meant closing the courts on Fridays and not appointing attorneys for indigent defendants in over 100 categories of crime. If an attorney can not be appointed, the defendant can not be tried and is instead set free. In four months, 28,000 people arrested for committing crimes will be released.

If attorneys will not be appointed and suspects released after arrest, the state has effectively decriminalized those crimes on the no appointment list. If you think these are just petty crimes, think again. There is nothing petty about second degree arson, second degree burglary (commercial buildings), criminal mischief, criminal trespass, disorderly conduct, refusing the order of police, drug possession, forgery, mail theft, identity theft, furnishing liquor to minors, furnishing pornography to minors, car theft, etc. . .

The result, in just a few months, is that juvenile crime is now at its highest level in history. The defendants know they can not be prosecuted. Already, at least one insurer is increasing its premiums dramatically. If possession of drugs and the property crimes used to finance drug habits are decriminalized, can premium increases by other insurers be far behind? That is if insurance companies even want to continue writing commercial and residential policies in Oregon.

  • Your Right To Petition the Court May be Next *

As bad as the current situation is in Oregon, it will soon get a lot worse if new cuts proposed for the courts are adopted. The Governor and the Co-Chairs of the Legislature's Ways and Means Committee (Co-Chairs) are proposing cuts that are between $34.5 and $36.5 million below the bare-bones maintenance level budget proposed by the Chief Justice of the Oregon Supreme Court. Since judicial salaries are frozen, this is a 50% reduction in the non-judge salary budget. With this type of cut, the court will only be able to handle violent criminal cases (as if arson is not violent enough) and child custody cases. Oregon courts will no longer handle civil cases.

At first blush, this may actually sound appealing. The risk of frivolous lawsuits is almost eliminated (certain cases could still be brought in federal court or the courts of other states). However, even if you have never filed a lawsuit, you have benefited by your ability to do so.

Please allow me to explain. The vast majority of contracts never end up in court. However, if there is no way to enforce a contract, the parties with whom you deal could breach their contracts with you when it suits their purpose without fear of recourse. The same is true in many other aspects of your business and personal life.

Consider the following:

- Employee Competition. A key employee leaves your company and goes to work for a competitor in violation of a noncompetition agreement. Would you like to be able to go to court to stop this employee and send a message to other employees who may be thinking about doing the same thing?

- Theft of Trade Secrets. Now lets suppose the employee described above downloads your customer list, internal cost figures, proprietary formulas or other confidential information. Would you like to go to court to stop this employee from going to a competitor and using your confidential information to steal business from you?

- Embezzlement. What if an employee embezzles money from you? Would you like to file a civil action to try to get some of your money back?

- Collections. What if a customer or a lot of customers decide to quit paying you? Would you like court assistance to collect the money you are rightfully owed?

- Rent. If you are a landlord, would you like to collect rent you are owed or at lease evict tenants who fail to pay rent?

- Commercial Development. How many commercial development projects involve disputes that must be resolved by civil action? If the disputes can not be resolved, what will happen to development in our state?

- Property Line Disputes. Each year, there are far more property line disputes handled by the court than you may realize. If a neighbor could block the issuance of building permits and prevent development of an adjoining parcel simply by asserting a frivolous property line dispute, what will happen to development in Oregon?

- Limit Local Government. The courts are often the only line of defense against local governments that want to stop development or improperly seize concessions from land owners. Who will prevent these improper governmental actions if not the courts?

- Construction Disputes. Almost every major construction project involves disputes. Battles over change orders appear to be part of the business model for some contractors. What will happen to construction and development in Oregon if these disputes can not be resolved?

- Divorce Property Settlements. What will happen to businesses large and small if the courts are no longer resolving business valuations and settling property disputes between divorcing couples?

- Property Transfers After Death. Probate cases, the liquidation and distribution of the estates of the deceased, are civil cases. If the courts no longer hear probate cases, how will businesses, land and other property be transferred upon death? What affect will this have on business and development in Oregon?

  • Consequences Will be Worse Than Imagined *

No one will be able to predict all of the consequences of failing to fund one of the three branches of government. We can guess at some of the more obvious consequences. Anyone making a list of effects will only be able to scratch the surface.

With that having been said, please allow me to list a few of the more obvious implications.

- Insurance. With juvenile crime rising dramatically and the decriminalization of property offenses, who will write property insurance in Oregon? Carriers will quietly quit doing business in Oregon. Those who dare do business in the state will charge substantially higher premiums.

- Bank Loans. If banks will not be able to file lawsuits to collect the money they are owed and won't be able to file lawsuits to foreclose mortgages, trust deeds and other liens, they probably will no longer be able to loan money in Oregon. At least they won't be able to make many of the loans they are currently making. This could have catastrophic consequences for the banking, real estate and building industries as well as any business wanting to borrow money or hire employees who desire to purchase a home. The effect on the Oregon economy will be devastating.

- Credit Cards. If credit card companies can not enforce the repayment obligations of their cardholders, they will quit issuing credit cards in Oregon. It has been reported that this happened once in Oregon in the 70's as a result of an Oregon Attorney General opinion. Credit card companies quit issuing new credit cards in Oregon and the state's economy took a $400 million hit in just a few months. If credit card issuers are denied access to Oregon courts, they are certain to take substantial actions to prevent loss. Every business that relies on credit cards as a means of facilitating payments will be impacted substantially, as will the Oregon economy.

- Out of State Lawsuits. If you do business with customers or suppliers outside of Oregon and there is a dispute, you may be forced to resolve those disputes in out of state courts, even if your agreements provide that the disputes are to be resolved in Oregon. Out of state courts may not recognize those provisions if there is no effective remedy in Oregon. It will be far more costly for you to litigate out of state and therefore you may be forced to settle on terms more favorable to the other party.

- Property Transfers After Death. It is reported that 70% of the people who should have a will die without a will. Obviously, probate is something that most people spend little time thinking about. However, if the property of the people who die with wills and the property of the people who die without wills can not be passed on to heirs and devisees, the value of that property will be removed from productive circulation for some period of time. The effect on our economy of removing this property from productive utilization will be substantial.

- Unemployment. With all the consequences described above, the increase in unemployment in Oregon will be tremendous. With that increase will come further damage to our economy and the adverse consequences of higher unemployment.

Whether you have been involved in a civil case or not, the work of the courts and the existence of the court system have a tremendous impact on your business and your employees.

  • There Are Things That Can Be Done *

The courts are the only state program the Legislature is constitutionally required to fund. This mandate is to protect the third branch of government from manipulation of the other two branches.

The amount of money necessary to fund the bare-bones court budget is not substantial. The $35 million difference, plus or minus, is a lot of money to me. However, when the State of Oregon's proposed budget exceeds $11 billion, when the budget proposed for the next two years is more than $1 billion (over 10%) higher than the money spent by the state last year, it is right to ask why the politicians feel they need to devastate our courts?

Can the courts be run more efficiently? Absolutely. Should political leaders be looking at ways to remake our courts so they can operate more efficiently? Absolutely. Should the Governor and the Legislature look at crimes they want to decriminalize, possibly. Perhaps increasing filing fees dramatically and basing those fees on the amount in dispute so that frivolous cases are removed from the court's docket has merit. Dismantling the courts, however, is not the answer.

If you would like to be heard, you can contact Representative Randy Miller, one of the Co-Chairs, Karen Minnis, Speaker of the House and Bob Patridge, chair of the public safety subcommittee. You can also contact the Governor, your legislators, business associates and friends. Let each of these people know that your business and the Oregon economy is dependent on adequate funding for Oregon courts.

  • Preventative Strategies to Take Now *

At this point, you must assume that Oregon courts will not hear your case if you need court assistance. You should do the following immediately:

- Employment Arbitration. Enter into arbitration agreements with all of your current employees and all of your new hires. The American Arbitration Association (AAA) provides special rules for resolving employment disputes.

- General Arbitration. Add arbitration provisions to all of your agreements with customers, vendors and joint venture partners. The AAA has special rules for resolving commercial disputes.

- Living Trust. Execute a living trust if you want your property to pass to your family after your death. In the past, living trusts have been over-sold to some people who really did not need a living trust. If the courts will no longer handle probate cases, there now is no reasonable choice except for living trusts.

- Transfer to Trust. Once you sign a living trust, make sure that all of your property is properly transferred to the trust. Any property not transferred to the trust must go through probate.

- New Property. Make sure that all new property you acquire after you execute your living trust is properly acquired in the name of the trust.

- Review Financial Affairs. Periodically review your financial affairs and make sure that any property not in the name of the trust is transferred to your trust.

  • Sorry for the Long "Brief" *

As long time readers of LegalBriefs know, I try to keep the LegalBriefs to the point and provide you with strategies you can use to prevent problems. This issue has been a little different. Like the other issues, however, it contains information you need to continue to conduct business in Oregon. Hopefully, the Governor and the Oregon Legislature will listen to you and do the right thing. In the meantime, however, you need to take steps to protect your business and your financial affairs.

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