Y2K Federal Statutory Update

Congress passed the following two Acts in anticipation of the potential for litigation surrounding the Y2K problem.

1. The Small Business Year 2000 Readiness Act.

Congress passed the Small Business Year 2000 Readiness Act (.P.L. 106-8) to establish a loan guarantee program for small businesses attempting to correct the Y2K problem. Funds loaned under the program must be used for the following purposes: (1) repairing and acquiring information technology systems; (2) purchase and repair of software; or (3) other Y2K related expenses. The Funds may be used to provide relief "for a substantial economic injury incurred by the small business as a direct result" of the Y2K problem.

Loans under this Act cannot exceed 85% of the balance of financing outstanding at the time of the loan's disbursement if the balance exceeds $200,000 or 90% of the balance of the financing outstanding at the time of the loan's disbursement if the balance is less than or equal to $100,000. Where a loan is processed under the SBA Express Pilot Program, the loan cannot exceed 50% of the balance outstanding at the time of the loan's disbursement.

This Act will automatically expire on December 31, 2000.

2. Y2K Act

Congress also passed the Y2K Act for the purpose of directing resources to help resolve Y2K problems before the end of the century, rather than allow excessive litigation resulting from Y2k related problems.

A. Definition. A Y2K failure is defined as a failure by any device or system, including software, to process or calculate year 2000 date-related data. The Act defines Y2K litigation as a civil action commenced in any court in which the plaintiff's alleged injury arises from or is related to an actual or potential Y2K failure, or where a claim or defense is related an actual or potential Y2K failure.

B. Application. The Act excludes actions brought by the government acting in a regulatory, supervisory or enforcement capacity. The Act applies to any Y2K action brought after January 1, 1999 for a Y2K related failure or potential failure occurring before January 1, 2003. The Act does not apply to any claim for personal injury or wrongful death, including claims for mental distress.

C. Consumer protection under the Act. The Act forbids foreclosing on a consumer residential mortgage resulting from a Y2K failure. To assert protection under the Act, the consumer must notify the mortgage servicer, in writing, of the consumer's inability to pay due exclusively to a Y2K failure (i.e. consumer's employer unable to meet payroll because of Y2K failure at employer's business), and the notice must be given within seven days of learning of the Y2K failure. The notice must be made before March 15, 2000. A subsequent mortgage foreclosure action may commence (1) four weeks after January 2000 or (2) four weeks after notification is made to the mortgage servicer. This protection does not apply to a default occurring before December 15, 1999. The protection under the Act only delays the residential mortgage foreclosure action, and does not relieve or otherwise effect to consumer's obligation to pay.

D. The Act excludes recovery for damages. The Act excludes in a Y2K action the recovery for any damages the plaintiff could have reasonably avoided, where the plaintiff knew, or should have known, relevant information. The Act does not apply if the plaintiff reasonably relied upon material misrepresentation from the defendant, so long as the defendant made the misrepresentation with actual knowledge of their falsity.

Damages in a Y2K action are limited to those expressly allowed under the contract, or if the contract is silent, those damages recoverable under state law at the time the contract was effective. In a Y2K tort action ( other than an intentional tort arising independent of a contract), there is no recovery for economic loss damages unless (1) the recovery of such damage is provided for by contract , or (2) the loss results directly from damage to tangible personal or real property cause by the Y2K failure. Economic loss is defined as lost profits or sales, business interruption, indirect loss suffered as a result of a defendant's wrongful act or omission, losses derived from third-party claims, special damages and consequential damages.

The Act prohibits punitive damages against individuals sued in their official capacity whose net worth is less than $500,000 and to unincorporated businesses with fewer than 50 full-time employees. The proofs required to obtain punitive damages are elevated and are capped at three times actual damages, or $250,000, whichever is less. The cap will not apply if the plaintiff proves, by clear and convincing evidence, a specific intent to injure the plaintiff. No punitive damages are allowed against a governmental entity.

This article was prepared by Alan P. Fox, a member of Capehart & Scatchard's Bankruptcy Group in its Mt. Laurel office. If you have any questions or would like additional information, please contact Mr. Fox at 856.914.2056 or by e-mail at afox@capehart.com