Business Law

COMPANY DOE v. PUBLIC CITIZEN, NO. 12-2209

Decided: April 16, 2014

The Fourth Circuit held that the district court order that sealed litigation records violated the public’s right to access under the First Amendment, and that the district court abused its discretion by allowing the company to proceed under a pseudonym.  Ultimately, the Court vacated the district court’s intervention denial and remanded the decision.

The plaintiff, Company Doe, filed suit under the Administrative Procedure Act seeking to enjoin the U.S. Consumer Product Safety Commission (CPSC) from publishing a “report of harm.”  The report alleged that a product that was manufactured, and sold, by Company Doe’s was related to the death of an infant.  Company Doe requested that the district court allow it to proceed under a pseudonym, and that the proceedings be sealed.  The district court granted both, and as the Fourth Circuit noted, “[r]egrettably . . . allowed the entire litigation to proceed . . . behind closed doors.”  The district court ultimately ruled in favor of Company Doe on the merits also, issuing a permanent injunction that barred the CPSC from publishing the alleged report.

Following the judgment, the court released an opinion “with sweeping redactions.”  The CPSC did not appeal the decision.  Rather, three consumer advocacy groups (collectively Consumer Groups) filed a post-judgment motion to intervene for the purposes of appealing both conditions.   The district court, however, did not rule on the motion until the period to appeal the underlying judgment expired.   Consumer Groups noted their appeal of the district court’s sealing and pseudonymity orders as well as the court’s “constructive denial” of the motion to intervene.  Consumer Groups filed their appeal, and three months later the district court denied the motion to intervene.

The Fourth Circuit vacated the court’s order denying intervention and concluded that the consumer groups had standing to appeal even though they “were neither parties to, nor intervenors in, the underlying case . . . because they [met] the requirements for nonparty appellate standing and have independent Article III standing to challenge the sealing . . . orders.”  The Consumer Groups also succeeded on the merits.   The Court noted the difficult balancing act involved: weighing Company Doe’s interest in sealing the bulk of the court record against the First Amendment Interest of the CPSC and Consumer Groups.  The Fourth Circuit ultimately held that the seal of the records violated the public’s right of access under the First Amendment.  Accordingly, the Court remanded the case to the district court and ordered that all documents be unsealed, unredacted, and made available to the consumer groups and the public.  The Court also concluded that the district court abused its discretion by allowing Company Doe to litigate under a pseudonym.

Full Opinion

Abigail Forrister

FELDMAN v. LAW ENFORCEMENT ASSOCIATES CORP., NO. 13-1849

Decided: May 12, 2014

The Fourth Circuit affirmed the district court’s grant of summary judgment by holding that the appellant failed to make a prima facie showing of his Sarbanes-Oxley Act of 2002 (“SOX”), 18 U.S.C. § 1514A, claims because he did not sufficiently prove that the alleged protected activities were a contributing factor to his termination.

Appellant argued that he was unlawfully fired in retaliation for engaging in activities protected under SOX.  These activities included: (1) reporting to the Board of Directors (Board) and the federal government about the potentially illegal exports with SAFE Source; (2) objecting to falsified Board meeting minutes; (3) objecting to leaks of information by the Outside Directors to Carrington; and (4) notifying the government of suspected insider trading.  The district court granted summary judgment to the Appellees, and held that plaintiffs failed to make a prima facie showing of their SOX claims because they did not sufficiently prove that the alleged protected activities were a contributing factor to their respective terminations.  Appellant filed a timely appeal and argued that the district court erred by holding that these activities did not contribute to his termination.  Appellant also argued that the district court erred by failing to decide whether Appellees had sufficiently demonstrated that he would have been fired regardless of these activities.

The SOX protects whistleblowers of publicly traded companies by prohibiting employers from retaliating against employees that provide information about potentially illegal conduct.  The Court applies a burden-shifting framework to SOX whistleblower claims.  The plaintiff must first establish a prima facie case by proving, by a preponderance of the evidence, that: “(1) he engaged in protected activity; (2) the employer knew that he engaged in the protected activity; (3) he suffered an unfavorable personnel action; and (4) the protected activity was a contributing factor in the unfavorable action.”  If the employee meets this burden, the defendant must then “rebut the employee’s prima facie case by demonstrating by clear and convincing evidence that the employer would have taken the same personnel action in the absence of the protected activity.”  This appeal centers on the fourth prong.  The Court found that the appellant failed to satisfy his light burden of showing by a preponderance of evidence, and that the activities tended to affect his termination in at least some way.

First, the Court found that there is no temporal proximity between appellant’s most significant protected activities because his reports regarding SAFE Source occurred roughly twenty months before his termination.  The Court reasoned that such a lengthy gap in time weighed against a finding that it is more likely than not that the alleged protected activities played a role in his termination.  Second, and most significantly, the Court noted that the appellant took a contradicting action that constituted a legitimate intervening event further undermining a finding that his long-past protected activities played any role in the termination.  While the Court mentioned that in SOX cases the contributing factor standard is meant to be broad and forgiving, it also emphasized the history of antagonism between the appellant, his employers, and the above referenced intervening events.  Furthermore, the Court opined that, under the particular circumstances here, the standard would be toothless if it held that a preponderance of the evidence showed that the long-past activities affected appellant’s termination.

Full Opinion

Grace Faulkenberry

UNITED STATES V. ABDELBARY, NO. 13-4083

Decided: March 11, 2014

The Fourth Circuit held that the United States District Court for the Western District of Virginia properly concluded that the attorney’s fees expended by Jordan Oil in defense of its interests against fraud committed by Youssef Hafez Abdelbary (Abdelbary) in his bankruptcy proceedings were recoverable under the Mandatory Victim Restitution Act (MVRA), 18 U.S.C. § 3663A.  The Fourth Circuit therefore affirmed the judgment of the district court.

Abdelbary, the owner and operator of a gas station and convenience store, bought gas from Jordan Oil.  In February 2008, Jordan Oil stopped sending gas to Abdelbary after Abdelbary failed to pay for a gas delivery.  Jordan Oil then sued Abdelbary to recover the money owed.  In May 2008, Jordan Oil obtained a final judgment in its favor.  Abdelbary filed for bankruptcy after consulting with an attorney in July 2008.  On his bankruptcy filing, Abdelbary “denied having made any gifts within one year or having transferred any property within two years of the filing.”  Also, at the creditors’ meeting, Abdelbary said he had not transferred assets to a member of his family.  However, Abdelbary had in fact sent $76,000 to his brother during the two years prior to filing.

Abdelbary was eventually charged with, inter alia, bankruptcy fraud under 18 U.S.C. § 152(3).  Abdelbary was convicted on all counts.  At sentencing, the district court ordered Abdelbary to, inter alia, pay Jordan Oil restitution for the attorney’s fees it expended during Abdelbary’s bankruptcy proceeding.  While the district court cited both the MVRA and the Victim and Witness Protection Act (VWPA), 18 U.S.C. § 3663, it did not clarify which provision it was relying on.  On appeal, the Fourth Circuit vacated the award of restitution and remanded the case with regard to this award, as the district court did not clarify whether it relied on the MVRA or the VWPA and “had overlooked making the factual findings required by the appropriate act.”  On remand, Abdelbary and the government agreed that the MVRA governed the issue.  However, Abdelbary argued that, inter alia, the attorney’s fees expended by Jordan Oil constituted a consequential loss rather than a direct one—and therefore could not be compensable under the MVRA.  The district court rejected this position, ordering Abdelbary to pay restitution to Jordan Oil under the MVRA.  Abdelbary appealed, arguing that, inter alia, attorney’s fees are not compensable under the MVRA per the Fourth Circuit’s decision in United States v. Mullins, 971 F.2d 1138.  Abdelbary argued that Mullins—in which the Fourth Circuit held that VWPA restitution cannot include consequential damages such as attorney’s fees incurred to recover the property at issue—was consistent with the “American Rule” for attorney’s fees.

The Fourth Circuit found the American Rule inapplicable, as Abdelbary’s appeal involved the types of losses includable as criminal restitution rather than entitlement to fee shifting.  The Fourth Circuit then enumerated the rule applicable to the case at hand, quoting United States v. Elson, 577 F.3d 713: “[W]here a victim’s attorney fees are incurred in a civil suit, and the defendant’s overt acts forming the basis for the offense of conviction involved illegal acts during the civil trial . . . such fees are directly related to the offense of conviction” and can be recovered under the MVRA.  The Fourth Circuit then distinguished the instant case from Mullins, noting that Abdelbary’s bankruptcy fraud was the direct and proximate cause of Jordan Oil’s fee expenditures—and Abdelbary’s bankruptcy fraud therefore “result[ed] in damage to or loss or destruction of property of a victim of the offense,” 18 U.S.C. § 3663A(b)(1).

Full Opinion

– Stephen Sutherland

CARNELL CONSTRUCTION CO. V. DANVILLE REDEVELOPMENT & HOUSING AUTHORITY, NOS. 13-1143; 13-1229; 13-1239

Decided: March 6, 2014

After a series of mistrials, a jury finally rendered a verdict on claims of race discrimination, retaliation, and breach of contract brought by a “minority-owned” corporation surrounding the construction of a low-income housing project. On appeal, the Appellants presented a number of issues for review: (1) whether a minority owned corporation has standing to sue for race discrimination under Title VI of the Civil Rights Act of 1964 (“Title VI”); (2) whether the district court erred in awarding summary judgment dismissing one of the defendants from the alleged discrimination and retaliation claims; (3) whether the court abused its discretion in allowing certain impeachment evidence; (4) whether the court erred in deciding certain contract issues relating to Virginia’s Public Procurement Act; and (5) whether the court erred in modifying the jury’s award of contract damage.  In a lengthy opinion, the Fourth Circuit affirmed the district court’s decision in part and vacated the decision in part.

The dispute arose out of work performed by Carnell Construction Company (“Carnell”), a contractor in Danville, Virginia on the Blaine Square Project (“the project”), a large public housing venture designed to provide low-income housing to Virginia residents. The project was funded in part by a grant from the United States government to the Danville Redevelopment and Housing Authority (“Housing Authority”). Carnell was the successful bidder for an initial phase of the contract that included clearing the site, grading the land, and installing drainage and erosion systems. Carnell was a certified “minority owned business” under Virginia law because its owner was African-American. Shortly after awarding the contract to Carnell, HUD leased the project site and assigned its interest to Blaine Square, LCC (“Blaine”), a nonprofit instrumentality of the Housing Authority. Blaine agreed that the Housing Authority would continue to supervise the actual construction of the project. Carnell began work in 2008, and the relationship between Carnell and the Housing Authority deteriorated quickly as each side complained about the other’s poor performance.  After an unsuccessful mediation, the Housing Authority advised Carnell that it would not extend Carnell’s contract beyond the stipulated May 2009 completion date, requiring that Carnell remove its equipment and personnel from the project by that date, regardless of whether the work was completed. Carnell complied, but requested reimbursement for unpaid work. The Housing Authority refused to pay and declared default under Carnell’s performance bond. Carnell then filed suit based on claims of race discrimination and breach of contract. In response, the Housing Authority filed counterclaims for breach of contract. After two mistrials, the jury returned a verdict for Carnell on its breach of contract claims, but not for its discrimination claims. The district court then reduced the award for breach of contract damages. The parties filed cross-appeals.

On appeal, the Court first held that a minority owned corporation has standing to sue for race discrimination under Title VI. The Housing Authority conceded that Carnell had constitutional standing to sue, but contested its prudential standing to sue under Title VI on the grounds that Carnell was not in the “zone of interests protected or regulated by” Title VI. Under Title VI “[n]o person in the Untied States shall, on the ground of race…be excluded from participation in, be denied the benefits of, or be subjected to discrimination under any program or activity receiving Federal financial assistance.” The defendants argue that Carnell, as a corporation, is not a person, and thus lacks a “race.” While the Fourth Circuit has not addressed this issue, other circuits have allowed corporations to establish a racial identity. For example, the Ninth Circuit held that a minority-owned corporation may establish an “imputed racial identity” to satisfy standing requirements. In the present case, the Fourth Circuit similarly held that Carnell had standing to bring discrimination claims under Title VI. Carnell was certified under Virginia law as a “small, women, and minority-owned business.” Carnell made this information public when it contracted to perform work for the Housing Authority. Therefore, the Fourth Circuit held that Carnell sufficiently demonstrated an imputed racial identity to satisfy standing requirements under Title VI.

Second, the Fourth Circuit held that the district court properly awarded summary judgment to Blaine on Carnell’s race discrimination claims, finding that Blaine did not engage in any of the alleged discriminatory conduct directly or as a principal for the Housing Authority. Carnell contested the district court’s finding on appeal, arguing that Blaine possessed sole control of the financing of the project and withheld payments from Carnell. The Fourth Circuit disagreed, explaining that Blaine was merely “a passive entity [that] would ensure that the checks would be written to [the Housing Authority] for purposes of paying contractors.” All decisions to withhold payments to Carnell were made by the Housing Authority. Furthermore, the court found that Blaine was not vicariously liable for the alleged discriminatory conduct of the Housing Authority because Blaine exercised no control over the Housing Authority. The agreement between Blaine and the Housing Authority grants the Housing Authority “sole responsibility for managing construction of the project as an independent contractor.” Moreover, the agreement expressly disclaims any formation of an agency relationship between the entities.

Third, the Fourth Circuit held that the district court abused its discretion by allowing defense counsel to use certain impeachment evidence in cross-examining Carnell’s president, Michael Scales. The contested evidence consisted of an unsigned proposal prepared by a marketing consulting group, which stated the consultant’s objective as to “[s]hape the initial story so that it is sympathetic to Carnell and critical of [the Housing Authority” and garner additional statewide support for Carnell. On cross-examination, defense counsel asked Scales whether he wanted to “shape” the evidence to “make out a race claim.” When Scales denied these accusations, defense counsel introduced the proposal as a prior inconsistent statement under Rule 613(b) of the Federal Rules of Evidence. The Fourth Circuit determined that the district court should have excluded the evidence under Rule 613(b) and Rule 403. First, the evidence was improper as a “prior inconsistent statement” under Rule 613(b) because there was insufficient evidence to conclude that the statement in the proposal was “reasonably attributable” to Scales. Scales denied recalling the proposal and did not sign the document. Upon signing and returning the consulting agreement to the consultants, Scales did not refer to any of the proposals. Second, the district court should have withheld the proposal under Rule 403 because the risk of unfair prejudice substantially outweighed the limited probative value of the evidence. The court found that the probative value of the proposal was minimal since the statements in the proposal were not fairly attributable to Scales. Additionally, the risk of unfair prejudice was “exceedingly high” by allowing the defense counsel to impeach Scales based on another person’s statement. Moreover, defense counsel relied on the evidence extensively at trial, even displaying a poster exhibit of the proposal during his closing argument.

Fourth and finally, the Fourth Circuit examined the competing breach of contract claims. The Fourth Circuit held that Carnell did not present sufficient evidence at trial for the court to determine that it complied with the notice requirements under Virginia’s Public Procurement Act (“VPPA”) to make claims for unpaid work. The VPPA requires that any contractor making a claim for unpaid work must provide written notice of each particular claim. In the third trial, Carnell erroneously failed to introduce evidence showing that it provided sufficient notice to the Housing Authority for its unpaid work claims. Under the VPPA, the Fourth Circuit held that Carnell could not state a claim for items of unpaid work for which it did not prove notice to the Housing Authority. Additionally, the Fourth Circuit affirmed the district court’s decision to reduce the amount of damages award under the contract for unpaid work claims pursuant to the VPPA’s limitation of the amount by which public contracts can be increased. Carnell did not contest that its contract increased more than the amount allowed under the VPPA, but rather asserts that the limitation on increase either does not apply to Carnell or, in the alternative is unconstitutional. The Fourth Circuit held that Carnell was subject to the VPPA through its participation in a public project. Furthermore, the court held that the VPPA’s limitation was neither a due process violation nor an unconstitutional taking. Finally, the court held that the district court properly denied Carnell’s claims for special damages because Carnell failed to adequately plead special damages in its breach of contract claims. Therefore, the Fourth Circuit affirmed the district court’s decision in part and reversed in part.

Full Opinion

– Wesley B. Lambert

VALENTINE V. SUGAR ROCK, INC., NO. 12-2273

Decided: March 12, 2014

The Fourth Circuit elected to certify the following question of law to the Supreme Court of Appeals of West Virginia:

Whether the proponent of his own working interest in a mineral lease may prove his entitlement thereto and enforce his rights thereunder by demonstrating his inclusion within a mining partnership or partnership in mining, without resort to proof that the lease interest has been conveyed to him by deed or will or otherwise in strict conformance with the Statute of Frauds.

The dispute involves a diversity action filed by the alleged owner of certain fractional working interests in four Ritchie County mining partnerships, Clifton Valentine, against Sugar Rock, Inc. (“Sugar Rock”), the operator of the oil wells. Valentine maintains that he purchased the working interests from the original leaseholder in the late 1950s and received his proportionate share of the net proceeds generated by the well operations for approximately 40 years. Those payments stopped, however, when the original leaseholder passed away and his son subsequently sold the majority interest in the partnership to Sugar Rock. In the current action, Sugar Rock maintains that the creation of the leaseholds transferred interests in real property and therefore any subsequent assignments by the lessee of the portions of its working interest similarly conveyed an interest in real property. Thus, Sugar Rock contends that the original transfer in the late 1950s could only be effected by a writing contemplated by the West Virginia Statute of Frauds. Conversely, Valentine argues that he possesses an ownership in a partnership arising under operation of law, and thus an indirect ownership interest in the working interests. He, therefore, contends that his interest can be proved by parol evidence and by the parties’ course of conduct. Perceiving that the answer to the certified question of West Virginia law may be determinative of the case, the Fourth Circuit, accordingly, availed itself of the privilege afforded by the State of West Virginia through the Uniform Certification of Questions of Law Act, West Virginia Code sections 51-1A-1 through 51-1A-13.

Full Opinion

– W. Ryan Nichols

CORE COMMUNICATIONS V. VERIZON MARYLAND, NO. 12-2572

Decided:  March 6, 2014 

The Fourth Circuit Court of Appeals affirmed the district court’s award of summary judgment to defendant Verizon Maryland, LLC (“Verizon”) on claims pursued by plaintiff Core Communications, Inc. (“Core”) for concealment and unfair competition. The Fourth Circuit also affirmed the district court’s award of nominal damages of only one dollar to Core on its breach of contract claim.

The Telecommunications Act of 1996 was designed to increase competition in local telephone markets. To that end, the Act required established telephone companies to enter into contracts known as interconnection agreements (in the singular, an “ICA”) with new market entrants seeking to connect with existing markets. Pursuant to the Act, Core, a market entrant, sought an ICA with Verizon, the established phone company in the Baltimore area.  On July 14, 1999, the companies jointly submitted their proposed ICA to the Maryland Public Service Commission (the “PSC”) for approval. On July 27, 1999, while the ICA was pending approval, Core wrote Verizon to request that the proposed interconnection— as to which Core would be a wholesale customer of Verizon— be accomplished by September 10, 1999. At a meeting on August 11, 1999, the companies agreed that Core’s interconnection would occur at Verizon’s “Wire Center” in Baltimore, which is physically connected to Verizon’s central network and houses the needed equipment. However, Verizon estimated that it would take another four to six months before the essential new equipment for Core’s interconnection would be available for use. Hoping to avoid those months of delay, Core suggested that instead of installing new equipment, Verizon should utilize the existing equipment already in the Wire Center. Verizon acknowledged that this was technically feasible, but declined to do so. On August 15, 1999, Verizon advised Core that, in any event, the existing equipment were already assigned to a Verizon “customer of record.” Only later did Verizon disclose that the “customer of record” was Core itself, already a Verizon retail consumer in a separate context. The existing equipment was never used for the Core interconnection, and Verizon installed the new equipment in late November 1999. The Core interconnection was consummated on December 23, 1999.

On appeal, Core argued that the district court erred in: (1) allowing Verizon to invoke the ICA’s Exculpatory Clause, and then by enforcing the Clause as a bar to Core’s recovery of consequential damages; (2) awarding summary judgment to Verizon on Core’s concealment and unfair competition tort claims; and (3) ruling that Core was entitled to only nominal damages on its breach of contract claim.

First, the Fourth Circuit assessed the timeliness and application of the Exculpatory Clause. Core advanced two arguments: first, that Verizon failed to timely invoke the Clause; and second, that the Clause was void under principles of Maryland contract law. The Fourth Circuit noted that, in analyzing a party’s failure to timely invoke an exculpatory provision, it has recognized an exception to Rule 8(c) where, as here, the pertinent provision was “evident” in the contract before the trial court. Furthermore, the district court properly observed that Core was neither unfairly surprised nor unduly prejudiced by Verizon’s delay in invoking the Exculpatory Clause. Thus, the Clause was timely and appropriately invoked. Then, Core contended that the Exculpatory Clause nonetheless could not be enforced because Maryland law bars the use of “exculpatory agreements in transactions affecting the public interest.” However, because the Clause is enforceable under federal law, state law principles cannot, at this stage, void a provision of an ICA already approved by the appropriate State commission. The proper time for Core to object on the asserted basis of Maryland’s public policy was prior to PSC’s approval of the Core ICA.

Second, the Fourth Circuit assessed Core’s challenge to the district court’s summary judgment awards with respect to Core’s state law tort claims for concealment and unfair competition. Both claims require proof of intentional fraud or deceit. The Fourth Circuit concluded that no reasonable jury could find that Verizon unlawfully concealed any material fact from Core. Core offered no evidence suggesting that Verizon’s failure to identify Core as the “customer of record” was driven by any intent to defraud or deceive Core.  Mingo, Core’s president, could merely assert that the failure to disclose occurred, and then theorize that Verizon must have done so intentionally in order to improperly delay the Core connection. Moreover, Mingo’s concession that he knew, and did not share, that Core was a retail customer in the Baltimore Wire Center establishes that Core could not have reasonably relied on the intentional concealment it alleges. Core’s unfair competition tort claim failed for the same reason. The Fourth Circuit also stressed its concern that both tort claims amounted to little more than “the assertion of a contract claim in the guise of a tort.” Where the essence of the relationship between the parties is contractual, the plaintiff only has an action for breach of contract, and tort claims are not available.

Third, the Fourth Circuit reviewed the district court’s judgment awarding nominal damages of one dollar to Core for Verizon’s breach of the Core ICA. Core contended that it was entitled to more for three reasons. First, Core argued that it could recover consequential damages because the breach involved “willful or intentional misconduct,” which the Fourth Circuit rejected. The “willful or intentional misconduct” exclusion to the Exculpatory Clause applies exclusively to actions sounding in tort, because an intent to defraud or deceive is ordinarily not an issue in a breach of contract claim. Second, Core argued that the Exculpatory Clause only limits Verizon’s liability for consequential damages in connection with services offered under the ICA, and that the interconnection was not a “service” within the meaning of the Clause. Although “interconnection” is not a “telecommunications service” for purposes of the Act, the parties did not use the term “Telecommunications Service” in the Clause, but instead used the single word “services.” Thus, the parties intended to draw a distinction between a “Telecommunications Service” and mere “services” and the word “service” in the Clause must include the provision of an interconnection at Core’s request. Finally, Core maintained that it was entitled to “performance penalties” under section 27.3 of the Core ICA, which provides for a limited remedy not barred by the Exculpatory clause. However, Core provided no evidence to satisfy the predicate conditions for the performance penalties provided for in section 27.3.

Full Opinion

– Sarah Bishop

IN RE TANEJA, NO. 13-1058

Decided: February 21, 2014

The Fourth Circuit, finding that (1) the lower courts applied the correct legal principles relevant to evaluating defendant’s good-faith affirmative defense and (2) the lower courts did not clearly err in determining that defendant satisfied its burden of proving a good-faith defense under the Bankruptcy Code, affirmed the decision of the district court and the bankruptcy court dismissing the bankruptcy trustee’s adversary action.

Vijay Taneja (“Taneja”) operated Financial Mortgage, Inc. (“FMI”), a business engaged in originating home mortgages and selling those loans to secondary purchasers. In carrying out its business operations, FMI worked with numerous financial institutions known as “warehouse lenders.” The warehouse lenders would typically extend lines of credit and advance funds to FMI, thus, enabling it to extend mortgage loans to individual mortgagees. The warehouse lenders required FMI to sell the mortgage loans to secondary purchasers within a certain time period. After the sale, FMI would replenish the warehouse lenders’ lines of credit according to the terms of the particular agreement. At some point after 1999, Taneja and FMI began selling the same mortgage loans to several different secondary purchasers and conspiring with other business entities controlled by Taneja to conceal the fraud.

FMI began a business relationship with First Tennessee Bank, National Association (“First Tennessee”) in 2007. Before extending a line of credit to FMI, First Tennessee performed a standard investigation of FMI and Taneja. The investigation, however, did not reveal any negative business information involving FMI or Taneja, and the parties entered into an agreement in July 2007, under which First Tennessee agreed to extend to FMI a $15 million line of credit. The lending agreement obligated FMI to send certain documents to First Tennessee within two business days after each mortgage loan closed. Although FMI routinely did not meet this two-day timeline, it eventually provided First Tennessee with the most critical security document underlying each transaction, the original promissory note for each loan. By mid-October 2007, FMI owed nearly $12 million on its line of credit with First Tennessee. As a result, First Tennessee suspended payment of any additional advances to FMI. Thereafter, First Tennessee executives, Robert Garrett and Benjamin Daugherty, met with Taneja at FMI’s place of business in November 2007 to discuss strategies to clear the line of credit. In that meeting, Taneja informed Garrett and Daugherty that FMI’s failure to produce timely, adequate documentation to complete mortgage loan sales to secondary purchasers was caused by the unexpected departure of one of FMI’s loan processors.

Garrett and Daugherty again met with Taneja at FMI’s office in January of 2008 to address the outstanding balance of advanced funds. In that meeting, Taneja proposed a collateral swap, in which Taneja would sell other real estate to “pay the bank off.” Taneja represented that the mortgage loans had lost value, and that Tanenja did not want to sell them until their value increased. Also during that meeting, Garret asked Taneja’s attorney whether FMI’s loans were valid, and free from fraud. Taneja’s attorney assured Garret that there were no issues with the loans. After that meeting, Garrett and Daugherty performed additional research into the properties serving as security for FMI’s loans. Thereafter, the two met once again with Taneja and her attorney. At that meeting, Garret and Daugherty reiterated the importance of confirming that the mortgage loans were real. Again, they were assured that the loans were good, and First Tennessee ultimately approved a forbearance agreement with FMI, in which Taneja agreed to provide additional collateral to secure the bank’s interests. First Tennessee learned otherwise, however, in April 2008, when it discovered that the deeds of trust securing the mortgage notes held by it were fraudulent. Immediately thereafter, First Tennessee declared FMI in default under the lending agreement. As a result of First Tennessee’s relationship with FMI and Taneja, it lost more than $5.6 million.

Taneja and his corporate affiliates, including FMI, filed Chapter 11 bankruptcy in June 2008. The bankruptcy trustee filed an adversary pleading in the bankruptcy court against First Tennessee, seeking to avoid and recover the funds that FMI transmitted to the bank in the twelve payments made under the lending agreement on the grounds that the funds were conveyed fraudulently. In response, First Tennessee contended that it received the payments from FMI for value and in good faith. A three-day trial ensued. At trial, First Tennessee relied on the testimony of Garrett and Daugherty to establish its good faith defense. Ultimately, the bankruptcy court determined that First Tennessee reasonably thought that the lagging secondary mortgage market, rather than any inappropriate conduct by FMI and Taneja, was the cause of the delayed sales. The bankruptcy court further determined that First Tennessee did not have any information that would reasonably have led it to investigate matters further, and that its actions were in accordance with the industry’s usual practices. In making its determinations, the bankruptcy court acknowledged that Garrett and Daugherty were responsible for the bank’s warehouse lending and transactions with FMI, but stated that it considered these factors in assessing whether their employment and job conduct may have affected their credibility. Having concluded that First Tennessee established its good-faith defense, the bankruptcy court dismissed the trustee’s action. The district court affirmed that decision, and this appeal followed.

On appeal, the Fourth Circuit first addressed the bankruptcy trustee’s contention that both the bankruptcy court and the district court erred in applying the good-faith standard, as articulated in In re Nieves, in conducting their analyses. Addressing this contention, the Court declined to adopt a bright-line rule requiring that a party asserting a good-faith defense present evidence that his every action concerning the relevant transfers was objectively reasonable in light of industry standards. Instead, the Court noted its inquiry regarding industry standards serves only to establish the correct context in which to consider what the transferee knew or should have known. The Court, additionally, noted that a defendant asserting a good-faith defense is not compelled to present third-party expert testimony in order to establish prevailing industry standards. And, therefore, the Fourth Circuit held that the bankruptcy court and the district court applied the correct legal standard in evaluating whether First Tennessee proved its good-faith defense.

Next, the Fourth Circuit rejected the trustee’s argument that First Tennessee presented insufficient objective evidence to prove its good-faith defense. In so doing, the Court reasoned that, in light of Garrett and Daugherty’s extensive experience in warehouse lending, no third-party expert testimony was required on the objective component of the good-faith defense. The Court further observed that the bankruptcy court explicitly stated that it considered the fact that Garrett and Daugherty were employed by the bank in assessing the weight to be given their testimony. Thus, the Court found Garrett and Daugherty provided competent evidence regarding the objective component of the good-faith defense. The Court then addressed evidence cited by the trustee, which he alleged should have signaled to First Tennessee that Taneja and FMI were committing fraud. The Court, however, held that the bankruptcy court did not clearly err in concluding that First Tennessee accepted the relevant transfers from FMI in good faith and without knowledge of facts that should have alerted it that the transfers were part of a fraudulent scheme. Thus, the decisions of the bankruptcy court and district court were affirmed.

Full Opinion

– W. Ryan Nichols

MILLENNIUM INORGANIC CHEMICALS, LTD. V. NAT’L UNION FIRE INS., NO. 13-1194

Decided: February 20, 2014

The Fourth Circuit held that the term “direct,” as used in the two commercial liability insurance policies at issue, was not ambiguous and, therefore, reversed and remanded the case to the district court for entry of summary judgment in favor of National Union Fire Insurance (“National Union”) and ACE American Insurance Company (“ACE”) (collectively, the “Insurers”).

Millennium Inorganic Chemicals Ltd. (“Millennium”) purchased a commercial liability insurance policy including contingent business interruption (“CBI”) insurance coverage from National Union and ACE. Pursuant to the purchase agreement, the Insurers respectively agreed to bear responsibility for 50% of Millennium’s covered losses, up to the specified limits. As pertinent to the CBI coverage, both Insurers issued a Binder of Insurance, stating that the liability coverage only applied to losses attributed to direct suppliers. Neither Binder provided any coverage for indirect suppliers. Shortly after issuing the Binders, both Insurers issued policies to Millennium with essentially identical terms. Specifically, each policy included an Endorsement titled “Contingent Business Interruption Contributing Properties Endorsement” (the “Endorsement”). The Endorsements insured Millennium against certain losses resulting from the disruption of Millennium’s material supply caused by damage to certain “contributing properties.”

Millennium was in the business of processing titanium dioxide at its processing plant in Western Australia. Natural gas received through the Dampier-to-Bunbury National Gas Pipeline (the “DB Pipeline”) was the energy source for Millennium’s operation. Millennium purchased the gas under a contract with Alinta Sales Pty Ltd. (“Alinta”), a retail gas supplier. Alinta, however, purchased the gas it offered for sale from a number of natural gas producers, one of which was Apache Corporation (“Apache”). Once Apache processed the natural gas, it injected the gas into the DB Pipeline, at which point custody, title, and risk passed from Apache to Alinta. Under Alinta’s contract with Millennium, title to the gas passed to Millennium only at the time of delivery, i.e., when the gas left the DB Pipeline and was delivered to Millennium’s facility by way of a separate delivery line. Millennium’s contract for the purchase of natural gas was solely with Alinta, and Millennium had no business relationship with Apache.

An explosion occurred at an Apache facility causing its natural gas production to cease on June 3, 2008. Apache notified Alinta, and Alinta, in turn, sent a notice of force majeure to Millennium and other customers. As a result, Millennium’s gas supply was curtailed, and it was forced to shut down its titanium dioxide manufacturing operations for several months. Consequently, Millennium sent notice of claim letters to the Insurers, seeking coverage for its losses. The Insurers, however, denied coverage because they concluded that Apache was not a direct supplier to Millennium.

Invoking diversity jurisdiction, Millennium filed a declaratory judgment action in the District Court for the District of Maryland. Millennium, further, asserted claims of breach of contract and failure to act in good faith. The district court denied the Insurers’ motion for summary judgment with respect to the declaratory judgment claim and granted the Insurers’ motion with respect to the bad faith claim. In an accompanying opinion, the court concluded that coverage under the policies extended only to “direct contributing properties.” The court then reviewed the meaning of that term and held that, because the term “direct” was ambiguous under the policies, the doctrine of contra proferentem applied in favor of Millennium. Accordingly, the district court held that Apache qualified as a “direct” supplier to Millennium, and that Apache’s facility was a “direct contributing property” within the meaning of the policies. In so holding, the district court observed that, despite not having a direct contractual relationship with Apache, Apache’s facility provided a direct supply of natural gas to Millennium’s premises.

As an alternative holding, the district court opined that the Endorsements also provided coverage for damage to contributing properties “which wholly or partially prevents delivery of material to Millennium or to others for the account of Millennium.” The court then concluded that this provision was also ambiguous because if failed to explain who must hold the account of the insured—the one who delivers, or the other to whom delivery is made. Based upon this ambiguity, it again applied the doctrine of contra proferentem, construing the phrase “for the account of” in favor of coverage for Millennium. After the district court granted Millennium’s motion for partial summary judgment, the parties stipulated and agreed to entry of judgment in favor of Millennium in the amount of $10,850,000, with the Insurers expressly preserving their right to appeal the judgment. Final judgment was then entered against the Insurers in the stipulated amount, and this appeal followed.

On appeal, the Fourth Circuit examined the plain language of the policies and held that the term “direct” was clear and without ambiguity. In so holding, the Court defined the term “direct,” according to Webster’s Third New International Dictionary, as “proceeding from one point to another in time or space without deviation or interruption,” or “transmitted back and forth without an intermediary.” The Court, therefore, reasoned that for Apache to be considered a direct contributing property to Millennium, it must have supplied Millennium with materials necessary to the operation of its business “without deviation or interruption” from “an intermediary.” Based on the undisputed facts of the case, however, the Court found that neither Apache nor Apache’s facilities could be considered a “direct contributing property” of Millennium. Specifically, Millennium did not dispute that it received its gas from Alinta, and that Alinta—not Apache—had the sole ability to control the amount of gas directed to Millennium. The court, therefore, found the relationship between Apache and Millennium was clearly interrupted by “an intermediary,” Alinta.

Next, the Court addressed Millennium’s alternative argument that it could also receive coverage under the “for the account of” clause of the Endorsements, and found that this contention failed for the same reason as Millennium’s primary argument. Because coverage under the policies was only triggered by damage to direct contributing properties, there could be no coverage under any reading of the “for the account of” clause because apache was not a direct supplier. Thus, the Fourth Circuit reversed and remanded the case to the district court for entry of summary judgment in favor of the Insurers.

Full Opinion

– W. Ryan Nichols

Painter’s Mill Grille v. Brown, No. 12-1357

Decided: May 24, 2013

The Fourth Circuit affirmed the United States District Court for the Distrct of Maryland’s decision to dismiss the complaint under Federal Rule of Civil Procedure (FRCP) 12(b)(6) by Painter’s Mill Grille, LLC (“Painter’s Mill Grille”), the owner and operator of the restaurant, and its principals in an action against the restaurant’s landlord.

Painter’s Mill Grille operated a restaurant known as Cibo’s Bar & Grill.  The premises were leased from a company identified as 100 Painters Mill.  The lease began in 2002 and provided that Painter’s Mill Grille could not assign the leasehold without 100 Painters Mill’s consent.  According to the facts, Painter’s Mill Grille continually failed to make rent payments that resulted in 100 Painters Mill obtaining multiple judgments.  In October 2008, Painter’s Mill Grille entered into an agreement with another company who had agreed to purchase Painter’s Mill Grille’s interest in the restaurant; however the deal was never completed.  Painter’s Mill Grille and its principals subsequently filed a complaint against 100 Painters Mill’s parent company and three attorney-employees of the company for damages.  Their complaint alleged that the defendants’ actions, which they argued were racially motivated, interfered with the business and with the contract between Painter’s Mill Grille and its potential buyer.  The complaint alleged that throughout the course of the lease the restaurants clientele’s racial make-up changes and became predominantly African-American.  The plaintiffs asserted that as the racial make-up changed, the defendants became increasingly hostile towards the plaintiffs.  Moreover, the plaintiffs alleged that 100 Painters Mill, inter alia, “arbitrarily charged rent, common area maintenance fees, and attorneys’ fees and that it unreasonably refused to allow the restaurant to use the patio and to install proper signage to advertise the business.”  As a result of this “constant harassment,” Painter’s Mill Grille decided to sell its restaurant and entered into an agreement with another company to purchase the business.  Painter’s Mill Grille asserted that this conduct resulted in a breach of the contract with 100 Painters Mill.  Plaintiffs made multiple claims including seven counts alleging violations of 42 U.S.C. §§ 1981, 1982, 1985(3), and Maryland state claims for tortious interference with contracts and economic relationships.  The defendants filed a motion to dismiss for failure to state a claim under FRCP 12(b)(6).  The district court dismissed with prejudice all claims against 100 Painters Mill’s employees holding that they were acting within the scope of their legal relationship with the company and were not individually liable. The district court also dismissed Painter’s Mill Grille’s owner and principals as improper plaintiffs.  The court also dismissed without prejudice the plaintiffs’ claims of racial discrimination holding that it failed to plausibly allege enough facts to show that defendants were liable under the applicable statutes.  The district court dismissed the § 1985(3) conspiracy claim with prejudice by relying on the fact that “agents of a corporation who are acting in that capacity cannot conspire with each other or with their corporate principal.”  Finally, with regards to the state law claims, the district court dismissed the tortuous interference with contract claims with prejudice and dismissed, without prejudice, the claim of tortious interference with economic relationships on the ground that plaintiffs failed to allege specific wrongful acts committed by the defendants.  The plaintiffs filed an appeal.  The defendants moved to dismiss the appeal under the theory that it was an interlocutory appeal because the district court had dismissed several of plaintiffs’ claims without prejudice.  The plaintiffs argued that by electing to stand on the complaint rather than to amend it, an appeal is not considered interlocutory and become immediately appealable.

First, the Fourth Circuit held that the district court was correct in dismissing the owner and principals of Painter’s Mill Grille as plaintiffs and holding that only Painter’s Mill Grille itself could be a proper plaintiff.  The Fourth Circuit relied on the principals of corporate and agency law to highlight the fact that the owner and principals elected to incorporate their business as a limited liability company (“LLC”) and, in doing so, were exposed to no personal liability under the LLC’s contracts.  As a result, plaintiffs’ claims under §§ 1981 and 1982 had to be dismissed because the plaintiffs could not identify injuries that flowed directly from a motivated breach of their own personal contractual relationships with the defendant.  Rather, their claims flowed directly from the LLC’s contractual relationship with the defendant.  With regards to the principals’ conspiracy claim under § 1985(3), the court held that they were based on the alleged violations of the §§ 1981 and 1982 claims and, as such, had to fail as well.  Finally, also with respect the principals, the court held that, for similar reasons, the plaintiffs did not have valid claims under state law for tortious interference with their contract and economic relationships when they were not individual parties to the contract.

The court next turned to the LLC’s claims.  First, the court addressed Painter’s Mill Grille’s claim for interference with a contract based on racial animus under § 1981.  The Fourth Circuit held that Painter’s Mill Grille’s complaint only contained “conclusory and speculative allegations” and failed to set forth facts that would support a plausible claim.  Similarly, the court held that Painter’s Mill Grille’s § 1982 claim failed because they failed to present any facts as to “how Painter’s Mill Grille was driven out of business.”  Next, the Fourth Circuit took up Painter’s Mill Grille’s claim that the defendants interfered with the LLC’s contractual right to sell the restaurant and assign its leasehold.  Here, the court stated that the initial allegation that defendants withheld consent could possibly state a claim and that the complaint did, in fact, allege the defendants interfered with the LLC’s contract to sell the restaurant, with racial animus, by unreasonably withholding its consent.  However, the court found that Painter’s Mill Grille had “abandoned this basis for its § 1981 claim” by representing to the court, both in its brief and at oral arguments, that the landlord actually did give its consent for the lease assignment prior to the meeting in question.  The Fourth Circuit also held that the district court was correct in dismissing Painter’s Mill Grille’s claim of conspiracy to deprive it of equal protection under § 1985(3) under the intracorporate conspiracy doctrine.  The court’s analysis under the doctrine found that both exceptions to the doctrine that a corporation cannot conspire with its agents when its agents acted in furtherance of the corporation were inapplicable. In addition, the court held that the three state law claims for tortious interference with contract and economic relationships had to fail the same way their federal counterparts did.  Finally, the Fourth Circuit upheld the district court’s decision to deny the plaintiffs’ request for leave to amend their complaint because the plaintiffs elected to stand on their original complaint in order to appeal and could not challenge their own election.

Full Opinion

– John G. Tamasitis

Vitol v. Primerose Shipping Co., No. 11-1900

Decided: February 8, 2013

This case involved a sea vessel chartering company’s attempt to reach the assets of two shipping companies—entities claimed to be controlled by the corporate owner of a certain vessel that had been the cause of an oil spill in the country of Estonia—in an effort to satisfy an outstanding judgment that the chartering company had recovered against the vessel owner in an English court.

In 2000, the plaintiff, Vitol, S.A., was chartering the Capri Marine-owned vessel, ALAMBRA, when the ship caused marine pollution in an Estonian port.  Vitol subsequently sued Capri Marine in England for breach of the warranty of seaworthiness; Vitol went on to recover a judgment for $6.1 million.  The English judgment was never paid off by Capri Marine, however, and at the time that this case reached the Fourth Circuit, with interest still accruing, the judgment totaled over $9 million.  In 2009, Vitol filed suit in the U.S. District Court for the District of Maryland against Spartacus Navigation Corp. and Primerose Shipping Company (collectively “S&P”)—two entities that Vitol claimed to be the corporate alter ego of Capri Marine.  Thus, Vitol requested that the district court pierce the corporate veil of Capri Marine and hold S&P liable for Vitol’s outstanding English judgment.  The district court granted Vitol’s motion for a maritime attachment of a Spartacus vessel that was then docked in the Baltimore harbor; however, S&P submitted to the court’s jurisdiction on a restricted basis and the court released the attachment in exchange for S&P posting $9 million as collateral.  In its 2010 order, although it ruled that it had competent jurisdiction to hear the dispute, the district court nonetheless granted S&P’s motion to dismiss for failure to state a claim.

On appeal, the Fourth Circuit first considered whether the district court had properly asserted subject matter jurisdiction over the case.  In answering that question, the court had to determine whether the plaintiff’s complaint “sound[ed] in admiralty so as to invoke the district court’s admiralty jurisdiction under [28 U.S.C.] § 1333.”  The court noted that it was well established that U.S. federal courts had admiralty jurisdiction to enforce the judgments of foreign admiralty courts.  The court rejected the argument by S&P that because the admiralty judgment was rendered in the English Commercial Court—and not the English Admiralty Court—that the claim lacked the “admiralty character” necessary to invoke the admiralty jurisdiction of the U.S. District Court.  The court pointed out that both parties’ expert witnesses on English law stated that there was overlap between those two English jurisdictions and that admiralty claims were occasionally brought in the Commercial Court.  The Fourth Circuit held, “[i]nasmuch as the English Commercial Court exercised jurisdiction over a maritime claim, we agree with the district court’s conclusion that ‘the Commercial Court was an admiralty court with respect to the English Judgment.’”

After resolving that jurisdictional question, the Fourth Circuit turned to the district court’s dismissal of Vitol’s alter ego claim.  The court was forced to determine whether Vitol had pled facts sufficient to state a claim for piercing the corporate veil of Capri Marine and thus exposing S&P to liability on the English judgment.  The court examined at depth the factual contentions in Vitol’s complaint concerning the ownership and operations of Capri Marine, focusing on the relationship between the entity that controlled Capri Marine (and its network of affiliates) and S&P.  In determining whether the alleged facts suggested that the defendants were the alter ego of Capri Marine, the court analyzed various factors including, the corporate formalities, transfers of money, comingling of funds, and corporate structures.  The court ultimately concluded that while the plaintiff had alleged a close business relationship, “there [was] nothing in the allegations of interconnectness [sic] that plausibly suggests the sort of dominion, control, failure to observe corporate formalities, or fundamental unfairness needed to state a claim for alter ego status.”  And under the pleading standards required by Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007) and Ashcroft v. Iqbal, 556 U.S. 662 (2009), the complaint’s “bald allegations” and “legal conclusions couched as factual allegations” were insufficient to show that the plaintiff was entitled to relief.  Thus, the Fourth Circuit affirmed the trial court’s dismissal for failure to state a claim.

Full Opinion

-John C. Bruton, III

Rivers v. Wachovia Corp., No. 10-2222

Decided Dec. 22, 2011

Appellant John M. Rivers, Jr., a former shareholder in Wachovia Corporation, sought to recover personally for the decline in value of his approximately 100,000 shares of Wachovia stock during the recent financial crisis. The Fourth Circuit Court of Appeals affirmed dismissal of Rivers’ suit against Wachovia and four of its senior executives because Rivers’s complaint stated a claim of derivative injury to the corporation, and therefore he was barred from bringing a direct or individual cause of action against the defendants. Under both North Carolina and South Carolina law, shareholders cannot pursue individual causes of action against third parties for wrongs or injuries to the corporation that result in the diminution of value of their stock. Shareholders may pursue such claims as a derivative suit on behalf of the corporation. Rivers’s allegations in his complaint describe an injury inflicted on the corporation and losses common to all Wachovia shareholders during the financial crisis; therefore, Rivers’s claim is derivative. However, Rivers claimed that the suit fell within two of the exceptions to the general rule. Rivers alleged that there was a special duty between the wrongdoer and himself, and that he suffered an injury separate and distinct from that suffered by other shareholders. However, the court held that it was clear that neither the special duty nor the special injury exceptions applied to Rivers’s claim. Absent a separate contract between Rivers and the defendants creating distinct duties personal to him, or individual subjection to misleading inducements outside of the officer-shareholder relationship, there is no special duty in North Carolina or South Carolina. Furthermore, the decline in the corporation’s share value did not inflict any special injury on Rivers such that his claim fell within the special injury exception.

Full Opinion

-Sara I. Salehi

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