Decided: April 2, 2015
The Fourth Circuit held, adopting the answers to certified questions to the Supreme Court of Appeals of West Virginia, that a person owning an interest in a West Virginia common law “mining partnership” must prove such partnership with a deed, will, or other written acquaintance and that a general partnership owning leases to extract oil and gas from real property need not be evidenced by a written instrument for a person to prove he/she is a partner of that general partnership. In so holding, the court affirmed the district court’s judgment in part, vacated it in part, and remanded it.
This appeal arose out of a mining partnership venture between Valentine and Sugar Rock, Inc., among others, which owned certain mining leases. Valentine filed the suit as a diversity action alleging fractional working interests in mining partnerships and demanding an accounting for the partnership as well as damages. Sugar Rock, Inc. responded to Valentine’s Complaint with a counterclaim for cumulative operating expenses of Valentine’s working interests in the partnerships. The district court granted Sugar Rock, Inc.’s motion for summary judgment on the ground that Valentine could not evidence his co-ownership of leases under certain mining partnerships. Thereafter, Valentine sought to voluntarily dismiss his action against Sugar Rock, Inc. so that he could bring a class action styled Washburn v. Sugar Rock, Inc., which included nine other purported owners of working interests in the mining partnerships. Upon the Washburn plaintiffs’ motion for partial summary judgment, the district court held that the plaintiffs were partners in the mining partnerships regardless of their ability to produce a written instrument evidencing such.
The reasoning that the Supreme Court of Appeals of West Virginia gave in its Order that was adopted by the Fourth Circuit reflected the idea that a mining partnership requires partners to be co-owners of mineral interests, and under the Statute of Frauds, such partnership interest may only be evidenced through a written instrument. On the other hand, a general partnership solely owns leases to extract minerals itself, making it impractical to require a general partner to produce a written instrument of the property interest because a stake in a general partnership need not be proven by a purported partner through a deed, will, or other written instrument under West Virginia Law.
Kayla M. Porter
Decided: June 6, 2014
The Fourth Circuit affirmed the district court’s dismissal of a quiet title action.
The Anands obtained a $500,000 mortgage on their home secured by a Deed of Trust (Deed), which provided that (1) ownership of the home would be transferred to a trust, and (2) the trust had the authority to foreclose on the home if the Anands failed to repay the loan according to the terms of the promissory note. Deutsche Bank National Trust Company (Deutsche Bank) held the rights under the Note and Deed of Trust. Ocwen Loan Service, LLC (Ocwen) serviced the loan. After the Anands defaulted on their loan, they brought a quiet title action under Maryland law seeking (1) a declaration that Deutsche Bank and Ocwen (collectively, Appellees) no longer held an interest in their home; (2) an order requiring the Appellees to release their liens; and (3) an order precluding Appellees from foreclosing on the Anands’ home. The Anands averred that both Appellees had insurance that compensated them in an amount equivalent to what the Anands owed, thus the payments triggered the release provision in the Anands’ Deed of Trust.
With respect to the Anands’ quiet title action, the Court reasoned that the Anands’ reliance on the provision within the Deed that provided “[u]pon payment of all sums secured by this Security Instrument, Lender or Trustee, shall release this Security instrument and mark the Note ‘paid’ and return the Note to Borrower” failed to give “meaning and effect to every part of the contract.” Instead, the release provision was only triggered when the borrowers, the Anands, paid the amount secured by the Note. Thus, the Court emphasized that because the Anands indisputably do not own legal title to their home, a quiet title action is inapplicable to their circumstances.
Amanda K. Reasoner
Decided: April 16, 2014
The Fourth Circuit held that the district court did not clearly err by holding Lavabit LLC (“Lavabit”) and its owner, Levison, in contempt for their failures to comply with a Pen/Trap Order.
Lavabit and Levison (“Lavabit”) provided email service to around 400,000-plus users, and used the industry-standard Secure Sockets Layer (“SSL”) encryption and decryption method to transmit its data. Essentially, this encryption method relies on a public key, less important, and a private key, which may compromise the data of all users if a third party gains access. In 2013, the Government obtained court orders under the Pen/Trap State, 18 U.S.C. §§ 3123–27, and the Stored Communications Act (“SCA”), 18 U.S.C. §§ 2701–12, which required Lavabit to turn over metadata, not email content, on the target account for a criminal investigation. While meeting with Federal Bureau of Investigation (FBI) agents, Lavabit signaled that he did not plan to comply with the order, but indicated he was “technically capable [of] decrypt[ing] the [target’s] information.” Thus, the Government secured an order to compel Lavabit’s compliance with the Pen/Trap Order. This order specifically stated that a failure to comply could result in a criminal contempt of court proceeding against Lavabit. Nonetheless, Lavabit disregarded the court’s order, ignored the FBI’s requests to confer, and withheld the unencrypted metadata. After a series of court orders, hearings, failed compliance, and attempted demands to pay for his services; Lavabit allowed a Pen/Trap Device to be installed but failed to provide the encryption keys so that the information was useless to the Government. Then, Lavabit moved to quash the seizure warrant, which the district court denied, and held a compliance hearing that ordered Lavabit to provide the private keys by August 5. Again, Lavabit failed to comply. On August 5, the Government moved for sanctions in the amount of five-thousand-dollars per day against Lavabit and Levinson until they complied. Finally, after six weeks of data was lost, Lavabit complied. Now, Lavabit appeals its civil contempt charges with various statutory and constitutional challenges.
Before addressing the appeal, the Fourth Circuit noted that the civil contempt order presented a live controversy because Lavabit and Levison may be sanctioned further for their conduct. The Court noted that Lavabit’s failure to raise its statutory challenges to the Pen/Trap Order and the SCA in the district court constricted the Fourth Circuit to “reverse only if the newly raised argument establishes ‘fundamental error’ or a denial of fundamental justice.” Stewart v. Hall, 770 F.2d 1267, 1271 (4th Cir. 1985). The Court emphasized that forfeiture and waiver rules are critical to maintaining the integrity of courts, avoiding unfair surprise to opponents, preserving finality, and conserving judicial resources. Holly Hill Farm Corp. v U.S., 447 F.3d 258, 267 (4th Cir. 2006).
The Court refused to rewrite Lavabit’s own statements to create a specific, timely objection that would preserve a claim on appeal, and instead stated that Lavabit’s own statements likely misled the Government, and the district court. The Court emphasized that Lavabit’s failure to raise his challenges in the district court required that he demonstrate a plain error standard for reversal by this Court. In re Celotex Corp., 124 F.3d 619, 631 (4th Cir. 1997). Instead, Lavabit attempted to persuade the Fourth Circuit to craft a new exception; by claiming that the district court and Government induced him to forfeit his challenges; to answer his question of pure law; to sympathize with him because he appeared pro se in the lower court; and to recognize that this case is one of “public concern.” The Court found none of these arguments persuasive, and reiterated that Lavabit failed to make his most essential argument for plain error. Therefore, the Court reasoned that Lavabit abandoned that argument as well. Finally, the Fourth Circuit noted that two independent bases supported the district court’s civil contempt order, which allowed the Court to avoid any constitutional challenges, and uphold the district court.
Samantha R. Wilder
Decided: March 7, 2014
The Fourth Circuit held that the United States District Court for the District of Maryland properly dismissed the plaintiff shareholders’ claims against Municipal Mortgage & Equity (MuniMae) and certain directors and officers of MuniMae (collectively, the MuniMae defendants) under the Private Securities Litigation Reform Act (PSLRA), 15 U.S.C. § 78u-4, as the plaintiffs did not adequately plead scienter in their action under § 10(b) of the Securities Exchange Act of 1934 (Exchange Act), 15 U.S.C. § 78j(b); that the plaintiffs’ claim under § 11 of the Securities Act of 1933 (Securities Act), 15 U.S.C. § 77k(a), was time-barred by the three-year statute of repose in § 13 of the Securities Act, 15 U.S.C. § 77m; and that named plaintiff Charles W. Dammeyer (Dammeyer) did not sufficiently allege standing to bring a claim under § 12(a)(2) of the Securities Act, 15 U.S.C. § 77l(a)(2). The Fourth Circuit therefore affirmed the judgment of the district court.
During the putative class period—spanning from May 3, 2004, to January 29, 2008—MuniMae “was one of the nation’s largest syndicators of low-income housing tax credits” (LIHTCs). MuniMae organized certain LIHTC investment partnerships (LIHTC Funds) to pool LIHTCs and sell them to investors. During the putative class period, MuniMae typically served as the general partner of these LIHTC Funds. MuniMae mainly considered its LIHTC Funds to be off balance sheet entities before 2003. In 2003, “the Financial Accounting Standards Board adopted Financial Accounting Standards Board Interpretation No. 46R” (FIN 46R), addressing the reporting requirements for off balance sheet entities therein. FIN 46R created a new category of off balance sheet entity, the Variable Interest Entity (VIE); pursuant to FIN 46R, a company that is the “primary beneficiary” of a VIE must consolidate the VIE’s assets and liabilities onto its financial statements. MuniMae first reported compliance with FIN 46R in the first quarter of 2004 and continued to assert compliance in its financial filings with the Securities and Exchange Commission through mid-2006. MuniMae also conducted a secondary public offering (SPO) in February 2005. In March 2006, MuniMae revealed that it was restating certain financial statements that involved financial reporting errors unrelated to FIN 46R. In September 2006, MuniMae announced another restatement (the second restatement). While MuniMae initially did not tell investors that the second restatement would deal with FIN 46R compliance issues, it later revealed that it had yet to “reach a conclusion regarding the extent of the [second] restatement.” In January 2007, MuniMae disclosed that the second restatement would deal with accounting errors involving FIN 46R; MuniMae stated that it would “be required to consolidate substantially all of the [LIHTC] equity funds it has interests in.” In a November 2007 teleconference with investors, MuniMae officers declined to estimate the second restatement’s cost—though they admitted that the cost would be substantial. In January 2008, MuniMae announced cuts to its quarterly dividend, attributing the cuts to, inter alia, the cost of the second restatement. However, MuniMae also asserted that it did “not believe the results of the restatement w[ould] materially change the previously recorded cash balances of the Company and its subsidiaries.” MuniMae’s share price dropped precipitously in late January. In a conference call on January 29, MuniMae gave investors more details about the second restatement—including details about the second restatement’s massive scope. In April 2008, MuniMae revealed that it had spent over $54 million on the second restatement.
After shareholders brought multiple lawsuits against the MuniMae defendants and the 2005 SPO’s lead underwriters, their suits were consolidated for pretrial proceedings; the shareholders then filed a class action complaint. They brought claims under the Exchange Act and the Securities Act, alleging that the MuniMae defendants committed securities fraud through false representations of MuniMae’s compliance with FIN 46R and concealment of the second restatement’s cost. With regard to the plaintiffs’ claims under § 10(b) of the Exchange Act, the district court held that—under the PSLRA’s heightened pleading standards—the plaintiffs’ amended complaint did not sufficiently plead scienter. The district court also found the plaintiffs’ claim under § 11 of the Securities Act time-barred by the Act’s statute of repose; furthermore, the district court found that Dammeyer—“the only named plaintiff asserting Securities Act claims with respect to the SPO”—did not have standing to bring a claim under § 12(a)(2) of the Securities Act. The district court therefore dismissed these claims, and the plaintiffs appealed.
With regard to the plaintiffs’ claims under § 10(b) of the Exchange Act, the Fourth Circuit concluded that, under the PSLRA’s heightened pleading standards, the inference that the MuniMae defendants acted with intent or severe recklessness—which the plaintiffs aimed to establish through the statements of three confidential witnesses, the presence of certain red flags, allegations of insider trading, and general business motivations for committing fraud—was not at least as compelling as the opposing inference that the MuniMae defendants acted innocently or negligently. The Fourth Circuit also considered the disclosures made by the MuniMae defendants during the class period when making this comparative inquiry. With regard to the plaintiffs’ claims under § 11 of the Securities Act, the Fourth Circuit found that the date upon which the securities in the SPO were “bona fide offered to the public” was the effective date of MuniMae’s registration statement—January 14, 2005. Because the plaintiffs brought their § 11 action more than three years after this date, the Fourth Circuit found their claim time-barred by the statute of repose. Lastly, with regard to the claim under § 12(a)(2) of the Securities Act, the Fourth Circuit found that the “pursuant and/or traceable to” language in the amended complaint to be conclusory; furthermore, the Fourth Circuit found that this language was not accompanied with sufficient supportive facts to support a plausible inference of standing.
– Stephen Sutherland
Decided: February 25, 2014
The Fourth Circuit affirmed the district court’s decision to quiet title in favor of plaintiffs, Trans Energy, Inc. to the gas rights located on a 3800-acre plot of land in northern West Virginia. However, in order to retain subject matter jurisdiction, the court vacated the district court’s decision as it pertains to plaintiff Republic Energy Ventures.
At the center of this dispute lies an oil and gas lease first conveyed in 1892 by John Blackshere (“Blackshere Lease”). In 1892, Blackshere entered into an oil and gas lease with South Penn Oil Company (“South Penn”) that would later become Pennzoil Products Company (“Pennzoil”) that was recorded with the county clerk. In 1901 and 1902, South Penn entered into two indenture agreements to sever its oil and gas rights from the Blackshere Lease and allocate them to Carnegie Natural Gas Company and Hope Natural Gas Company (“Hope”). These indentures were never recorded. In 1965, Hope conveyed all of its interests in any property in the county to a predecessor in interest to EQT Production Company (“EPC”). This transfer was recorded, but did not mention the Blackshere Lease specifically. EPC asserts gas rights in the Blackshere Lease through this recorded conveyance.
In 1996, Pennzoil assigned its rights in the Blackshere Lease to Cobham Gas Industries, Inc. (“Cobham”) through an assignment and bill of sale that was filed and recorded with the County Clerk. In 2004, Cobham conveyed its interest to the plaintiff, Trans Energy, Inc. (“Trans Energy”) through a recorded transfer. Trans Energy assigned half of its interest to plaintiff Republic Partners VI, LP (“Republic Partners”). Republic Energy Ventures (“REV”) claimed an interest in the royalties that Republic Partners obtained form the lease.
In 2011, the West Virginia Department of Environmental Protection granted Trans Energy a permit to drill a new gas well on the Blackshere Lease property. Before drilling the new well, the plaintiffs discovered EPC’s alleged interest in the Blackshere Lease and filed an action to quiet title on the basis that Trans Energy was a bona fide purchaser for value with no actual or constructive knowledge of a competing interest in the property when it acquired the property in 2004. EPC responded and asserting a competing claim to quiet title. Both parties then filed cross-claims for summary judgment. The district court awarded summary judgment to the plaintiffs. EPC appealed.
On appeal, EPC first argued that the district court lacked subject matter jurisdiction in the case. The plaintiffs relied on diversity of citizenship to file the case in federal court. The defendant, EPC is a Pennsylvania company. Plaintiffs conceded that a partner of REV was a citizen of Pennsylvania and proposed that the court dismiss REV as a party under Federal Rule of Civil Procedure 21. EPC did not consent to the dismissal, however, insisting that REV was an indispensable party under Rule 19 who could not be dismissed. The court agreed with the plaintiffs and dismissed REV in order to retain subject matter jurisdiction. The Fourth Circuit found that REV’s interest in the case was limited only to its royalty interest, and would be adequately protected by the remaining plaintiffs. Furthermore, EPC was unable to show “a single tangible way in which it will be harmed by REV’s absence.”
Next, EPC asserted three arguments based on the merits of the case. First, EPC argued that the 1996 transfer from Pennzoil to Cobham was limited to oil rights in the Blackshere Lease, and did not include the gas rights. EPC’s argument principally relied on an exhibit attached to the Assignment that indicated that the “rights” associated with the Blackshere Lease were “oil.” Based on this exhibit, EPC contended that the term “rights” referenced the actual ownership rights of the lease rather than the wells being transferred. Thus, because “oil” was the only right associated with the Blackshere Lease wells, the conveyance was limited to oil rights. The Fourth Circuit disagreed, finding that the exhibit merely indicated the existing wells on the property and not the ownership rights. Additionally, in several locations other than exhibit EPC relied upon, the record indicated that the transfer included both oil and gas rights. The court found that the exhibit should not be read in isolation of the rest of the recorded document.
Second, EPC argued that the district court lacked a factual basis to find that Trans Energy received title through the 2004 assignment because the plaintiffs accidentally failed to place the 2004 Assignment into the record. The Fourth Circuit dismissed this argument, finding extensive testimony from witnesses and experts that established the existence of the 2004 assignment.
Third, EPC argued that Trans Energy had notice of its competing claim at the time of the 2004 Assignment, and therefore, did not qualify as a bona fide purchaser. The Fourth Circuit disagreed. The court found that without recorded documents containing information about a Hope’s interest in the Blackshere Lease, a reasonably prudent purchaser would not be placed on notice of EPC’s competing claim. Additionally, mere rumors in the oil and gas industry that EPC held an interest in the property was insufficient to constitute constructive notice of a competing interest. Furthermore, the court found that Trans Energy was not placed on inquiry notice by EPC’s operation of two gas wells on the Blackshere Lease property. Trans Energy spent several days visiting well sites and found not sign of EPC’s wells. The property consists of 3800 acres of undeveloped and heavily forested land. Thus, the court held that Trans Energy conducted adequate due diligence in its search of the site. Therefore, the Fourth Circuit affirmed the district court’s judgment that quieted title in favor of the plaintiffs, but vacated the judgment as it applied to REV in order to retain subject matter jurisdiction.
– Wesley B. Lambert
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.
– W. Ryan Nichols
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.
– Sarah Bishop
Decided: February 25, 2014
The Fourth Circuit Court of Appeals affirmed the district court’s judgment enjoining the defendant from participating in deceptive Internet advertising practices and holding her jointly and severally liable for equitable monetary consumer redress.
The Federal Trade Commission (the “Commission”) sued Innovative Marketing, Inc. (“IMI”), and several of its high-level executives and founders, including Kristy Ross (“Ross”), for running a deceptive Internet “scareware” scheme in violation of the prohibition on deceptive advertising in Section 5 (a) of the Federal Trade Commission Act. The defendants operated a massive, Internet-based scheme that tricked consumers into purchasing computer security software, referred to as “scareware.”
On appeal, Ross challenged the district court’s judgment on four bases: (1) the court’s authority to award consumer redress; (2) the legal standard the court applied in finding individual liability under the Federal Trade Commission Act; (3) the court’s prejudicial evidentiary rulings, and (4) the soundness of the district court’s factual findings.
First, Ross contended that the district court did not have the authority to award consumer redress—a money judgment—under the Federal Trade Commission Act. The Act authorizes the Commission to sue in federal district court so that “in proper cases the Commission may seek, and after proper proof, the court may issue, a permanent injunction.” However, although the statute’s text does not expressly authorize the award of consumer redress, precedent dictates otherwise. The Supreme Court in Porter v. Warner Holding Co. held that Congress’ invocation of the federal district court’s equitable jurisdiction brings with it the full “power to decide all relevant matters in dispute and to award complete relief even though the decree includes that which might be conferred by a court of law.” Here, by authorizing the district court to issue a permanent injunction in the Federal Trade Commission Act, Congress presumably authorized the district court to exercise the full measure of its equitable jurisdiction. Accordingly, absent some countervailing indication sufficient to rebut the presumption, the court had sufficient statutory power to award “complete relief,” including monetary consumer redress, which is a form of equitable relief. Congress does not need to use the magic words, “other order” to invoke the full injunctive powers of the district court.
Second, Ross challenged the legal standard for finding individual liability under the Federal Trade Commission Act. The district court held that there was individual liability if the Commission proves that the individual (1) participated directly in the deceptive practices or had authority to control them, and (2) had knowledge of the deceptive conduct, which could be actual knowledge, reckless indifference to the truth, or an awareness of a high probability of fraud combined with intentionally avoiding the truth (i.e., willful blindness). Ross proposed a standard that requires proof of an individual’s (1) “authority to control the specific practices alleged to be deceptive,” coupled with a (2) “failure to act within such control authority while aware of apparent fraud.” The Fourth Circuit adopted the district court’s standard, recognizing that Ross’ proposal would effectively leave the Commission with the “futile gesture” of obtaining “an order directed to the lifeless entity of a corporation while exempting from its operation the living individuals who were responsible for the illegal practices” in the first place.
Third, Ross mounted three evidentiary challenges. First, she contended that the district court improperly precluded her expert from testifying bout how “the advertisements linkable to Ross’ responsibilities’ were non-deceptive.” However, because the individual liability standard does not require a specific link from Ross to particular deceptive advertisements and instead looks to whether she had authority to control the corporate entity’s practices, the expert’s testimony was immaterial, and thus irrelevant, to the issue reserved for trial. Second, Ross challenged the admission of a 2004 to 2006 profit and loss statement that the district court relied on to calculate the amount of consumer redress. Ross’ co-defendant submitted an affidavit with this profit and loss summary. The Fourth Circuit recognized that although the district court admitted the profit and loss statement under the residual exception to the rule against hearsay, it may affirm on the basis of any ground supported by the record. The Fourth Circuit concluded the statement was admissible as an adoptive admission by Ross. Ross expressly adopted her co-defendant’s affidavit in her own affidavit. Third, Ross contended that the district court improperly admitted hearsay evidence: an email from a co-defendant to a payment processor, listing Skype numbers and titles for a group of high-level company executives. Ross’ telephone number is listed on the email, as is her title, “Vice President.” While it is true that the proponent for admission of a co-conspirator’s out-of-court statement “must demonstrate the existence of the conspiracy by evidence extrinsic to the hearsay statement,” that requirement was satisfied in this case. Moreover, the email was a quintessential example of a statement made “in furtherance” of the conspiracy because its role was to maintain the logistics of the conspiracy and “identify names and roles” of members of the deceptive advertising endeavor.
Fourth, Ross contended that the district court erred in finding that she had “control” of the company, participated in any deceptive acts, and had knowledge of the deceptive advertisements. The Fourth Circuit concluded Ross had “control,” based on her affidavit, in which she swore she was a high-level business official with “product optimization” duties, and based on evidence that other employees requested her authority to approve certain advertisements. The Fourth Circuit also concluded Ross “directly participated in the deceptive marketing scheme.” She directed the design of particular advertisements, as memorialized in chat logs between her and other employees. Ross was a contact person for the purchase of advertising space for IMI, and there was evidence that she had the authority to discipline staff and developers when the work did not meet her standards. Finally, the Fourth Circuit concluded Ross had actual knowledge or was at least recklessly indifferent or willfully blind to the deceptive marketing scheme. There was evidence that she edited and reviewed the content of multiple advertisements and, at one point, ordered the removal of the word “advertisement” from a set of ads. Also, Ross was on notice of multiple complaints about IMI’s advertisements, including that they would cause customers to automatically download unwanted IMI products.
– Sarah Bishop
Decided: February 21, 2014
The Fourth Circuit Court of Appeals affirmed the district court’s dismissal of relator’s False Claims Act (“FCA”) claim, which alleged that the defendants presented false claims to the government for reimbursement of drugs packaged in violation of Food and Drug Administration (“FDA”) regulations and, therefore, ineligible for reimbursement.
Omnicare provides certain pharmaceutical services to senior citizens through its drug repackaging and pharmacy facilities. Omnicare owned Heartland Repack Services, LLC (“Heartland”), the drug repackaging operation located in Toledo, Ohio (“the Toledo building”). Omnicare also operated the pharmacy that shared the Toledo building with Heartland. Although Heartland repackaged non-penicillin drugs for distribution, the Omnicare pharmacy that shared the Toledo building processed penicillin products. From 1997 until 2006, Relator Barry Rostholder (“relator”), a licensed pharmacist, was employed at Heartland. In 2004, when Omnicare executive Denis Holmes suggested that Heartland begin repackaging penicillin products, relator informed him that any repackaging of penicillin drugs would constitute a violation of FDA regulations requiring the separate processing of penicillin and non-penicillin products. In February 2006, relator resigned from Heartland due to his concerns about the facility’s quality control efforts. Relator then notified the FDA, which investigated Heartland and discovered that penicillin was being repackaged in the Toledo building.
The Fourth Circuit first addressed whether the district court lacked subject matter jurisdiction over the action due to the “public disclosure bar” in the FCA, which requires the person bringing the action be an original source of the information. The Fourth Circuit concluded relator had independent knowledge, apart from Securities and Exchange Commission’s filings regarding Omnicare’s revenue, that Omnicare caused claims to be submitted to the government for payment. Therefore, the public disclosure bar did not divest jurisdiction.
The Fourth Circuit then addressed whether the district court erred in dismissing relator’s complaint on the ground that he did not adequately allege a false statement or fraudulent course of conduct as required for an FCA claim. To plead an FCA claim, a relator must plausibly allege four distinct elements: (1) there was a false statement or fraudulent course of conduct; (2) made or carried out with the requisite scienter; (3) that was material; and (4) that caused the government to pay out money or to forfeit moneys due.
Relator’s assertion that Omnicare fraudulently made claims for payment for “adulterated” drugs was based on the statutes governing reimbursement under Medicare and Medicaid. Those statutes define “covered outpatient drugs” as those “approved for safety and effectiveness” under the FDCA. Therefore, to qualify as a “covered outpatient drug” as defined in the Medicare and Medicaid statutes, FDA must merely approve the drug. The relevant statues do not provide that when an already-approved drug has been produced or packaged in violation of FDA Safety regulations, that particular drug may not be the proper subject of a reimbursement request under Medicare and Medicaid. Therefore, the Fourth Circuit concluded that once a new drug has been approved by the FDA and thus qualifies for reimbursement under the Medicare and Medicaid statutes, the submission of a reimbursement request for that drug cannot constitute a “false” claim under the FCA on the sole basis that the drug has been adulterated as a result of having been processed in violation of FDA safety regulations.
Although compliance with FDA regulations is material to the government’s decision to provide reimbursement for regulated drugs, a relator must allege both materiality and a “false statement or fraudulent course of conduct” as distinct elements of an FCA claim. The Fourth Circuit noted that were it to accept relator’s theory of liability based merely on a regulatory violation, it would sanction use of the FCA as a sweeping mechanism to promote regulatory compliance, rather than a set of statutes aimed at protecting the financial resources of the government from the consequences of fraudulent conduct.
The Fourth Circuit further concluded that relator failed to allege Omnicare acted with the requisite scienter. The FCA requires actual knowledge, deliberate ignorance, or reckless disregard of the truth or falsity of the information. Because the Medicare and Medicaid statutes do not prohibit reimbursement for drugs packaged in violation of the FDA regulations, Omnicare could not have knowingly submitted a false claim for such drugs.
– Sarah Bishop
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.
– W. Ryan Nichols
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.
– W. Ryan Nichols
Decided: January 31, 2014
The Fourth Circuit, finding that 15 U.S.C. § 1692g(a)(3) permits consumers to orally dispute the validity of a debt, vacated the district court’s order dismissing the plaintiff’s complaint and remanded for further proceedings.
Dana Clark and David Clark (“the Clarks”) brought this class action suit under the Fair Debt Collection Practices Act (“FDCPA”) against Absolute Collection Service, Inc. (“ACS”) for its actions in attempting to collect a debt. The Clarks incurred two debts at a health care facility in Raleigh, North Carolina. When the Clarks failed to pay, the health care facility referred the debts to ACS, a third-party collector. In its efforts to collect, ACS sent the Clarks separate collection notices. In both collection notices, a disclosure statement provided that all portions of the debt “shall be assumed valid unless disputed in a writing within thirty days.”
Claiming that ACS violated their right to challenge their debt orally under Section 1692g(a)(3) of the FDCPA, the Clarks brought this class action. ACS, however, moved to dismiss the suit, contending that the collection notice complied with the FDCPA because Section 1692g(a)(3) contains an inherent writing requirement. The district court granted ACS’s motion, and this appeal followed.
On appeal, addressing this matter of first impression for the court, the Fourth Circuit noted that the Third Circuit held that Section 1692g(a)(3) must be read to include a writing requirement. In contrast, however, the Second and Ninth circuit held that the plain text of Section 1692g(a)(3) permits oral disputes, and that such a reading results in a logical, bifurcated scheme of consumer rights. In line with the Second and Ninth Circuit, the Fourth Circuit held that the FDCPA clearly defines communications between a debt collector and consumers. In so holding, the court noted that Sections 1692g(a)(4), 1692g(a)(5), and 1692g(b) explicitly require written communication, whereas 1692g(a)(3) plainly does not. Thus, the court rejected ACS’s argument that 1692g(a)(3) must be read to impose an inherent writing requirement, and refused to insert additional language. The Court, therefore, found that Section 1692g(a)(3) permits consumers to orally dispute the validity of a debt. Accordingly, it vacated the district court’s judgment and remanded for further proceedings.
– W. Ryan Nichols
Decided: January 27, 2014
The Fourth Circuit combined two similar cases from the district courts of South Carolina and Maryland to consider whether the Federal National Mortgage Associate (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”) are exempt from paying state and local taxes on the transfer of real property. Both district courts held that Fannie Mae and Freddie Mac were exempt from paying transfer taxes. The Fourth Circuit affirmed. In addition, the Fourth Circuit held that Congress acted within its power under the Commerce Clause in exempting Fannie Mae and Freddie Mac from property transfer taxes.
During the Great Depression, Congress created Fannie Mae to provide banks with more capital for mortgage lending with the intent that additional capital would increase credit stability and to provide additional access to residential mortgages throughout the country. In 1970, Congress established Freddie Mac as a competitor to Fannie Mae, with similar purposes. Fannie Mae and Freddie Mac met these goals by purchasing mortgages originated by third-party lenders, pooling the mortgages into securities, and then selling those mortgage-backed securities to fund further purchases. Ideally, these activities promote access to mortgage credit and stabilize the residential lending market. To help accomplish their goals, Congress exempted Fannie Mae and Freddie Mac generally from all state and local taxes “except that any real property [of Fannie Mae or Freddie Mac] shall be subject to State, territorial, county, municipal, or local taxation to the same extent as other real property is taxed.” Like many other states, South Carolina and Maryland impose taxes on the ownership and the transfer of real property. The Counties of South Carolina and Maryland charged with collecting property transfer taxes (“Counties”) claim that the exemption did not apply to the transfer taxes because of Congress’ real property exception to the tax exclusion. On the other hand, Fannie Mae and Freddie Mac claim that the real property exception is sufficiently narrow to only cover the payment of property ownership taxes and thus, does not extend to similarly require the payment of property transfer taxes. The district courts of South Carolina and Maryland agreed with Fannie Mae and Freddie Mac, upholding the exemption. The Counties appealed.
On appeal, the Fourth Circuit first affirmed the district court’s determination that the tax exemption applied to property transfer taxes. Courts have consistently distinguished general property taxes from taxes levied on the transfer of property. The Fourth Circuit noted the extensive Supreme Court precedent providing that recording taxes are distinct from property taxes, explaining that “a privilege tax is not converted into a property tax because it is measured by the value of the property.”
Secondly, the court affirmed the constitutionality of the tax exemption. The court began by noting that Congress only needed a “rational basis” to grant the exemption from state taxation. The Counties argued that Congress did not have a rational basis to grant such an exemption because the transfer tax was purely a local, intrastate activity beyond Congress’ control. The Fourth Circuit disagreed, emphasizing the substantial economic effect that Fannie Mae and Freddie Mac had on the nationwide mortgage market. The 2008 mortgage collapse provided ample evidence of the extensive impact that local mortgages have on the entire nation’s economy.
Convinced that mortgage lending has a substantial effect on the nation’s economy, the Fourth Circuit then considered whether Congress’ tax exemption was necessary and proper to Congress’ legitimate exercise of its power under the Commerce Clause. The Court held that “Congress could rationally have believed that state taxation would substantially interfere with or obstruct the legitimate purposes of Fannie Mae and Freddie Mac of regulating and stabilizing the secondary mortgage market.” First, imposing excessive taxes on Fannie Mae and Freddie Mac could undermine their ability to purchase mortgages by reducing their access to capital. Second, the inconsistencies in state property transfer taxes would impose varied transactions costs between states that may undermine the ability to provide the same mortgage liquidity to all parts of the country. Third, without such an exemption, the large volume of the mortgage portfolios held by Fannie Mae and Freddie Mac would pose an attractive target for large taxes by states and localities. Thus, the Fourth Circuit held that the tax exemption was a necessary and proper exercise of Congress’ Commerce Clause power.
– Wesley B. Lambert
Decided: December 19, 2013
The Fourth Circuit held that private parties have standing in civil suits under the False Claims Act (“FCA”) to seek redress on behalf of federal government interests, and ordered the trial court to impose $24 million in FCA penalties against the defendants.
The Department of Defense (“DOD”), in its effort to provide its armed forces and civilian personnel with their household goods across the Atlantic, instituted the International Though Government Bill of Lading Program to govern transoceanic moves and the Direct Procurement Method (“DPM”) to contract for transport strictly in Europe. The DOD’s Military Traffic Management Command (the “MTMC”) administered both methodologies. The MTMC solicited domestic vendors to bid on one or more “through rates” for moving household goods along shipping channels. The successful bidders contracted with the MTMC to supply door-to-door service. Subcontractors, including Gosselin World Wide Moving (“Gosselin”), provided services in connection with the European segment, and the prices quoted by those subcontractors were taken into account by the freight forwarders. In 2000, Gosselin and a number of its industry peers met and agreed to charge a non-negotiable minimum price for these local services. Pursuant to that agreement, Gosselin was awarded a contract after colluding with its fellow bidders to artificially inflate the submitted bids.
Despite the efforts of Gosselin and its cohorts, freight forwarder Covan International (“Covan”) was awarded a contract in Summer 2001. In order to increase the likelihood of obtaining business in those channels, other freight forwarders with which Gosselin had a continuing relationship would have been compelled to match Covan’s through rate. Instead, Gosselin threatened to withdraw financing from Covan in another business venture. Consequently, Covan cancelled its bid, and Gosselin spread the word that the freight forwarders should match only the second-lowest bid on the Covan channels during the second phase of bidding. The previous scenario was duplicated one year later when Cartwright International Van Lines (“Cartwright”) submitted the low bid on twelve Germany-U.S. channels. For it’s actions in connection with that, Gosselin was convicted of federal criminal offenses in 2005.
The above-described acts gave rise to the underlying civil actions premised on the False Claims Act (“FCA). Pursuant to the FCA, Kurt Bunk (“Bunk”) brought this action in the government’s name in 2002, asserting claims arising from the DPM scheme. Also in 2002, Ray Ammons (“Ammons”) brought a similar suit in the same capacity in the Eastern District of Missouri. In 2007, the Ammons matter was transferred and consolidated with the Bunk Proceeding. The United States intervened in substitution of Ammons. By its February 2012 order, the district court assessed a single penalty in the sum of $5,500 in favor of the United States, as to a single portion of its FCA claim; finding Gosselin immune under the Shipping Act, decreed judgment for Gosselin on the remainder of the FCA claim; granted judgment as to liability with respect to a single FCA claim alleged by Bunk against Gosselin in the second action; but denied recovery of civil penalties on that claim because such penalty would violate the Eighth Amendment.
On appeal, Gosselin first argued that Bunk, as a relator seeking solely civil penalties, lacked standing. The Fourth Circuit rejected this contention and held that relators seeking solely civil penalties are entitled to sue because denying the recovery on the ground that the relator cannot pursue penalties alone would be to deny the United States due recompense, or, in the alternative, to deprive the government of its choice to forgo intervention.
The primary issue before the court was whether the district court erred in determining that, concerning 9,136 false invoices at the heart of Bunk’s claim, any award under the FCA must necessarily exceed more than $50 million. Because the district court ruled that such an assessment would contravene the Eighth Amendment’s Excessive Fines Clause, it awarded nothing. The Fourth Circuit, however, reversed and remanded for entry of Bunk’s requested award of $24 million. In so doing, the court noted that the discretion accorded to the government and a relator to accept reduced penalties within constitutional limits avoids injustice. And, in this case, it found that $24 million appropriately reflected the gravity of Gosselin’s offenses and provided the appropriate deterrent effect going forward.
Lastly, the court addressed the issue of whether the district court properly declared Gosselin immune under the Shipping Act. Relying on the preclusive effect of its prior judgment in the criminal proceeding, the Fourth Circuit reversed, holding that Gosselin was not entitled to immunity under the Act and therefore remanded this issue for further proceedings.
– W. Ryan Nichols
Decided: December 11, 2013
The Fourth Circuit affirmed the district court’s order compelling arbitration of a breach of warranty claim in accordance with a lease agreement between the parties.
Christine and Antwan Seney (the “Seneys”) entered into a “Rental-Purchase agreement” with Rent-A-Center (“RAC”) for a bedframe and mattress. In that contract, the Seneys agreed to rent the bed for two weeks, with an option to renew the lease. The contract also contained a purchase option. Pursuant to the contract, RAC retained the manufacturer’s warranty to the bed. However, RAC provided its own warranty to repair, replace, and service the bed during the lease term. Additionally, the parties agreed to submit any contract dispute to binding arbitration. Soon thereafter, RAC delivered the bed to the Seneys’ home and assembled it in their son’s bedroom. Within a week, the boy was infested with bedbugs. After Mrs. Seney notified RAC, RAC employees returned to the home and replaced the mattress, but not the bedframe, which apparently was also infested with bedbugs. The infestation continued. Ultimately, RAC returned once more, this time removing both the mattress and the frame, but not before dragging them through the Seneys’ home. The bed shed bugs, and the infestation spread. RAC paid for a partial fumigation, but refused to treat the entire house.
The Seneys’ filed suit in Maryland state court, alleging breach of warranty in violation of the Magnuson-Moss Warranty Act (“MMWA” or “the Act”). RAC removed to federal court and filed a motion to compel arbitration. The district court rejected the Seneys’ argument that the regulations promulgated by the Federal Trade Commission (“FTC”) interpreting the MMWA ban binding arbitration and therefore granted RAC’s motion to compel arbitration. This appeal followed.
On appeal, the Fourth Circuit first held that the district court erred in holding that the FTC regulations contain no ban on binding arbitration. The court explained that, although the ban is intricate and limited, it certainly exists. Nonetheless, the court held that the Act’s ban on arbitration did not apply to the rental agreement at issue in this case. In so holding, the court found that the contract fell outside the FTC regulation banning binding arbitration because the Seneys’ relied on a warranty in a lease agreement—not a sales agreement. Specifically, the FTC ban applies only to dispute settlement procedures included in a “written warranty.” According to the FTC regulations, the term “written warranty” must implicate a sale. Here, because the promise made in the contract was not made in connection with a sale, but rather in connection with a lease, the FTC regulation banning binding arbitration did not apply. Therefore, the district court’s order compelling arbitration was affirmed.
– W. Ryan Nichols
Decided: June 19, 2013
The Fourth Circuit held that the United States District Court for the Western District of North Carolina properly granted summary judgment to the Federal Deposit Insurance Corporation (“FDIC”) in its action to recover the balance owed on a promissory note (“Note”) executed by Avery T. Cashion, III (“Cashion”), as the FDIC proved it was the holder of the note, the district court did not abuse its discretion by granting the FDIC’s motion to strike Cashion’s surreply and an affidavit from his business partner, and the Internal Revenue Service (“IRS”) Form 1099-C (“the 1099-C Form” or “the Form”) offered by Cashion was insufficient evidence of cancellation or assignment of the Note.
In August 2006, Cashion signed a Note payable to The Bank of Asheville (“the Bank”). Originally, the Note was secured by three additional promissory notes; in 2010, another promissory note was added as collateral. In September 2010, the Bank filed an action in state court alleging that, as the holder of the Note, it was entitled to full payment plus interest because Cashion had failed to make payments on the Note and had therefore defaulted. However, the Bank closed before the case reached trial and the FDIC was then substituted as the real party in interest. The FDIC removed the case to the federal court and moved for summary judgment. Cashion countered that there were two issues of material fact: Whether the FDIC had proven that it was the holder of the Note, and whether the Note had been cancelled or assigned. With regard to the first issue, Cashion noted that the FDIC had not produced the original Note; with regard to the second, Cashion included the 1099-C Form with an affidavit, arguing that the Form—labeled “Cancellation of Debt” and filled out with information on the Note—constituted evidence of the Note’s discharge. The FDIC then attached a supplemental affidavit from a “Resolutions and Receiverships Specialist” who asserted that, inter alia, the copy of the original Note provided by the FDIC was “true and correct.” Furthermore, the FDIC asserted that the 1099-C Form did not constitute competent evidence of cancellation. In response, Cashion filed a surreply challenging the FDIC’s interpretation of the 1099-C Form. Cashion also attached an affidavit from his business partner, in which the partner gave his interpretation of the 1099-C Form’s impact on the Note. The district court granted the FDIC’s motion to strike the surreply and attached affidavit, and granted summary judgment to the FDIC. Cashion appealed, challenging the summary judgment and the court’s decision to strike the surreply and affidavit.
The Fourth Circuit found that, though the FDIC did not produce the original Note, the copy of the Note and the specialist’s affidavit sufficiently proved that the FDIC was the holder of the Note under North Carolina law. With regard to the surreply, the Fourth Circuit noted that such reply briefs are usually not permitted under the local rules of the district court and the briefing schedule did not authorize surreplies; additionally, Cashion’s surreply responded to his own arguments and evidence rather than presenting new matters. Furthermore, the testimony from Cashion’s business partner did not reflect the partner’s “personal knowledge” of the 1099-C Form, in violation of the requirements stated in Federal Rule of Civil Procedure 56(c)(4). Lastly, the Fourth Circuit found that the 1099-C Form constituted an IRS reporting requirement rather than a way to discharge a debt. The court noted that, in combination with other evidence regarding its filing, a 1099-C Form could be properly considered as evidence of the Note’s status; on its own, however, a 1099-C Form cannot constitute sufficient evidence of cancellation.