GALLOWAY v. SANTANDER CONSUMER USA, INC., No. 15-1392
Decided: April 8, 2016
The Fourth Circuit affirmed the district court’s order.
Jacqueline Galloway (“Galloway”) entered into a retail installment contract (“RISC”) in order to finance her purchase of a vehicle in March 2007. The RISC was assigned to CitiFinancial Auto, LTD. (“CitiFinancial”). Galloway was supposed to make 72 payments of $487.46 on the 17th day of every month. Sometime before October 31, 2008, Galloway contacted CitiFinancial about reducing the amount of her monthly loan payment. CitiFinancial sent her an amended agreement to sign and once she signed it, the company would review her request. Galloway reviewed and signed the amended agreement for the RISC, which contained terms reducing her monthly payment. The amended agreement also contained an arbitration agreement which allowed CitiFinancial to elect to arbitrate any dispute rather than passing through the court system. There is nothing in the record that CitiFinancial ever sent Galloway written approval of the amended agreement, but Galloway reported a decrease in her monthly payments sometime after November 14, 2008. There was an 86-cent discrepancy between the amount contemplated in the amended agreement and the amount Galloway reported. Galloway paid and continued to pay the lower monthly payments for several years. In December 2011, CitiFinancial assigned the security interest in the vehicle to Santander Consumer USA, Inc. After Galloway fell behind on payments, Santander repossessed her car, sold it and eventually waived the deficiency. Galloway subsequently brought this action in state court. The action was later removed to federal district court where Santander moved to compel arbitration under the Federal Arbitration Act (“FAA”) based on the amended agreement. The district court determined that Galloway was bound to the agreement and gave an order compelling arbitration. The district court entered a final judgment dismissing the case so as to allow Galloway to pursue an immediate appeal.
The Court reviewed the district court’s decision de novo. The Court stated that application of the FAA requires demonstration of four elements. The second element, a written agreement that includes an arbitration provision that purports to cover the dispute, is the only element at issue here. Galloway contended that there was a factual issue as to whether the arbitration provision was a term of any contract that she and CitiFinancial entered into. The court disagreed and found as a matter of law that the amended agreement signed and sent by Galloway to CitiFinancial constituted an offer to enter into an agreement, not an acceptance. Furthermore, the Court found that the offer was accepted when CitiFinancial lowered the amount of Galloway’s monthly payment. The court found that the 86-cent difference between the amended agreement and the payment Galloway was given constituted a counter offer that Galloway accepted by making the payments for several years. While there was no explicit acceptance, the Court found that Galloway’s conduct could be interpreted as assent to the terms of the amended agreement. The Court held that a signature was not necessary and that the writing element of the FAA was satisfied in this case. The Court also disagreed with Galloway’s argument that the arbitration agreement was not enforceable. The Court reasoned that the writing requirement was satisfied because there was a physical embodiment of the underlying legal obligations and as such the written assent was not necessary. The Court stated that all that was required was that the arbitration provision be in writing.
Accordingly, the judgment of the district court is affirmed.
Michael W. Rabb
GROVES v. COMMC'N WORKERS OF AM., NO. 14-1854
Decided: March 10, 2016
The Fourth Circuit affirmed the district court’s decision.
In December 2008, Rebecca Groves and Jonathan Hadden (the “employee-plaintiffs”) began working as retail sales consultants for AT&T in Anderson, South Carolina, and both became members of Communication Works of America (“CWA”). As the exclusive bargaining representative for Groves, Hadden and other members of the union, CWA entered into a collective bargaining agreement with AT&T on March 27, 2010 that remained effective until February 7, 2014. The agreement, which both employee-plaintiffs attended an orientation on (though only Groves recalls receiving a copy), contained a provision concerning the required grievance procedure for allegations of employee termination without just cause.
After having received earlier disciplinary warnings, both employee-plaintiffs were fired in the spring of 2012 as a result of their failure to meet sales goals. A few months later, AT&T discovered that April and May 2012 reports on which sixteen employee terminations were based, including Groves and Hadden’s, were flawed, and consequently AT&T was offering a settlement of either reinstatement along with $2,500, or just $5,000 without reinstatement. CWA did not make any attempt to contact the employee-plaintiffs because they had not filed a grievance nor communicated with CWA in any way. When the plaintiff-employees independently found out about the settlement offers and contacted CWA, their desired offer of $2,500 with reinstatement was no longer available. Consequently, the employee-plaintiffs filed suit against CWA under § 301 of the Labor Management Relations Act, claiming that CWA’s failure to inform them of the offers constituted a breach of the union’s duty of fair representation. However, the district court granted CWA’s motion for summary judgment, holding that the employee-plaintiffs failed to satisfy the threshold requirement of a § 301 claim.
On appeal, the Court considered whether or not conduct by a union that obstructed but did not contribute to the employees’ failure to exhaust all possible contractual remedies for an employer’s action can be properly challenged by a hybrid § 301 claim. Looking to both the Supreme Court’s framing of a hybrid § 301 action in Vaca v. Sipes, as well as relevant cases from sister circuits, the Court held that a hybrid § 301 claim requires both allegation that the union’s conduct breached its duty of fair representation and that such conduct prevented the employee from exhausting his contractual remedies. However, here the employee-plaintiffs do not allege that the CWA prevented them from filing grievances concerning their terminations, and thus by not grieving their terminations, the employee-plaintiffs were not entitled to AT&T’s offer under the collective bargaining agreement. It follow then that CWA’s conduct was not the cause of the employee-plaintiffs failure to exhaust their contractual remedies, and without that causal link, the Court held, there is no basis of a hybrid § 301 suit. Thus, the Court affirmed the district court’s decision to grant summary judgment to CWA.
UNITED STATES ex rel. BEAUCHAMP v. ACADEMI TRAINING CTR., NO. 15-1148
Decided: February 25, 2016
The Fourth Circuit vacated the portion of the district court’s order dismissing plaintiff’s weapons qualification claims under the public disclosure bar and remanded for further proceedings.
In 2005, the U.S. Department of State hired defendant, Academi, as a contractor to provide security services for embassy workers stationed across the Middle East. Their agreement required Academi’s workers to maintain proficiency with several firearms and to submit marksmanship scores to the State Department on a regular basis.
Plaintiffs, serving as relators under the False Claims Act, 31 U.S.C. §§ 3729-3733 (“FCA”), filed their complaint with the Eastern District of Virginia on April, 2011, alleging that Academi submitted false reports to the State Department. On May 24, 2011, plaintiffs filed their first amended complaint, which included additional allegations that Academi fraudulently billed the State Department for security services performed by contractors who had not been tested for, or achieved, requisite marksmanship scores.
While this first-amended complaint was pending, two former firearms instructors contacted plaintiffs’ counsel with additional information about the weapons qualification scheme and filed a separate complaint against Academi alleging wrongful termination. See Winston v. Academi Training Ctr. Inc., No. 1:12cv767, ECF No. 1 (E.D. Va. July 12, 2012). The Winston complaint, which was made available to the public, detailed Academi’s failure to comply with the marksmanship testing requirements. The information included in the complaint generated a significant amount of publicity. On November 19, 2012, the plaintiffs in this case filed a second-amended complaint, which expanded the allegations as to the weapons qualification scheme by adding paragraphs from the Winston complaint.
The district court granted Academi’s motion to dismiss plaintiffs’ qui tam actions based on the public disclosure bar provided by the post-2010 amended version of the FCA. The district court found the publicity generated by the instructor’s complaint qualified as a public disclosure under the statutory scheme. Relying on Rockwell International Corp. v. United States, 549 U.S. 457 (2007), it further concluded that the most recent complaint was the proper pleading for analysis for purposes of the statutory timing benchmark. Since the public disclosure occurred before plaintiff’s most recent amended complaint, the district court held the public disclosure bar applied to plaintiffs’ claims.
The Court found that the district court misinterpreted Rockwell when it adopted the view that only the most recent pleading should control the public-disclosure bar’s timing. The Court reasoned that in Rockwell, the Supreme Court only focused on the relator’s last pleading because that was where the relevant fraud had been pled. As such, the district court should have evaluated the relevant fraud claim under the pleading that first alleged the fraud in this case, which was the first amended complaint.
The Court rejected Academi’s argument that that second-amended complaint was the first pleading that described with specificity the weapons qualification scheme. Instead, the court held that the facts alleged in the first-amended complaint were sufficient for purposes of the public disclosure bar. As such, because the first-amended complaint was filed before the Winston complaint and the publicity generated from the Winston complaint, the Court held public disclosure bar was not triggered in this case.
Finally, the Court also held that another FCA case, U.S. ex. rel. Davis v. U.S. Training Ctr., Inc., No. 1:08cv1244 (E.D. Va. Filed Dec. 1, 2008) did not trigger the public disclosure bar, nor was is a preclusive first-filed action, because it alleged fraud claims that were distinct and unrelated to the weapons qualification scheme at issue in this case.
Accordingly, the Court vacated and remanded the judgment of the district court.
MCFARLAND v. WELLS FARGO BANK, NO. 14-2126
Decided: January 15, 2016
The Fourth Circuit remanded the case back to the district court, so it could consider whether Plaintiff Philip McFarland ‘s (“McFarland”) mortgage agreement was unconscionably induced.
McFarland purchased his Hedgesville, West Virginia home in 2004, for approximately $110,000. In June of 2006, McFarland entered into discussions with Greentree Mortgage Corporation (“Greentree”), a third-party mortgage lender. McFarland was informed that the market value of his home and gone up to $202,000 since the time of purchase. McFarland entered into two secured loan agreements. The first was a mortgage agreement with Wells Fargo Bank (“Wells Fargo”), which is the subject of this dispute. The mortgage had a principal amount of $181,800 and an adjustable interest rate that started at 7.75 percent and could increase to 13.75 percent (“Wells Fargo Loan”). The second mortgage was with Greentree. McFarland used the proceeds of those two loans to consolidate all of his debts. In 2007, McFarland began to fall behind on his mortgage payments. In May of 2010, McFarland and Wells Fargo entered into a loan modification in May 2010. McFarland was still unable to make his payments. In 2012, as a result, Wells Fargo foreclosed on McFarland’s home. McFarland brought this suit against Greentree and Wells Fargo, as well as U.S. Bank National Association (“U.S. Bank”).
McFarland raised two “unconscionable contract” arguments in his complaint. McFarland argued that either claim could support an unconsionability finding under the West Virginia Consumer Credit and Protection Act, W. Va Code § 46 A-1-101, et seq. (“WVCCPA”). After several months of extensive discovery, McFarland eventually reached a settlement with Greentree. His case against both Wells Fargo and U.S. Bank (“the Banks”) continued. The district court granted the Banks’ motion for summary judgment and dismissed McFarland’s unconscionable contract claim. The district court found that neither of McFarland’s unconscionable claims provided a basis for a finding of substantive unconscionability because a refinanced loan that exceeds the value of a home is not evidence of substantive unconsionability under West Virginia law. The court found that in light of its finding of no substantive unconscionability, there was no need to consider McFarland’s allegations regarding the process that led to contract formation.
On appeal, the Fourth Circuit agreed with the district court that the amount of a mortgage loan, by itself, cannot show substantive unconscionability under West Virginia law. As a result, the Court found that McFarland had not otherwise made a showing of substantive unconsionability. The Court also agreed with the district court that West Virginia law requires a showing of substantive unconscionability to make out a traditional claim that a contract itself is unconscionable. However, the Court disagreed as to the district court’s interpretation of the WVCCPA and whether it requires a showing of substantive unfairness. The Court, unlike the district court, found that the WVCCPA allows for claims of “unconscionable inducement” even when the substantive terms of a contract are not themselves unfair. The Court held that the district court erred in dismissing McFarland’s claim of unconscionable inducement on the “grounds that substantive unconscionability is a necessary predicate of a finding of unconscionability under the WVCCPA.” The Court took no views as to the merits of McFarland’s unconscionable inducement claim, but remanded the case to the district court to consider McFarland’s evidence that his loan agreement was “induced by misrepresentations” and to determine whether he should be able to proceed with his suit against Wells Fargo and U.S. Bank.
Accordingly, the Court affirmed the judgment of the district court in part and vacated and remanded in part for further proceedings.
ASKEW v. HAMPTON ROADS FIN. CO., NO. 14-1384
Decided: January 11, 2016
The Fourth Circuit affirmed the district court’s judgment with regard to Plaintiff Dante Askew’s (“Askew”) Maryland Credit Grantor Closed End Credit Provision (“CLEC”) claim and his breach of contract claim. However, the Court reversed the district court’s order granting summary judgment to Defendant Hampton Roads Finance Company “HRFC”) for Askew’s Maryland Consumer Debt Collection Act (“MCDCA”) claim and remanded for further proceedings.
In 2008, Askew entered into a contract between himself and a car dealership financing the purchase of a used car. The dealership subsequently assigned the contract to HRFC. The contract, which was subject to the CLEC’s maximum allowable rate of 24%, charged a 26.99% interest rate. In August 2010, HRFC recognized this error and informed Askew via letter that HRFC had credited his account $845.40. After receiving the letter from HRFC, Askew fell behind on his payments, leading to HRFC to take steps to collect on his account. Askew then filed suit in state court alleging violations of CLEC, MCDCA, as well as breach of contract based on HRFC’s alleged failure to comply with CLEC. HRFC removed the case to federal court. After limited discovery, HRFC moved for summary judgment, which the district court granted.
On appeal, the Court agreed with the district court regarding its grant of summary judgment to HRFC on Askew’s CLEC claims and breach of contract claim. The Court first gave a brief summary of CLEC’s framework. Creditors doing business in Maryland may opt to make a loan governed by CLEC if they “make a written election to that effect.” If the statute applies, section 12-1003(a) sets a maximum interest rate of 24%. Askew presented three arguments to the Court with respect to CLEC. First, he argued that HRFC violated CLEC by failing to expressly disclose in the contract an interest rate below the statutory maximum. Second, Askew contends that the “discovery rule” from the statute of limitations should apply to the safe harbor of CLEC. Finally, Askew argues that section 12-1020 of the CLEC provides HRFC no protection because HRFC failed to properly notify him of the interest rate error and it failed to make the proper corrections to the error. As for Askew’s first argument, the Court held that HRFC’s mere failure to disclose an interest rate below CLEC’s statutory maximum is not a distinct violation of section 12-1003(a) for which liability can be imposed. Likewise, the Court found that the district court properly found that HRFC was not liable under CLEC, as long as HRFC properly notified Askew and made proper adjustments. As to that, the Court held that HRFC properly complied with section 12-1020’s notice requirements. The Court also determined that the district court properly granted HRFC summary judgment for Askew’s breach of contract claim because the contract incorporated all of CLEC, including its safe harbors. Therefore, the Court determined that a defense under CLEC precludes contract liable for HRFC.
The Court, however, found that the district court erred in granting HRFC summary judgment as to Askew’s MCDCA claim. The Court reasoned that HRFC informed Askew at least three times that it had taken some legal action against him when, according to Askew, it had not. As a result, the Court held that a jury could find that HFRC’s alleged conduct, “at least in the aggregate, could reasonably be expected to abuse or harass Askew,” in violation of the MCDCA. Accordingly, the Fourth Circuit reversed the district court’s order granting summary judgment to HRFC on Askew’s MCDCA claim.
SEVERN PEANUT CO., INC. v. INDUSTRIAL FUMIGANT CO., NO. 15-1063
Decided: December 2, 2015
Industrial Fumigant Co. (Industrial) applied pesticide at Severn Peanut Co.’s (Severn) peanut storage dome, resulting in a fire and explosion. The Fourth Circuit found that Severn’s claim against Industrial for breach of contract was barred by the contract between the parties, and Severn’s claims for negligence were likely barred by North Carolina’s economic loss doctrine. On this basis, the Fourth Circuit upheld the District Court’s grant of summary judgment to Industrial on all claims.
In April, 2009, Industrial and Severn entered into a contract for Industrial to apply the pesticide phosphine at Severn’s peanut storage dome in Severn, North Carolina. The contract required Industrial to apply the pesticide in the correct manner, contained an agreed upon price of $8,604, and noted that the price was not sufficient for Industrial to assume any risk of consequential damages. On August 4, 2009, Industrial applied phosphine to the dome in such a way that phosphine tablets piled up on one another, which was against the rules for usage noted on the phosphine label. As a result, a fire broke out on August 10, and continued despite fire fighting efforts until August 29, when an explosion occurred, causing major damage to the peanut dome, and the loss of nearly 20,000,000 pounds of peanuts. Severn’s insurer ultimately paid more than 19 million dollars for loss of peanuts, loss of income, damage to the dome, and fire fighting costs.
In January, 2012, Severn, its insurer, and the insurer’s parent company brought suit in federal court against Industrial and its parent company for breach of contract, negligence, and negligence per se. In March, the District Court granted summary judgment to Industrial on the breach of contract claim, finding that the consequential damages claim was barred by the contract between the parties. After briefing on the issue of contributory negligence, the District Court granted summary judgment to Industrial on the negligence claims, finding that Severn was contributorily negligent. Severn appealed both grants of summary judgment to the Fourth Circuit.
The Fourth Circuit first found that the contract between Severn and Industrial barred Severn’s breach of contract claim. The Fourth Circuit noted that North Carolina policy generally gives parties the freedom to contract as they wish. Further, in this case, Severn and Industrial were sophisticated parties who bargained for a contract with a clause limiting consequential damages, the contract was neither unconscionable nor against public policy, and Severn purchased, and received payment from, an insurance policy to cover the risk from breach of contract.
The Fourth Circuit next held that there were material issues of fact in relation to Severn’s contributory negligence, such that summary judgment on that ground was inappropriate. The Fourth Circuit nonetheless upheld summary judgment for Industrial on the negligence claims based upon North Carolina’s economic loss doctrine. The economic loss doctrine generally will not allow a tort claim for breach of contract. Because the contract here included a consequential damages exclusion, Severn would likely be unable to bring negligence claims for Industrial’s breach of contract. On the basis of these holdings, the Fourth Circuit upheld the grants of summary judgment to Industrial on both the breach of contract and negligence claims.
Katherine H. Flynn
FLAME S.A. v. FREIGHT BULK PTE. LTD., NO. 14-2267
Decided: November 24, 2015
The Fourth Circuit affirmed the ruling of the district court.
Industrial Carriers, Inc. (“ICI’) breached numerous contracts during its last few months of operation. Among those contracts breached were Plaintiffs, Flame S.A. (“Flame”) and Glory Wealth Shipping Pte. Ltd. (“Glory Wealth”). Flame obtained a foreign judgment against ICI for the breach of four Forward Freight Swap Agreements (“FFAs”), and Glory Wealth obtained a foreign arbitration award against ICI for the breach of a charter party. Both Plaintiffs sought a writ of maritime attachment to attach to the vessel M/V Cape Viewer when it docked in Norfolk, Virginia. Defendant Freight Bulk Pte. Ltd. (“Freight Bulk”) is the legal owner of the vessel, but Plaintiffs assert that Freight Bulk was the alter ego of ICI, and that ICI fraudulently conveyed its assets to Freight Bulk to evade its creditors. On trial in district court, the Plaintiffs argued that the court could enforce their claims against ICI through Freight Bul. The district court agreed and awarded judgment to Flam and Glory Wealth, ordered the sale of the M/V Cape Viewer, and confirmed the distribution of the sale proceeds to Flame and Glory Wealth.
On appeal, Defendants had six separate arguments. (1) Defendant argued that under Fourth Circuit precedent, United States substantive law should not apply to this dispute, therefore the district court lacked subject matter jurisdiction. The Fourth Circuit disagreed, holding that both Flame and Glory Wealth had claims arising within federal admiralty jurisdiction, per 28 U.S.C. § 1333. (2) Defendants argued that under Supreme Court precedent, in Peacock v. Thomas, Flam and Glory Wealth’s allegations of alter ego and fraudulent concealment did not independently provide the district court subject matter jurisdiction, and that a plaintiff cannot rely on a prior lawsuit’s basis for the court’s jurisdiction in a subsequent suit to shift liability. The Court disagreed; recognizing Supreme Court precedent that a district court’s admiralty jurisdiction extends to claims to enforce foreign admiralty judgments. Therefore, because the district court had admiralty jurisdiction under § 1333, the district court also had authority to consider the questions of alter ego and fraudulent conveyance. 3) Defendants further argued that the district court erred in distributing funds from the sale of M/V Cape View to Glory Wealth because Glory Wealth failed to register its New York default judgment with the district court. The Court declined to consider the substance of this argument, noting that Freight Bulk did not raise this argument to the district court, and therefore, the issue was not properly preserved for appeal. (4) The district court abused its discretion by imposing certain discovery sanctions. The Court concluded that it need not go into the details of this argument, because even if the district court abused its discretion, its error was harmless. (5) The Defendants argued that there was insufficient evidence as to both the alter ego liability and fraudulent conveyance. As to alter ego liability, the Court found that the district court properly applied Fourth Circuit case law to the facts presented. Similarly, the Court found that there was sufficient evidence to support the judgment against Freight Bulk as to the fraudulent conveyance claim. (6) Finally, Defendants argued that the district court judge had a personal bias against Defendants’ Ukrainian nationality. The Court noted that Freight Bulk did not challenge the district court judge’s impartiality to hear the case at any time throughout the proceedings. As such, Freight Bulk failed to preserve this claim for appellate review. Further, the Court found that no exceptional or extraordinary circumstances exist in this case to justify reviewing it on the merits.
Accordingly, the Court affirmed the district court’s ruling in favor of Flame and Glory Wealth.
CORETEL VA., LLC v. VERIZON VA., LLC, NO. 15-1008
Decided: November 13, 2015
The Fourth Circuit held that the judgment of the district court involving the calculation of damages and late fees was appropriate.
In accordance to the Telecommunications Act of 1996, CoreTel and Verizon entered into interconnection agreements (ICAs). The Act requires incumbent local exchange carriers such as Verizon to allow competitive local exchange carriers such as CoreTel to connect with end users over the incumbent’s network. Carriers negotiate private agreements with each other to establish the rates and terms in which their networks will be interconnected. The ICAs govern certain aspects of interconnection such as CoreTel’s use of Verizon’s physical telecommunications facilities.
In CoreTel I, the Fourth Circuit addressed a dispute between the parties involving what rates CoreTel must pay to use Verizon’s facilities. The Court held that Verizon should have billed CoreTel for facilities at the total element long-run incremental cost (TELRIC) rate instead of the tariff rates. Therefore, CoreTel was entitled to summary judgment regarding Verizon’s claim for declaratory relief relating to Verizon’s facilities charges. The Fourth Circuit did not resolve Verizon’s claim for damages associated with CoreTel’s breach of the ICAs. Instead, the case was remanded so that the district court could apply the proper TELRIC rates to calculate what CoreTel owes Verizon for the use of Verizon’s facilities.
On remand, the district court held a bench trial, where Verizon presented the tariff-based monthly bills it had issued to CoreTel and the “pricing attachments” to the ICAs. These monthly bills explained “(1) what facilities Verizon provided to CoreTel; (2) whether the facility was provided by Verizon Virginia or Verizon South and, if split between those two, the percentage of the facility in each company’s service area; and (3) for transport facilities billed by the mile, the number of transport miles provided. From the evidence, Verizon developed a summary spreadsheet showing the specific amount owed for each at TELRIC rates. The entries totaled $227,974.22 in damages. Verizon also calculated late fees at 1.5% per month on the facilities charges under the ICAs, totaling $131,885.25. CoreTel objected to Verizon’s proposed damages calculations, but the district court rejected and entered judgment for Verizon in the full amount. This appeal followed.
Here, CoreTel argues (1) that the district court violated the Fourth Circuit’s mandate in CoreTel I by awarding as damages any TELRIC-based facilities charges at all; (2) that even if Verizon can recover facilities charges, the district court erred in calculating the total amount owed; and (3) that the district court also erred in its calculation of late fees. The Fourth Circuit clarified that the mandate rule applies, prohibiting lower courts from considering questions that the mandate of a higher court has laid to rest. CoreTel was incorrect in believing CoreTel I froze not only the law of the case but also all of the underlying facts. The only matter that the mandate of CoreTel I “laid to rest” was that TELRIC rates should apply, not tariff rates. The district court did not err and followed that ruling.
The Fourth Circuit determined that the district court did not err when it considered Verizon’s damages claim. In CoreTel I, the Court expressly did not resolve Verizon’s claim for damages associated with CoreTel’s breach of the ICAs. The case was remanded to the district court to consider Verizon’s damages claim, and the district court appropriately followed this mandate.
After discussing background information regarding the technical aspects of ICAs, the Fourth Circuit affirmed the district court’s calculation of the TELRIC-based facilities charges CoreTel owes Verizon. CoreTel must pay TELRIC based facilities charges for any Verizon facilities it uses to transport traffic between the point of interconnection (POI) and the relevant Verizon interconnection point (IP). The specific objections that CoreTel had with the district court’s damages calculations were addressed individually; however, the Fourth Circuit ultimately rejected each argument and affirmed the calculation of the facilities charges set forth by the district court.
Finally, CoreTel challenged the district court’s award of $138,724.47 in late fees to Verizon. CoreTel argued “(1) that it cannot owe late fees under the ICAs because Verizon has never issued it formal bills at the proper TELRIC rates, (2) that Virginia law limits any late fees to 5% per year rather than the ICA-prescribed 18% per year that the district court imposed, and (3) that the principal on which any late fees are calculated should be offset by certain payments Verizon has withheld from CoreTel during this course of litigation.” However, similarly, the Fourth Circuit rejected each of CoreTel’s arguments and concluded that the district court properly calculated the late-fees. Therefore, the ultimate judgment of the district court was affirmed.
Austin T. Reed
CHORLEY ENTERS. INC. v. DICKEY’S BARBECUE REST., NO. 14-1799
Decided: August 5, 2015
The Fourth Circuit reversed the decision of the district court and held that the clear and unambiguous language of the provisions of the arbitration agreements require that the common law claims asserted by Dickey’s must proceed in arbitration, while the franchisees’ claims under Maryland Franchise Law must proceed in the district court of Maryland.
Dickey’s Barbeque Restaurants, Inc. (Dickey’s) is a restaurant chain that offers franchising opportunities. Both sets of plaintiffs were franchisees and previously operated Dickey’s restaurants in Maryland under franchise agreements. Shortly after opening, Dickey’s claimed that several of its franchisees breached their franchise agreements by running their restaurants poorly. The franchisees claimed that Dickey’s misrepresented the costs of running the restaurants in violation of Maryland Franchise Law and never gave them a chance to succeed in operating the restaurants. The franchisees wanted to bring suit in the district courts of Maryland, and Dickey’s wanted to arbitrate.
The arguments of the parties depend on the “interplay” between two provisions of the franchise agreements: (1) the dispute resolution provisions in Article 27 and (ii) the Maryland specific provisions in Article 29. Article 27 contains the Arbitration Clause and requires the parties to first mediate their claims before proceeding to arbitration. If mediation fails, either party is entitled to seek arbitration at the office of the American Arbitration Association nearest to Plano, Texas. The parties also agreed to arbitrate “all disputes, controversies, claims, causes of action and/or alleged breaches or failures to perform arising out of or relating to this Agreement (and attachments) or the relationship created by this Agreement.” The agreements also included “State Specific Provisions” in Article 29. In Article 29.1, the “Inconsistent Provision Clause” provided that Maryland law would control any inconsistent provisions. Also, Article 29.2(4), the “Maryland Clause” states that the “provisions of this Agreement shall not require you to waive your right to file a lawsuit alleging a cause of action arising under Maryland Franchise Law in any court of competent jurisdiction in the State of Maryland.” The Maryland Clause is similar to a Maryland regulation that states a franchisor violates the Maryland Franchise Law if it requires a franchisee to waive the franchisee’s right to file a lawsuit alleging a violation of Maryland Franchise Law in any court of competent jurisdiction in the state of Maryland.
The franchisees claimed that the Maryland Clause conflicts with the Arbitration Clause and renders the Arbitration Clause void, allowing the proceedings in district court. Dickey’s claimed the Maryland Clause is consistent with the Arbitration Clause because the Maryland Clause merely preserves the rights of the franchisees to bring an action under the Maryland Franchise Law in either arbitration or in court. In the alternative, assuming the interpretation provided by the franchisees, Dickey’s said the Federal Arbitration Act (FAA) preempted the Maryland Clause as an invalid prohibition on arbitration. The district court found the provisions to be conflicting and ambiguous and stated a jury must determine exactly which claims, if any, the parties agreed to arbitrate.
The Fourth Circuit determined that they had jurisdiction under 9 U.S.C. § 16(a)(1). That section of the FAA authorizes interlocutory appeals from a district court’s refusal to either stay litigation pending arbitration under Section 3 of the FAA or compel arbitration under Section 4 of the FAA. The district court expressly denied the motions to compel arbitration “without prejudice,” and that is all that is necessary to grant the Fourth Circuit appellate jurisdiction.
The court will compel arbitration under Section 4 of the FAA if: (1) the parties have entered into a valid agreement to arbitrate, and (2) the dispute in question falls within the scope of the arbitration agreement. The court must give the parties the intentions as expressed in the agreement. However, a party cannot be forced to arbitrate if it has not agreed to do so.
The franchisor’s breach of contract claims clearly “arise out or relate to” the Franchise Agreements, and thus fall within the Arbitration Clause. Additionally, the franchisor’s claim that the franchisees falsified sales reports falls within the Arbitration Clause because that claim arises directly from the franchise relationship created by the agreement. As to the common law claims, the Arbitration Clause is not contrary to the Maryland Clause. Therefore, the franchisees agreed to arbitrate the franchisor’s common law claims.
However, the franchisees’ claims directly implicate the Maryland Clause, which states nothing in the agreements shall require the waiver of bringing a claim under the Maryland Franchise Law in a court in Maryland. By looking at its plain language, the Maryland Clause conflicts with the Arbitration Clause. The Fourth Circuit concluded that the Maryland Clause trumps the more general Arbitration Clause as to Maryland Franchise Law claims, allowing the franchisees to sue in Maryland court. By agreeing to this Maryland Clause, the parties agreed to litigate in Maryland and arbitrate all other claims in Texas.
Alternatively, Dickey’s claims that if the Maryland Clause does prohibit arbitration of the claims of the franchisees, then the Clause is preempted by the FAA. Where the state law prohibits the arbitration of a claim, the conflicting law is preempted by the FAA. However, the Fourth Circuit determined the Maryland Clause is not a state law prohibiting arbitration, but a contractual provision prohibiting arbitration. When a party to a contract voluntarily assumes an obligation to proceed under certain state laws, the traditional preemption doctrine does not apply to protect a party from liability for a breach of that agreement.
The Fourth Circuit realized that requiring the parties to litigate in two different forums was inefficient and could lead to conflicting results; however, this outcome is mandated by the Federal Arbitration Act, which requires piecemeal litigation when agreements call for arbitration of some claims, but not others. Therefore, the Fourth Circuit vacated the order of the district court and remanded for further proceedings.
Austin T. Reed
ELDERBERRY OF WEBER CITY, LLC v. LIVING CENTERS – SOUTHEAST, INC., NO. 13-2176
Decided: July 21, 2015
In a case about entitlement to damages for non-payment of rent and related items, the Fourth Circuit held that the district court erred in calculating damages. The Fourth Circuit thus affirmed the district court in part, vacated in part, and remanded the case for recalculation of appropriate damages.
In November, 2000, Elderberry of Weber City, LLC (“Elderberry”) leased a skilled nursing facility to Living Centers – Southeast, Inc. (“Living Centers”) for a ten-year period. Although the lease did not initially allow assignment without prior written permission from Elderberry, it was eventually amended. The amended lease allowed assignment to FMSC Weber City Operating Company, LLC (“FMSC”), its affiliates, or subsidiaries without prior approval from Elderberry with a guaranty from Mariner Health Care, Inc. (“Mariner”), a company with majority ownership in FMSC and full ownership of Living Centers. Under this amendment, the lease reset to an April, 2017 expiration date, and was assigned from Living Centers to FMSC in January, 2007, and from FMSC to Continiumcare of Weber City, LLC (“Continium”), a company owned and controlled by a then-manager of FMSC, in November, 2011. During this period, the facility had a variety of problems. In March, 2012, Continium stopped paying rent. Elderberry and Continium tried to negotiate a rent reduction, but in May, 2012, Continium indicated it was no longer able to pay rent. In August 2012, Elderberry hired a company to help it find and sign a new tenant for the facility, and on August 15, Elderberry sent a letter to Living Centers, Continium, Mariner, and their attorneys demanding payment of past due rent. On August 17, 2012, Continium discharged the last patients in the facility, and abandoned the property. On August 24, 2012, Elderberry mailed a lease termination letter to Living Centers, FMSC, Continium, and Mariner.
Mariner filed suit against Elderberry seeking a declaratory judgment that the guaranty was unenforceable. Elderberry then filed suit against Living Centers, FMSC, and Continium for breach of lease and breach of contract, and against Mariner for breach of guaranty. These suits were consolidated, and the parties filed summary judgment motions. The district court denied the summary judgment motions, and found the guaranty was enforceable. The district court then ruled in favor of Elderberry on all counts, and found Elderberry entitled to $2,742,029.50 in damages, plus interest. The damages covered unpaid rent from April to August, 2012, and from September, 2012 to February, 2013, a subsequent rent shortfall, other unpaid bills from August, 2012 to February, 2013, maintenance and rehabilitation of the facility, and amounts paid to the company that helped find and sign the new tenant. Living Centers, FMSC, Continium, and Mariner appealed.
The Fourth Circuit first held that Elderberry was entitled to unpaid rents only through the date it terminated the lease. The court reasoned, based on earlier case law, that upon a tenant abandoning a property, a landlord can recover unpaid rent for the balance of the lease only if the landlord does not terminate the lease. Although Elderberry argued that the lease allowed it to both 1) terminate, and 2) retake possession of the property without termination and without absolving the lessee of liability for rent, the Fourth Circuit disagreed. The Court argued that remedies allowing for future rent are to be strictly construed, leases should be construed against the lessor, the language of the lease here was itself inconsistent, and the Court’s reading would allow Elderberry to seek other possible remedies. The Fourth Circuit thus found that Elderberry was entitled to unpaid rents only through the August 24, 2012 termination of the lease.
The Fourth Circuit next found that Elderberry was entitled to non-rent damages only through lease termination. Based on case law and legal principles, the Court found that landlords are entitled to non-rent damages that occur prior to lease termination. Based upon that finding, and the fact that Living Centers, FMSC, Continium, and Mariner did not specifically challenge the district court’s findings regarding non-rent damages, the Fourth Circuit found that Elderberry was entitled to non-rent damages that occurred prior to the August 24, 2012 lease termination.
The Fourth Circuit then found that Mariner’s guaranty did not violate the Georgia statute of frauds, and was thus enforceable. Although the guaranty contained several blanks, which would normally violate the statute of frauds, the Court found that, under Georgia case law, the guaranty could be interpreted together with the lease amendment to which it was attached. Further, the Court found that the statute of frauds allowed using parol evidence to determine the meaning of ambiguous guaranty terms. Using the lease amendment and parol evidence, the Court found enforceable the guaranty in which Continium was the debtor who failed to pay rent from March, 2012 until lease termination, and Mariner was the guarantor.
Based on the foregoing, the Fourth Circuit affirmed the district court in part, vacated in part, and remanded for recalculation of damages.
Katherine H. Flynn
LIBERTY UNIV. INC. v. CITIZENS INS. CO. OF AM., NO. 14-2254
Decided: July 10, 2015
The Fourth Circuit reversed the district court’s grant of summary judgment and held that Citizens Insurance Company of America (“Citizens”) had no duty to defend Liberty University (“Liberty”) against the complaint filed by Janet Jenkins.
In 2012, Janet Jenkins sued Liberty University, alleging that the school participated in a scheme to kidnap Jenkins’ daughter. Jenkins alleged that Liberty aided Lisa Miller, the child’s biological mother and former partner in a same sex civil union, to take the child to Nicaragua. This lawsuit stems from Jenkins complaint against Liberty.
The district court found that Citizens had a duty to defend Liberty against the complaint. According to the policy at issue, Citizens must defend Liberty against suits alleging certain harms that arise from an “occurrence” or an unexpected accident, which does not fall under any of the listed coverage exclusions. The policy also contains a “Separation of Insureds” provision, which requires a court to evaluate a claim by each named insured individually. The district court found that the Separation of Insureds provision was ambiguous and should therefore be interpreted in Liberty’s favor. Furthermore, the district court refused to consider the intent of Liberty’s agents when determining if the complaint alleged an accidental “occurrence” and whether the policy’s exclusions applied. The district court concluded that Jenkins’ complaint failed to “sufficiently allege” Liberty’s vicarious liability. Accordingly, the district court granted summary judgment to Liberty.
The Fourth Circuit disagreed and found that Jenkins’ complaint did not allege an “occurrence” and that the complaint triggered the policy’s coverage exclusions. Therefore, Citizens did not have a duty to defend Liberty. The Court applied Virginia law and concluded that the Separation of Insureds provision in the policy did not displace Virginia’s rule that an insurer has no duty to defend against a suit alleging the insured is liable for the intentional acts of its agents under a theory of respondent superior. Furthermore, the Court found that because the complaint alleged only intentional acts, it did not claim Liberty’s liability for damage arising from an “occurrence.”
Accordingly, the Court reversed the district court’s grant of summary judgment and remanded for further proceedings.
CVLR PERFORMANCE HORSES, INC. v. WYNNE, NO. 14-1021
Decided: July 9, 2015
In a case related to a RICO action, the Fourth Circuit affirmed the district court’s denial of a motion to intervene, and denied the defendant’s motion to dismiss the appeal of the district court’s denial.
In September of 2011, CVLR Performance Horses, Inc. (“CVLR”) filed suit against John Wynne and his solely owned companies for RICO violations, claiming Wynne held out one of his companies as a bank, made loans under false pretenses, and engaged in insurance fraud. Wynne moved to dismiss, and the district court granted his motion, finding CVLR failed to state a claim. On appeal, the Fourth Circuit reversed, finding CVLR’s pleadings had stated a RICO claim, and remanded to the district court. Four months later (more than two years after the original filing), Karen Foster and Vicki Marsh, acquaintances of Wynne who claimed injury from his financial dealings, moved to intervene as plaintiffs. The district court denied Foster and Marsh’s motion, finding that the statute of limitations on RICO claims had passed, and equitable tolling was not warranted. Foster and Marsh appealed. CVLR and Wynne then settled their dispute, and the district court, per CVLR and Wynne’s agreement, dismissed the case. Wynne then moved to dismiss Foster and Marsh’s appeal, arguing that the dismissal of CVLR’s case made Foster and Marsh’s appeal moot, since there was no longer a case in which to intervene.
The Fourth Circuit first held that dismissal of CVLR’s case did not moot Foster and Marsh’s appeal. The Fourth Circuit reasoned that Foster and Marsh made their motion to intervene, and appealed denial of that motion, before CVLR’s case against Wynne was dismissed. The Court further reasoned that the settlement of CVLR’s case did not provide a remedy to Foster and Marsh, and if the Fourth Circuit were to reverse the denial of Foster and Marsh’s motion to intervene, Foster and Marsh would be able to pursue a claim against Wynne independent of CVLR’s case.
The Fourth Circuit then held that the district court did not err in finding equitable tolling should not be applied to Foster and Marsh’s appeal. The Fourth Circuit noted that, by their own admission, Foster and Marsh exceeded the RICO statute of limitations by at least 14 months. The Fourth Circuit then found that equitable tolling was inappropriate in this case. The Fourth Circuit noted that equitable tolling is an extraordinary remedy allowed where applicants have diligently pursued their rights, but been unable to timely file a claim due to extraordinary circumstances. Here, the Fourth Circuit found that Foster and Marsh had not alleged taking any steps towards timely filing a RICO claim, and had not alleged that a claimed mental impairment (Marsh’s claimed autism) had any relation to the failure to timely file. Further, the Fourth Circuit found that no extraordinary circumstances caused Foster and Marsh’s failure to timely file a claim. Foster and Marsh claimed that the first dismissal of CVLR’s case (for failure to state a claim) was an extraordinary circumstance, because filing a claim against Wynne after the dismissal would have been subject to a Rule 11 sanction since the district court had found Wynne’s conduct did not violate RICO. The Fourth Circuit disagreed, noting that while Foster and Marsh’s separate lawsuit against Wynne would likely have been dismissed in the wake of the dismissal of the CVLR case, Rule 11 allows for arguments based not only on existing law, but also on nonfrivolous arguments to modify or reverse existing law, and thus Foster and Marsh would likely not have faced faced Rule 11 sanctions for filing a separate lawsuit against Wynne.
Based on the above, the Fourth Circuit denied Wynne’s motion to dismiss Foster and Marsh’s appeal of the district court’s denial of their motion to intervene. The Fourth Circuit affirmed the district court’s denial of Foster and Marsh’s motion to intervene.
Katherine H. Flynn
POINDEXTER v. MERCEDES-BENZ CREDIT CORP. NO 14-1858
Decided: July 7, 2015
The Fourth Circuit affirmed the district court’s grant of summary judgement to the Mercedes-Benz Credit Corporation (“MBCC”).
This case was an appeal from the district court’s grant of summary judgement to MBCC. Virginia Poindexter (“Poindexter”) originally purchased a car from a dealer in Virginia, and although she was originally in a contract with the dealer, the dealer assigned that contract to MBCC. Subsequent to that assignment, Poindexter chose to participate in MBCC’s Owner’s Choice program, whereby “Poindexter would grant MBCC a lien against her Potomac Falls residence by a deed of trust (“Deed”) as security for the outstanding automobile loan.” This program would allow her to make the interest deductible for federal tax purposes. Poindexter signed a disclosure allowing the loan to be governed by the Real Estate Settlement Procedures Act “(RESPA), executed a Deed of Trust to MBCC, and that deed was properly recorded. Although under the terms of the Deed MBCC would release the lien upon full payment, when Poindexter traded in her car for another one, her obligation to pay was terminated and MBCC failed to release the Deed. When Poindexter tried to refinance her existing mortgage, this error was discovered, she was denied, and thereafter filed suit against MBCC. MBCC then filed a certificate that released the lien, and moved for summary judgment, claiming that Poindexter’s claims were time-barred and that she failed to make the necessary showing. The district court granted summary judgment, and Poindexter appealed.
The Fourth Circuit began by determining that it would review the case de novo, and that it would examine each of the claims set forth by Poindexter. First, the Court looked at the breach of contract claim. At the outset, the Court noted that Poindexter had conceded on appeal that her claim was untimely, but that she nevertheless asserts that MBCC should be equitably estopped from using the statute of limitations against her. The Court quickly disposed of this argument, saying that she did not show by “clear, precise, and unequivocal evidence” that she fulfilled the conditions for equitable estoppel. Specifically, the Court noted that there was nothing in the record that showed that Poindexter was unable to get information about the status of the MBCC lien, and that there was no evidence of a false representation or a concealment of a material fact. Turning to the slander of title claim, the Court quickly dismissed that claim because the record did not contain any evidence that MBCC acted with any form of malice when it failed to file a timely certificate of satisfaction. The Court then looked at Poindexter’s RESPA claim, which required in part that Poindexter had to have sent MBCC a “qualified written request for information relating to the servicing of such loan.” Although Poindexter contended that the multiple requests she made to MBCC satisfied this requirement, the Court agreed with the district court that those requests did not satisfy the definition. Not only were the majority of the requests not written, they also did not qualify because they did not relate to the servicing of a RESPA loan. The Court looked to a Ninth Circuit case for guidance, and applied that case to determine that these requests were not related to servicing the loan. The Court then turned to the VCPA claims, and agreed with the district court’s ruling because Poindexter entered into a modification of her loan with MBCC, so they fell under the mortgage lender exception to the statute. Finally, the Court looked at Poindexter’s claims under Virginia statute § 55-66.3. However, the Fourth Circuit also agreed with the district court that this claim fell outside the two-year statutory limitation. Therefore, the Court affirmed the district court’s judgment. The Court did, however, did write a cautionary note at the end of its opinion criticizing MBCC and advising it to review its business practices, as Poindexter’s claims might have been viable if she had raised them in the correct timeframe.
CAPITAL CITY REAL ESTATE, LLC v. CERTAIN UNDERWRITERS AT LLOYD’S LONDON, NO. 14-1239
Decided: June 10, 2015
The Fourth Circuit vacated and remanded the lower court, finding that a general contractor is covered where the subcontractor, as the named insured, was partially negligent and that the allegations in the tort actions potentially brought the claim within the coverage of the policy.
This appeal stems from Plaintiff, operating as a general contractor for the renovation of a building, subcontracting foundation, structure, and underpinning work to Marquez Brick Work, Inc (“Marquez”). The subcontract required Marquez to indemnify the Plaintiff for any damages caused by its work and also required that Marquez maintain liability insurance with Plaintiff named as additional insured. The Defendant issued an insurance policy to Marquez with Plaintiff listed as an additional insured. During the course of the work, a wall collapsed and ultimately Plaintiff made a claim against Marquez. The Defendant insurance company denied coverage and the Plaintiff filed an action for declaratory judgment against Defendant. The district court granted summary judgment to the Defendant, and the Plaintiff appeals.
Maryland courts ask, when determining if an insurer has a duty to defend the insured, (1) what is the coverage and what are the defenses under the terms and requirements of the insurance policy, and (2) do the allegations in the tort action potentially bring the tort claim within the policy’s coverage. St. Paul Fire & Marine Ins. Co. v. Pryseski, 438 A.2d 282, 285 (Md. 1981). The Defendant sought to limit liability based on a theory of vicarious liability. The Court ultimately held that the language of the insurance contract must control, and the language lacked vicarious liability limitations and, therefore, the first element of the Maryland test was satisfied. Having determined the scope of the policy, the Fourth Circuit then examined the second step of the Pryseski analysis. The Court noted that the underlying Complaint faulted the Defendants for improperly excavating and supporting and for failing “to comply with the applicable standard of care while performing said renovations.” Therefore, the Fourth Circuit found that there was a potentiality for coverage and that the Defendant had a duty to defend the Plaintiff in the underlying tort claim.
William H. Yarborough
DILLON v. BMO HARRIS BANK, N.A.; GENERATIONS FEDERAL CREDIT UNION; BAY CITIES BANK; AND FOUR OAKS BANK & TRUST COMPANY, NO. 14-1728
Decided: May 29, 2015
The Fourth Circuit held that the district court impermissibly denied appellants’ renewed motions to compel arbitration, vacated the order denying the renewed motions and remanded for further proceedings.
This case stemmed from a class action against the named group of Banks, where Dillon alleged that the Banks, because they allowed the transfer of funds from third-party lenders to and from Dillon’s bank account, facilitated the lenders’ illegal practices by giving them access to an electronic payment system, the Automated Clearing House Network. After Dillon initiated a lawsuit against the Banks, the Banks filed motions to compel arbitration and to stay further court proceedings. As a basis for their motions, the Banks asserted that Dillon agreed to arbitration as part of the application process for the loans. In response, Dillon argued that the Banks had not carried their burden of proof to show that he had agreed to arbitration since he argued that the loans were inadmissible hearsay due to their lack of physical signature and proof of authentication. The Banks, however, asserted that since the loan agreements were significant to Dillon’s case, that Dillon was the party who had signed the agreement in the first place, and that Dillon was merely questioning the Banks’ burden of proof and not the authenticity of the loans themselves, that it was proper for the loans to be admitted. Although the district court initially denied the Banks’ motions, the Banks attempted to cure their motions, by attempting to authenticate the loan documents. However, Dillon opposed the motion by saying that the district court had already “fully and finally” decided the issues, and the district court agreed, denying the motions for “failure to justify reconsideration,” and the Banks appealed.
The Fourth Circuit first discussed the Federal Arbitration Act (FAA), and its significance to the case, looking at both sections 3 and 4 of the FAA and examining how they provide for a hearing to resolve questions of material fact, and noting that section 16 allows for an appeal of a decision about a section 3 or 4 action. By looking at the FAA, the Fourth Circuit then determined that it did have jurisdiction to hear this case. Although Dillon argued that this was an appeal of an order denying reconsideration, the Court determined the Banks were seeking to enforce arbitration, and therefore section 16 applied. By examining the language in the Banks’ motions, the Court noted the explicit reference to “compel” and “stay,” which triggered sections 3 and 4, giving the court jurisdiction. After determining that it had jurisdiction, the Fourth Circuit then turned to the merits of the case, and determined that the lower court erred in deciding that the renewed motions were motions for reconsideration and denying them because of that. Although the Fourth Circuit allowed for two plausible reasons for the district court’s decision, but swiftly disposed of both of those reasons, stating that there is no rule that limits a party to only one motion under sections 3 and 4 of the FAA, and furthermore, the renewed motions presented different issues, so the law of the case rule was no longer applicable. Since the Fourth Circuit determined that the district court denied the Banks’ motions in a way that was inconsistent with the strong policy that favors arbitration, nor for any other plausible reason, the court vacated the order and remanded for further proceedings.
CERTAIN UNDERWRITERS AT LLOYD’S, LONDON v. COHEN, NO. 14-1227
Decided: May 5, 2015
The Fourth Circuit reversed the grant of summary judgment to the Underwriters and remanded the case to the district court to determine whether the answers Dr. Cohen supplied on the policy applications were material misrepresentations.
This appeal stemmed from a magistrate judge granting summary judgment to the Underwriters due to Dr. Cohen’s material misrepresentations on his policy applications and denying Dr. Cohen’s motion in limine to exclude all references to the Consent Order. Cohen, on April 1, 2011, submitted initial applications for disability insurance. Each of the insurance applications contained questions that were pertinent to the applicant’s personal, financial, and medical information. Three of Cohen’s responses were at issue. Cohen checked the “Yes” box when asked “Are you actively at work?” In response to the question “Are you aware of any fact that could change your occupation or financial stability?,” Cohen checked the “No” box. Finally, when asked “Are you party to any legal proceeding at this time?,” Cohen checked the “No” box. Cohen signed final applications with these responses on August 8, 2011.
Notably, on April 12, 2011, after submission of his initial application and before submission of his final applications, Cohen signed a Consent Order with the Maryland State Board of Physicians, which suspended his license to practice. Cohen’s suspension would begin on August 2, 2011 and would last for three months. Further, the Consent Order stated that if Cohen returned to active practice after his suspension, he would be on probation for five years. On September 8, 2011, Cohen sought medical treatments for injuries to his thumb and leg. The Underwriters retained Disability Management Services, Inc. to investigate and adjust the potential claim. This investigation uncovered the Consent Order, and the Underwriters notified Cohen that they intended to rescind the policy. Under the policy’s grievance procedures and informal review, the rescission was upheld. Later, the magistrate judge concluded that the Underwriters validly rescinded the insurance policies due to the material misrepresentations made by Cohen in his applications.
Under Maryland law, a material misrepresentation on an insurance policy application allows for the recession on an insurance policy issued on the basis of that application. Applying the principles of contracts, the Fourth Circuit could only conclude that each of the questions to which Cohen allegedly gave false answers for is subject to more than one reasonable interpretation. Being “actively at work” was considered by the Underwriters to include surgery, from which he was banned. “Actively at work” was considered by Cohen to include the administrative duties of running his practice. The court determined that neither of these interpretations was unreasonable. Each of the general questions contains undefined terms susceptible to more than one reasonable interpretation, “making them ill-suited to elicit the specific type of information the Underwriters claim to have requested.” On remand, the court may consider whether extrinsic or parol evidence can be used to cure the ambiguity. The Fourth Circuit noted that it is of course within the court’s discretion, on remand, to conduct any further proceedings that it finds appropriate, including further consideration of summary judgment.
Further, Cohen contends that the admissibility of the Consent Order was contrary to Maryland law, which requires express consent of all parties before such an Order can be admitted in a civil proceeding. The plain language of Health Occupations § 14-410 bars the “admission of ‘any order’ of the Board in ‘a civil or criminal action’ except by consent, or when ‘a party to a proceeding before the Board’ brings a civil action, claiming to be ‘aggrieved by a decision of the Board.’” Therefore, only by the express stipulation and consent of all parties before the Board can a Board order be admitted into evidence in a civil proceeding like this one. There was no consent here. The Fourth Circuit held that while public documents, Board Orders are not admissible in a civil or criminal action absent consent, except for in an action brought by a party aggrieved by a Board decision. Therefore, the judgment of the district court was reversed and the case remanded.
Austin T. Reed
DAN RYAN BUILDERS, INC. v. CRYSTAL RIDGE DEV., INC., NO. 13-2234
Decided: April 20, 2015
The Fourth Circuit affirmed the ruling of the district court to dismiss plaintiff’s tort claim seeking additional damages because plaintiff rested his claim solely on a breach of contract without alleging that defendant had an independent legal duty.
In 2005, Dan Ryan and Lang Brothers, Inc. (Defendant) entered into a Lot Purchase Agreement (LPA). The LPA stated that Defendant was to build a fill slope that would provide grading on certain lots to accommodate construction. Defendant completed the work and was paid in full by Ryan. In 2007, cracks appeared in the basement slab and foundation walls of a partially constructed home. The parties amended the LPA with Ryan agreeing to purchase the remaining lots and reapportioned the parties’ responsibilities. Later that year, the slope behind one of the lots began sliding downhill toward a nearby highway. Furthermore, Ryan began experiencing difficulties with Defendant’s stormwater management system, development permits, and entrance drive.
The court reasoned that Ryan’s tort claim failed under the “gist of the action” doctrine, which bars recovery in tort when the duty that forms the basis of the asserted tort claim arises solely from a contractual relationship. The Fourth Circuit acknowledged the “principle of party presentation”, but “[a] party’s failure to identify the applicable legal rule certainly does not diminish a court’s responsibility to apply that rule.” Thus, even though Defendant didn’t raise the “gist of the action” doctrine as a defense, the court can apply the defense because it is an “antecedent” and “dispositive” issue, since it is goes to the duty element of any tort claim. Moreover, the Fourth Circuit found that Defendant had no separate legal duty besides the one owed in the contract. Tort recovery is barred “where liability arises solely from the contractual relationship between the parties.” Accordingly, the Fourth Circuit affirmed the dismissal of plaintiff’s tort claim seeking additional damages.
PRIORITY AUTO GROUP v. FORD MOTOR COMPANY, NO. 13-1696
Decided: July 30, 2014
The Fourth Circuit affirmed the district court’s decision to dismiss Priority’s right of first refusal claim for lack of standing, and also dismissed Priority’s claim for tortious interference with a contract.
Priority Auto brought both claims against Ford Motor Company (“Ford Motor”) for obstructing its attempt to purchase the Kimnach Ford car dealership. Ford Motor’s contract with Kimnach Ford gave Ford Motor the right of first refusal, which Ford Motor exercised, then used to direct a sale of Kimnach Ford’s assets, and to close the dealership. Priority Auto brought suit in Virginia state court, claiming that Ford Motor unlawfully exercised its right of first refusal, and, in the alternative, that Ford Motor tortiously interfered with the sales contract between Priority Auto and Kimnach Ford. After Ford Motor removed the case to federal court based on diversity jurisdiction, the district court dismissed both of Priority Auto’s claims, and Priority Auto appealed.
The Court reasoned that Priority Auto lacked standing to bring the right of first refusal suit because it was not within the class of plaintiffs that the Virginia statute sought to protect. According to the Court, only the dealer—Kimnach Ford—had standing to bring an action against Ford Motor for unlawfully exercising its right of first refusal. Priority Auto could only recover—and had already recovered from Ford—for its reasonable expenses paid in pursuit of the sale.
Alternatively, the Court reasoned that Priority Auto’s tortious interference claim was properly dismissed because Ford Motor did nothing unlawful by exercising its right of first refusal. A claim for tortious interference with a contract requires the tortfeasor to interfere using an “improper method.” Here, Ford Motor did not interfere with the sale using an improper method because it had a right to interfere with the sale pursuant to its contract with Kimnach. Therefore, the Court affirmed the district court’s dismissal of Priority Auto’s claims.
James Bull Sterling
FLAME S.A. v. FREIGHT BULK PTE. LTD., NO. 14-1189
Decided: August 5, 2014
The Fourth Circuit held that the district court did not err in denying Flame S.A.’s (“Flame”) motion to vacate a writ of maritime attachment issued in favor of Freight Bulk Pte. Ltd. (“Freight Bulk”) under Supplemental Rule B of the Federal Rules of Civil Procedure (F.R.C.P.).
Flame, an integrated shipping and trading company, entered into four Forward Freight Swap Agreements (“FFAs”) with Industrial Carriers, Inc. (“ICI”). ICI defaulted on the contracts after a steep decline in freight rates, and a default judgment was entered against ICI. Flame brought an action seeking attachment of a shipping vessel to satisfy an English judgment against Freight Bulk, as the alter ego of ICI. The district court issued the attachment order. On appeal, Freight Bulk challenged the subject matter jurisdiction of the district court to issue this order.
The Fourth Circuit first addressed whether U.S. federal law or foreign law controlled the jurisdictional inquiry. The Court recognized that under English law the FFAs would not be maritime contracts, and under U.S. federal law the FFAs would be maritime contracts. Thus, if English law applied, then the district court did not have jurisdiction over the matter. After reviewing relevant precedent, the Court concluded that “U.S. Supreme Court precedent strongly indicates that federal law should control [its] determination of whether a claim, such as the FFA dispute . . . sounds in admiralty.” Accordingly, the Court held that federal law, rather than foreign law, controlled the procedural inquiry into whether a foreign judgment is a maritime judgment. Thus, the district court had admiralty subject matter jurisdiction under federal law.
The Court next considered whether FFAs are maritime contracts under federal law to determine if the district court properly exercised admiralty jurisdiction in the case. The Court first concluded that maritime contracts need not refer to any particular vessel or any particular shipment. Also, despite Freight Bulk’s claim, the Court concluded that the fact that the FFAs call for cash settlement does not preclude the conclusion that these FFAs are maritime contracts. Here, the FFAs were between two shipping companies engaged in maritime commerce, and as the district court determined, the companies created the FFAs as a component of their shipping businesses. Accordingly, the Court held that the district court did not err in concluding that the FFAs at issue were maritime contracts, and thus, that the district court had subject matter jurisdiction to hear the matter. Importantly, the Court noted that its holding did not resolve the issue of whether all FFAs are maritime contracts as a matter of law.
CHERRY v. MAYOR OF BALTIMORE CITY, NO. 13-1007
Decided: August 6, 2014
The Fourth Circuit held that the City of Baltimore did not violate the Contract Clause of the U.S. Constitution when it changed the method for calculating pension benefit increases.
The City of Baltimore (City) instituted a public pension plan for public safety employees and, in 1983, instituted a variable benefit. The variable benefit entitled retirees to a benefit increase if the plan’s investments earned more than 7.5 percent in the preceding year. In 2008, in response to budget deficits, the City replaced the variable benefit plan with a cost of living allowance (COLA), which increased benefits by a maximum of two percent each year. Under the variable benefit method, retirees’ benefits increased an average of three percent. Appellants, retired police officers and firefighters, filed a class action suit averring that the ordinance establishing the COLA violated the retirees’ rights under the Contract Clause. The test of whether a sovereign has violated the Contract Clause is a three-part inquiry. The court considers (1) whether an impairment exists, (2) whether the state law in question substantially impairs a contractual relationship, and (3) if the impairment is substantial, whether the impairment is permissible. Balt. Teachers Union v. Mayor of Baltimore, 6 F.3d 1012, 1015, 1018 (4th Cir. 1993).
The Court concluded that no contract impairment existed because the ordinance did not preclude the appellants from pursuing a breach of contract claim under state law; did not protect the City from paying damages arising out of a breach of contract; and did not create a statutory defense to a breach of contract claim. Additionally, Maryland law allows appellants to challenge whether the change to pension benefits was a reasonable modification and entitles plaintiffs to relief if the modification is unreasonable. Therefore, the Court reasoned that state law provides plaintiffs the necessary protection for breach of contract and the ordinance did not violate the Contract Clause.
Amanda K. Reasoner
CORETEL VIRGINIA, LLC v. VERIZON VIRGINIA, LLC., NO. 13-1765
Decided: May 13, 2014
The Court held that Verizon Virginia, LLC (“Verizon”) was required to offer entrance facilities to CoreTel Virginia, LLC (“CoreTel”) at cost-basis for interconnection; CoreTel’s ports and multiplexers did not qualify as entrance facilities; Verizon did not have to pay reciprocal compensation charges for calls even if it did not provide “EMI data” to CoreTel; and CoreTel did not provide “terminations in the end office of end user lines” because it did not utilize its own facilities to connect its customers by converting incoming calls into Internet data streams.
Congress passed the Telecommunications Act (the “Act”) to reduce the competitive advantages enjoyed by telecommunications carriers, known as “incumbent carriers,” over new market entrants, known as “competing carriers.” Verizon, an incumbent carrier, entered into an agreement (the “ICA”) pursuant to the Act to share network resources with CoreTel, a competing carrier. A dispute arose between CoreTel and Verizon regarding the ICA, with claims and counterclaims between the two parties. The district court organized the various claims into four broad categories: (1) Verizon’s facilities claims relating to its bills for the entrance facilities CoreTel leased; (2) CoreTel’s facilities claims relating to its bills for the entrance facilities that CoreTel contends Verizon leased; (3) Verizon’s reciprocal compensation claims; and (4) Verizon’s claims that CoreTel improperly billed it for services under CoreTel’s tariffs. The district court granted summary judgment in favor of Verizon on all claims; CoreTel appealed.
For the first category of claims, the Fourth Circuit determined that CoreTel was entitled to summary judgment on both parties’ claims for declaratory relief that related to Verizon’s facilities charges. The Court noted that a provision in the ICA authorized CoreTel to lease entrance facilities from Verizon at “rates[, which were listed at cost basis] and charges, set forth in this Agreement.” For the second category of claims, the Court reasoned that CoreTel’s trunk ports and multiplexers are not entrance facilities, Verizon was entitled to summary judgment on CoreTel’s facilities claims. For the third category of claims, the Court reasoned that Verizon did not have to pay reciprocal compensation charges for calls even if Verizon did not provide “EMI data” to CoreTel because Verizon and that data were needed to properly categorize every call. For the fourth category of claims, the Court reasoned that CoreTel did not deploy its own facilities to connect it to its customers by converting incoming calls into an Internet data stream once they reached CoreTel’s office. Accordingly, CoreTel did not provide “terminations in the end office of end user lines” as required by its tariffs. Thus, CoreTel’s general definition of switched-access service that explicitly permitted CoreTel to charge for that service did not override the more specific definition of end-office switched access provided in the Communications Act of 1934.
SANTORO v. ACCENTURE FED. SERVS., LLC, NO. 12-2561
Decided: May 5, 2014
The Fourth Circuit affirmed the district court’s order compelling the Appellant to arbitrate his federal claims, and held that where the Appellant does not pursue his Dodd-Frank whistleblower claims, neither 7 U.S.C. § 26(n)(2) nor 18 U.S.C. § 1514A(e)(2) override the Federal Arbitration Act’s (FAA) mandate that arbitration agreements are enforceable.
The appellant started his employment at Accenture in 1997, and progressed through several positions over the years. In 2005, the appellant signed an employment contract that automatically renewed each year, and included an arbitration provision stating that all disputes that arose out of appellant’s employment at Accenture would be settled through arbitration. Appellant alleged that the new supervisor he received in 2010 disliked him. In 2011, Accenture terminated appellant’s employment as a cost cutting measure, and replaced him with a younger employee. Appellant then filed suit for age discrimination under the District of Columbia’s Human Rights Act. Accenture moved to compel the appellant to submit to arbitration, and appellant opposed Accenture’s motion to compel, and stated that the arbitration clause was void under the whistleblower provisions of the Dodd-Frank Act. The district court rejected appellant’s argument, and granted defendant’s motion to compel arbitration. However, while the motion to compel was pending, appellant filed another action stating claims under the ADEA, FMLA, and ERISA. Accenture moved to compel arbitration for these claims as well. The district court granted Accenture’s motion, and found that because appellant did not bring a Dodd-Frank whistleblower claim, appellant could not use Dodd-Frank to invalidate a valid arbitration clause. Appellant filed a timely appeal.
The Fourth Circuit found that Congress enacted the FAA in 1925, and stated that arbitration agreements are valid and irrevocable unless equity or law determines otherwise. Further, the Court noted that the FAA embodies the national policy of favoring arbitration, and therefore courts should “rigorously enforce arbitration agreements according to their terms.” Am. Express Co. v. Italian Colors Rest., 133 S. Ct. 2304, 2309 (2013). However, the Court mentioned that the FAA could be overridden by a contrary congressional command. Here, the appellant argued that Dodd-Frank represented a “contrary congressional command” and overrode the valid arbitration clause in his employment contract. Dodd-Frank strengthened whistleblower protections for employees that report illegal or fraudulent activities conducted by their employers. Dodd-Frank includes 7 U.S.C. § 26(n)(2) and 18 U.S.C. § 1514A(e)(2), which prohibit retaliation against a whistleblower employee, and create causes of action and remedies for these employees. Appellant argued that because his employment contract did not carve out Dodd-Frank claims from arbitration, and requires those claims to be arbitrated, that the entire arbitration agreement was invalid or unenforceable. However, the Fourth Circuit stated that where an arbitration clause neglects to exempt Dodd-Frank whistleblower claims from arbitration, it does not follow that non-whistleblowers claims are similarly prohibited from arbitration. Further, the Fourth Circuit found that nothing in Dodd-Frank to indicate that Congress intended to bar the arbitration of every claim simply because the agreement did not exempt Dodd-Frank claims. Thus, the appellant’s argument, in light of Dodd-Frank’s language and context, failed to meet the burden of showing that Dodd-Frank represents a “contrary congressional command” and overrode the validity of arbitration agreements according to the FAA.
-Alysja S. Garansi
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).
– 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.
– Wesley B. Lambert
TRANS ENERGY, INC. V. EQT PRODUCTION CO., NO. 12-2553
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
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.
– W. Ryan Nichols
KENNEY V. THE INDEPENDENT ORDER OF FORESTERS, NO. 13-1788
Decided: March 10, 2014
The Fourth Circuit Court of Appeals reversed the district court’s dismissal of the insurance beneficiary’s complaint against the insurance company, for bad-faith “handling” of her claim for proceeds on the policy, pursuant to the West Virginia Unfair Trade Practices Act (“WVUTPA”). The Fourth Circuit held that actions brought pursuant to the WVUTPA sound in tort and not in contract. The Fourth Circuit further held that West Virginia law governs the underlying lawsuit and that the complaint states a claim upon which relief can be granted.
On September 19, 2011, Ronald Kenney passed away, leaving his wife, Audrey Kenney (“Kenney”) as the sole beneficiary of a life-insurance policy (the “policy”) issued by The Independent Order of Foresters (“IOF”), a Canadian corporation. At the time of Mr. Kenney’s death, the Kenneys were residents of West Virginia. At the time that IOF issued the policy, the Kenneys resided in Virginia. The policy contains a choice-of-law provision that states that rights will be governed by “the laws of the State in which this certificate is delivered.” On September 21, 2011, Kenney filed a claim with IOF to collect the policy benefits, which she believed to be $130,000, but IOF responded that the policy was worth only $80,000. However, although the policy was originally worth only $80,000, Mr. Kenney subsequently applied for and received a $50,000 increase in coverage. For almost one year, IOF refused to pay $130,000 to Kenney. On July 20, 2012, IOF reversed course and agreed to pay $130,000.
Kenney sued IOF in West Virginia state court, pursuant to the WVUTPA. She acknowledged that she had obtained the coverage to which she was always entitled. However, she alleged that IOF’s conduct in connection with its handling of her claim constituted an unlawful settlement practice prohibited by the WVUTPA.
On appeal, the Fourth Circuit addressed three issues: (1) whether Kenney’s lawsuit pursuant to the WVUTPA sounds in tort or contract; (2) whether West Virginia law or Virginia law governs the outcome of the suit pursuant to West Virginia’s choice-of-law rules; and (3) whether the complaint’s factual allegations sufficiently state a claim upon which relief can be granted.
First, the Fourth Circuit concluded that Kenney’s WVUTPA claim sounds in tort. Although Kenney’s WVUTPA claim would not exist but-for the policy, her claim was not predicated on the terms of the policy itself; rather Kenney’s complaint makes clear that her cause of action stems from IOF’s allegedly bad-faith “handling” of her claim for proceeds on the policy. In other words, not withstanding the repeated references to the policy (a contract) in the complaint, the “essential claim” underlying Kenney’s lawsuit is IOF’s allegedly tortious conduct. The tort-nature of the action is further evidenced by the type of damages available under the WVUTPA and the type of relief prayed for in the complaint. A successful plaintiff suing pursuant to the WVUTPA may recovery attorney’s fees and punitive damages, which are not available in contract cases.
Second, the Fourth Circuit concluded that West Virginia law applies pursuant to the lex loci delicti approach and the Restatement approach. Under the lex loci delicti choice-of-law approach, courts apply the “law of the place of the wrong.” The Fourth Circuit rejected IOF’s argument that Kenney felt the effects of its allegedly unlawful conduct in Virginia, the state where the policy was issued and where Mr. Kenney applied for the increase in coverage. The Kenneys moved from Virginia to West Virginia in 2003 and lived there continuously until Mr. Kenney passed away in 2011. Kenney filed her claim on the policy with IOF from West Virginia and remains a West Virginia resident. Therefore, the injury to Kenney undoubtedly occurred in West Virginia, not Virginia, and West Virginia law applies pursuant to the lex loci delicti choice-of-law approach.
The Fourth Circuit then addressed the Restatement choice-of-law approach, which applies the law of the state with the most significant relationship to the occurrence and the parties under the principles stated in § 6. Section 145(2) then lists four contacts to consider determining the most significant relationship. The first is “the place where the injury occurred,” which is West Virginia. The second is “the place where the conduct causing the injury occurred,” which is Canada, the place where the letter denying the full benefit of the policy to Kenney was sent from IOF. The third is “the domicile, residence, nationality place of incorporation and place of business of the parties.” Here, Kenney is currently a West Virginia resident and IOF is headquartered in Canada. The fourth is “the place where the relationship, if any, between the parties is centered,” which is West Virginia, where Kenney sought to collect, and was denied, policy benefits. In sum, none of the contacts point to Virginia, and three of the four point to West Virginia.
However, the contacts must be analyzed against several factors set forth in section 6, which, inter alia, include: “the relevant policies of the forum;” “the relevant policies of other interested states and the relative interests of those states in the determination of the particular issue;” “the protection of justified expectations;” and “the basic policies underlying the particular field of law.” The Fourth Circuit rejected IOF’s argument that, based on Oakes, the section 6 factors lead to applying Virginia law. In contrast to the Oakes plaintiff, who filed a claim in the nonforum state, Kenney filed a claim with the Commissioner in West Virginia- not an analogous entity in Virginia. Thus, the relevant policies of West Virginia are operative, and its public policy should be “vindicated.”
Unlike the majority of states, it is well settled that West Virginia law, and the WVUTPA specifically, allows plaintiffs to recover for unfair settlement practices independent of any claim on a policy or contract. The difference between West Virginia’s law and Virginia’s law is substantial: one state’s law allows Kenney’s cause of action to proceed and the other state’s law does not. West Virginia courts will not apply the substantive law of a foreign state when that state contravenes its public policy. Accordingly, even assuming that the majority of the section 145(2) contacts point to Virginia law–which, as analyzed above, they do not—West Virginia’s favoritism toward laws that align with its own public policy trumps any comity to Virginia’s law. Therefore, West Virginia law also applies pursuant to the Restatement approach and the district court erred in determining that Virginia law applies.
Finally, the Fourth Circuit concluded that Kenney’s complaint stated a claim upon which relief could be granted pursuant to West Virginia law. IOF’s motion to dismiss, its opposition to Kenney’s motion for reconsideration, and its brief on appeal, each focus nearly exclusively on resolving the issue of which state’s law applies and on arguing that Kenney’s complaint failed to state a claim pursuant to Virginia law. IOF never contended, however, that Kenney’s complaint would also fail to state a claim upon which relief could be granted should West Virginia law apply; consequently, IOF waived any such argument.
– Sarah Bishop
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.
– W. Ryan Nichols
DANA CLARK V. ABSOLUTE COLLECTION SERVICE, NO. 13-1151
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
Drager v. PLIVA USA, Inc., No. 12-1259
Decided: January 28, 2014
The Fourth Circuit held that the United States District Court for the District of Maryland did not abuse its discretion by denying Shirley Gross’s (Gross) request to amend her complaint, and that the district court did not commit error by finding Gross’s state law tort causes of action to be preempted by the Federal Food, Drug, and Cosmetics Act (FDCA), 21 U.S.C. §§ 301 et seq. The Fourth Circuit therefore affirmed the judgment of the district court.
Gross was prescribed the drug Reglan in 2006. Reglan, a brand of metoclopramide, is “used to treat gastroesophageal reflux disease and other ailments.” Gross also took a generic metoclopramide produced by PLIVA USA, Inc. (PLIVA) for ten months. Gross developed permanent injuries as a result of her long-term use of metoclopramide. In January 2010, Gross sued PLIVA and certain manufacturers of brand name Reglan, alleging “state law claims of negligence, breach of warranty, fraud and misrepresentation, strict liability, and failure to warn. In November 2010, the district court dismissed Gross’s claims against the brand name producers; in April 2011, the district court stayed the proceedings against PLIVA pending the decision of the Supreme Court in PLIVA, Inc. v. Mensing, 131 S. Ct. 2567. The district court lifted the stay after the Supreme Court issued its decision in Mensing. PLIVA then filed motion for judgment on the pleadings, arguing that under Mensing, the FDCA preempted Gross’s claims. In her response to this motion, Gross asked the district court for leave to amend her complaint, seeking to make allegations “that PLIVA violated a state law duty by failing to update its warnings to include changes made by brand name manufacturers in 2004.” The district court granted PLIVA’s motion in November 2011 and denied Gross’s request to amend her complaint. Gross then filed a motion to alter or amend the judgment; the district court denied the motion in January 2012. Gross died during the pendency of the present action, and Arthur L. Drager (Drager) continued the case as a personal representative for her estate. On appeal, Drager argued that the district court abused its discretion by denying Gross’s request to amend her complaint; Drager further contended that the district court committed error by finding Gross’s state law tort causes of action to be preempted by the FDCA.
With regard to the district court’s denial of Gross’s request to amend her complaint, the Fourth Circuit noted that Gross never actually filed a motion to amend or a proposed amended complaint. With regard to Drager’s contentions regarding Gross’s state tort claims, the Fourth Circuit noted that, under Mensing and Mutual Pharmaceutical Co., Inc. v. Bartlett, 133 S. Ct. 2471, manufacturers of generic drugs cannot—under the FDCA—unilaterally change their labeling, change their product formulations, be required to leave the market, or accept liability for state torts. The Fourth Circuit then found that the district court’s failure to conduct a full preemption analysis did not constitute reversible error. With regard to Gross’s negligence claims, the Fourth Circuit found it questionable as to whether Maryland recognizes “specific causes of action for negligent testing, inspection, and [post-market] surveillance”—and that, even if Maryland recognizes a general duty to protect consumers from injuries resulting from negligent marketing and sales, a manufacturer of generic drugs with a product that is unreasonably dangerous as sold could not satisfy the general duty without taking one of the four prohibited actions from Mensing and Bartlett. With regard to Gross’s strict liability claims, the Fourth Circuit found that Drager’s arguments were based on the “stop selling” rationale prohibited by Bartlett; the Fourth Circuit also found the difference between the state law method of assessing the unreasonableness of a products’ danger at issue in Bartlett (risk utility) and at issue under Maryland law (consumer expectations) immaterial. Next, the Fourth Circuit found that PLIVA breached the implied warranty of merchantability and the implied warranty of fitness for a particular purpose by selling metoclopramide—but that PLIVA’s only method of avoiding liability for breach of these warranties was leaving the market. Furthermore, while Drager contended that breach of express warranty is a violation of contract law—and therefore not preempted by the FDCA—the Fourth Circuit noted that “the content of generic drug manufacturers’ product descriptions and other assertions is mandated by federal law,” and found that PLIVA could only avoid liability for breaching this warranty by exiting the market. Lastly, with regard to Gross’s allegations regarding negligent misrepresentation and fraudulent concealment of safety information, the Fourth Circuit found that—assuming PLIVA made false or misleading representations—PLIVA’s only recourse would be to exit the market or accept state tort liability.
– Stephen Sutherland
United States ex rel. Bunk v. Gosselin World Wide Moving, N.V., No. 12-1369
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
Seney v. Rent-A-Center, No 13-1064
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
Perini/Tompkins Joint Venture v. ACE American Insurance Company, No. 12-2415
Decided: December 16, 2013
The Fourth Circuit held that, under Maryland statutory law, Maryland common law, or Tennessee law, the United States District Court for the District of Maryland properly granted summary judgment to ACE American Insurance Company (ACE), as Perini/Tompkins Joint Venture (PTJV)’s failure to obtain ACE’s consent prior to settling an underlying dispute precluded PTJV from claiming reimbursement under certain insurance policies with ACE. Furthermore, PTJV did not demonstrate that ACE intentionally relinquished its right to invoke the voluntary payment and no-action clauses in these policies. The Fourth Circuit therefore affirmed the decision of the district court.
In 2005, Gaylord National LLC (Gaylord) hired PTJV to manage the construction of a $900 million hotel and convention center (the Project) in Maryland. Under its construction contract with PTJV, Gaylord agreed to purchase an Owner Controlled Insurance Policy (OCIP)—a program sold by ACE “to insure only the Project and its participants.” Gaylord purchased two OCIP policies from ACE: a general liability policy and an excess liability policy (collectively, the Policies). PTJV was, by endorsement, added as a named insured on both Policies. Each of the Policies contained voluntary payment clauses, under which an insured could not—except at its own cost—“voluntarily make a payment, assume any obligation, or incur any expense, other than for first aid, without [ACE’s] consent.” Each of the Policies also contained no-action clauses, under which an insured could not sue for coverage “unless all of [the] terms [of the Coverage Part] have been fully complied with.”
During construction, certain property damage to the Project occurred. After the completion of the Project, PTJV and Gaylord settled certain litigation arising from the Project—but PTJV did not seek to obtain ACE’s consent prior to settlement. On May 6, 2009—about six months after the settlement and almost two years after the underlying damage to the Project occurred—PTJV sent ACE a formal, written notice of an insurance claim. The letter did not mention PTJV’s settlement with Gaylord. ACE issued a reservation of rights letter over ten months later, listing the potential grounds for denial of coverage. On December 13, 2010, PTJV sued ACE in the district court, alleging breach of contract and other claims. The district court granted summary judgment in ACE’s favor, and PTJV appealed. PTJV argued on appeal that, inter alia, ACE must demonstrate actual prejudice before denying coverage under section 19-110 of the Maryland Code or under Maryland common law—thus creating an issue of fact—and that certain statements and conduct on the part of ACE should constitute waiver of its right to invoke the voluntary payment and no-action provisions in the Policies.
The Fourth Circuit first noted a choice of law issue—specifically, whether to apply the law of Maryland or the law of Tennessee, the state in which the Policies became binding insurance contracts. However, the Fourth Circuit found that the outcome of the case was the same under either Maryland or Tennessee law. While section 19-110 of the Maryland Code provides that the insurer may only disclaim coverage due to the insured’s failure to cooperate or failure to provide notice if the insurer proves, by a preponderance of the evidence, “that the lack of cooperation or notice has resulted in actual prejudice to the insurer,” the court applied the Maryland case Phillips Way, Inc. v. American Equity Insurance Co., 795 A.2d 216, to find this section inapplicable to PTJV’s failure to meet a condition precedent in the no-action clause. The Fourth Circuit also held that ACE was not required to show prejudice under Maryland common law; the court applied a broad reading of Phillips Way, under which “an insured’s failure to obtain the insurer’s prior consent to a settlement does not ever require prejudice.” However, even if ACE was required to show prejudice, the court held that ACE would have been prejudiced as a matter of law per the Maryland case of Prince George’s County v. Local Gov’t Ins. Trust, 879 A.2d 81. Furthermore, the Fourth Circuit held that the Tennessee cases of Anderson v. Dudley Moore Insurance Co., 640 S.W.2d 556, and State Auto. Ins. Co. v. Lashlee-Rich, 1997 WL 781896, counseled the same result: ACE would also not be required to demonstrate prejudice under these cases. Lastly, with regard to ACE’s purported waiver of its right to invoke the voluntary payment and no-action clauses, the Fourth Circuit noted that the statements and conduct cited by PTJV did not demonstrate intentional relinquishment. Indeed, ACE stated that it would not waive “any other terms, conditions, exclusion or provisions” of one of the Policies in a September 8, 2010 letter, in which ACE offered to pay part of the claim.
– Stephen Sutherland
Gaines Motor Lines, Inc. v. Klaussner Furniture Industries, Inc., No. 12-2269
Decided: October 30, 2013
The Fourth Circuit dismissed a complaint for lack of subject matter jurisdiction finding that, absent a federal tariff, federal courts have no subject matter jurisdiction over a motor carrier’s breach of contract claim against a shipper for unpaid freight charges.
Plaintiffs, a group of motor carriers (“Carriers”), had agreements through Salem Logistics Traffic Services, LLC (“Salem”) to transport furniture for Klaussner Furniture Industries (“Klaussner”) throughout the United States. Salem coordinated all shipping logistics for Klaussner. Klaussner provided a fee to Salem for its services and Salem, in turn, agreed to pay all Carriers directly. After initially making payment, Salem defaulted on its obligation to pay the Carriers and went out of business. The Carriers filed suit against Klaussner under the Interstate Commerce Commission Termination Act (“ICCTA”) to recover the unpaid freight charges. The District Court found that Klaussner was not liable for the unpaid freight charges. Salem appealed.
On appeal, Klaussner, the prevailing party at the district court, for the first time argued that the district court lacked subject matter jurisdiction over the dispute. The Carriers responded that federal courts had jurisdiction over their claim under the ICCTA. In the alternative, Carriers argued that, even if the ICCTA did not provide a federal cause of action, the federal courts should create a federal cause of action because the ICCTA preempted state law breach of contract claims. The Fourth Circuit disagreed with the Carriers on both counts and found that the federal courts lacked subject matter jurisdiction.
First, the court held that the ICCTA did not provide a federal cause of action. The court explained that historically, Congress regulated all motor carriers to file a tariff with the Interstate Commerce Commission that included their price. Any disputes over price were adjudicated through a federally created administrative body. In 1995, however, Congress deregulated the motor carrier industry by passing the ICCTA, which removed the tariff requirement for most shipping contracts, and instead allowed the free market to set the prices for shipping. Congress retained some regulation over motor carriers by requiring compliance with federal licensing, employment, safety, and accessibility requirements. The court found that merely allowing private negotiation of shipping rates under the ICCTA, replacing the tariff requirement, was not enough to create a federal private cause of action under the ICCTA. The court contrasted that provision with another provision in the ICCTA that explicitly provided federal jurisdiction for a claim seeking compensation for goods damaged in shipping. Additionally, the court found the ICCTA’s regulation of billing and collection practices insufficient to create federal jurisdiction because the regulations does not impose any obligations concerning rates.
Second, the court held that the ICCTA did not preempt the Carrier’s state law breach of contract claim. The court explained that the ICCTA’s preemption clause was taken directly from the Airline Deregulation Act (“ADA”). The Supreme Court’s interpreted the ADA to recognize an exception to preemption for routine breach of contract claims against airlines. Given the Supreme Court’s interpretation of the same provision under the ADA, the Fourth Circuit held that the ICCTA did not preempt ordinary breach of contract claims. Furthermore, the court emphasized that the resolution of the claim required the interpretation of no federal statute or regulation. Therefore, the court concluded that it lacked subject matter jurisdiction and dismissed the suit.
– Wesley B. Lambert
Federal Deposit Insurance Corp. v. Cashion, No. 12-1588
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.
ABB Inc. v. CSX Transportation, Inc. and Transportation and Logistics Council, Inc., No. 12-1674
Decided June 7, 2013
The Fourth Circuit Court of Appeals reversed the portion of the district court’s judgment in favor of CSX Transportation Inc. (CSX) on its claimed liability limitation of $25,000. The court concluded that the Carmack Amendment to the Interstate Commerce Act, 49 U.S.C. § 11706, subjected CSX to full liability for the shipment, and that the parties did not modify CSX’s level of liability by written agreement as permitted in that statute.
In March 2006, rail carrier CSX transported an electrical transformer worth about $1.3 million from shipper ABB Inc.’s plant in St. Louis, Missouri to a customer in Pittsburgh, Pennsylvania. ABB filed a complaint in the district court alleging the transformer was damaged in transit and that CSX was liable for over $550,000 – the full amount of the damage. CSX denied full liability, and alternatively contended that even if the court found CSX liable for the cargo damage, the parties had agreed in the bill of lading to limit CSX’s liability to a maximum of $25,000. The Fourth Circuit disagreed.
The court discussed the history of interstate freight shipments. Congress enacted the Interstate Commerce Act in 1887 to regulate the transportation industry. Until 1995, carriers were required to file their rates, or “tariffs”, publicly with the ICC. In 1995 this requirement was abolished to ease regulatory burdens on the transportation industry. The Carmack Amendment “creates a national scheme of carrier liability for goods damaged or lost during interstate shipment under a valid bill of lading.” In other words, the Carmack Amendment constrains carriers’ ability to limit liability by contract. All rail carriers remain fully liable for damage caused to its freight unless the shipper has agreed otherwise in writing. However, the Carmack Amendment has an exception allowing for limited liability, which is a very narrow exception to the general rule imposing full liability on the carrier. The court’s analysis centered on the requirements of this exception to the Carmack Amendment to exempt a carrier from liability.
The court analyzed two documents: (1) the bill of lading governing the March 2006 shipment and (2) the CSX Price List 4605. The bill of lading (“BOL”) was a partially completed copy of ABB’s standardized bill of lading. Although the BOL included general information about the shipment, it did not include a price for the shipment or indicate the level of liability assumed by CSX for lost or damaged cargo. The Price List was “issued” by CSX on November 18, 2005 and became “effective” on December 14, 2005. The section of Price List 4605 titled “Price Restrictions” listed 18 provisionary rules, one of which required the shipper to negotiate directly with the carrier to receive coverage for full liability. Although no direct negotiation occurred, none of ABB’s representatives were aware of Price List 4605 prior to the March 2006 shipment.
However, the Fourth Circuit decision really turned on the BOL because, as the court recognized, the Carmack Amendment imposes the burden of securing limited liability on the carrier, CSX, not on the shipper, ABB. On its face, the BOL governing the March 2006 shipment was silent regarding the extent of CSX’s liability. The space on the BOL labeled “rate authority,” where a notation regarding rate and liability normally would be listed, was left blank. Moreover, the BOL did not contain any references to an identifiable classification, a rate authority code, a price list, or any other indication that the carrier assumed only limited liability. The court rejected CSX’s argument that the Price List 4605 is incorporated by reference into the BOL through standardized language appearing on the BOL, indicating that the shipper agreed to the terms and conditions in “the classification or tariff which governs the transportation of this shipment.” The court subsequently found the BOL was an insufficient writing to constitute exemption from the Carmack Amendment and to limit CSX’s (the carrier) liability. The court believed its ruling will encourage parties to employ precise bills of lading, which reflect fully and specifically the parties’ choice of liability terms, and to memorialize these terms in writing as Congress intended by passage of the Carmack Amendment.
– Sarah Bishop
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.
– John G. Tamasitis
Central Telephone Co. of Virginia v. Sprint, No. 12-1322
Decided: April 29, 2013
The Fourth Circuit affirmed the United States District Court for the Eastern District of Virginia on all issues arising out of a dispute over an interconnection agreement entered into by nineteen incumbent local exchange carriers (collectively “CenturyLink”) and Sprint Communications Company of Virginia, Inc., and Sprint Company L.P. (collectively “Sprint”) under the Telecommunications Act of 1996 (the “1996 Act”).
In April 2004, when the interconnection agreements (“ICAs”) at issue in this case were entered into, both the CenturyLink Plaintiffs and Sprint were wholly owned subsidiaries of Sprint Corporation. In 2006, Sprint Corporation spun off the CenturyLink Plaintiffs, which then formed a separate company that was ultimately acquired by CenturyTel, Inc. in July 2009. The resulting entity began doing business as “CenturyLink.” The parties did business together for several years in accordance with the terms of the ICA’s. However, beginning in June 2009, Sprint began filing written disputes with CenturyLink, ultimately leading to their unilaterally reducing rates and demanding that CenturyLink remit previous payments made by Sprint, which Sprint deemed to be in excess of what it should have paid. In November 2009, CenturyLink filed a breach of contract claim against Sprint. Sprint moved to dismiss and counterclaimed alleging that CenturyLink breached the North Carolina ICA (the “NC ICA”) by billing Sprint for local traffic not subject to access charges. In two separate bench trials, the district court found in favor of the CenturyLink Plaintiffs for both the breach of contract claim and Sprint’s counterclaim. Following the completion of both bench trials, while preparing his financial disclosure for the financial year of 2010, the presiding judge discovered that he had owned eighty shares of CenturyLink in a managed IRA during the time he presided over the trials. After alerting the parties and considering a briefing between the parties, the judge determined that the circumstances did not require recusal or vacatur. Sprint appealed.
On appeal, Sprint argued that the district court should not have gotten to the merits of the case because its role is limited to reviewing a State commission’s determination and no such determination occurred here. However, the Fourth Circuit, supported by the FCC’s amicus brief, held that neither the text nor structure of the 1996 Act supported Sprint’s position that the Act contains a statutory exhaustion requirement. In so holding, the Fourth Circuit reasoned that, although other circuits have interpreted the 1996 Act to confer authority upon State commissions to interpret and enforce an ICA, nothing in the text grants State commissions such authority; thus it follows that, likewise, nothing grants State commissions the exclusive authority to do so in the first instance. Similarly, the court did not find it necessary to impose such a requirement as a prudential matter. Sprint further contended that the district court should not have gotten to the merits of the case because the district judge should have recused himself and vacated all orders and judgments issued in the case. The Fourth Circuit did not agree, citing to the judicial recusal statute’s definition of “financial interest,” which specifically carves out an exemption for ownership of securities in a common investment fund over which a judge exercises no management responsibilities.
Having concluded that the district court properly reached the merits of the case, the Fourth Circuit addressed Sprint’s alternative arguments on the merits. First, Sprint maintained that the district court misconstrued the ICAs as applying to long distance calls that are transmitted via the Internet or a private IP network, known as VoIP traffic. Because the court found that the ICAs were ambiguous as to whether it applied to VoIP traffic, it looked to the previous course of dealings between the parties and noted that Sprint drafted the ICAs at issue. Therefore, the court was compelled to reject this argument. Second, Sprint contended that CenturyLink improperly billed Sprint for local calls under the NC ICA. Sprint alleged that CenturyLink improperly identified calls as intrastate long distance, in violation of the terms of the NC ICA, using an impermissible method—the Billing Telephone Number (“BTN”) method, rather than the Calling Party Number (“CPN”) method. However, the Fourth Circuit found that the NC ICA did not specifically establish a method for identifying local traffic. Therefore, because the BPN method is an acceptable identification method used in the industry, Sprint’s counterclaim was rejected.
– W. Ryan Nichols
Spaulding v. Wells Fargo Bank, N.A., No. 12-1973
Decided: April 19, 2013
The Fourth Circuit affirmed the decision of the district court to dismiss the Appellants’ lawsuit for failure to state a claim upon which relief could be granted. Appellants asserted five separate claims against Wells Fargo Bank (“Wells Fargo”) after Wells Fargo denied the Appellants’ application for a mortgage modification under the Home Affordable Modification Program (“HAMP”).
The Appellants, after falling on difficult financial times and failing to keep up with their mortgage payments, submitted a “hardship letter” to Wells Fargo explaining their financial difficulties. The Appellants included two weekly pay stubs with their mortgage modification application. After receiving the letter, Wells Fargo responded and requested additional proof of income, specifically requesting two additional weekly pay stubs. The letter from Wells Fargo stated that if the information requested was not received within ten days, the modification request would be considered cancelled. The Appellants submitted the additional proof of income eleven days past the deadline. Wells Fargo subsequently sent a delinquency notice. Three months later, Wells Fargo sent a second HAMP introduction letter and application packet and additional delinquency notices along with a “Notice of Intent to Foreclose.” Later, Wells Fargo sent Appellants a denial of their HAMP application, citing failure to provide requested documentation within the specified time period. Appellants continued to apply for a mortgage modification and were denied each time. Approximately a year after the initial denial, Appellants filed suit against Wells Fargo alleging five counts: breach of an implied-in-fact contract, negligence, violations of the Maryland Consumer Protection Act (“MPCA”), negligent misrepresentation, and common law fraud. Wells Fargo subsequently removed the action to federal court. The district court dismissed the complaint in its entirety citing the absence of a Trial Period Plan (“TPP”) agreement. Without such an agreement, there was no privity of contract and the suit seeking enforcement of the HAMP guidelines would have to fail without such an agreement. The TPP agreement is implemented after the bank determines a borrower is eligible for mortgage modification.
The Fourth Circuit affirmed the district court’s decision. With regards to the breach of an implied-in-fact contract claim, the Appellants asserted there was sufficient consideration given on their side by submitting an application to give rise to an implied-in-fact contract. Moreover, the Appellants argued that Wells Fargo “bound itself to comply with the applicable ‘standard of care’” for the following reasons: Wells Fargo entered into an agreement with the U.S. Treasury to participate in HAMP and consented to being publicly listed as a HAMP participant, Wells Fargo promise in the foreclosure notice that if the Appellants were eligible for HAMP then Wells Fargo would look into the Appellants’ financial situation and determine an affordable payment plan, and finally, Wells Fargo regularly sent “HAMP Starter Kits” that stated if Appellants provided the required documentation, then Wells Fargo would determine if they qualified for the TPP. The Fourth Circuit held that none of this conduct was “sufficient to constitute a ‘meeting of the minds’” to create an implied-in-fact contract. More specifically, the court asserted that Wells Fargo’s offer “to process an application under HAMP” only required to Wells Fargo to process the application, which they actually did, and required them to do nothing more. With respect to the negligence claim, the Fourth Circuit held that the evidence showed that Wells Fargo owed no duty to the Appellants. Without “special circumstances,” that did not exist here, “banks typically do not have a fiduciary duty to their customers.” Because no contractual privity between the parties had been pled or otherwise proven, then no duty existed. For the MPCA claim, Appellants alleged that Wells Fargo made a misrepresentation when it requested more proof of income information and cited the failure to provide the required information as a reason for rejecting their HAMP application. According to the Appellants, Wells Fargo had enough information when the original two pay stubs were sent with their “hardship letter.” The court rejected this claim because the MPCA claim “sounds in fraud” and is therefore subject to heightened pleading standards and Appellants failed to show that Wells Fargo’s statements were made with the “purpose of defrauding” the Appellants. Moreover, Appellants could not prove that Wells Fargo actually made any false statements. Regarding the negligent misrepresentation claim, the court held that Appellants had failed to establish that any of the statements made by Wells Fargo were false and that Appellants “took action in reliance on the alleged false statements.” Finally, the court held Appellants failed to satisfy any of the elements of their common law fraud claim for many of the reasons stated before. Specifically, the court asserted that Appellants could not show that Wells Fargo actually made any false representations nor did Appellants satisfy the heighted pleading standards associated with a common law fraud claim.
– John G. Tamasitis
Southern Walk at Broadlands Homeowners Assoc., Inc. v. OpenBand at Broadlands, LLC, No. 12-1331 and No. 12-2083
Decided: April 5, 2013
Consolidating two cases, the Fourth Circuit Court of Appeals affirmed the district court’s dismissal of Southern Walk’s declaratory judgment action, as well as OpenBand’s request for attorneys’ fees. However, to the extent that Southern Walk’s declaration request was dismissed with prejudice, the Fourth Circuit vacated and remanded with instructions to dismiss without prejudice.
In 2001, OpenBand, a wire-based video service provider, contracted with Southern Walk securing the exclusive right to provide wire-based video services to Southern Walk homeowners. Seeking a declaratory judgment, Southern Walk alleged that the 2007 Exclusivity Order issued by the FCC rendered the 2001 contract “null and void.” Based on lack of standing, the district court dismissed Southern Walk’s claim with prejudice. Subsequently, OpenBand moved for attorneys’ fees pursuant to a fee-shifting provision in the 2001 contract. That claim was also dismissed. On appeal, the two cases were consolidated.
The Fourth Circuit first addressed the standing issue, noting that Southern Walk had the opportunity to establish standing in its own right or as a representative of its members. The court first examined Southern Walk’s claim that it had standing in its own right and found that its alleged injury was non-redressable because it did not demonstrate personal harm that was traceable to the challenged contract or redresssable by the court. Specifically, Southern Walk claimed that it was harmed personally by a provision in the contract that required it to pay for all services from OpenBand for which its member households fail to pay. However, the court reasoned that regardless of the challenged exclusivity arrangement, the bulk billing provisions of the 2001 contract would still require payment. Thus Southern Walk would still be required to pay for OpenBand’s services regardless of the outcome of the case. Consequently, Southern Walk did not allege any economic injury to itself caused by the exclusivity arrangement.
Next, the Fourth Circuit examined Southern Walk’s standing as a representative of its members and found insufficient standing because Southern Walk failed to identify a single specific member. Citing a Supreme Court decision, the court noted that an organization must make specific allegations establishing that at least one identified member had suffered or would suffer harm in order to establish standing as a representative of its members. The court rejected Southern Walk’s contention that the identification requirement only applied to large, diverse advocacy groups with voluntary membership refusing to create an exception for smaller groups with mandatory membership, like homeowners’ associations. Similarly, Southern Walk’s alternative contention that it satisfied the identification requirement by alleging that each of its members were harmed by the exclusivity arrangement was also rejected because the complaint only alleged that the homeowners’ association was being harmed, not any of its individual members.
Finally, the court addressed OpenBand’s challenge to the district court’s refusal to grant attorneys’ fees pursuant to the fee-shifting provision in the 2001 contract. The fee-shifting provision authorized the prevailing party, in any litigation commenced in connection with the contract, to recover attorneys’ fees. Because a dismissal for lack of standing does not constitute a determination on the merits, the court held that OpenBand was not a “prevailing party.”
– W. Ryan Nichols
Muriithi v. Shuttle Express, Inc., No. 11-1445
Decided April 1, 2013
The Fourth Circuit Court of Appeals reversed the district court’s holding that it could not compel arbitration based on the unconscionability of three provisions in the parties’ franchise agreement. The Fourth Circuit did not find these contractual provisions unconscionable and, therefore, vacated the district court’s judgment and remanded the case for entry of an order compelling arbitration.
The plaintiff, Samuel Muriithi, brought suit based on the franchise agreement he signed as part of his employment with the defendant taxicab service, Shuttle Express, Inc (“Shuttle Express”). Muriithi claims that Shuttle Express induced him to sign a Unit Franchise Agreement that improperly classified him as an “independent contractor,” rather than an “employee” and thereby afforded him lesser compensation. Muriithi asserted claims against Shuttle Express based on the Fair Labor Standards Act and Maryland state law. Shuttle Express moved to dismiss the complaint or to compel arbitration. Shuttle Express based its motion to compel arbitration on the Arbitration Clause included in the parties’ Franchise Agreement. The district court held that because Muriithi’s claims “arise out of” the Franchise Agreement, they were within the scope of the Arbitration Clause. However, the district court concluded that the Arbitration Clause was not enforceable based on three unconscionable provisions in the Franchise Agreement: (1) the fee-splitting provision, (2) the class action waiver, and (3) the one-year limitations provision.
The Fourth Circuit first addressed the enforceability of the class action waiver. The district court held that the class action waiver prevented Muriithi from fully vindicating his statutory rights and thereby rendered the Arbitration Clause unconscionable. On appeal, Shuttle Express cited the Supreme Court’s recent decision in Concepcion, which held that “[r]equiring the availability of class-wide arbitration interferes with the fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA.” Although Muriithi tried to argue that the Supreme Court’s holding is limited in scope to the FAA’s preemption of state law on this issue, the Fourth Circuit disagreed and concluded that the Supreme Court’s holding was not merely an assertion of federal preemption, but also plainly prohibited application of the general contract defense of unconscionability to invalidate an otherwise valid arbitration agreement under these circumstances.
The Fourth Circuit next addressed the enforceability of the fee-splitting provision. The district court held that this provision imposed prohibitive arbitration costs on Muriithi and thereby rendered the Arbitration Clause unconscionable. However, the Fourth Circuit indicated that the party seeking to invalidate an arbitration agreement based on prohibitive costs bears the “substantial” burden of showing a likelihood of incurring such costs. The Fourth Circuit concluded that Muriithi did not meet this burden because he merely alleged the likelihood of incurring prohibitive costs, rather than establishing the likelihood with firm proof. Muriithi also failed to provide evidence about the value of his claim. Further, Shuttle Express agreed to pay all arbitration costs if this case is referred to arbitration. Therefore, the Fourth Circuit concluded that Muriithi has not carried his burden of showing that he likely would incur prohibitive costs as a result of arbitration subject to the fee-splitting provision.
Finally, the Fourth Circuit addressed the enforceability of the one-year limitations provision, which the district court found unconscionable because it unreasonably restricted Muriithi’s ability to arbitrate “employment-related statutory claims.” Because the one-year limitations provision is not referenced in the Arbitration Clause, but is only applicable generally to the Franchise Agreement, the Fourth Circuit concluded that it was not properly considered by the court in a motion to compel.
– Sarah Bishop
Decohen v. Capital One, N.A., No. 11-2161
Decided: December 26, 2012
In this case, the Fourth Circuit considered whether a federal statute, the National Bank Act (“NBA”), preempted a Maryland law, the Credit Grantor Closed End Provisions (“CLEC”), with respect to a debt cancellation provision in a retail installment contract.
The plaintiff and a local car dealer entered into this retail installment contract for the purchase of a used motor vehicle. Pursuant to the contract, the purchase price would be financed by the dealer, and it would be subject to a bargained-for debt cancellation agreement. This agreement, in turn, provided that in the event that the car was totaled a portion of the remaining debt would be cancelled. After the plaintiff purchased the car, the dealer negotiated the retail installment contract to Capitol One, N.A., a national bank regulated by federal banking laws. When the car was later totaled, and the insurance proceeds were insufficient to cover the total amount outstanding on the loan, the Capital One demanded that the plaintiff make payment to satisfy the remaining loan balance. In response, the plaintiff filed suit against both the national bank and the local dealer, claiming breach of contract and a violation of the CLEC.
Under Maryland state law, to be proper, a debt cancellation agreement must cancel all of the remaining debt on a contract when insurance proceeds do not cover the outstanding balance of the loan. In contrast, federal regulations promulgated under the NBA provide only that a debt cancellation agreement must cancel a portion of the remaining debt. The Fourth Circuit thus had to determine whether the retail installment contract, sought to be enforced by the national bank, was governed by Maryland law or if that law had been preempted by federal law. According to the court, the relevant federal regulations explicitly governed debt cancellation agreements entered into by a national bank. Here, the credit was extended by a local lender and only later was the loan assigned to the national bank. And because the “[fe]deral regulations of national banks do not encompass such a situation” and because “Congress had not occupied the field with regard to debt cancellation agreements, the Maryland law was neither expressly preempted nor field preempted by federal law. Thus, the court held that the plaintiff had properly stated a claim for breach of contract on the basis of Capital One’s refusing to abide by the terms of the CLEC under Maryland law.
-John C. Bruton, III
Huggins v. Prince George’s County, No. 10-2366
Decided: June 27, 2012
Jane Huggins, trading as SADISCO of Maryland, appealed the district court’s grant of summary judgment in favor of Prince George’s County and five County officials. In November 2001, SADISCO purchased a 99.7 acre parcel of land in the County, with the intention of operating a salvage automobile wholesaling business on the parcel. The Property directly abuts a portion of the Andrews Air Force Base, a designated superfund site by the Environmental Protection Agency, which requires priority remedial attention because of the presence of a dangerous accumulation of hazardous wastes. The purchas contract SADISCO signed acknowledged the condition of the property and that the purchaser would have no recourse against the Seller with respect to the environmental condition of the property. On December 20, 2011 SADISCO applied to the County for a use and occupancy permit, and three months later applied for a permit to temporarily house a construction trailer on the Property. On June 12, 2002, the County issued a permit for the trailer, but by the end of October 2002, the County had revoked all outstanding permits to SADISCO based upon violation of numerous County Code provisions, particularly performing grading work on the property without the proper permits and impermissibly operating its business out of the construction trailer.
SADISCO continued to operate its business on the property, and in May 2003, the County filed two petitions in Maryland state court for injunctive relief against SADISCO’s grading permit violations and zoning code violations. On September 2, 3002, SADISCO and the County entered into two consent orders for each petition for injunctive relief, providing that within 60 days SADISCO would obtain the required grading permit and within 90 days vacate the premises until a valid use and occupancy permit as well as a building permit for the trailers. The day before SADISCO signed the consent orders, its attorney sent a letter to a County attorney describing the standard practice of the county to work with property owners to resolve county code violations and to forbear from enforcement as long as the property owner was making good faith efforts to cure its violations. According to SADISCO, the letter memorialized an oral contract between SADISCO and the County that predates the consent orders. The County then granted SADISCO a series of extensions of the deadline for compliance with the consent orders, however on March 18, 2004 the county notified SADISCO of its intention to enforce the Zoning Consent Order as of March 28. At an April 27 meeting various County officials decided to padlock the gate onto SADISCO’s property the next day and allow access only to remove cars and perform other tasks that would bring SADISCO into compliance.
Almost three years later, on March 30, 2007, SADISCO filed the present action against the County and five officials, alleging: 1) violation of SADISCO’s substantive due process rights under the Due Process Clause; 2) violation of SADISCO’s substantive due process rights under the Maryland Declaration of Rights; 3) breach of contract; 4) tortious interference with economic relations; and 5) negligent misrepresentation. In February 2008 the district court dismissed Counts 2, 4, and 5 for failure to comply with the pre-suit notice requirements of the Local Government Tort Claims Act. Count 3 was dismissed as time barred as to a written contract, and proceeded with discovery as to two alleged oral contracts. On July 24, 2009, the district court granted the County summary judgment, dismissing the Officials in their individual capacities from the action on the basis of qualified immunity, as well as the remaining portion of Count 3. On November 9, 2010, the district court granted summary judgment to the county as to Count 1. On appeal, SADISCO challenged all of the district court’s rulings.
As to the breaches of two oral contracts, the district court held that no consideration in favor of the County existed to support a valid oral contract which predated the Consent Orders. The Court of Appeals upheld that determination, and further explained that the parol evidence rule barred the admission of an oral contract because such evidence directly contradicts the terms of the two subsequent written consent orders. As to Count 1, the district court held that SADISCO had not forecast sufficient evidence that it had a property interest protected by the Due Process Clause, as SADISCO did not hold a valid permit at the time the county locked its gates. The Court of Appeals agreed, further stating that even if SADISCO had been in possession of a valid permit, the County’s conduct did not rise to the level of arbitrary or conscience shocking. As to Counts 2, 4, and 5, the district court held that SADISCO failed to comply with the notice requirements of the LGTCA and failed to show good cause for its noncompliance. The LGTCA prohibits an action for unliquidated damages against a local government or its employees unless the plaintiff provides notice of the claim within 180 days after the injury. The doctrine of substantial compliance allows an exception where a plaintiff has sufficiently apprised local governments of their possible liability at a reasonable time thereafter to conduct an investigation. Furthermore, a suit can still proceed if a plaintiff is able to show good cause to waive the requirements and the defendant cannot affirmatively show that its defense has been prejudiced by a lack of required notice. The Court of Appeals held that the district court had not committed an abuse of discretion in finding that SADISCO had failed to comply with the notice requirements and failed to show good cause for their noncompliance.
Wheeling Hospital, Inc. v. Health Plan of the Upper Ohio Valley, Inc., No. 11-1694
Decided: June 27, 2012
A putative class of plaintiffs which included hospitals, physician practice groups, and individual physicians brought a breach of contract action against, inter alia, the Health Plan of the Upper Ohio Valley (“Health Plan”). The plaintiffs alleged that the Health Plan, as an administrator of employment benefit plans, had failed to pay the plaintiffs for the health care services provided to patients covered under the various benefit plans. After several months of litigation, in which the district court had considered and ruled on multiple procedural and substantive motions, the Health Plan made a motion to dismiss the hospital plaintiffs’ claims. The Health Plan argued that pursuant to a clause in the Hospital Service Agreement contracts between itself and the hospital plaintiffs, the breach of contract claims should have been submitted to arbitration. Citing the considerable time and resources that had already been invested in the litigation and the unfair prejudice that would disadvantage the hospital plaintiffs, the district court ruled that the Health Plan had defaulted on its right to arbitrate.
On appeal, the Fourth Circuit reversed the trial court’s decision to deny the Health Plan’s motion to dismiss the hospital plaintiffs’ claims. The court first engaged in a lengthy discussion regarding whether it had jurisdiction to hear the appeal. Because the Health Plan had not specifically invoked the proper sections of the Federal Arbitration Act (“FAA”) in its motion to dismiss, there was a question of whether the Health Plan could utilize the FAA provision which allows immediate appeal of an order denying a petition to arbitrate. Relying on “Congress’ deliberate determination that appeal rules should reflect a strong policy favoring of arbitration, however, the court focused on the substance, rather than the form, of the Health Plan’s motion to dismiss. According to the court, the “Health Plan clearly stated in its motion to dismiss that it was seeking to enforce the arbitration agreement….The memorandum specifically argued that the court should compel separate binding arbitrations for each hospital plaintiffs’ claims pursuant to the express terms of the contracts between the parties.” Thus, because the denied motion to dismiss was, in effect, a motion to compel arbitration, the Fourth Circuit possessed appellate jurisdiction.
Reviewing the merits of the trial court’s order de novo, the court held that the Health Plan had not defaulted on its right to arbitrate the hospital plaintiffs’ claims. The court stated that a party loses its right to stay court proceedings in order to arbitrate if it “substantially utilizes the litigation machinery that to subsequently permit arbitration would prejudice the party opposing the stay.” Expounding on this legal standard, the court stated that even where the party seeking arbitration has engaged in pretrial activity, “the dispositive question is whether the party objecting to arbitration has suffered actual prejudice.” (emphasis in original).
In determining whether the hospital plaintiffs had suffered actual prejudice, the court analyzed both the amount of delay in the Health Plan’s seeking arbitration and the extent of the Health Plan’s “trial-oriented” activities. In regards to the first consideration, the court found that there was no evidence that the hospital plaintiffs had been prejudiced by the the Health Plan’s six month delay in asserting its right to arbitration. Whether the Health Plan’s litigation conduct had been prejudicial was a more difficult question for the court because the Health Plan had joined in another defendant’s potentially dispositive motion. Nevertheless, the court held that there was no evidence that this motion forced the plaintiffs to reveal litigation strategy and that the Health Plan had gained no advantage from it. The court also rejected the hospital plaintiffs’ argument that it expended considerable expenses due to the Health Plan’s activity because the plaintiffs failed to distinguish the amount of money it spent litigating against the Health Plan as opposed to the other defendants and the amount spent as a response to activity initiated by the Health Plan. Finally, the court made it clear in a footnote that it did not believe that the Health Plan was attempting to “game the system” with its delayed motion for arbitration; rather, the delay was understandable “given the complicated and uncertain posture of the litigation during its early stages which involved multiple plaintiffs and multiple defendants, only some of whom had entered into arbitration agreements with each other.”
-John C. Bruton, III