Wake Forest Law Review

By Kelsey Hyde

On March 17, 2017, the Fourth Circuit published an opinion in the civil matter of Sharma v. USA International, vacating the district court’s grant of summary judgment and remanding for further proceedings. In departing from the lower court’s ruling, the Court found the U.S. District Court for the Eastern District of Virginia improperly granted the defendant’s motion for summary judgment based solely on the contested issue of plaintiff’s purported damages.

Factual & Procedural Background

The plaintiffs in this case, Jatinder Sharma & his corporation Haymarket Fast Foods, Inc., were involved in a business transaction with defendants Khalil Ahmad and Mahrah Butt, partners at USA International, LLC. Sharma became interested in purchasing two restaurants– a Checkers and an Auntie Anne’s– from defendants upon learning how these restaurants were generating high sales. Throughout negotiations for the purchase of these restaurants, Sharma reviewed USA International’s tax returns and financial statements, which indicated the combined sales of the restaurants for the most recent months were about $75,000 per month.

The parties’ first purchase agreement specified a price of $720,000, and made the sale contingent on the stores collectively acquiring $90,000 in monthly sales in the two months prior to a settlement. Subsequent financial statements revealed lower monthly sales, thus the price was later reduced to $600,000 and the conditional-sale provision was eliminated from the final agreement. Sharma formed the entity Haymarket Fast Foods, Inc. in relation to the transaction, and also applied for a loan at his bank to secure part of the purchase price. His application represented that the restaurants’ average monthly sales based on the figures presented in the financial statements provided by defendants.

Shortly after the closing, Sharma noticed sales well below the figures that had been conveyed by defendants. Sharma looked further at other elements of the business– namely the supply orders, employee’s personal observations, and bank records– in an attempt to uncover the discrepancy. This investigation made Sharma realize that, based on the supplies available, the amount of sales defendants had purported to make were simply not possible; he then suspected that defendants had inflated their sales on the income statements provided to him before closing. Further, employees who had been working for defendants revealed to Sharma that defendant Butt had, on numerous occasions, rung up high sales for food not ordered by customers, and then directed employees not to prepare the food that coincided with these orders. Moreover, Bank of America accounts revealed that deposits attributable to the restaurant were substantially lower than those represented in the statements given to Sharma.

In response to these findings, Sharma filed on action for fraud against the defendants, alleging they had inflated sales figures and lied during negotiations, resulting in fraudulent inducement to pay a higher price for the business than it was truly worth. He proposed that damages be calculated by either (1) multiplying weekly sales by 36, or (2) multiplying monthly earnings by 48, either of which meant to provide the proper valuation of the business.

Defendants filed a motion for summary judgment, claiming plaintiffs had failed to sufficiently establish the materiality of the alleged misrepresentations, their reliance on the misrepresentations, and their damages (i.e. three of the particular elements necessary to succeed on a fraud claim). The district court found that plaintiffs had adequately shown the materiality of and reliance on defendants’ misrepresentation, but had indeed failed to provide enough evidence for a factfinder to estimate with reasonable certainty the amount of damages they sustained. Namely, the court rejected the two methods proposed by plaintiff for finding the actual value of the two restaurants, concluding that neither method conformed to any generally accepted methods for valuing a business, nor sufficiently proved they were independently reliable. Thus, because damages are a necessary element of a fraud claim under controlling state law, the court granted summary judgment. On appeal, the sole issue presented regarded the district court’s finding of insufficient evidence of damages.

Elements of the Claim & Standards to be Met on Motion for Summary Judgment

On a motion for summary judgment, the court takes the record in the light most favorable to the non-movant party. The moving party is entitled to a grant of summary judgement as a matter of law if they show there is no genuine dispute as to any material fact. F.R.C.P. 56(a).

To establish a claim for fraud under Virginia law, a plaintiff must show: (1) false representation, (2) of a material fact, (3) made intentionally and knowingly, (4) with intent to mislead, (5) reliance by the party misled, and (6) resulting in damages to the party so misled. Evaluation Research Corp. v. Alequin, 439 S.E.2d 387, 390 (Va. 1994). Because all such elements are necessary, failure to satisfy any one element is enough to bar relief for a fraud claim, as the district court found in their ruling based on failure to establish damages.

Under Virginia law, when a dispute involves the transfer of goods or property, damages are measured by the difference between the asset’s actual value at the time of contract and the asset’s purported value if the representations made had instead been true. Courts have previously treated sales prices as sufficient evidence of value, especially in arms’ length transactions. Virginia law maintains that plaintiffs need not prove damages with absolute certainty, but a plaintiff still must provide sufficient evidence to allow a factfinder to make an intelligent, probable estimate of the damages or losses allegedly sustained.

Fourth Circuit Finds Plaintiffs’ Evidence Regarding Estimated Damages Sufficient to Survive Motion for Summary Judgement

The Court concluded that plaintiffs had indeed met their burden and had put forth sufficient evidence to allow an estimate of damages by a factfinder. Namely, the Court emphasized that the parties’ arms-length transaction would allow a reasonable factfinder to conclude that the restaurants’ final sales price represented their value, as needed for the calculation of damages. Viewing the record most favorably for the plaintiffs, the Court found that negotiations surrounding the final price of the restaurants evidenced that both parties’ relied on a valuation of the businesses derived from a multiple of weekly and/or monthly sales. Moreover, the entire content of negotiations between the parties clearly revolved around the restaurants’ weekly or monthly sales, from Sharma’s initial interest in purchasing the restaurant to the later financial statements used by defendants to further persuade Sharma to go forward with the purchase. The Court even performed its own calculations to affirm this result, despite the defendants’ refusal to confirm the calculation methods used to arrive at the sales price.

However, the Court also emphasized that the actual multiplier-numbers used or derived are not dispositive in this case, and that defendants could indeed challenge those numbers as a matter of fact later in the case. Instead, the true question was whether plaintiffs provided sufficient evidence, as a matter of law, for a factfinder to estimate a probable calculation of damages. In the Fourth Circuit’s opinion, the plaintiffs did just that by presenting their own estimate with reasonable precision and support for their own calculations, using an accepted approach based on income and computing their results with specific numbers provided by defendants to estimate the purchase price.

Vacated & Remanded

Based on their finding that Plaintiff’s purported estimates of damages were acceptable and sufficient to create a material dispute of fact, the Fourth Circuit vacated the District Court’s grant of summary judgement and remanded for further proceedings to continue plaintiff’s fraud claims.

By Ali Fenno

On February 21, 2017, the Fourth Circuit issued a published opinion in the civil case of vonRosenberg v. Lawrence. In vonRosenberg, the Fourth Circuit addressed whether the district court abused its discretion by staying a federal proceeding until the conclusion of a similar state action involving different parties and claims. After examining the abstention standard from Colorado River Water Conservation District v. United States, the Fourth Circuit vacated the abstention order and remanded the case back to the district court, holding that the district court abused its discretion by abstaining in favor of state court proceedings that were not parallel to the federal court proceedings.


Both this federal proceeding and the related state proceeding concerned whether the Diocese of South Carolina (the “Diocese”) dissociated itself from the Protestant Episcopal Church in the United States (the “Episcopal Church”). Bishop vonRosenberg, the federal plaintiff-appellant, claims that the Episcopal Church appointed him as Bishop of the Diocese after removing Bishop Lawrence, the federal defendant-appellee, from the position. But Bishop Lawrence contends that the Episcopal Church could not have removed him because the Diocese of South Carolina had dissociated from the Episcopal Church and acted independently of the organization. Thus, each party claimed to be the Bishop of the Episcopal Church in South Carolina.

State Claim

Litigation over the dissociation matter first began when the Diocese filed suit against the Episcopal Church in a South Carolina state court, claiming that the Diocese had dissociated from the Episcopal Church and sought “resolution of their real and personal property rights.” The Episcopal Church then counterclaimed for trademark infringement and dilution under the Lanham Act. It also requested that Bishop Lawrence and others be added as counterclaim defendants, but the state trial court denied the request in September 2013.

The state court issued its final order on February 3, 2015. It held that the Diocese had validly dissociated from the Episcopal Church and owned the property at issue, and permanently enjoined the Episcopal Church from using the Diocese’s marks. The Episcopal Church appealed, and the South Carolina Supreme Court heard oral arguments on September 23, 2013. No opinion from the state supreme court has yet been issued.

Federal Claim

Bishop vonRosenberg filed this federal action on March, 13, 2013, seeking declaratory-injunctive relief against Bishop Lawrence. He claimed that Bishop Lawrence violated the Lanham Act by falsely advertising himself as the Bishop of the Diocese. But the district court abstained the proceeding in favor of the state court proceedings in August 2013. The court reasoned that it had broad authority to decline jurisdiction on cases seeking declaratory relief. On appeal, the Fourth Circuit vacated the abstention order on the grounds that the district court had applied the wrong abstention standard; the district court should have applied the standard for actions involving both declaratory and non-declaratory relief from Colorado River Water Conservation District v. United States. The Fourth Circuit remanded the case so this correct standard could be applied.

On remand, the district court again abstained in favor of the state proceedings, and Bishop vonRosenberg appealed.

Failure to Meet the “Exceptional Circumstances” Abstention Standard

The Fourth Circuit began its analysis by establishing that Colorado River is a narrow standard; it requires that abstention of jurisdiction be justified by “exceptional circumstances.” The Fourth Circuit identified the first step in this “exceptional circumstances” test to be a determination of whether the state and federal cases are parallel. It listed three guiding principles for this determination: (1) the federal and state parties should have more in common than merely the litigation of substantially similar issues; (2) the parties themselves should be nearly identical; and (3) despite overlapping of facts, there must not be serious doubt that the state action would not resolve all the claims. The Fourth Circuit then noted that even if the if the factual circumstances are sufficiently parallel, Colorado River requires that a handful of procedural factors be balanced before abstaining.

In applying these principles to this case, the Court first observed that the parties in the two cases are not the same. Neither Bishop Lawrence nor Bishop vonRosenberg were parties to the state action. Furthermore, the two courts were not litigating the same claims. The state court looked only at the Episcopal Church’s false advertising claim, not that of Bishop vonRosenberg. Thus, because the state and federal cases involved different parties and different claims, the cases were not parallel as required by Colorado River‘s “exceptional circumstances” standard.


The Fourth Circuit concluded that the state and federal proceedings failed to meet Colorado River’s “exceptional circumstances” standard because, as they involved different parties and different claims, they could not be considered parallel cases. Accordingly, it vacated the abstention order and remanded the case back to the district court.

By Katie Baiocchi

On January 25, 2017, the Fourth Circuit published Marlon Hall v. DIRECTV, LLC, a civil case. Plaintiffs Marlon Hall, John Wood, Alix Pierre, Kashi Walker and John Albrecht (“Plaintiffs”) appealed the order granting defendants’ DIRECTV, LLC, DIRECTSAT USA, LLC and DIRECTV, INC. (“Defendants”) motion to dismiss under Federal Rules of Civil Procedure 12(b)(6). Plaintiffs alleged that defendants were joint employers and therefore are jointly and severally liable for any violations under the Fair Labor Standards Act (“FLSA”). The Fourth Circuit found the district court relied on out-of-circuit authority that has been rejected in the Fourth Circuit in analyzing the relationship between the parties. The district court also failed to construe plaintiffs’ allegations liberally as required by a motion to dismiss. Accordingly the Fourth Circuit reversed and remanded the case.

Facts and Procedural History

Defendant DIRECTV employs technicians through the DIRECTV “Provider Network.” Each plaintiff alleged that between 2007 to 2014 they worked as a technician for defendant, an intermediary provider, a subcontractor, or a combination of all three. Defendant DIRECTSAT enforced the hiring criteria of DIRECTV for technicians. DIRECTV also provided a centralized work-assignment system, and regulated and audited personnel files. Plaintiffs were required to wear DIRECTV uniforms, carry DIRECTV identification cards, and display the DIRECTV logo on their vehicles. Technicians who did not meet DIRECTV hiring criteria could not install or repair DIRECTV equipment. Plaintiffs claim that they each regularly worked in excess of forty hours per week without receiving overtime pay while working as technicians. Plaintiffs specifically allege that the defendants qualify as joint employers and their failure to provide overtime pay violated FLSA overtime and minimum wage requirements. Defendants each moved to dismiss plaintiffs’ complaint pursuant to F.R.C.P. 12(b)(6). The district court granted this motion in its entirety because they concluded that the Complaint did not allege facts sufficient to establish that defendant DIRECTV jointly employed plaintiffs.

The Fourth Circuit reviewed the district court’s dismissal de novo and accepted as true all the factual allegations contained in the complaint and drew all reasonable inference in favor of plaintiffs.

The District Court Applied an Improper Legal Test for Determining Joint Employment Under the FLSA

Under the FLSA, 29 C.F.R. § 791.2(a), “joint employment” exists when “employment by one employer is not completely disassociated from employment by the other employer(s).” Courts are split on the appropriate test for distinguishing separate employment from joint employment in relation to the FLSA. The district court’s analysis was flawed because it concluded that a worker must be an employee as to each putative joint employer when considered separately for the entities to constitute joint employment under the FLSA. Additionally, the district court relied on the test no longer employed by the Fourth Circuit in determining joint employment of the plaintiffs.

Under the Fourth Circuit two-step framework for determining whether a defendant may be liable for an alleged FLSA violation under the joint employment theory the court must first determine whether the defendant and one or more entities shared, agreed to allocate responsibility for, or otherwise co-determined the key terms and conditions of plaintiffs’ work. The second step relies heavily upon the answer to the first part of the analysis and asks whether a worker was an employee or independent contractor under FLSA. The district court erred in considering the second step before the first.

The Fourth Circuit determined that under the first part of the two-part framework that the allegations sufficiently demonstrate defendants were not completely disassociated. The district court erred by failing to follow the new standard employed by the Fourth Circuit to determine joint employment. The Fourth Circuit has held that the fundamental question is whether the entities are “not completely disassociated” with respect to the worker. The Fourth Circuit identified a non-exhaustive list of six factors to assist lower courts in determining if joint employment exists. The court emphasized that no single factor is determinative.

The Fourth Circuit also found that under the second part of the two-part framework the plaintiffs were employees rather than independent contractors. In focusing on the economic realities of the relationship between the defendants and plaintiffs the Fourth Circuit found that the plaintiffs were economically dependent on the defendants.

The District Court Misapplied the Plausibility Standard by Subjecting Plaintiffs to Evidentiary Burdens Inapplicable at the Pleading Stage

Plaintiffs’ factual allegations establish that defendants jointly determined the key terms of plaintiffs’ conditions of employment. Per the complaint defendant DIRECTV was the principal client of the other defendants. Defendant DIRECTV had the authority to direct, control and supervise the plaintiff’s day-to-day job duties. Defendant DIRECTV had specific installation procedures implemented and controlled the uniforms and identification of technicians. The complaint is also replete with allegations that DIRECTV had control over hiring, firing and compensation. The Fourth Circuit found that at this stage of litigation the allegations are sufficient to make a plausible claim that defendants were not completely disassociated.


The Fourth Circuit reversed and remanded the consolidated cases for further proceedings consistent with the opinion because the district court relied on out-of-circuit authority that had been rejected in the Fourth Circuit. Furthermore, the Fourth Circuit found the district court failed to construe plaintiffs’ allegations liberally as a motion to dismiss requires.


By Ali Fenno

On November 8, 2016, the Fourth Circuit issued a published opinion in the civil case of Thomas v. Salvation Army.  In Thomas, the Fourth Circuit addressed whether the Western District of North Carolina properly dismissed Sharon Thomas’s (“Thomas”) various claims against three charitable organizations that allegedly refused to admit her to homeless shelters because of her mental disability. The Fourth Circuit held that Thomas did not allege sufficient facts to support her claims and affirmed the lower court’s dismissal of the case.

Facts and Procedural History

On July 22, 2012, Thomas was admitted to defendant Salvation Army’s homeless shelter after being referred there by an organization that provided her with behavioral mental health services. Shortly thereafter, Salvation Army transferred Thomas to defendant Church in the City, a stricter shelter run by the final defendant, Victory Christian Center, because Salvation Army’s shelter had become too crowded.

Thomas disclosed her mental health issues immediately upon arriving at Church in the City. While living there, she returned to Salvation Army for two separate visits, at which she disclosed that she was receiving behavioral mental health services, authorized the release of some of her medical records to Salvation Army, and was referred to a behavioral health center.

On August 12, 2012, Church in the City evicted Thomas. Thomas was given no reason for her eviction and alleged that she had never missed curfew. She tried to be readmitted to the Salvation Army shelter but was turned down because she was evicted from Church in the City. Thomas made numerous other attempts to return over the next few days, but was still denied re-entrance on the grounds that she had violated Church in the City’s curfew and was not a good fit for the shelter. One staff member told her that she would likely be admitted after getting a mental health evaluation, but the shelter later refused Thomas admission when she returned with psychiatric discharge papers.

Thomas did not attempt to return to the shelter after this last attempt, but she continued to try to discover why she was denied admission. In September, a Salvation Army caseworker that had investigated her case informed her that her dismissal had been justified because she had been disrespectful and hostile towards the shelter staff. He offered her admission to the shelter if she submitted a mental health evaluation and received behavioral mental health services. Thomas instead requested records of her stay at the shelter and of the relationship between Salvation Army and Church in the City. This request was denied.

Nearly two years later, Thomas filed this action in the Western District of North Carolina, moving to proceed in forma pauperis. Although the district court granted the motion, in the very same order it dismissed all of her claims under 28 U.S.C. § 1915(e)(2)(B)(ii) for failure to state a claim on which relief could be granted. The court also warned Thomas that it would require her to show cause as to why it should not enter a pre-filing injunction against her if she continued to file meritless lawsuits.

Thomas then appealed to the Fourth Circuit, challenging her appeals under 42 U.S.C. § 1983 (“§ 1983”), 42 U.S.C. § 1985 (“§ 1985”), the Americans with Disabilities Act (“ADA”), the Fair Housing Act (“FHA”), and the Rehabilitation Act.

§ 1915(e)(2)(B)(ii) Standard of Review

The Fourth Circuit established that the standard for reviewing a dismissal under § 1915(e)(2)(B)(ii) is the same as that for a dismissal under Federal Rule of Civil Procedure 12(b)(6). It therefore reviewed the district court’s dismissal de novo and accepted Thomas’s pleaded facts as true. Because Thomas was a pro se plaintiff, the court liberally construed the allegations in her complaint, but it maintained that her claims for relief must still be plausible on their face.

Lack of State Action Invalidates § 1983 Claim

The Fourth Circuit first determined that Thomas’s § 1983 claim was correctly dismissed because the defendants were not state actors. It recognized that § 1983’s color of law requirement does not cover private conduct, and private conduct can only be converted to state action when the state dominates the private activity. Here, because all three defendants were private organizations and Thomas did not allege any facts attributing their actions to the state, the Fourth Circuit held that Thomas had not plead a valid § 1983 claim.

Lack of a Conspiracy Invalidates § 1985 Claim

The court next approved the dismissal of Thomas’s § 1985 claim, holding that she did not allege any facts supporting the existence of a conspiracy between Salvation Army and Church in the City. Although Thomas alleged that her Salvation Army badge included a mention of Church in the City and that her inability to return to Salvation Army was due to her ejection from Church in the City, the court concluded that these facts only showed that the charities worked together to help Charlotte’s homeless population. Thomas’s remaining allegation that Salvation Army conspired with Church in the City was merely conclusory, which is not enough to proceed on a § 1985 claim.

No Standing for an ADA Claim

The Fourth Circuit then addressed Thomas’s ADA claim. The district court dismissed the claim on the grounds that Title I of the ADA requires a plaintiff to exhaust her administrative remedies before pursuing civil litigation. But the Fourth Circuit rejected this reasoning, noting that Title I of the ADA only applies to claims concerning employment, and here, Thomas’s claim did not concern employment.

However, the Fourth Circuit still found that that Thomas lacked standing to bring an ADA claim pursuant to both Title II and Title III of the ADA. Title II did not apply because it only applies to actions against public entities, and in this case, none of the defendants were public entities. Title III, though applying to places of public accommodation like the shelters in Thomas, still did not give the plaintiff standing because it only provides a private right of action for injunctive relief. The court noted that injunctive relief is only available to plaintiffs that show they have suffered irreparable injury, which requires a showing of a real or immediate threat that the plaintiff will be harmed again. Here, the court concluded that Thomas did not show a real or immediate threat that she would be harmed again because all the alleged harms occurred over two years before the action was filed. Furthermore, Thomas admitted that she filed the relief not to prevent future discrimination, but because of her “persistent and distressing memories” of the past discrimination. Accordingly, the court concluded that the ADA claim was invalid because the facts alleged in Thomas’s complaint did not establish irreparable harm entitling her to injunctive relief.

 Lack of Discrimination Invalidates FHA Claim

The Fourth Circuit approved the dismissal of Thomas’s FHA claim because her complaint did not contain a plausible allegation of discrimination. The court first noted that the FHA prohibits “mak[ing] unavailable or deny[ing] . . . a dwelling to any buyer or renter because of a handicap,” and that a handicap is “a physical or mental impairment which substantially limits one or more of such person’s major life activities.” Here, Thomas did not adequately identify a mental impairment for the purpose of the FHA: she identified her mental illness as a mood disorder, but then alleged that she was “mentally stable” and that the mental evaluation requested by Salvation Army was not necessary.

Even if Thomas had identified a valid mental illness, the court concluded that she did not allege facts establishing a nexus of causation between that illness and the defendants’ actions. The complaint listed multiple reasons besides Thomas’s mental disability for her eviction from the shelters, and the court further found that Thomas’s behavior with staff members gave Salvation Army valid grounds for requesting mental health examinations and records. Accordingly, the Fourth Circuit held that Thomas’s FHA claim must be dismissed because her factual allegations did not amount to a plausible showing of a mental impairment and causation, which are both essential to proving the discrimination element of a FHA claim.

Failure to Meet the Rehabilitation Act’s Heightened Causation Standard

The Fourth Circuit last concluded that Thomas failed to meet the Rehabilitation Act’s heightened causation standard. Like the ADA and FHA, the Rehabilitation Act forbids discrimination based on a disability. However, the court noted that it is different in two ways: (1) it applies only to programs receiving federal assistance, and (2) the plaintiff must show that the discrimination was solely by reason of her disability. The court first recognized that the Plaintiff only alleged that the Salvation Army received federal funding; there was no mention in the complaint of such funding for Church in the City or Victory Christian Center. It then reasoned that the second causation element must fail for the same reasons the FHA claim failed: (1) the complaint failed to allege a mental illness qualifying as a disability under the Act, and (2) it did not establish a nexus of causation between Salvation Army’s refusal to admit her and that disability. Accordingly, the court affirmed the district court’s dismissal of the claim.


Because the Fourth Circuit approved the dismissal of all five of Thomas’s claims, it also affirmed the district court’s decision to not exercise supplement jurisdiction over Thomas’s state law claims and to dismiss them without prejudice. However, the court noted that Thomas was not given an opportunity to respond before the district court dismissed her complaint sua sponte or to amend her complaint. Thus, the Fourth Circuit affirmed the decision of district court but modified it so that the dismissal would be without prejudice.


By M. Allie Clayton

On November 1, 2016, in the civil case of Ripley v. Foster Wheeler, LLC, a published opinion, the Fourth Circuit established that the government contractor defense is available in failure to warn cases. The Fourth Circuit reversed and remanded to the Eastern District of Virginia to determine if the government contractor presented sufficient proof to warrant removal under U.S.C. § 1442.

Facts and Procedural History

For over four years in and around the 1970s, Mr. Bernard Ripley worked as a boilermaker at the Norfolk Naval Shipyard. In 2014, when Mr. Ripley was diagnosed with malignant mesothelioma, he and his wife, Deborah Ripley, filed suit in Newport News Circuit Court, a Virginia state court. The Ripleys allege that Mr. Ripley was exposed to asbestos due to products that Foster Wheeler, LLC and Foster Wheeler Energy Corp. (“Appellants”) manufactured for the Navy, and that Appellants are liable for failing to warn Mr. Ripley of the asbestos hazards.

Appellants filed a Notice of Removal and removed the case to the United States District Court for the Eastern District of Virginia. Appellants asserted a government contractor defense, arguing that the suit stemmed from Appellant’s contract with the Navy, thus allowing removal pursuant to the federal officer removal statute 28 U.S.C. § 1442(a)(1). The government contractor defense allows a company that contracts with the military to avoid liability under state-law tort claims for design defects. When the Ripleys moved for remand, the district court granted the motion due to a decades-old practice in the district that denies the government contractor defense in failure to warn cases. Because the federal defense did not apply, according to the District Court, the federal courts had no subject matter jurisdiction. Appellants appealed the grant of the motion for remand.

The Issue

Does the government contractor defense apply to failure to warn cases? If it does, can Appellants, under the federal officer removal statute, remove to the federal district court in order to establish the defense?

The Federal Officer Removal Statute

The federal officer removal statute is an exception to the well-pleaded complaint rule. It allows a defendant to remove a case if the defendant establishes:

  • (1) it is a federal officer or a “person acting under that officer,” 28 U.S.C. §1442(a)(1);
  • (2) a “colorable federal defense”; and
  • (3) the suit is “for a[n] act under color of office,” which requires a causal nexus “between the charged conduct and asserted official authority.” Jefferson Cty., Ala. v. Acker. (alteration and emphasis in original).

The Federal Officer Removal Statute—As Applied

Appellants sought removal based on the government contractor defense as explained under Boyle v. United Technologies Corp.. In Boyle, the Supreme Court held that the government contractor defense applied to design defect cases. The reasons for applying the defense to defect cases were two-fold: (1) separation of powers suggested that the judiciary should be hesitant to intervene in matters of military procurement contracts; and (2) a higher risk of liability for contractors would increase costs to the government and decrease the supply of contractors.

The Eastern District of Virginia in McCormick v. C.E. Thurston & Sons, Inc. had previously held that the government contractor defense was “not available in failure to warn cases.” However, the Fourth Circuit found that most other jurisdictions, including the Second, Fifth, Sixth, Seventh, Ninth, and Eleventh Circuits, that have considered this issue held that the defense does apply to failure to warn cases. The Fourth Circuit further found that the reasons for applying the defense to defect cases were equally applicable in the failure to warn cases. The separation of powers consideration was still relevant due to the fact that it was a military contract. Also, the increased costs to the governments due to the increase risk of liability and the decreased supply of contractors was equally relevant in the general failure to warn context, beyond asbestos. Due to the overwhelming amount of opposing precedent and the valid rationales supporting the application of the defense, the Fourth Circuit “join[ed] the chorus and h[e]ld that the government contractor defense is available in failure to warn cases.”


The Fourth Circuit went against precedent that the District Court relied on in remanding the case back to the state court. Because of this shift in doctrine, the Fourth Circuit reversed and remanded the case to the District Court to determine if the Appellants have presented enough proof to warrant removal pursuant to 28 U.S.C. § 1442.


By Daniel Stratton

Today, March 21, 2016, the Fourth Circuit issued a published opinion in the civil case Jane Doe #1 v. Matt Blair, vacating the district court’s decision. The Fourth Circuit held that the lower court incorrectly determined that there was no federal diversity jurisdiction because the defendant corporation failed to allege its principal place of business. The Fourth Circuit overturned the decision because it was a procedural determination rather than a jurisdictional one.

The Case Bounces Between State and Federal Courts

On March 27, 2014, Ben and Kelly Houdersheldt filed a complaint in West Virginia state court as the next friends and guardians of Jane Doe #1, against Matt Blair and Res-Care, Inc. On July 14 of that same year, Res-Care removed the case to federal court, claiming subject matter jurisdiction based on diversity. Res-Care alleged that Jane Doe #1 was a resident of West Virginia and that Blair was a resident of Virginia. The company alleged that it was incorporated in Kentucky, but did not allege the state in which it had its principal place of business. The Houdersheldts, acting as next friends and guardians of Jane Doe #2, amended the complaint to include the second plaintiff. Jane Doe #2 and the Houdersheldts were residents of West Virginia.

On January 20, 2015, the district court sua sponte remanded the case back to state court, asserting that diversity subject matter jurisdiction had not been established. The court asserted that because neither party had asserted where Res-Care had its principal place of business, the court did not have jurisdiction based on diversity. Defendant Blair filed a motion to amend under Federal Rule of Civil Procedure 59(e) and for reconsideration under Federal Rule of Civil Procedure 60. Res-Care joined the motion. In the motion, the defendants argued that no party had challenged the diversity jurisdiction and that the parties had determined that Res-Care’s principal place of business was Louisville, Kentucky. The plaintiffs did not oppose Blair and Res-Care’s motion, but the district court denied it. Res-Care and Blair appealed.

Procedural or Jurisdictional: The Threshold Question for Reviewing Removal Orders

Federal circuit courts are restricted in reviewing district court orders remanding removed cases to state court. Under 28 U.S.C. § 1447(d), remand orders are generally “not reviewable on appeal or otherwise.” Supreme Court precedent, however, limits 28 U.S.C. § 1447(d) to cases where (1) a district court lacks subject matter jurisdiction, or (2) there is a defect in removal (other than a lack of subject matter jurisdiction) that was raised by a motion filed by a party within thirty days after the notice of removal was filed.

Under this system, a court can remand a case sua sponte for lack of subject matter jurisdiction at any time. Such an order is not reviewable by a federal appellate court. However, if the remand is based on another defect, a motion must be timely filed. If no motion is filed, 28 U.S.C. § 1447(d) does not bar a court’s review. Essentially, whether an appellate court has jurisdiction to review a district court’s remand order turns on whether the order was jurisdictional or procedural in nature.

How Have Other Circuits Tackled This Question?

In deciding how to resolve this case, the Fourth Circuit took notice of how other circuits have dealt with the the precise issue of “whether a failure to establish a party’s citizenship at the time of removal is a procedural or jurisdictional defect.” Three other circuits – the Fifth, Seventh, and Eleventh Circuits – had previously determined that this type of failure was “procedural, rather than jurisdictional.” Those circuits determined that a procedural defect was any defect that did not go to the question of whether the case could have been brought in federal court in the first place.

The Fourth Circuit, in the 2008 case Ellenberg v. Spartan Motors Chassis, reached a similar decision in regards to the amount in controversy component of diversity jurisdiction. In that case, the complaint did not state a dollar amount for damages claimed. The notice of removal to federal court there stated that the amount in controversy exceeded $75,000. Once the case was in federal court, the district court sua sponte considered whether the case should be remanded to state court. There, the district court found that the defendants’ allegations of diversity jurisdiction failed because they had failed to establish that the amount in controversy exceeded the required jurisdictional amount. Soon after, the defendants filed a motion with facts supporting their allegations regarding the amount in controversy, which the district court denied. On appeal, the Fourth Circuit determined that it was not barred from reviewing the lower court’s decision because the remand order was based on a procedural insufficiency rather than on finding a lack of subject matter jurisdiction.

The Fourth Circuit Applies Ellenberg; Adopts Approach of the Other Circuits

Turning to the present case, the Fourth Circuit noted that the district court had proceeded in a manner similar to the district court in Ellenberg. Like that court, the court in the current case had “recited the well-established principles of subject matter jurisdiction” then determined that diversity jurisdiction had not been established. Then, after Blair attempted to correct this failure with his Rule 59(e) motion, the court here denied that motion, much as the court in Ellenberg.

The Fourth Circuit was not persuaded that in the present case the lower court had explicitly concluded that there was no subject matter jurisdiction, because such an order required an examination of the underlying substantive reasoning. This, the Fourth Circuit reasoned, was enough to show that the district court had not based its decision on a lack of subject matter jurisdiction, but instead on the procedural insufficiency of the removal notice. As a result, the court explained that the only way the this procedural deficiency could be raised would be by a party filing a timely motion, which did not occur here. Thus the Fourth Circuit adopted the approach used by the Fifth, Seventh, and Eleventh Circuits.

The Fourth Circuit Remands the Case Back to Federal District Court

Because the district court improperly remanded this case sua sponte, the Fourth Circuit reversed the lower court’s decision and remanded the case back for further proceedings. The Fourth Circuit also granted a motion made by Res-Case to amend its removal notice to correct its earlier deficiency.


By Daniel Stratton

On March 8, 2016, the  Fourth Circuit issued a published opinion in the civil case Peabody Holding Company, LLC v. United Mine Workers of America, vacating the district court’s decision. The Fourth Circuit held that under the complete arbitration rule, an arbitrator handling a labor dispute between Peabody Holding and United Mine Workers of America should have been allowed to finish resolving both the liability and remedial phases of the dispute before the matter was moved to federal court.

United Mine Workers and Peabody Coal Company Enter into Job Opportunity Agreement

In 2007, the United Mine Workers of America and Peabody Coal company entered into a Memorandum of Understanding Regarding  Job Opportunities (“Jobs MOU”). Peabody Coal signed the agreement on behalf of itself and its parent company, Peabody Holding. The purpose of the Jobs MOU was to require non-unionized companies within the Peabody corporation to give preference to coal miners who either worked for or were laid off by Peabody Coal with regards to hiring treatment. The Jobs MOU included an arbitration clause that required all disputes involving the MOU to be submitted to an arbitrator, whose decisions would be final and binding.

That same year, Peabody Energy Corp., the ultimate corporate parent of Peabody Holding,  Peabody Coal, and another company, Black Beauty Coal Company, began a process to spinoff part of its mining operation into a new entity known as Patriot Coal Corporation. Peabody Coal was spun off into Patriot. All of the Peabody subsidiaries that became part of Patriot had been signatories to the Jobs MOU. The only subsidiary that had been a signer to the Jobs MOU that was not spun off into Patriot was Black Beauty. At the completion of the spinoff, Peabody Coal had no corporate relationship with Peabody Holding or Black Beauty.

In 2008, Black Beauty hired United Minerals Company to assist with mining operations on Black Beauty’s property. Both United Minerals Company and Black Beauty were non-unionized. Shortly after United Minerals Company began working with Black Beauty, the United Mine Workers of America sent a letter to Peabody Energy and Peabody Holding explaining that Peabody Holding and Black beauty were still bound by the Jobs MOU. Peabody disagreed, arguing that after Peabody Coal had been spun off, the rest of the Peabody corporate family no longer had any obligation under the Jobs MOU.

Peabody initially argued that this dispute with United Mine Workers was not arbitrable, an argument that the Fourth Circuit rejected in 2012. After being sent back to arbitration, the union and Peabody agreed to bifurcate the dispute into separate liability and remedy phases. The arbitrator ruled that the Jobs MOU remained in effect despite the fact that Peabody Coal had no corporate relationship with Peabody Holding. The arbitrator declined to rule on whether or not Black Beauty was actually exempt from the Jobs MOU, deferring its decision on that question until the remedy stage.

Peabody and United Mine Workers Take Their Dispute to the Courts

Peabody sought to vacate the arbitrator’s decision, filing an declaratory judgment action in the U.S. District Court for the Eastern District of Virginia. At the same time, the United Mine Workers filed a counterclaim to enforce the decision by the arbitrator.  Under Section 301 of the Labor Management Relations Act (“LMRA”), some courts viewed their jurisdiction as being limited to “review of final arbitration awards,” while others believed that Section 301 provided “sweeping jurisdiction.” The district court ultimately declined to weigh in on that debate, instead noting that because the liability portion of the arbitration was finished, it was final and therefore reviewable. The district court found in favor of the union, holding that the arbitrator was right to find the Jobs MOU still valid. Peabody and its subsidiaries appealed the district court’s decision. After the parties briefed the appeal, the Fourth Circuit asked for additional briefing on whether the arbitrator’s decision was even properly before the circuit, because the arbitration was not yet complete.

The Limits and Scope of the Complete Arbitration Rule

Under Section 301 of LMRA, federal district courts have jurisdiction over suits involving contract violations between employers and unions. The Supreme Court has long held that Section 301 can be used to seek enforcement of an arbitration award made under a collective bargaining agreement’s arbitration clause. As a threshold matter however, a court must determine that the award is final and binding. Many courts have held this to mean that an arbitrator must have ruled on both liability and remedies before the decision can be reviewable.

Some judicial decision viewed the complete arbitration rule as a restriction on federal jurisdiction. Other decisions had focused on Section 301’s broad language, and have viewed the complete arbitration rule to be “only a prudential limitation on judicial involvement” in an arbitrated labor dispute.

The Fourth Circuit Finds that the Arbitration Decision was sent to the Courts Too Soon

The Fourth Circuit noted that several courts which view the complete arbitration rule in jurisdictional terms still concede that there are exceptions to the rule in extreme cases. Based on this, the Fourth Circuit noted that this necessarily meant that the complete arbitration rule only constituted a prudential limitation. The Court also noted many policy rationales for the complete arbitration rule were the same as those used for strictly jurisdictional relatives. Like the rules that require a district court to enter a final judgment or order before an appellate court can review the case, the complete arbitration rule promotes the same goals of preventing “piecemeal litigation and repeated appeals.” Applying the complete arbitration rule also helps prevent a party from using courts to delay the arbitration, the Fourth Circuit noted.

In terms of actually applying the complete arbitration rule, the Fourth Circuit noted that the application was straightforward. Generally, when an arbitrator decides liability and “reserves jurisdiction to decide remedial questions” later, a federal court should wait to review until all questions have been resolved.  The Court was unpersuaded by Peabody’s arguments that the liability phase was final and thus reviewable. The Fourth Circuit noted that such a division was sensible and common. Just because the parties decided to split their dispute did not change the fact that they agreed to submit the entire dispute to the arbitrator.

The Fourth Circuit also quickly dismissed Peabody’s arguments that reviewing the liability portion now would promote efficiency. Such efficiency arguments could potentially be applied to virtually any case, the court noted, before explaining that by waiting until after the remedy portion was resolved the court was actually promoting efficiency. This was because the parties could still reach a settlement at some point, making a review of the liability portion moot. The Fourth Circuit concluded by explaining that arbitration is a matter of contract, and as such the parties should be able to design an arbitral process that best suits the needs of the parties.

The Fourth Circuit Remands the Case Back to the Arbitrator

The Fourth Circuit ultimately held that the arbitrator’s decision had been prematurely sent to the courts, and remanded the case back to the district court to remand the case back to the arbitrator to continue the arbitration.

By Anthony Biraglia

In the civil case of Grayson v. Anderson, the Fourth Circuit affirmed two district court judgments arising out of litigation over a South Carolina-based Ponzi scheme. In a published opinion released on March 7, 2016, the Court first affirmed the district court’s judgment that it did not have personal jurisdiction over a Cypriot company, finding that the district court had identified the correct standard of proof on the jurisdictional issue. Second, the Court agreed with the district court that South Carolina does not recognize a cause of action for aiding and abetting fraud.

The Ponzi Scheme and Underlying Litigation

Beginning in 1997, Derivium Capital (“Derivium”) ran a program through which borrowers could use stocks as collateral to receive loans of up to 90% of the stock’s market value. When the loan matured, borrowers had two options: surrender the stock, or pay off the loan and demand return of the stock. What Derivium did not disclose to borrowers was that two of its principals were selling the stock in order to fund risky venture capital investments. When most of these investments failed, Derivium continued to solicit stocks from new borrowers in order to cover the losses that left it unable to pay back the stock as the loans came to maturity. Derivium continued to do this for years after it knew the scheme would eventually fail. The scheme collapsed in 2005, and by 2007 the defrauded parties had filed lawsuits that included more than 50 named defendants. The ultimate result was a judgment of $150 million for the plaintiffs. Subsequently, the plaintiffs in the appeal before the Court began pursuing certain claims that had been stayed pending the outcome of the litigation.

One issue in these resumed cases was whether defendant Vision International (“Vision”), a Cypriot company that allegedly took part in the Ponzi scheme, was subject to personal jurisdiction in South Carolina. The parties filed motions that included deposition excerpts and affidavits, but neither presented any live testimony at a hearing on the motion. The district court granted Vision’s 12(b)(2) motion to dismiss for lack of personal jurisdiction on the grounds that the plaintiffs had failed to prove by a preponderance of the evidence facts demonstrating personal jurisdiction over Vision. After a trial, the district court also granted the defendant’s motion for judgment as a matter of law on plaintiff’s aiding and abetting fraud claims, reasoning that no such cause of action existed in South Carolina. The plaintiffs challenged each decision in a separate appeal, which the Fourth Circuit consolidated and considered in this opinion.

No Personal Jurisdiction over Vision

 The plaintiffs argued that, in deciding Vision’s 12(b)(2) motion, the district court erred by applying a preponderance of the evidence standard rather than a prima facie showing standard. According to the plaintiffs, the district court did not hold the evidentiary hearing required to apply the preponderance of the evidence standard. The Fourth Circuit found, however, that the lack of live testimony at the hearing on the 12(b)(2) motion did not prevent that hearing from being evidentiary for the purposes of deciding which standard to apply. All that is required to allow for the preponderance of the evidence standard is that the district court give the parties a fair opportunity to present to the court the relevant facts and legal arguments.

In this case, the parties were able to present to the court, after full discovery, deposition excerpts, affidavits, exhibits, interrogatory answers, and other similar evidence prior to a hearing. At that hearing, neither party offered, nor did the district court request, any further evidence. The Court presumed that this lack of further evidence showed that the parties considered all relevant matters to be before the district court. The Fourth Circuit found no deficiency in the district court’s procedures, and thus concluded that it properly applied the preponderance of the evidence standard.

The Court also took no issue with the district court’s factual findings. While Vision’s employee’s had done some work relating to the Ponzi scheme, the company itself had insufficient contacts with both South Carolina and the United States more generally. Finally, the Fourth Circuit rejected an argument that Federal Rule of Civil Procedure 4(k)(2) provided for personal jurisdiction over Vision for the plaintiff’s federal claims.

South Carolina Does Not Recognize A Cause of Action for Aiding and Abetting Fraud

The plaintiffs also challenged the district court’s decision to grant the defendant’s judgment as a matter of law on their aiding and abetting fraud claims. In asserting that South Carolina recognized such a claim, the plaintiffs chiefly relied on the 1929 case of Connelly v. State Co. In Connelly, the South Carolina Supreme Court held that an action against defendants charged jointly with libel could be brought in the home county of either defendant. This decision supposedly applied to the case at bar because of language that stated that “[A]ll who aid, advise, countenance, or assist the commission of a tort are wrongdoers.” However, the Connelly court also stated that its holding in that case concerned only the issue of where an action could be brought when two persons were accused of jointly composing libelous articles.

The Fourth Circuit found that the plaintiff’s argument that Connelly provided support for a cause of action for aiding and abetting fraud bordered on frivolous. The language upon which the plaintiffs relied was actually from the trial court’s opinion in that case, and the South Carolina Supreme Court specifically limited its holding to the narrow issue before it. Even if the district court or the Fourth Circuit found that Connelly indirectly supported a cause of action for aiding and abetting fraud, it is not permissible for a federal court sitting in diversity to surmise on the expansion of state law. Rather, the court must apply the state law as it actually exists.


The Fourth Circuit affirmed the judgment of the district court as to its lack of personal jurisdiction over Vision, as well as its judgment as a matter of law on plaintiff’s aiding and abetting fraud claim.

By Cate Berenato

On February 19, 2016, in the published civil case Perdue Foods v. BRF, the Fourth Circuit affirmed the United States District Court for the District of Maryland’s dismissal of Perdue’s breach of contract claim because of a lack of personal jurisdiction of BRF. The court stated that Perdue had not alleged sufficient facts to show that BRF had the required minimum contacts for such jurisdiction.

 Issue of Jurisdiction

The only issue on appeal was whether the district court had personal jurisdiction over BRF.

Dispute Between Perdue and BRF

Perdue, headquartered in Maryland, is a food producer that sells poultry under the mark “PERDUE.” BRF is an exporter of poultry, and it is headquartered in Brazil and uses the mark “PERDIX.” When Perdue was concerned about consumer confusion over the similar trademarks, it and BRF entered into an agreement in 2002. Under the agreement, Perdue agreed not to register its mark in Brazil, and BRF “agreed to abandon a version of its PERDIX mark worldwide.” Later, in 2012, Perdue purchased chicken from BRF. Perdue sent purchase orders from Maryland and BRF sent invoices to Maryland. BRF shipped this chicken from Brazil to Tanzania.

Perdue commenced this action in 2014 when it alleged that BRF breached the agreement by pursuing applications for trademark registrations in foreign countries. BRF subsequently moved to dismiss the suit for lack of specific personal jurisdiction pursuant to Fed . R. Civ. P. 12(b)(2). The lower court held that Perdue indeed lacked such jurisdiction.

 Personal Jurisdiction 

A court has specific personal jurisdiction over a defendant if the defendant “purposefully established minimum contacts in the forum state” so that the defendant could reasonably anticipate being haled into court in that state. Courts consider the totality of facts to determine if the party had the requisite contacts. Specifically, courts will consider “the extent to which the defendant purposefully availed itself of the privilege of conducting activities in the state.” To determine if a defendant has purposefully availed itself in this way, courts considers whether the defendant maintained offices, owned property, engaged in long-term business activities, or made in-person contact in the forum state. Courts also consider whether the parties agreed that the law of the forum state would govern the disputes and whether parties carried out the contract in the forum state.

BRF Did Not Have Sufficient Contacts in Maryland

In this case, though the agreement included a Maryland choice-of-law provision, BRF employed no officers in Maryland, owned no property there, did not initiate the agreement there, nor did any BRF employee travel to Maryland in connection with the agreement. BRF does not conduct business in Maryland, nor does it import products into or sell products from Maryland. The agreement did not even require Perdue to perform contractual obligations in Maryland. Finally, BRF did not engage in significant, long-term business activities in Maryland.

Though Perdue stated that specific personal jurisdiction could arise from a single contract where the defendant deliberately engaged in activities within a state, this agreement did not establish continuing contacts between BRF and Perdue in Maryland. In fact, the agreement prevented BRF from doing business in Maryland.

Thus, the Fourth Circuit affirmed the district court’s dismissal of Perdue’s claim.

By Elizabeth DeFrance

On December 9, 2015 the Fourth Circuit Court of Appeals issued a published opinion in the civil case, Goode v. Central Virginia Legal Aid Society. The plaintiff, Freddie L. Goode (“Goode”), appealed the district court’s dismissal without prejudice of his complaint against Central Virginia Legal Aid Society (“CVLAS”) for race and age discrimination. The Fourth Circuit Court of Appeals determined that it lacked jurisdiction because the order of dismissal was not final and appealable.

Complaint for Race and Age Discrimination Dismissed Under 12(b)(6)

Goode is an African-American male, who was seventy-two years old when he was terminated from his position as one of two Senior Managing Attorneys at CVLAS. The Board of Directors made the decision to eliminate Goode’s position during a meeting where it discussed the loss of funding and the need for reorganization. Goode subsequently filed a complaint against CVLAS for race discrimination under Title VII of the Civil Rights Act of 1964 and for age discrimination under the Age Discrimination in Employment Act. The district court granted CVLAS’s motion to dismiss for failure to state a claim under12(b)(6), determining that Goode “failed either to present direct or circumstantial evidence of discrimination or to make out a prima facie case of discrimination.” The district court held that Goode failed to allege sufficient facts to show his job performance was satisfactory at the time of his termination, that he was treated differently than similarly situated employees outside the protected class, and that he was replaced by someone outside the protected class with comparable qualifications. Accordingly, Goode’s case was dismissed without prejudice, and he filed a timely appeal.

When A Complaint Is Dismissed Without Prejudice, It Is Not Appealable

Under 28 U.S.C. § 1291, the Court may only exercise jurisdiction over final orders (and certain interlocutory and collateral orders not at issue in this case). When a complaint is dismissed without prejudice, it is not a final order “unless the grounds for dismissal clearly indicate that no amendment in the complaint could cure the defects in the plaintiff’s case.”

Defects in The Complaint Were Curable

The Court concluded that Goode could cure the defects in his complaint by amending it to plead specific facts supporting his contentions that his job performance was satisfactory at the time he was terminated, that he was treated differently than similarly situated employees outside the protected class, and that his job duties were dispersed to remaining, younger employees. Nothing in the district court’s order indicated Goode would not have the opportunity to amend his complaint to include such facts. Therefore, the order of dismissal was not final because the district court’s order did not clearly indicate that no amendment could cure the defects in the complaint.

In his appeal, Goode alleged that the district court used an erroneous legal standard to dismiss his case. However, the Court declined to take up this issue because the “district court maintains authority over a case until it issues a final and appealable order.”

Dismissed for Lack of Jurisdiction

Because the district court’s order did not clearly indicate that no amendment could cure the defects in the complaint, the order of dismissal was not final and appealable. Therefore, the Court dismissed the appeal for lack of jurisdiction and remanded the case with instructions to allow Goode to amend his complaint.


By Malorie Letcavage

On December 1, 2015, the Fourth Circuit issued its published opinion in the case of Tommy Davis Construction, Inc. v. Cape Fear Public Utility Authority. The defendant, Cape Fear Public Utility, appealed the district court’s findings and award of attorneys fees in favor of plaintiff, Tommy Davis Construction. Defendant raised four issues on appeal, but the Fourth Circuit affirmed the district court’s judgment in favor of plaintiff and the award of attorneys fees.

Davis Objects to Paying Invalid Impact Fees

Davis Construction (“Davis”) was developing a subdivision named Becker Woods, and arranged to have Aqua NC provide water and sewer services. Aqua NC was the only utility in that part of the county to offer those services, although Water and Sewer District (“WSD”), Cape Fear Public Utility’s predecessor, provided those services in other parts of the county. A County employee told Davis Construction it was necessary to pay WSD impact fees before it could get building permits from the County. WSD did not offer services where Becker Woods was located, and Davis had already paid Aqua NC those fees since it would be the utility providing the services. Despite objecting profusely, Davis paid in order to get the building permits.

About a year later WSD became Cape Fear Public Utility Authority (“Cape Fear”). Davis then applied for more permits for other lots in Becker Woods and was only required to pay the impact fees to Aqua NC for providing the services, and not to WSD.

Davis filed a suit in order to recover the fees it had paid to the county. The District Court found that Cape Fear’s collection of impact fees was “an ultra vires act beyond their statutory authority.” The district court rejected Cape Fear’s defenses of the claims being time-barred or the application of the doctrine of laches. The court awarded Davis a refund of the impact fees and attorney’s fees.

Statute of Limitations Bars the Federal Claims, but not the State Claims

The Court found that Davis’ federal due process claim was time barred by the statute of limitations. It held that the claim was really a §1983 claim, although this was not explicitly stated. The statute of limitations for §1983 claims are borrowed from the statute of limitations in a personal injury action in that state. In North Carolina, this is a three year period that began to run when Davis paid the impact fees. Since Davis then brought the claim five years later, the federal claim is time barred.

However, the Court found that the state law claims were timely filed. It compared the present case to Point South Properties, LLC v. Cape Fear Public Utility Authority (“Point South”). That case had extremely similar facts where impact fees were forced to be paid twice to a utility that was not providing the service. That court found that the applicable statute of limitations was ten years, derived from the catch all in NC. Gen. Stat. 1-56. The Court held this ten year period was also the appropriate statute of limitations, and the state claims were timely.

The Court also rejected Cape Fear’s claim that even if the claims were timely, they were barred by the equitable doctrine of laches. The Court once again referenced Point South and came to the same conclusion as that case; laches did not apply because it is not available in an action at law. Laches also did not apply because Cape Fear did not establish that they were prejudiced by the delay in time.

Cape Fear’s Collection of Fees was Ultra Vires

The Court upheld the district court’s finding that the collection of fees was ultra vires. Cape Fear argued that since they intended to expand their services to that part of the county, the fees could have been considered in furtherance of “services to be furnished.” But the Court held that Cape Fear had only vague plans for forty years and had taken no concrete steps to expanding service to that area. The services to be furnished must take effect in a reasonable time after construction and even ten years after Davis received its permits, Cape Fear still had not taken steps to provide service. Cape Fear’s generalized goal to expand service was not sufficient, and the Court upheld the lower court’s finding of summary judgment in favor of Davis.

Court Upholds Award of Attorney’s Fees

Cape Fear alleged that attorney’s fees were inappropriate because they were not a city or a county as required under the relevant statute. However, the district court found that the County acted outside of its legal authority by requiring Davis to pay the impact fees in order to receive its permits, and that it collected those fees on behalf of WSD. Thus, the Court found that the lower court had the authority to award attorneys fees.

Judgment Affirmed

The Court affirmed the lower court’s grant of summary judgment for Davis and the award of attorneys fees.


By George Kennedy

On July 1, 2015, the Fourth Circuit issued a published opinion in the civil case of Houck v. Substitute Trustee Services, Inc. The Fourth Circuit held that the district court’s dismissal of Plaintiff’s claims brought under 11 U.S.C. § 362(k) was erroneous, and consequently vacated the district court’s judgment, reversed its order, and remanded the case for further proceedings.

Plaintiff’s Foreclosure Proceedings and Petition for Bankruptcy

In 2000, Plaintiff Diana Houck secured financing from Lifestore Bank, F.S.A. to purchase a mobile home for her property. In 2007, Houck refinanced the loan so that she could make renovations to her family farmhouse. Two years later, however, Houck lost her job and began to have difficulty making loan payments. Because of this, Houck asked Lifestore for a loan modification. In response, Lifestore referred Houck to a debt collection agency, Grid Financial Services, Inc., which denied Houck’s request.

In July 2011, the Hutchens Law Firm, representing both Lifestore and Grid Financial, served Houck with a notice of foreclosure. To stop the foreclosure proceedings, Houck filed for Chapter 13 bankruptcy protection because the filing of a bankruptcy petition triggers an automatic stay for certain debt collection actions under 11 U.S.C. § 362(a). While the bankruptcy court denied this first petition , Houck again filed for Chapter 13 bankruptcy protection. After filing the second petition, Houck called the Hutchens Law Firm to notify it of the bankruptcy filing. Notwithstanding Houck’s second bankruptcy petition, however, the Substitute Trustee, also represented by Hutchens, sold Houck’s property in a foreclosure sale.

Dismissal of Plaintiff’s Claims by the District Court

To undo the sale of her property, Houck commenced an action against Lifestore, Grid Financial, and the Substitute Trustee. Houck alleged a claim against the three Defendants under 11 U.S.C. § 362(k) for violation of the automatic stay triggered by the filing of a bankruptcy petition. Houck also alleged related state law claims.

In two separate orders, one in October 2013 and the other in February 2014, the district court dismissed all of Houck’s claims. In October 2013, the district court granted the Substitute Trustee’s motion to dismiss under Federal Rule of Civil Procedure 12(b)(6). The district court held that Houck failed to allege facts that showed that the Substitute Trustee’s violation of the automatic stay was willful. Since this is a necessary element for a claim under 11 U.S.C. § 362(k), the district court held that Houck failed to state a claim for relief and granted the Substitute Trustee’s motion. In February 2014, the district court dismissed the remaining claims against Lifestore and Grid Financial on the grounds that the court lacked subject matter jurisdiction to hear Houck’s claim under 11 U.S.C. § 362(k). The district court reasoned that such claims can only properly be heard in federal bankruptcy courts, and not district courts. The district court then dismissed Houck’s related state law claims.

The District Court Reversed

Ultimately, the Fourth Circuit held that the district court erred in dismissing Houck’s claims and rejected the reasoning underlying the district court’s holding. Yet before resolving Houck’s claims on the merits, the Fourth Circuit established that it had jurisdiction to hear Houck’s appeal. At issue in terms of appellate jurisdiction was whether Houck was appealing from a final judgment as required by 28 U.S.C. § 1291(a). The Fourth Circuit held that Houck was in fact appealing from a final judgment under the doctrine of cumulative finality. In so holding, the Fourth Circuit reasoned that the district court’s initial dismissal of Houck’s claims against the Substitute Trustee and subsequent dismissal of Houck’s claims against Lifestore and Grid Financial had the cumulative effect of rendering all Houck’s claims against these defendants as decided with finality.

Next, the Fourth Circuit addressed the district court’s holding that it did not have jurisdiction to hear claims brought under 11 U.S.C. § 362(k). The district court held that such claims can only be brought in the bankruptcy courts, and therefore, district courts do not have jurisdiction to resolve them. The Fourth Circuit disagreed, however, and held that the statute provides both district courts and bankruptcy courts with original jurisdiction over claims brought under 11 U.S.C. § 362(k). Therefore, the Fourth Circuit held the district court erred in dismissing Houck’s 11 U.S.C. § 362(k) claims against Lifestore and Grid Financial for lack of subject matter jurisdiction.

Lastly, the Fourth Circuit reversed the district court’s dismissal of Houck’s claims against the Substitute Trustee under Rule 12(b)(6) of the Federal Rules of Civil Procedure. In dismissing Houck’s claim, the district court argued that Houck failed to allege facts that, if true, would have satisfied all the required elements under 11 U.S.C. § 362(k). In particular, the district court held that Houck failed to provide any facts showing that the Substitute Trustee’s violation of the automatic stay was willful. The Fourth Circuit disagreed, and argued that by notifying the Hutchens Law Firm of her bankruptcy petition, Houck provided the Substitute Trustee with notice since the Substitute Trustee was also represented by Hutchens. Therefore, the Fourth Circuit held that Houck did allege facts to show that the Substitute Trustee’s violation of the automatic stay was willful because Houck alleged that the Substitute Trustee had notice of Houck’s bankruptcy petition which triggers an automatic stay under 11 U.S.C. § 362(a).

Vacated, Reversed in Part, and Remanded

Because the district court erred in dismissing Houck’s claims against Lifestore, Grid Financial, and the Substitute Trustee, the Fourth Circuit vacated the district court’s judgment, reversed its order, and remanded the case for further proceedings.