Wake Forest Law Review

By M. Allie Clayton

Today, in the civil case of Barton v. Constellium Rolled Products-Ravenswood, LLC., a published opinion, the Fourth Circuit affirmed the District Court in granting summary judgment for the company. The court stated that the governing collective bargaining agreement did not provide for vested retiree health benefits, and thus the former employer was within their power to unilaterally alter its retiree health benefits program.

Facts

A class of retirees and their union, The United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industry & Service Workers International Union AFL-CIO/CLC (“The Union”), filed this action. The union had represented the retirees since 1988 and had negotiated collective bargain agreements with their previous employer—Constellium Rolled Products-Ravenswood, LLC (“Constellium”).

The Parties’ Agreement

There was a specific provision of their collective bargaining agreement (“CBA”) that governed group health insurance benefits: Article 15. The 2010 provision of Article 15 stated:

  1. The group insurance benefits shall be set forth in booklets entitled Employees’ Group Insurance Program and Retired Employees’ Group Insurance Program, and such booklets are incorporated herein and made a part of the 2005 Labor Agreement by such reference.
  2. It is understood that this agreement with respect to insurance benefits is an agreement on the basis of benefits and that the benefits shall become effective on July 15, 2010, except as otherwise provided in the applicable booklet, and further that such benefits shall remain in effect for the term of this 2010 Labor Agreement.

In addition to Article 15 and the various booklets incorporated by reference therein (which operated as summary plan description (“SPD”)), Constellium (or its predecessors) and retirees agreed to further parameters governing retiree health benefits that were contained in “Cap Letters.” The cap letters throughout the years governed how Constellium (or its predecessors) would allocate health care spending of employees based on pre- and post-January 2003 retirees. The third cap letter, which took effect on January 1, 2011, was unique in that it took effect after the concurrently-negotiated collective bargaining agreement did.

The Unilateral Change Leading to Litigation

While the parties were negotiating a new CBA in July 2012, Constellium proposed a change to Article 15 that would extend the cap on its contributions to retiree health benefits to those who retired before January 1, 2003, and freeze its Medicare Part B premium reimbursement amount for all hourly retirees at $99.90. The Union refused to bargain about this issue because it asserted that the retiree health benefits had already vested. Constellium notified the Union that it planned to make those changes on January 1, 2013, and made those changes on that day.

Procedural History

After discovery, the parties filed cross-motions for summary judgment. The district court granted the company’s motion and dismissed the case.

The Issue

Did Constellium’s unilateral alteration of those benefits breach its obligations under the CBA?

Reasoning

The Supreme Court in M&G Polymers USA, LLC v. Tackett stated that courts must “interpret collective-bargaining agreements, including those establishing ERISA plans, according to ordinary principles of contract law, at least when those principles are not inconsistent with federal labor policy.” Therefore, as this court was interpreting the collective bargaining agreement with the parties, it was bound by ordinary contract principles. Those ordinary contract principles included the rule that states that in order to find that the retiree health benefits vested, there must be unambiguous evidence that indicates that the parties intended that outcome.

The Fourth Circuit found that the plain language of the CBA and the SPD indicated that the benefits did not vest. They found that there was explicit durational language in the retiree health benefits SPDs. Bolstering that conclusion was the contrast of the retiree health benefits section with a different section of the SPD that stated unambiguously that the pension plans cannot be reduced and they are paid monthly for the participants. Because the language was unambiguous in another section, it clearly demonstrated that the parties knew how to express their intent that certain benefits should vest.

Disposition

Because there were clear temporal limitations on the employee health benefits, the retirees’ and the Union’s arguments that the benefits had already vested cannot be upheld. Therefore, the grant of summary judgment in favor of Constellium by the district court is affirmed.

By Ali Fenno

On November 22, 2016, the Fourth Circuit issued a published opinion in the civil case of UBS Financial Services, Inc. v. Padussis. In UBS Financial, the Fourth Circuit addressed whether an arbitration award of over $900,000 to Gary Padussis (“Padussis”) could be vacated or modified in light of Padussis’s insolvency and UBS Financial Services’ (“UBSFS”) lack of participation in the selection of the arbitrators. In affirming the district court, the Fourth Circuit held that there was no basis for overturning the arbitrators’ award and that UBSFS’s motion should be dismissed in its entirety.

Facts of the Case and Procedural History

Padussis began working for UBSFS in 2009, bringing with him a team of financial advisors and an established list of clients. As part of his initial compensation, UBSFS granted Padussis a $2.7 million loan, for which he signed a promissory note that provided the balance of the loan would become fully due in the event he ended his employment with UBSFS. Also executed by Padussis was a Letter of Understanding describing his compensation and a Financial Advisor Team Agreement that governed the operations of his team. Each agreement entered into by the parties provided that any dispute would be subject to arbitration before the Financial Industry Regulatory Authority (“FINRA”).

Two years later, Padussis resigned from UBSFS on the grounds that it had ruined his team of financial advisors and cost him valuable clients. When he did not pay the $1.6 million remaining balance on the promissory note, USBS initiated arbitration proceedings.  Padussis responded with counterclaims alleging that UBSFS’s interference with his team of financial advisors and clients amounted to tortious conduct and a breach of contractual duties.

Pursuant to the FINRA Code of Arbitration Procedure for Industry Disputes (the “FINRA Code”), the Director of FINRA Dispute Resolution (the “Director”) mailed a list of potential arbitrators to Padussis and USBFS on August 21, 2013. Each party was then supposed to indicate their preferences by striking four arbitrators from the list and ranking the remaining ones. The lists were to be returned to the Director within 20 days of their being sent so he could then select a three-person arbitration panel based on those rankings. Padussis returned his list of preferences within the proscribed time, but USBFS did not, allegedly because it never received the list from the Director.

On September 11, UBSFS received a letter, dated September 3, reminding the parties to return their list of preferences by the September 10 deadline. It then filed a motion to extend the deadline. Padussis opposed the motion, claiming that UBSFS had notified him in mid-August that it was transferring to new counsel and that the list of preferences had not yet been sent. Padussis argued that this transfer of counsel caused confusion over who was sending the list and was the reason the list was never sent.

Although FINRA Rule 13207(c) allows a Director to extend the Code’s deadlines for good cause, FINRA’s Regional Director, acting for the Director as consistent with FINRA Rule 13100(k), denied UBSFS’s motion. The Director affirmed the denial, finding that UBSFS did not have good cause to extend the deadline because the list of arbitrators and a courtesy reminder of the deadline were both timely mailed, and FINRA did not receive any mail returned as undeliverable. Accordingly, FINRA proceeded with the arbitration process and selected a three-person panel of arbitrators based off of Padussis’s list of preferences.

UBSFS challenged the composition of the panel based on his lack of participation in the selection of the arbitrators, but his challenge was denied. Then, on October 27, 2014, the panel issued its final decision, awarding UBSFS $1,683,262 for the balance on the promissory note and Padussis $932,887 for damages UBSFS caused to his business.

However, faced with a statutory lien and the prospect of bankruptcy, Padussis admitted that he could not pay the full $932,887, leaving UBSFS in a position of owing Padussis over $900,000. UBSFS subsequently filed the present action to vacate the award on the grounds that UBSFS did not participate in the arbitrator selection process. It argued in the alternative that the award should be offset because of Padussis’s admission of being unable to pay the award owed to UBSFS.

The district court declined to vacate the arbitration award and to impose an offset, and UBSFS appealed.

Narrow Standard of Review

The Fourth Circuit first established the extremely narrow scope of judicial review of an arbitration award. It noted that an arbitration award should only be modified if it is one of the limited circumstances listed in the Federal Arbitration Act, or if under common law, it “fails to draw its essence from the contract” or “evidence a manifest disregard of the law.” The court emphasized that in reviewing an arbitration award, whether an arbitrator did their job “well, or correctly, or reasonably,” is not the concern. Instead, courts should ask whether the arbitrators exceeded their powers because they did not meet certain thresholds of arbitrability such as not being appointed according to the parties’ agreement. Deference should be given to arbitrators on questions outside those thresholds that regard the merits of the case or procedural questions.

The court found support for this narrow scope in public policies that focus on using arbitration as a tool to avoid the costs and delays of litigation. It noted that parties entering into agreements to arbitration do so in the hope of avoiding “a protracted set of legal proceedings.” Narrowing the judicial review of arbitration awards furthers this intent.

Rightful Appointment of Arbitrators

The Fourth Circuit next addressed UBSFS’s claim that the arbitrators were not selected according to the parties’ agreement. It first confirmed that, pursuant to Section 5 of the Federal Arbitration Act, arbitration awards will be vacated where the arbitrators’ appointment violates the parties’ contract. It then noted that here, UBSFS and Padussis agreed that all disputes would be subject to arbitration before FINRA and thus subject to the FINRA Code.

However, the Fourth Circuit rejected UBSFS’s claim that the rules for selecting arbitrators were not followed. The court listed every step FINRA and the Director took in selecting the panel and noted that not a single requirement was skipped. And even though UBSFS did not get to participate in the selection of the arbitrators, the court found that this outcome was explicitly allowed in FINRA Rule 13404(d), which requires a Director to appoint arbitrators without a party’s input when the list of arbitrators is not returned.

Because FINRA clearly followed the FINRA Code’s rules for selecting arbitrators, the Court decided that the issue raised by UBSFS was instead whether FINRA properly applied the rules when it found that UBSFS did not have good cause to extend the deadline for submitting its list of preferences. But the Fourth Circuit concluded that this constituted a procedural question, and relying on the Supreme Court’s decision in Howsam v. Dean Witter Reynolds, Inc., affirmed that such a “procedural question[] which grow[s] out of the dispute and bear[s] on its final disposition [is] presumptively not for the judge, but for the arbitrator, to decide.” The court also noted that the power to determine whether good cause existed was explicitly given to FINRA in FINRA Rule 13412. Furthermore, the court reasoned that arbitrators would be more expert about the issue because it concerned, as stated in Dockser v. Schwartzberg, “the written rules governing the parties’ proceeding.” Accordingly, the Court refused to question FINRA’s decision that there was not good cause for extending the deadline for returning the list of preferences.

Refusal to Reduce the Award

The court next addressed UBSFS’s request for the arbitral award to be offset based on Padussis’s admission of being unable to pay his portion of the award. The court first noted that complying with UBSFS’s request would result in a net profit for UBSFS and thus eliminate any damages he might owe to Padussis. It also found that the offset would constitute a modification of the arbitration award because the agreement explicitly denied “any and all relief not specifically addressed” in the arbitrators’ final decision, which never mentioned the possibility of an offset.

Pursuant to the Federal Arbitration Act, a court may modify an award if it will effectuate the intent of the arbitrators. Here, the court concluded that this modification would not effectuate the intent of the arbitrators because the award never mentioned an offset and there is no other evidence in the record suggesting such an intention. UBSFS contended that the offset of the award would reflect the intent of the arbitrators because it would provide a “simple, fair result” without changing the arbitrators’ valuation decision. But the court rejected this claim, reasoning that UBSFS should have determined the arbitrators’ intent by asking for an offset during the arbitration proceedings. Accordingly, because evidence in the record and the arbitration award did not indicate that the intent of the arbitrators would be effectuated by an offset, the Fourth Circuit chose to not impose an offset on these grounds.

UBSFS last claimed that the offset should be imposed regardless of the arbitrators’ actual intent and that the court should recognize a presumption favoring an offset. The court disagreed, reasoning that such an action would put a “judicial gloss” on the arbitration award. A judicial gloss on this award would be impermissible because the award explicitly limited itself to the relief specifically rendered in the arbitrators’ final decision.

Accordingly, because the intent of the arbitrators would not be effectuated by the offset, and because a presumption of an offset would directly conflict with the arbitrator’s final decision, the court held that granting an offset in this case would be inappropriate.

Conclusion

The Fourth Circuit concluded that UBSFS simply did not want to abide by a result it did not like. Because UBSFS had agreed to arbitration, the dispute was within the scope of that agreement, and the rules for arbitration were selected in the agreement and then followed, the court could find no reason to vacate or modify the award. Accordingly, it affirmed the district court’s decision to deny UBSFS’s motion in its entirety.

 By Whitney Pakalka

On January 11, 2016, the Fourth Circuit issued a published opinion in the civil case of Askew v. Hampton Roads Finance Company. The District Court for the District of Maryland granted Hampton Roads Finance Company (“HRFC”) summary judgment on all of Dante Askew’s borrower-creditor claims. The Fourth Circuit affirmed the grant of summary judgment as to Askew’s claims that HRFC violated the Maryland Credit Grantor Closed End Credit Provisions (“CLEC”) and was in breach of contract for failing to properly notify him that the interest rate exceeded the statutory maximum within sixty days of when it “should have” known of the error. However, the Court found that genuine issues of material fact existed as to Askew’s claim that HRFC violated the Maryland Consumer Debt Collection Act (“MCDCA”), and reversed and remanded the district court’s grant of summary judgment as to that claim.

The Used Car Contract and Dispute Between Askew and HRFC

 In 2008, Askew entered into a contract with a car dealership for financing to purchase a used car. The dealership assigned the contract to HRFC, which discovered in August 2010 that the contract’s interest rate of 26.99% exceeded CLEC’s maximum allowable rate of 24%. The next month, HRFC sent Askew a letter informing him that the interest rate was “not correct” and credited his account $845.40. However, the letter did not specify the new interest rate, which was set at 23.99%.

After receiving the letter, Askew fell behind on his payments and HRFC took steps to collect on the account. Over a period of seventeen months, HRFC contacted Askew five times by letter or telephone to seek repayment. Askew alleged that HRFC made false and threatening statements, including that it had reported him to state authorities for fraud for failing to insure his car and attempting to conceal it from repossession agents, that a replevin warrant had been prepared, and that his complaint in this case had been dismissed.

Askew filed the present suit in state court, alleging violations of CLEC, the MCDCA, and breach of contract based on the alleged failure to comply with CLEC. After HRFC removed the case to federal court, the district court granted HRFC’s motion for summary judgment on all claims.

Askew’s Claim that HRFC Violated CLEC and Accordingly Was in Breach of Contract

Under Maryland’s CLEC, credit grantors can elect to make a loan governed by CLEC that sets a maximum interest rate of 24%, which “must be expressed in the agreement as a simple interest rate.” Md. Code § 12-1013.1. If a creditor violates this provision, it may generally only collect the principal of the loan, but not interest, costs, fees, or other charges. Md. Code § 12-1018(a)(2). However, CLEC, also has two safe harbor provisions. One allows creditors to avoid liability “for any failure to comply with CLEC” through self correction “if, within 60 days after discovering an error . . . the credit grantor notifies the borrower of the error and makes whatever adjustments are necessary to correct the error.” Md. Code § 12-1020. The second safe harbor offers protection from liability where a creditor “unintentionally and in good faith” failed to comply with CLEC. Md. Code § 12-1018(a)(3).

Askew argued that HRFC violated CLEC by failing to expressly disclose in the contract an interest rate below the statutory maximum. The district court rejected the argument, finding that CLEC’s disclosure requirement only mandated that the interest rate be expressed as a simple interest rate. The Fourth Circuit agreed, stating that Askew’s interpretation would create a “meaningless technical requirement while doing little to protect consumers.”

Askew further argued that the “discovery rule” usually applicable in the statute of limitations context should apply to CLEC’s 12-1020 safe harbor, which would mean that HRFC “should have” known of the error when it took assignment of the contract because parties to a contract are presumed to have read and understood its terms.   The meaning of “discovery” in § 12-1020 was an issue of first impression, and the Fourth Circuit determined that “discovering an error” means when the creditor actually uncovers the mistake that violated CLEC. The Court reasoned that this reading better comports with CLEC’s text and purpose, as well as public policy. The Fourth Circuit reasoned that Askew’s reading of the safe harbor would give creditors little incentive to self-correct their mistakes and would work “to exacerbate one of the harms CLEC seeks to avoid—the charging of usurious interest.” Because HRFC discovered its error and attempted to cure the mistake within sixty days of that discovery, the Fourth Circuit affirmed the district court’s finding that HRFC is not liable under CLEC.

The Fourth Circuit also rejected Askew’s contention that because the contract incorporated CLEC’s provisions, HRFC is liable for breach of contract for any deviation, regardless of whether HRFC properly cured the violation. The Court found that the contract incorporated all of CLEC’s provisions, safe harbors included, and that to find differently would lead to an anomalous result by nullifying the safe harbor provisions.

Askew’s MCDCA Claim that HRFC Attempted to Collect Debt Through Improper Threats and Harrassment

 MCDCA § 14-202(6) provides that a debt collector may not “[c]ommunicate with the debtor or a person related to him . . . in any other manner as reasonably can be expected to abuse or harass the debtor.” Askew contended that HRFC violated the MCDCA by making false representations about legal action it had not actually taken by falsely suggesting it had obtained a replevin warrant, reported a notice of complaint to the Maryland Motor Vehicle Administration fraud division for failure to insure his vehicle and hiding the car from the lien holder, and that the present case had been dismissed when it was still pending.

The Court made a distinction between “truthful or future threats of appropriate legal action,” which would not violate MCDCA, and “false representations that legal action has already been taken.” Based on Askew’s allegations, the Fourth Circuit concluded that a reasonable jury could find that HRFC had engaged in conduct reasonably expected to abuse or harass. Accordingly, The Fourth Circuit reversed and remanded the district court’s grant of summary judgment on Askew’s MCDCA claims.

The Fourth Circuit Affirmed in Part and Reversed and Remanded in Part 

Because the Fourth Circuit found that the correct meaning of “discovering an error” in the context of Maryland’s CLEC means when the credit grantor in fact realizes a mistake has been made, the Court affirmed the district court’s grant of summary judgment as to Askew’s claims that HRFC violated CLEC. Similarly, the Court rejected Askew’s breach of contract claim, because to subject a credit grantor to liability for violating CLEC when its conduct falls within a safe harbor of CLEC would be anomalous. However, the Fourth Circuit found that a reasonable jury could find that HRFC engaged in abusive and harassing conduct in violation of MCDCA, and reversed and remanded for further proceedings on that count alone.

 

 

peanuts

By Malorie Letcavage

On December 2, 2015, the Fourth Circuit issued its published opinion in Severn Peanut Co., Inc. v. Industrial Fumigant Co. In this case, appellant Severn Peanut Co. (“Severn”) asked the Fourth Circuit to overturn the lower court’s grant of summary judgment for appellee, Industrial Fumigant Co. (“IFC”) on both the breach of contract and the negligence claim. The Fourth Circuit ultimately affirmed the grant of summary judgment because the consequential damages provision in the contract overcame the breach of contract claim and North Carolina law does not allow a plaintiff to pursue a tort claim under the guise of a contract claim.

Background

Severn entered into an agreement with IFC to apply a pesticide, phosphine, to its peanut storage dome. The parties signed a Pesticide Application Agreement (“PAA”) which detailed that Severn would pay IFC $8,604 for the pesticide services. The contract specified that the sum excluded IFC assuming any risk of “incidental or consequential damages” to Severn’s “property, product, equipment, downtime, or loss of business.” It also stipulated that the pesticide would be applied according to the instructions on its label.

The label on the phosphine requires the user to avoid the pesticide tablets from piling up because this could lead to fire or an explosion. Despite this warning, IFC dumped 49,000 tablets of the pesticide into the peanut dome through a single hatch. The pile up of the tablets caused a fire and an explosion. Severn’s insurer paid to cover Severn’s loss of peanuts, business income, and the damage to the peanut dome. Severn filed against IFC for breach of contract and negligence. The District Court granted partial summary judgment for IFC on the breach of contract claim because it found that the consequential damages clause in the PAA excluded a claim for breach of contract. It also found Severn to be contributorily negligent, and thus granted summary judgment in favor of IFC on the negligence claim.

Breach of Contract Claim

The Court examined the consequential damages limitations in North Carolina. It found that this doctrine allows parties the freedom to contract. It strongly stressed that it would not overhaul a valid enforceable contract that both parties agreed to and signed. It held that the consequential damages doctrine may only be limited if the clause is unconscionable. The Court found that overall the doctrine is a widely used tool for completing business.

In application to Severn’s case, the Court held that the language of the PAA established a valid consequential damages clause, and the items damaged fell within this language. It also found that the clause was not unconscionable. A clause is unconscionable when no reasonable person would view the contract’s result without feeling injustice. However, this clause was conscionable because it was between two experienced business parties who contracted specifically to include the provision; it was a fair result according to the contract.

The Court also rejected Severn’s argument that the clause was a violation of public policy. The Court refused to find consequential damage clauses against public policy without a clear indication from the North Carolina courts, of which there was none. It held that North Carolina law provides other criminal and civil penalties for the misapplication of the pesticide, so there was no reason to hold private liability as the only means of enforcement. Thus, the Court affirmed summary judgment on the breach of contract claim because the contract was an agreement between two sophisticated commercial entities who should be held to the terms of the contract they signed.

Negligence Claim and Economic Loss Doctrine

While the Court agreed with Severn’s argument that the ruling of contributory negligence ignored material facts, it still affirmed the grant of summary judgment for IFC because of the economic loss doctrine. The Court found that the negligence claims would not survive the assent to the consequential damages limitation. The economic loss doctrine “prohibits recovery for purely economic loss in tort when contract…. operates to allocate the risk.” The doctrine encourages parties to allocate the risk of loss themselves, as they are in the best position to do so.

In this case, Severn wanted to claim a remedy in tort for IFC’s breach of duty to apply the pesticide according to the label, which is the same source as their breach of contract claim. Yet since Severn bargained to limit consequential damages caused by breach of contract they cannot be allowed to try to undo that bargain using tort law. Additionally, the Court found that the storage dome and peanuts were not outside of the contract, and were not exempt from the economic loss doctrine.

Summary Judgment Affirmed

Thus, the Fourth Circuit affirmed the lower court’s grant of summary judgment for IFC on both the breach of contract and the negligence claim.

 

By Anthony Biraglia

In the civil case of Chorley Enterprises v. Dickey’s Barbecue Restaurants, Inc., the Fourth Circuit vacated a Maryland district court’s decision to hold a jury trial on a purportedly ambiguous contract provision, rather than compel arbitration, in a franchise dispute between two sets of plaintiffs and Dickey’s Barbecue Restaurants (“Dickey’s”). The Court determined that it could resolve the purported ambiguity in the contract provision as a matter of law, and found that the “clear and unambiguous language” of the provisions mandated that Dickey’s common law claims be arbitrated, while the plaintiff’s Maryland Franchise Law claims go forward in Maryland district court. In a published opinion released on August 5, 2015, the Court stated that the Federal Arbitration Act (“FAA”) requires this result despite the inefficiency of piecemeal litigation in multiple forums.

Arbitration or Litigation? Pre-Trial Maneuvering

Both sets of plaintiffs (collectively “Franchisees”) were franchisees operating Dickey’s restaurants in Maryland. The first set of plaintiffs, Matthew Chorley, Carla Chorley, and Chorley Enterprises (collectively “Chorleys”), were involved in a dispute with Dickey’s over the franchise’s management. Dickey’s brought arbitration proceedings, alleging common law breach of contract claims for the franchise and development agreements between Dickey’s and the Chorleys. In turn, the Chorleys brought suit in federal court seeking to enjoin arbitration and declare the arbitration provision unenforceable. The Chorley’s also claimed that Dickey’s fraudulently misrepresented start-up and operating costs in violation of the Maryland Franchise Regulation and Disclosure Law (“Maryland Franchise Law”). Dickey’s filed a similar set of claims against the second set of plaintiffs, Justin Trouard and Jessica Shelton (collectively “Trouard and Shelton”). Trouard and Shelton responded in the same fashion as the Chorleys by filing suit in Maryland district court. Dickey’s filed motions to compel arbitration in both matters. The district court consolidated these two cases to decide the pre-trial motions because the provisions in question were virtually identical.

The Franchisees agreed to similar contracts with Dickey’s that included several forum selection provisions, two of which were at issue here. The first was an arbitration provision (“the Arbitration Clause”) in which the parties agreed to arbitrate all claims arising out of the agreement at the American Arbitration Association nearest to Dickey’s headquarters in Texas. The second was a state specific provision (“the Maryland Clause”) that created an exception to arbitration provision with regard to claims under the Maryland Franchise Law. The agreement provided that the Franchisees could file such claims in any competent court in Maryland. In the district court, both the Franchisees and Dickey’s presented an all-or-nothing argument. The Franchisees argued that the Maryland Clause fundamentally conflicted with the Arbitration Clause such that the Arbitration Clause was void, whereas Dickey’s argued that the Maryland Clause merely preserved the right to bring a Maryland Franchise Law claim in either arbitration or in court.

The district court found both the Franchisees’ and Dickey’s arguments to be plausible. Thus, it ordered a jury trial to determine which, if any, issues the parties agreed to arbitrate. The parties filed interlocutory appeals challenging the denial of their motions.

The FAA Requires Arbitration of Claims that Parties Agree to Arbitrate

Section 2 of the FAA provides that arbitration clauses may only be invalidated on “such grounds as exist at law or in equity for the revocation of any contract.” Courts will compel arbitration under § 4 of the FAA if (i) the parties have entered into valid agreement to arbitrate and (ii) the dispute in question falls within the scope of the agreement. If a federal court finds both of these elements, it must enforce the agreement as written. To make these findings, the Court applied Maryland contract law, which required it to look at the intent of the parties to determine whether the agreement was valid with respect to the Arbitration Clause.

The Fourth Circuit found that the Franchisees and Dickey’s intended to arbitrate Dickey’s common law claims. The claims arose out of the relationship between the parties, and thus were within the scope of the Arbitration Clause. Because the Court found the intent to arbitrate, which was evidence of a valid agreement, and the claims were within the scope of the agreement, the Court compelled arbitration on Dickey’s common law claims. In doing so, the Court rejected the Franchisees’ claim that an adverse arbitration decision would be prejudicial to their Maryland Franchise Law claims, as well as a claim that the Maryland Clause trumped the entire Arbitration Clause. Supreme Court precedent instructed that the FAA requires piecemeal litigation in cases where some claims were subject to arbitration and some were not.

On the other hand, the Court agreed with the Franchisees that the Maryland clause trumped as it pertains to Maryland Franchise Law claims. The agreement provided that the Franchisees could bring Maryland Franchise Law claims in Maryland courts notwithstanding the Arbitration Clause. The Court determined that the plain language of the agreement provided that Maryland Franchise Law claims should go forward in the Maryland district court.

Dickey’s also argued that the FAA preempted the Maryland Clause. The Court rejected this argument on the basis that the FAA preemption upon which Dickey’s relied applied to state law that prevented arbitration of certain claims rather than contractual provisions.

Vacated and Remanded

Because the FAA requires claims that can be arbitrated to be arbitrated even if there are other related claims that may not be arbitrated, the Court vacated the district court’s decision to order a jury trial to resolve an ambiguous contract provision and decided the dispute as a matter of law. The Court remanded to the district court the issue of whether the stay the proceedings in that court pending arbitration.

car-with-keys copy

By Malorie Letcavage

On July 7, 2015, the Fourth Circuit issued its published opinion in the civil case Poindexter v. Mercedes-Benz Credit Corp. Ms. Virginia Poindexter appealed the district court grant of Mercedes-Benz Credit Corporation’s (“MBCC”) motion for summary judgment. That court held that all of Poindexter’s claims were time barred and she failed to demonstrate facts that would support all the elements of her claims. The Fourth Circuit agrred and affirmed the district court’s grant of summary judgment because her claims violated the statute of limitations and she did not point to facts that would sufficiently support the elements of her claims.

Lien on House to Help with Car Payments

In April 2001 Poindexter purchased an Audi from HBL Inc., who then assigned her repayment contract to MBCC. Poindexter then voluntarily participated in the Home Owner’s Choice Program, which allowed her to put a lien on her home by a deed of trust for her outstanding car payments. This structure made the interest she paid on the loan tax deductible. Poindexter signed a Servicing Disclosure Statement acknowledging the mortgage loan was covered by Real Estate Settlement Procedures Act (“RESPA”). Poindexter executed the deed of trust, which had a covenant that MBCC would release the lien when all payments were satisfied.

In 2004 Poindexter traded in her Audi to HBL for a Mercedes-Benz sedan, so she was released from further payments on the Audi. However, MBCC did not record a certificate of satisfaction that would release the deed of trust. Thus, when Poindexter went to refinance her mortgage, she found there was still a lien on her home. She wrote to MBCC and demanded it record a certificate of satisfaction, but MBCC did not do so in a timely fashion. Only after Poindexter filed a complaint did MBCC record a certificate of satisfaction. Poindexter alleged six causes of action:(1) breach of contract; (2) slander of title; (3) violation of RESPA; (4) violation of the Virginia Consumer Protection Act (“VCPA”); (5) violation of Virginia Code § 55- 66.3; and (6) declaratory judgment.

Summary Judgment Appropriate for Breach of Contract Claim

The statute of limitation begins to toll when the debt is satisfied. Since the debt was satisfied in 2004 when the car was traded and Poindexter did not file until 2013, her claim was time barred. Poindexter still argued that the court was equitably estopped from pleading the statute of limitations bars her claim. However, the Court found that Poindexter had not satisfied the elements of equitable estoppel because she did not establish facts that showed she did not have a “convenient and available means” of obtaining information about status of the lien on her home. There was also no evidence on the record whether there was a genuine issue of material fact as to whether MBCC tried to conceal anything or falsely misrepresent anything.

Poindexter also claimed that her previous dealings with MBCC made her believe MBCC had filed a certificate of satisfaction. However, she only cited that she traded in her Audi to support this claim. MBCC made no further statements about certificate of satisfaction. MBCC’s March letter was found to only have an accurate statement about the release of a security interest in her first vehicle and did not contain any security information about her Audi.

Also, Poindexter argued that the district court prematurely granted summary judgment because it did not rule on her motion for discovery. But Poindexter did not show how the information she requested would have created a genuine issue of material fact sufficient to overcome summary judgment. The Fourth Circuit found no error in the grant of summary judgment on the breach of contract claim.

Summary Judgment Appropriate for Slander of Title Claim

The Court found that MBCC did not publish false words with malice that disparaged Poindexter’s title to her property. There was no evidence in the record that showed MBCC had acted with malice or reckless disregard and Poindexter only pointed to the fact that MBCC didn’t file a certificate of satisfaction. However, the Court found this to just be an administrative oversight and showed nothing more than negligence. Therefore, Poindexter did not establish the elements for slander of title. The Court also found it was untimely because it was outside of the five year statute of limitations.

Summary Judgment Appropriate for RESPA Claim

A provision of RESPA states that a response to any “qualified written request” was necessary upon receipt. However, the Court did not find that Poindexter had sent a qualified written request that requested “information relating to the servicing of the loan.” First, her oral communications did not qualify as written requests. Second, the letter from Poindexter’s attorney to MBCC did not have a statement of the reasons or sufficient detail related to the servicing of the loan. That letter only referenced the details of another vehicle, which was not the Audi, for which the deed of trust was recorded so it did not properly identify the “account of the borrower” as RESPA requires.

The Court also found that Poindexter’s correspondence did not relate to the servicing of her loan. The Court followed the reasoning of Medrano v. Flagstar Bank, and held that Poindexter’s request related to the terms of the loan and mortgage and an obligation that arose after the loan was satisfied. Therefore, it did not relate to the receipt of making of loan payments and did not satisfy the elements of a RESPA claim.

Summary Judgment Appropriate for VCPA claim

The VCPA protects against deception or fraud in consumer actions but does not apply to mortgage lenders. The Court held that MBCC was a mortgage lender because after HBL transferred the vehicle loan to MBCC, Poindexter agreed to modify the car payment agreement and place a lien on her house. Thus, the vehicle loan was converted into a mortgage loan.

The Court further reasoned that both parties had a clear intent that the payment arrangement be a mortgage loan. Also, Poindexter reaped the benefits in tax deductions from it being classified as a mortgage loan so she could not avoid its consequences from such a classification.

Summary Judgment Appropriate for Va. Code § 55-66.3 Claim

This section states the requirements for the filing of a certificate of satisfaction as ninety days after the debt was paid and the consequences if the certificate is not filed. However, Poindexter’s claim was time barred. Her cause of action accrued on the ninety-first day after her obligations were satisfied in 2004. Since she did not enter a complaint until 2013, her claim was outside of the two-year time limit.

Summary Judgment Affirmed

The Fourth Circuit affirmed the district court’s granting of summary judgment for MBCC on each count. The Court held that these claims were either outside of the applicable statute of limitations or that Poindexter had failed to establish all the elements of her claims.

By Elizabeth DeFrance

In an opinion for the civil case, Marks v. Scottsdale Ins. Co., published June 29, 2015, the Fourth Circuit Court of Appeals held that a general liability insurer for a hunt club had no duty to indemnify or defend a club member who accidentally shot a passing driver while hunting on land the club leased.

Marks Accidentally Hit by Pellets When Deer Hunter Shot Towards Public Road

Plaintiff Timothy B. Johnson (“Johnson”), a member of the Northumberland Hunt Club (“Hunt Club” or “Club”) was hunting deer on land leased by the Club when he took a shot that traveled towards an adjacent public highway. Pellets from Johnson’s gun struck Plaintiff-Appellant Danny Ray Marks, Jr. (“Marks”) in the head as he was driving. Marks filed a negligence claim against Johnson in Virginia state court, alleging that because Johnson was experienced with firearms and the location, he should have known his actions posed a risk to drivers on the highway. Marks also filed a negligence claim against the Hunt Club, alleging they failed to promulgate rules to protect the public. In a second complaint filed in Virginia state court, Marks sought a declaration that the Hunt Club’s insurer, Scottsdale Insurance Company (“Scottsdale”) had a duty to indemnify and defend Johnson due to an endorsement provision in the Club’s insurance policy. Scottsdale removed to federal court based on diversity jurisdiction and filed a counterclaim seeking an endorsement stating it does not have a duty to indemnify or defend Johnson. Johnson joined the district court litigation and the parties agreed to have a magistrate adjudicate the matter. On cross motions for summary judgment, the magistrate held that Scottsdale did not owe a duty to indemnify or defend Johnson, and granted Scottsdale’s motion.

Scottsdale issued a commercial general liability policy to the Hunt Club, establishing its duty to indemnify for “those sums that the insured becomes legally obligated to pay for damages from bodily injury or property damage to which this insurance applies,” and to defend the Club in such suits. The policy also included an endorsement that modified its coverage “to include as an insured any of your members, but only with respect to their liability for your activities or activities they perform on your behalf.” “You” and “your” are defined as “the Named Insured.”

The Court Applied Contract Principles to Determine the Scope of the Policy’s Coverage

To determine whether Johnson was an “insured” under the policy’s endorsement, the Court looked to the plain meaning of the language. Under Virginia common law, ambiguous policy language is to be construed against the insurer. However, a term is only deemed ambiguous if it is “capable of more than one reasonable meaning.” An insurer only owes a duty to indemnify and defend if the allegations in the complaint come within the scope of the policy’s coverage.

Language of the Endorsement is not Ambiguous

The Court analyzed the language of the two clauses in the endorsement to determine the scope the coverage. The first clause insured “any of [the Club’s] members, but only with respect to [member] liability for the Club’s activities.” Johnson argued that the language was clear, and that his actions were covered under this clause because he was hunting at the time of the incident and hunting is one of the Club’s activities. In the alternative, he argued that the language was ambiguous and should be construed in his favor. The Court disagreed, reasoning that the language was clear, and that this clause “restricts coverage to situations involving a member’s alleged vicarious liability for the activities of the Club as an entity, not for torts allegedly committed by members during a Club activity.

Johnson conceded that the second clause in the endorsement, covering “activities [members] perform on [the Club’s] behalf,” did not apply to him in this situation.

The Court reasoned that Johnson’s proposed interpretation of the first clause was flawed when the language of the endorsement was examined as a whole. The court determined that the first clause covered actions taken by the Club that a member might be held vicariously liable for, and the second clause covered actions taken by an individual on behalf of the Club. However, under Johnson’s interpretation, the second clause becomes redundant because all member actions in connection with the Club would be covered under the first clause.

Once the scope of coverage was established, the court looked to Marks’s complaint to determine if the allegations against Johnson came within the scope of the policy’s coverage. The court reasoned that because the complaint only alleged that Johnson was a member of the club and on land leased by the club when he shot Marks, the complaint rested only on “the recreational pursuits indulged in by members,” not on Johnson’s vicarious liability for the Club’s activities.

Scottsdale has No Duty to Indemnify or Defend Johnson

Because Scottsdale was not be liable for any of the allegations against Johnson in the complaint, Scottsdale did not have a duty to indemnify or defend Johnson. The Court affirmed the judgment of the magistrate judge.

By Blake Stafford

On May 5, 2015, the Fourth Circuit issued its published opinion in the civil case of Certain Underwriters at Lloyd’s v. Cohen.  This case (in federal court under diversity jurisdiction) involved an insurer’s rescission of disability insurance policies due to alleged material misrepresentations on the policy applications.  The Fourth Circuit reversed and remanded the summary judgment that was granted in favor of the Underwriters on two main grounds.  First, the Court held that three questions on the policy application were facially ambiguous; thus, the applicant’s answers were not, as a matter of law, “material misrepresentations” that justified rescission of the policy.  Second, in a matter of first impression, the Court held that Consent Orders from the Maryland State Board of Physicians are inadmissible as evidence in a criminal or civil action given the plain language and legislative history of § 14–410 of the Maryland Code, Health Occupations Article.

Dr. Cohen’s Insurance Application and Consent Order to Suspend His Medical License

On April 1, 2011, Dr. Max Cohen submitted several initial applications for disability insurance to an authorized broker of the Underwriters.  Dr. Cohen’s responses to three of the application questions were at issue:

  1. “Are you actively at work?”—”Yes.”
  2. “Are you aware of any fact that could change your occupation or financial stability?”—”No.”
  3. “Are you party to any legal proceeding at this time?”—”No.”

These responses were submitted with the initial policy applications as well as with the final applications, which were signed on August 8, 2011.  The policies became effective on that date.

Shortly after submitting the initial applications (but before signing the final applications), Dr. Cohen signed a Consent Order with the Maryland State Board of Physicians (the “Board”).  This Consent Order suspended his license to practice medicine in Maryland for three months beginning on August 2, 2011.  This Consent Order required Dr. Cohen to wind down his practice and refer all patients to other doctors during the three-month period.  If he returned to active practice after the suspension, he would be placed on probation for five years.  Dr. Cohen also maintained a license to practice medicine in the District of Columbia, and this license was not affected by the Consent Order.

On September 8, 2011, one month after the disability policies went into effect, Dr. Cohen sought medical treatment for injuries he sustained from a fall.  The insurance agent notified the Underwriters of a possible insurance claim, and their efforts to investigate and adjust the potential claim led them to uncover the Consent Order.  They notified Dr. Cohen that they intended to rescind the policies and issued him a refund check for his premium payments.

Asserting that Dr. Cohen made material misrepresentations on his applications for insurance, the Underwriters sought a declaration by a magistrate judge that their rescission was proper.  During this proceeding, Dr. Cohen filed a motion in limine to exclude all references to the Consent Order, which was denied.  The magistrate judge granted summary judgment to the Underwriters, concluding that the Underwriters validly rescinded the insurance policies because Dr. Cohen made material misrepresentations on his application.

Maryland’s Rule for Material Misrepresentations

In the first part of its opinion, the Court identified two requirements for a valid rescission of an insurance policy on the basis of a “material misrepresentation.”  Under Maryland law, the court must determine: (1) whether the policyholder made a false statement on the application, and (2) whether the false statement was material to the risk assumed by the insurer.  These are typically questions of fact for the jury unless the insurer demonstrates falsity and materiality by “uncontradicted or clear and convincing evidence,” thus making them questions of law.

Ambiguous Questions and Undefined Terms

The Court noted that insurance policies must be construed under contract principles, and policy terms are given the meaning a “reasonably prudent layperson would attach.”  Policy language is ambiguous if it is “general” and “suggests two meanings to a reasonably prudent layperson.”  The court applied these principles to the three questions at issue.

1.  “Are you actively at work?”—”Yes.”

The Court found this question to be ambiguous.  The Underwriters interpreted this language to indicate that Dr. Cohen was performing surgery on a daily basis. Dr. Cohen interpreted this language more broadly, noting that he was still a licensed surgeon and performed various duties at his office related to his practice (including research, administrative work, and professional development).  The Court found that both interpretations were reasonable—the application did not define the phrase “actively at work,” did not restrict the work to Maryland, and did not provide that “actively at work” requires performance of any specific “daily duties” that may have been listed elsewhere in the application.

2.  “Are you aware of any fact that could change your occupation or financial stability?”—”No.”

The Court also found this question to be ambiguous.  The Underwriters contended that “financial stability” (another term undefined in the application) only referred to active income, not net worth, since disability insurance only protects active income.  Dr. Cohen interpreted this language to include net worth as well as his “active practice” in D.C.  The Court found that “financial stability” is a broad term that could refer to net worth; a figure that did increase during Dr. Cohen’s suspension.

3.  “Are you party to any legal proceeding at this time?”—”No.”

The magistrate judge found that this question was ambiguous, and the Fourth Circuit affirmed that finding.  The application did not define “legal proceeding.”  While the Board proceedings had many characteristics of a legal proceeding (including representation by counsel and the resulting Consent Order—a legal document), no court was involved, and persons subject to a Board proceeding could conclude that, by agreeing to the Consent Order, they are able to avoid a legal proceeding.

Because these questions were ambiguous, the Court held that summary judgment was inappropriate.

The Consent Order

The Court then turned to the the denial of Dr. Cohen’s motion in limine to exclude all references to the proceedings and documents connected to his Consent Order with the Board.

Md. Code Ann. Health Occ. § 14–410 squarely addresses this issue.  Except by express stipulation and consent of all parties in a proceeding before the Board: “(1) The proceedings, records, or files of the Board . . . are not discoverable and are not admissible in evidence; and (2) Any order passed by the Board . . . is not admissible in evidence” in a civil or criminal action.

In evaluating the plain meaning of the statute, as well as the legislative history, the Court held that Board orders are not admissible in a civil or criminal action absent consent, except for an action brought by a party aggrieved by a Board decision.

Reversed and Remanded

The Fourth Circuit reversed the district court’s judgment and remanded the case.

By Mikhail Petrov

In the civil case of Dan Ryan Builders, Inc. v. Crystal Ridge Development, Inc., Plaintiff, Dan Ryan Builders Inc., (“Ryan”) appealed the decision of the US District Court for the Northern District of West Virginia and sought additional damages from Defendant, Lang Brother’s Inc. (“Lang”). The Fourth Circuit affirmed the decision of the district court, finding that the “gist of the action” doctrine was properly applied and Plaintiff was not entitled to additional damages. The case was argued on December 10, 2014, and the decision was released on April 20, 2015.

The Facts of the Case

The events of this case took place in West Virginia. Lang sought to build a housing development, Crystal Ridge, on a seventy acre tract of land. In 2005, pursuant to a Lot Purchase Agreement (“LPA”), Lang subdivided the land and contracted to sell all 143 lots to Ryan, a Maryland corporation. The LPA detailed the responsibilities of each party. The parties also entered into a number of other written contracts, including a contract to do a “fill of slope.” Lang was responsible for all of the infrastructure, including the fill slope, which was done by an independent contractor. In March 2007, cracks appeared in the basement slab and the foundation walls of a partially constructed house. Ryan contracted an engineering firm to fix the issue – but the relationship between Lang and Ryan had soured after the incident and the parties “divorced.” In December 2007, the slope behind the lot that had exhibited cracks in the foundation began sliding downhill towards a nearby highway. A geotechnical study concluded that the slope had failed due to its natural composition as well as poor construction. Ryan also experienced other difficulties with the development, including the storm water management system, the development permits, and the entrance drive.

At the District Court

In December 2009, Ryan filed a lawsuit against Lang seeking monetary damages. Ryan asserted three causes of action. First, negligence on the part of Lang in connection to the construction of the fill slope. Second, a breach of several contractual duties stated in the LPA and a subsequent amendment to the LPA made after the parties had “divorced.” Third, fraudulent misrepresentation. The third and final cause of action was abandoned at trial. The court held a five-day bench trial and awarded Ryan $175,646.25 in damages and $77,575.50 in pre-judgment interest for breach of contract with respect to repairs of the road leading to Crystal Ridge. Ryan failed to carry its burden of proof with other asserted breaches, including the entrance easement, storm water management, and the erosion control system. Lastly, the court rejected Ryan’s negligence claim because it failed under West Virginia’s “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. It requires plaintiffs seeking relief in tort to identify a non-contractual duty breached by the alleged tortfeasor. Ryan appealed.

Standard of Review

The Fourth Circuit used a mixed standard of review following a bench trial. Factual findings may only be reversed if clearly erroneous. Conclusions of law, including contract construction, are examined de novo.

Reasoning

Ryan offers two reasons why the district court erred in the “gist of action” holding. The court considered both of them separately.

Reason One – Principles of Party Presentation

Ryan contends that the “principles of party presentation” ought to have prevented the district court from relying on the “gist of the action” doctrine. The party presentation principle cautions a federal court to consider only the claims and contentions raised by the litigants before it – and neither Ryan nor Lang raised the “gist of action” doctrine in district court. The Fourth Circuit rejected this argument, stating that a party’s failure to identify the applicable legal rule does not diminish a court’s responsibility to apply that rule. Additionally, the Supreme Court has long recognized that “a court may consider an issue ‘antecedent’ to … and ultimately ‘dispositive of’ the dispute before it, even an issue the parties fail to identify and brief.”  U.S. Nat’l Bank of Or. v. Indep. Ins. Agents of Am., Inc. 508 U.S. 439, 447 (1993). Here, the “gist of the action” doctrine is just such an “antecedent” and “dispositive” issue since it goes to the duty element of any West Virginia tort claim. Therefore, Ryan’s contention that the party presentation principle barred the district court is rejected.

Reason Two – Gist of the Action

The Fourth Circuit found that the district court did not err in its application of the “gist of the action” doctrine. Because Ryan’s tort claim rests on Lang’s asserted negligence in performing the two contracts, the LPA and its Amendment, and not on any duty independent of those contracts, the “gist of action” doctrine bars the claim. The Fourth Circuit found that this is precisely the type of simple breach of contract claim that is masqueraded as a tort claim. Therefore, the court found that Ryan’s negligence claim fails as a matter of law.

Ryan’s New Claim

Alternatively, Ryan sought damages under claims he had not alleged at the district court level. Specifically, he alleges that he should have been awarded damages for the “fill of slope” contract. The Fourth Circuit found that the district court is not responsible for searching through the case in pursuit of potential basis for awarding relief. In fact, The Fourth Circuit stated that the district court did an excellent job of identifying Ryan’s meritorious claims.

Holding

The Fourth Circuit affirmed the decision of the district court. The Fourth Circuit did not agree with Ryan on either of his two arguments about the district court’s application of the “gist of the action” doctrine. Additionally, the Fourth Circuit rejected Ryan’s contention that he should have been awarded damages for the “fill of slope” contract. Arguing that Ryan should have been able to recover for the “fill of slope” contract, Circuit Judge Gregory dissented in part.

By Patrick Southern

Today, the Fourth Circuit released an unpublished opinion in the civil case of Jones Lang LaSalle Americas, Inc. v. The Hoffman Family, LLC. The appellate court reversed a decision from the Eastern District of Virginia, where summary judgment had been previously granted to the defendant in this breach of contract claim. While the district court had ruled that an agreement between the parties pertaining to commission to be paid on a real estate deal was unenforceable as a matter of public policy, the Fourth Circuit had a different interpretation of the relevant Virginia law.

The Parties Wanted to Find a Tenant to Lease Hoffman’s Property

Jones Lang LaSalle (“JLL”), the plaintiff in this matter, is a real estate business. Hoffman owns considerable property in Virginia. In 2007, the parties signed an agreement, under which Hoffman retained JLL to act as the exclusive leasing agent for its landholdings in Virginia as Hoffman tried to get the United States government to lease the land. The agreement provided that if JLL’s efforts resulted in the lease of any of the properties in question, JLL would receive a commission equal to two percent of the lease’s base rent.

JLL hired Arthur Turowski, a former member of the U.S. General Services Administration (“GSA”), to advise JLL on matters related to the federal lease procurement process. Turowski was not a licensed Virginia real estate salesperson.

In 2011, the GSA solicited proposals for a lease for a site to house the new headquarters of the National Science Foundation. JLL assisted Hoffman in presenting its property as a candidate, and the GSA selected Hoffman for the lease in 2013. As a result, Hoffman will receive a total base rent of more than $330 million over the 15-year term of the lease.

The parties then began to disagree about the commission; JLL claimed it was owed $6.62 million (two percent of the base rent) while Hoffman asserted it only owed $1 million based on what it claimed were oral agreements reflected in written submissions made to the GSA and elsewhere.

JLL Claimed Hoffman Was In Breach of Contract

JLL ultimately filed an action for breach of contract in 2013, seeking the $6.62 million it claimed it was owed under the agreement between the parties. During discovery, Hoffman learned that Turowski was not a licensed real estate salesperson.

Hoffman moved for summary judgment, arguing that as a matter of public policy, JLL could not recover commission that might have been payable under the agreement because Turowski was critical to JLL’s efforts to lease the property.

The Eastern District of Virginia entered summary judgment in favor of Hoffman. The court concluded Turowski was required to have a real estate salesperson’s license because he was centrally involved in the activities that led to Hoffman’s successful bid for the lease. The court said that there was a public policy which had been declared by Virginia’s courts that such individuals were to be licensed real estate agents.

The Plaintiffs Claimed the District Court Erred On the Public Policy Question

On appeal, JLL argued the district court erred in concluding that a JLL employee involved in the leasing efforts was required to have a Virginia real estate salesperson’s license, and that the consequence of the employee’s failure to be so licensed was a total forfeiture of JLL’s commission.

Essentially, it indicated that the district court was wrong in determining Turowski’s participation in the leasing efforts rendered the agreement between JLL and Hoffman unenforceable on public policy grounds.

The Fourth Circuit Interpreted Relevant Virginia Law Differently than the Eastern District of Virginia

Hoffman did not dispute that the agreement was valid when formed; instead, it argued that JLL performed its obligations in contravention of the Virginia real estate licensing scheme (and, thus, rendered the agreement unenforceable).

But the Fourth Circuit disagreed, saying Hoffman’s position was unsupported in Virginia law. There is no explicit statute or judicial decision the court could point to that would impose a total prohibition of JLL’s commission under Virginia law.

The appellate court did say that Virginia law was clear on two fronts: (1) that a contract made in violation of the real estate licensing statutes is illegal and unenforceable, and (2) that Virginia courts are averse to holding contracts unenforceable on public policy grounds unless their illegality is “clear and certain.” The Fourth Circuit noted that relevant precedent indicates Virginia courts are to be wary of employing public policy concerns to invalidate contracts that were valid when formed.

The Fourth Circuit’s opinion makes clear that its reversal of the summary judgment ruling doesn’t mean that JLL is entitled to the $6.62 million it seeks. Instead, this ruling only clarifies that Turowski’s participation in the leasing efforts did not render the agreement unenforceable as a matter of law. The District Court will receive the case on remand to resolve the remaining issues, including whether the parties agreed to a lesser commission in an oral agreement.

By Patrick Southern

Today, in a published opinion in the civil case of Lord & Taylor, LLC v. White Flint, L.P.,  the Fourth Circuit affirmed a ruling from the District of Maryland which refused to stop plans for redevelopment of a now-vacant shopping mall. It did so over the objections of the plaintiff, Lord & Taylor, which had argued the plans were barred by an existing Reciprocal Easement Agreement (“REA”) between the parties.

The Parties Had a Long-Standing Relationship

In 1975, White Flint began discussions with Lord & Taylor about developing a store at a new mall in Maryland. The parties ultimately agreed Lord & Taylor would serve as an anchor tenant in a building detached from the mall itself.

As part of their agreement, they entered into the REA, which bound White Flint to operating a three-story mall on the site. Any changes to the mall were to be approved by Lord & Taylor. The REA was to remain operative until at least 2042, and Lord & Taylor had an option to extend it until 2057 by exercising its final option to renew its lease.

The relationship was initially positive, but business at the mall steadily declined. By 2013, 75 percent of the mall’s tenants had left, and the mall was ultimately shuttered permanently early in 2015.

In October 2012, the local county government approved plans to tear down the mall and redevelop the site into a mixed-use development with apartments, parks, a hotel, and high-rise office buildings. The Lord & Taylor store was to remain in place.

Lord & Taylor Sought Declaratory Judgment and Injunctive Relief

Lord & Taylor filed an action to stop White Flint from going forward with the redevelopment plan, saying the REA promised Lord & Taylor’s store would have a “first class high fashion shopping center” adjacent to it for the duration of its lease. It said the new plans violated the terms of the REA and would negatively affect the store’s business.

Lord & Taylor sought declaratory judgment that the REA barred the plans and a permanent injunction that would prohibit White Flint from replacing the mall with the proposed “town center” development.

White Flint moved for partial summary judgment, arguing it would be infeasible for the courts to enforce an injunction requiring what was, by then, a mostly empty mall to resume operations and then to maintain status as a “first class high fashion shopping center” until 2057. White Flint further argued that halting the redevelopment project was against the public interest given the time and expense already devoted to the project.

The District Court granted White Flint’s motion, concluding an injunction would be unworkable in light of the advanced stage of the project.

Lord & Taylor Appealed On Two Grounds

On appeal to the Fourth Circuit, Lord & Taylor argued two separate issues: (1) that the district court erred by failing to apply the correct Maryland law to its request for injunctive relief, and (2) that the district court erred in judging the injunctive relief it sought would not be feasible.

The Fourth Circuit rejected both arguments, adopting similar reasoning to that of the District of Maryland in choosing to affirm the lower court’s decision.

The District Court Applied the Proper Legal Standards in Rendering Judgment

Lord & Taylor argued a proper application of Maryland law would necessarily mean an injunction should be granted. It indicated Maryland law strongly favors injunctive relief for breaches of restrictive covenants, to the point that other factors such as the public interest or the availability of monetary damages to compensate for a breach aren’t to be considered.

But the Fourth Circuit disagreed. It noted that even the cases cited by Lord & Taylor said that injunctive relief is subject to “sound judicial discretion.” Further, Maryland law makes clear that trial courts may take account of feasibility concerns, such as those cited by the District Court in this case, in considering injunctive relief for breach of a restrictive covenant.

The Fourth Circuit indicated Maryland courts have made clear that injunctions may be denied if they would cause courts to have to engage in “long-continued supervision” or “enforcement of the injunction would be ‘unreasonably difficult.'” Thus, it rejected Lord & Taylor’s argument.

The District Court Correctly Ruled Injunctive Relief Was Infeasible

Lord & Taylor further argued that the District Court incorrectly ruled that injunctive relief in this case would be infeasible. The Fourth Circuit reviewed that decision under an abuse of discretion standard and affirmed the lower court ruling. In making its decision, the Fourth Circuit noted that the practical realities of the situation didn’t weigh in favor of an injunction.

Much of the mall was vacant, so enforcing the REA would have necessitated an affirmative injunction ordering White Flint to transform the mall back into a “first class high fashion shopping center.” Such an order is difficult to draft with specificity, and also difficult to enforce. The court would be left to enforce detailed provisions involving parking and interior access roads, potentially for a protracted period of time, and such enforcement is beyond the level of judicial involvement that is practical.

While Lord & Taylor had indicated a “negative injunction” (which would merely bar the redevelopment plans from going forward) would be acceptable, the Fourth Circuit said that, too, was unrealistic. Such an injunction would freeze in place a vacant mall, and would essentially be a judicially-mandated blight on the area. The court was not prepared to take such a step, doing so would be against the public interest.

By Marcus Fields

            Today in Lee Graham Shopping Center, LLC v. Estate of Diane Z. Kirsch, a published opinion, the Fourth Circuit determined that the relevant Partnership Agreement was unambiguous in its prohibition of gift transfers of partnership interests to non-family members. Therefore the late Kirsch’s transfer of her partnership interest to Wayne Cullen via a revocable trust was invalid and the District Court was correct in granting summary judgment to the Partnership.

The Partnership Agreement and Contested Transfer of Kirsch’s Interest

In 1984, Dr. Paul Zehfuss and Eugene Smith converted the Lee Graham Shopping Center partnership, which they had founded in 1969, to a limited partnership – adopting a partnership agreement at the same time. Dr. Zehfuss died the following year and through his will, as well as gifts before his death, twenty one percent interest in the Partnership ultimately passed to his daughter, Diane Kirsch. In 2011, Kirsch was diagnosed with terminal cancer and in the process of estate planning assigned her limited partnership interest to the Kirsch Trust. The Kirsch Trust provided that the limited partnership interest would pass to the Cullen Trust, established for her long-term companion Wayne Cullen. Kirsch died the following year and in February 2013 the Partnership filed suit claiming that the Partnership Agreement prohibited the transfer of Kirsch’s interest to the Cullen Trust. The District Court for the Eastern District of Virginia granted summary judgment for the Partnership.

Jurisdiction was Proper:  Case does not Fall Within Probate Exception to Federal Diversity Jurisdiction

Cullen, a Maryland citizen, challenged the subject matter jurisdiction of the District Court claiming that the case fell within the probate exception to federal diversity jurisdiction. Citing the 2006 Supreme Court Case Marshall v. Marshall, the Fourth Circuit explained that this exception was to be construed narrowly and was limited to two types of cases: “(1) those that require the court to probate or annul a will or to administer a decedent’s estate, and (2) those that require the court to dispose of property in the custody of a state probate court.” The Fourth Circuit pointed out that the present case did not require the court to interpret or act on Kirsch’s will and that the property in question was in the custody of the Cullen Trust, not the probate court. Thus the probate exception does not apply and the court has subject matter jurisdiction under 28 U.S.C. § 1332.

The Partnership Agreement Does Not Permit Gift Transfers to Non-Family Members

The 1984 Partnership Agreement addresses the “Assignment of Limited Partner’s Interest,” in Section 6.02. The introductory clause to that section states that “[t]he interest of each Limited Partner in the Partnership shall be assignable subject to the following terms and conditions.” Cullen argues that this clause generally allows for the transfer of a Limited Partner’s interest unless restricted by the subsequent subsections (6.02(a)-(e)). Section 6.02(a) is titled “Limitations on Assignment,” and essentially creates a right of first refusal for the Partnership and all current partners. 6.02(e), titled “Family Transfers” provides that “[t]he sale or other transfer by a Partner, whether inter vivos or by will, of his Partnership interest … shall not be subject to the restrictions or limitations of Section 6.02(a)” if made to a family member.

The Fourth Circuit found that “[t]he clear reading of Section 6.02 as a whole is that interests may only be assigned pursuant to the terms of either 6.02(a) or 6.02(e).” It reasoned that to find otherwise would render the introductory clause and the clause in 6.02(e) – dealing with “other types of transfers between family members – superfluous. If transfers other than sales were generally allowed without restriction based on the introductory clause, as Cullen argues, then there would be no need to explicitly allow for non-sale transfers to family members in 6.02(e). The Fourth Circuit was also persuaded by the fact that both 6.02(a) and 6.02(e) served to provide favored treatment of family members because at the time the agreement was written the interests were held by the original partners or their family members.

Judgment of the District Court is Affirmed

In addition to the two issues discussed above, Cullen raised 10 additional issues as part of this appeal. The Fourth Circuit dispensed with these in a footnote, stating that “We have independently reviewed the record and we find that each of these contentions has either been waived or has no merit.” Thus the District Court’s grant of summary judgment was appropriate.