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 Whitney Pakalka

On August 10, 2015, the Fourth Circuit released its amended published opinion in the civil case of Elderberry of Weber City, LLC v. Living Centers – Southeast, Inc., a case decided on July 21, 2015. The Court found that Plaintiff Elderberry of Weber City was not entitled to damages that accrued after it terminated a lease held by Defendants. The Fourth Circuit vacated the award of damages in part and remanded for the district court to recalculate damages for the period of time up to the termination of the lease.

Assignments and Termination of the Lease

In November 2000, Elderberry leased a skilled nursing facility in Weber City, Virginia to Living Centers for a ten-year term. The lease was amended to allow Living Centers to assign its lease to FMSC Weber City Operating Company or any of its subsidiaries or affiliates on the condition that Living Centers first obtain a guaranty from its parent company, Mariner Health Care, Inc. The required guaranty was attached as an exhibit to the lease amendment and was signed by an officer of Mariner in Georgia.

In 2007, Living Center assigned the lease to FMSC, who in turn assigned it to ContiniumCare of Weber City in November 2011.   At this time the facility was experiencing numerous problems, including nonpayment of utility vendors and being listed as a “Special Focus Facility,” thus subjecting it to increased health and safety inspections. Continium stopped making rent payments on March 2012. After hiring a company to secure a new tenant, Elderberry sent a letter to Living Centers, Continium, and Mariner demanding payment of past due rent. Continium did not make payments but instead abandoned the property. Elderberry then mailed notice that it was terminating the lease to Defendants on August 24, 2012, terminating the lease as of midnight that same day.

Mariner filed suit against Elderberry in the Northern District of Georgia seeking a declaration that its guaranty was unenforceable under the statute of frauds. Elderberry then filed a breach of lease action in the Western District of Virginia against Living Centers, FMSC, and Continium, along with a breach of contract action against Mariner. Both actions were consolidated in the Western District of Virginia. The district court denied the parties’ cross motions for summary judgment, and after a bench trial, entered judgment for Elderberry for accrued and future damages, plus pre- and post-judgment interest.

On appeal, Defendants argue that the district court erred in awarding damages that accrued after Elderberry terminated the lease and in finding that the guaranty satisfies the statute of frauds. The Fourth Circuit reviewed the district court’s grant of summary judgment de novo and reviewed the judgment entered after the bench trial under a mixed standard of review. Findings of fact were reviewed for clear error and conclusions of law, including interpretations of written contracts, de novo.

Rent and Non-Rent Damages are Available for the Period Before Termination of a Lease

As required by the lease, the Court applied Virginia law, which entitles a landlord to sue for rent due on the balance of the lease when a tenant abandons the property only if the landlord does not terminate the lease. tenBraak v. Waffle Shops, Inc., 542 F.2d 919, 924 (4th Cir. 1976). Although Virginia law does not allow a landlord to recover future damages from a lessee who abandons the premises, they may provide for such recovery in the lease. Under Virginia law, parties to a contract may provide an exclusive remedy only where the language used clearly shows an intent that the remedy be exclusive, and these provisions must be strictly construed against the lessor. The intent of the parties as expressed in the contract controls and is to be determined from the language of the contract.

The lease stated that in the event of default, the lessor’s remedies shall include (1) a right to terminate the lease upon written notice, (2) a right to reenter the premises and resume possession (which will not be deemed a termination and will not free the lessee from liability for rent or other obligations under the lease, and (3) the remedies provided in the lease are in addition to any rights provided by statute or otherwise. The Fourth Circuit rejected Elderberry’s argument that the rights under the lease are cumulative, instead finding that it would not make sense to allow a lessor to simultaneously terminate and continue application of the lease. The Court found that by terminating the lease, Elderberry extinguished its right to future rent upon reentry, but is entitled to rent accrued prior to termination of the lease.

Turning to non-rent damages, the Court found that under Virginia law a landlord may seek compensation for a tenant’s failure to return the facility in the required condition. Furthermore, where a lease permits the landlord to terminate the lease, the lessor is still entitled to recover non-rent liabilities accrued up to the time of termination.

The lease here required the lessee to pay for utility services, taxes, and insurance premiums, and additionally required the lessee to return the premises in good order and repair or pay costs associated with such repairs. The lease further required the lessee to comply with all applicable health and safety requirements. The Fourth Circuit found that all of these covenants could provide for accrued damages up to the point of termination. However, on appeal Defendants did not challenge the inclusion of utility, maintenance, and other fees in the damages award, and were thus deemed to have waived the argument. The Court held that Elderberry was entitled to non-rent damages prior to termination

Contemporaneous Writings Attacheded or Incorporated by Reference May Satisfy the Statute of Frauds

The Fourth Circuit applied the principle of lex loci contractus, which requires application of the law of the state where the contract became effective. Because Mariner’s officer signed the guaranty in Georgia, the law of that state was applied. Under Georgia law, for a guaranty to be binding on the guarantor, it must be in writing, signed by the party to be charged, and must identify the debt, the principal debtor, the promisor, and the promisee. John Deere Co. v. Haralson, 599 S.E. 2d 164, 166 (Ga. 2004). Georgia case law and statutory law allows for omitted material to be supplied from contemporaneous writings where the information can be readily identified in documents that are incorporated by reference or are physically attached to the contract at issue. See White House Inn & Suites, Inc. v. City of Warm Springs, 676 S.E. 2d 178, 179 (Ga. 2009); C.L.D.F., Inc. v. The Aramore, LLC, 659 S.E. 2d 695 (Ga. Ct. App. 2008). Additionally, while parol evidence cannot supply missing terms, under Georgia law it may be used to explain ambiguities in descriptions.

Here, the guaranty identifies Mariner as the promisor, but includes several blanks where required identifications were not made. The guaranty identifies Elderberry as the landlord and Living Centers as the original tenant, but the current tenant is identified as Family Senior Care Holdings or any of its subsidiaries or affiliates. The Fourth Circuit concluded that this identification is ambiguous, but used the Assignment and Assumption Agreement whereby FMSC assigned the lease to Continium to conclude that Continium is clearly the principal debtor. Because Continium stopped paying rent after March 2012 until Elderberry terminated the lease on August 24, 2012, the Fourth Circuit concluded that these are the rent payments for which Continium was the principal debtor and for which Mariner is the guarantor.

Damages Award Was Vacated in Part, Reversed in Part, and Remanded

 The Fourth Circuit concluded that the district court erred in awarding rent and non-rent damages that accrued after the termination of the lease. The Court rejected Defendants’ claims that the guaranty was invalid. The judgment was vacated in part, reversed in part, and remanded for a recalculation of the damages for the appropriate period.

 

 

 

 

 

 

 

 

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By Paige Topper

On November 13, 2015, in the civil case of CoreTel Virginia, LLC v. Verizon Virginia, LLC, a published opinion, the Fourth Circuit affirmed the District Court’s decision to grant damages for use of telecommunications facilities and late-payment fees.

The Telecommunications Act of 1996

The Telecommunications Act requires incumbent local exchange carriers, like Defendants, Verizon Virginia and Verizon South (collectively “Verizon”), to allow competitive local exchange carriers, like Plaintiff, CoreTel, to connect with users over the incumbent’s network. This arrangement is executed through private agreements that determine the rates and terms under which the companies’ networks will be interconnected. Here, the two interconnection agreements (the “ICAs”) at issue were between CoreTel and Verizon Virginia and between CoreTel and Verizon South.

CoreTel I: Procedural History

The Fourth Circuit first encountered these parties in a dispute over what rates CoreTel had to pay to use Verizon’s facilities. CoreTel had ceased paying for the use of Verizon facilities since the parties could not agree as to the proper rate. Subsequently, Verizon filed suit bringing both a declaratory relief claim (to enforce Verizon’s tariffs as the rate) and a claim for damages. The Fourth Circuit found that Verizon should have billed CoreTel for facilities at TELRIC rate (a cost-based pricing method established by the Federal Communications Commission) rather than the tariff rates of Verizon. As a result, CoreTel was entitled to summary judgment on that first claim. However, the Fourth Circuit did not resolve Verizon’s claim for damages associated with CoreTel’s breach of the ICAs for failure to pay.

On remand, the district court heard evidence from Verizon regarding CoreTel’s debts for the both the Verizon Virginia and Verizon South facilities. Verizon further argued that it was entitled to late fees. The district court entered judgment in favor of Verizon for the full amount of damages plus the late fees.

Mandate in CoreTel I Did Not Preclude the District Court’s Finding of Damages

The Fourth Circuit found that CoreTel misconstrued the mandate rule, which prohibits lower courts from considering questions that a mandate of a higher court laid to rest. The Fourth Circuit emphasized that the only matter its mandate in CoreTel I laid to rest was that TELRIC rates should apply. While the Fourth Circuit held in favor of CoreTel on Verizon’s claim for declaratory relief, the Court did not resolve Verizon’s claim for damages related to CoreTel’s breach of the ICAs. Therefore, the decision in CoreTel I did not preclude the district court’s findings on damages.

Fourth Circuit Found District Court Did Not Err in Calculating the Outstanding Facilities Charges

Under the ICAs, parties establish “interconnection points,” at agreed-upon locations. When a CoreTel customer calls a Verizon customer, CoreTel is responsible for delivering that call to the relevant Verizon Internet Protocol (IP). In this case, CoreTel completed the delivery of the calls by purchasing access to Verizon’s facilities at the TELRIC rates. CoreTel had to pay TELRIC-based facilities charges for any Verizon facilities it used to transport the calls. CoreTel completely failed to make these payments.

CoreTel argued six reasons for why the district court erred in granting the specified amount of damages. The Fourth Circuit found each argument unpersuasive. The majority of the Fourth Circuit’s discussion revolves around the language of the ICAs and what the parties contractually agreed on. For instance, CoreTel argued that it should not owe facility charges to Verizon South because all its traffic entered the Verizon network through Verizon Virginia facilities. The Fourth Circuit concluded that the ICAs made clear that CoreTel must pay Verizon Virginia for the use of Verizon Virginia facilities and Verizon South for the use of Verizon South facilities, regardless of where CoreTel traffic enters the Verizon network.

District Court Did Not Err in Awarding Late Fees

CoreTel further challenged the district court’s award of late fees to Verizon on three claims. Again the Fourth Circuit found each argument unpersuasive. In disputing CoreTel’s arguments, the Fourth Circuit determined that, despite the fact that Verizon had never issued CoreTel formal bills at the proper TELRIC rate, CoreTel still owes late fees because CoreTel did not even pay the undisputed amount (the TELRIC rate). Additionally, the Fourth Circuit concluded that although Virginia law requires late fees to be limited to 5% per year, when a state utilities commission approves an ICA, its provisions are not subject to state law claims. Here, Virginia’s state utilities commission approved both ICAs and thus CoreTel could not claim a violation of Virginia law.

Fourth Circuit Affirmed

The Fourth Circuit affirmed the district court’s damages award for both the use of Verizon facilities and late fees because the district court properly calculated Verizon’s damages for CoreTel’s breach of contract according to the TELRIC rate, as the Fourth Circuit instructed in CoreTel I.

By Ashley Escoe

On Monday March 30, 2015, the Fourth Circuit released a published opinion regarding the civil case of Georgia-Pacific Consumer Products v. Von Drehle Corporation. In its opinion, the court agreed with von Drehle Corporation (“von Drehle”) and vacated the district court’s injunction and award of attorneys fees and also reversed the increase in damages and the award of prejudgment interest–all of which had been in favor of Georgia-Pacific Consumer Products (“Georgia-Pacific”).

Georgia-Pacific’s Claim of Trademark Infringement

Georgia-Pacific brought this trademark infringement case against von Drehle for designing and selling ten-inch paper-towels specifically for use in Georgia-Pacific’s “enMotion” motion sensor towel dispensers. Georgia-Pacific owns the trademark “enMotion” and alleged that von Drehle had violated the Lanham Act, 15 U.S.C. § 1114(1)(a), for contributory trademark infringement because the von Drehle towels were “likely to cause confusion and . . . deceive End-User Customers.”

Georgia-Pacific brought three separate actions against von Drehle for selling these ten-inch paper-towels: in the Western District of Arkansas, the Northern District of Ohio, and the Eastern District of North Carolina. The first to rule on this issue was Arkansas, which concluded that von Drehle towels made for use in an enMotion dispenser were not likely to cause confusion, and therefore not an instance of trademark infringement. The Eighth Circuit affirmed. The district court in Ohio then ruled against Georgia-Pacific as well, holding that Georgia-Pacific was precluded from litigating the same issue; the Sixth Circuit affirmed.

The Eastern District of North Carolina initially ruled against Georgia-Pacific based on von Drehle’s affirmative defense of claim and issue preclusion. However, on appeal the Fourth Circuit reversed this decision, concluding that von Derhle waived those defenses by failing to raise them in a timely manner. A jury awarded Georgia-Pacific the $791,431 in profits von Drehle made from the paper-towel sales. The district court trebled the jury verdict and awarded attorneys’ fees as well as prejudgment interest–totaling $4,887,283.51. The district court also granted Georgia-Pacific a permanent, nationwide injunction prohibiting von Drehle from selling its paper-towels.

On appeal, von Drehle challenged the geographical scope of the injunction and the monetary awards.

The Scope of the District Court’s Injunction Was Too Broad

The Fourth Circuit determined that the district court abused its discretion by granting a nationwide injunction. Generally, a district court has the authority to issue a nationwide injunction prohibiting trademark infringement. 15 U.S.C § 1116(a). In this instance, however, for the sake of inter-circuit comity, the court determined that the injunction should be limited to the states in the Fourth Circuit. The Sixth and Eighth Circuits have already ruled that von Drehle was not prohibited from selling its ten-inch paper towels, and the other Circuit courts that have not yet ruled on the issue should be free to resolve this matter for their jurisdictions. The Fourth Circuit vacated the district court’s injunction and remanded the issue.

Trebling the Damages Award Was Inappropriate

The Fourth Circuit concluded that the district court’s reliance on Larsen v. Terk Techs. Corp. was an erroneous conflation of 15 U.S.C. § 1117(a) and § 1117(b). In Larsen, the issue was the use of a counterfeit mark and thus was governed by § 1117(b), which mandates treble damages for willful and intentional infringement. The instant case does not concern counterfeit marks, but rather is a general trademark infringement case governed by § 1117(a). Section 1117(a) does allow a court to adjust a jury award, but only if the award was inadequate or excessive and never solely to punish the defendant. Georgia-Pacific only requested an award of von Drehle’s profits, and that is precisely what the jury awarded; therefore, there was no basis for the district court to find the award inadequate. The Fourth Circuit reversed the increase in the damages award and ordered the jury award be reinstated.

A New Standard for “Exceptional” in Regard to Attorneys Fees

The district court granted attorneys’ fees to Georgia-Pacific, finding the case to be “exceptional” because von Drehle purposefully and willfully sold its towels to be used in Georgia-Pacific’s dispensers. However the Fourth Circuit noted that the district court failed to distinguish between willfully performing an act one believes to be lawful and willfully breaking the law. Further, after the district court made its ruling, the Supreme Court issued its decision in Octane Fitness, LLC v. ICON Health & Fitness, Inc. Though this decision did not define “exceptional” in the attorneys’ fees provision of § 1117(a), it defined an “exceptional case” in an identical provision of the Patent Act. The Supreme Court held that a district court may determine a case is exceptional by looking at the totality of the circumstances. The Fourth Circuit vacated the award of attorneys’ fees and remanded the issue for the district court to determine in light of the Octane Fitness standard.

Congress Did Not Intend for Prejudgment Interest in This Circumstance

Section 1117 is particular about what types of monetary relief are available for trademark infringement in specified circumstances. The Fourth Circuit concluded that if Congress did not include a certain type of monetary relief in a specified circumstance, then it was Congress’ intention that it not be available. Section 1117(a) does not provide for prejudgment interest in cases concerning recovery of a defendant’s profits. The court noted that it may be possible to recover prejudgment interest under § 1117(a) as an element of damages, but Georgia-Pacific only claimed von Drehle’s profits, not damages. Therefore the Fourth Circuit reversed the district court’s award of prejudgment interest.

The Fourth Circuit Vacated, Reversed in Part, and Remanded in Part the District Court’s Decision

The Fourth Circuit vacated the district court’s injunction and award of attorneys fees’ and remanded on these issues. It also reversed the increase in the damages award and the award of prejudgment interest.

Judge Shedd Disagrees with Limiting the Scope of the Injunction

Judge Shedd wrote separately, concurring in part and dissenting in part. Judge Shedd only disagreed with the decision to restrict the injunction to the Fourth Circuit. On appeal, injunctions are reviewed for abuse of discretion. Judge Shedd points out that the district court “applied the correct injunction standard, did not rely on a clearly erroneous finding of material fact, and did not misapprehend the law with respect to the underlying issues of this case.” The district court did not abuse its discretion, and the Fourth Circuit should affirm the injunction. Instead the majority of the panel relied on the doctrine of comity in determining that the nationwide scope of the injunction was too broad. The doctrine of comity is not a rule of law, but just a courtesy; and, according to Judge Shedd, relying on comity was not appropriate in this situation.

By Chad M. Zimlich

On Monday, March 16, 2015, the Fourth Circuit in Moses v. CashCall, Inc., a published civil opinion, considered an appeal from a district court affirmation of a bankruptcy court decision from the Eastern District of North Carolina.

The appeal centered around whether claims for declaratory relief and for monetary damages asserted by Oteria Moses, a resident of Goldsboro, North Carolina, against CashCall, Inc. were subject to arbitration. The bankruptcy court retained jurisdiction over both claims, denying CashCall’s motions to compel arbitration. With respect to the claim of monetary damages, the bankruptcy court also made recommended findings of fact and conclusions of law. The district court affirmed the bankruptcy court’s decision.

On appeal, the Fourth Circuit held that that the district court did not err in affirming the bankruptcy court’s exercise of discretion to retain in bankruptcy Moses’ first claim for declaratory relief. However, the majority of the Court found that the district court erred in retaining in bankruptcy Moses’ claim for damages under the North Carolina Debt Collection Act and denying CashCall’s motion to compel arbitration of that claim. As to this part of the holding, the judges were split three ways, Judges Gregory and Davis for concurring in a judgment reversing the issue of arbitration for the money damages, and Judge Niemeyer dissenting.

A Question of Where the Case Belongs: Bankruptcy or Arbitration

The issue that the Fourth Circuit was confronted with was whether it was appropriate for either of Moses’ claims to be submitted to arbitration, or if one or both claims required the use of the bankruptcy court system. The question may seem simple, however, there were two distinct inquiries regarding each claim centered on the jurisdiction that the bankruptcy court had.

Loan Sharking By Western Sky

Facing financial difficulties, Moses signed a Western Sky Consumer Loan Agreement (“Loan Agreement”) on May 10, 2012, and agreeing to pay Western Sky, or any subsequent holder of the debt, $1,500 plus 149% interest. Pursuant to the agreement, Western Sky gave Moses $1,000, and retained $500 as a “prepaid finance charge/origination fee.” The Loan Agreement stated that the annual percentage rate for the loan was 233.10%, with the amount of all scheduled totaling $4,893.14. North Carolina law limits interest rates to a maximum of 16%. The Loan Agreement also gave Western Sky’s address as being in South Dakota and stated that the agreement was subject to the Indian Commerce Clause of the Constitution. Additionally, Western Sky was not licensed to make loans in North Carolina.

The Loan Agreement provided that any disputes relating to it were to be resolved by arbitration “conducted by the Cheyenne River Sioux Tribal Nation.” Lastly, the Loan Agreement stated that the arbitration could take place either on tribal land or within 30 miles of Moses’ residence, but in either case the Cheyenne River Sioux Tribe would retain sovereign status or immunity.

Three days after signing the Loan Agreement, Moses received a notice from Western Sky that the Agreement had been sold to WS Funding, LLC, a subsidiary of CashCall, Inc., and would be serviced by CashCall. Three months later Moses filed a Chapter 13 bankruptcy petition in the Eastern District of North Carolina. One week later, CashCall filed a proof of claim in the bankruptcy proceeding, asserting that Moses owed it $1,929.02. Moses objected on the basis the loan was not enforceable in North Carolina, both because of the unlicensed lending and the 16% limit. Moses also filed an adversary proceeding against CashCall seeking a declaratory judgment that the loan was void under North Carolina law, as well as damages against CashCall for its illegal debt collection.

After the bankruptcy court approved Moses’ bankruptcy plan, CashCall filed simultaneous motions to withdraw it’s claims, or, in the alternative, to compel Moses to arbitrate pursuant to the Loan Agreement. Because Moses had already filed an adversary proceeding against CashCall, CashCall could not withdraw its proof of claim without court approval. Moses objected to CashCall’s motion to withdraw its proof of claim. She contended that CashCall, which had 118 similar claims in the Eastern District of North Carolina, sought to withdraw its proof of claim in her case only after she had challenged its practices. The purpose of the withdrawal, Moses argued, was simply an attempt by CashCall to divest the bankruptcy court of jurisdiction.

The bankruptcy court denied CashCall’s motion to dismiss the complaint or to stay and compel arbitration, concluding that Moses’ claim for a declaratory judgment that CashCall’s loan was void was a “core” bankruptcy claim. As to Moses’ second claim, which sought damages, the court concluded that the claim was non-core, over which it could only recommend findings of fact and conclusions of law for a decision by the district court. The bankruptcy court also denied CashCall’s motion to withdraw its proof of claim, finding that the withdrawal would prejudice Moses by removing the court’s jurisdiction over the other causes of action. CashCall filed interlocutory appeals on both counts to the district court. The district court affirmed the bankruptcy court’s orders.

Whether a Claim is Statutorily or Constitutionally Core, and Tensions Between the FAA and Bankruptcy Code

The rule iterated by the Fourth Circuit was the basis of this decision hinges on whether or not the claim in question was constitutionally core according to the Supreme Court’s decision in Stern v. Marshall. The Court there held that “Article III of the Constitution prohibits bankruptcy courts from issuing final orders regarding statutorily core claims unless they ‘stem[] from the bankruptcy itself or would necessarily be resolved in the claims allowance process.’” That means that, should the claim be based in a statute but raise no constitutional questions, it should be treated as statutorily non-core and the district court is given de novo review, making it the court of first impression.

However, a further issue was the tension between the Federal Arbitration Act (“FAA”), which favors the use of arbitration and grants the decision to arbitrate to the court of first impression, and the Bankruptcy Code, which gives the bankruptcy courts their jurisdiction and lays out a completely separate purpose intended by Congress.

The Claim of a Declaratory Judgment Belonged to the Bankruptcy Court

The Court first noted that previous courts that have considered agreements similar to the Loan Agreement, specifically the Eleventh and Seventh Circuits and the District of South Dakota, have “found that the Cheyenne River Sioux Tribe has no laws or facilities for arbitration and that the arbitration procedure specified is a ‘sham from stem to stern.’” The Fourth Circuit agreed and found that the Loan Agreement was clearly illegal under North Carolina law due to the extreme interest rate, however that did not negate the fact that the agreement specified that Indian tribal law would apply and that any dispute under the agreement would be resolved by the Sioux Tribe’s arbitration.

However, while arbitration agreements should normally be enforced, in this case the Court found that the fundamental public policy present in the Bankruptcy Code was in direct conflict with a decision to arbitrate. Meaning that, should it be declared that the Loan Agreement was illegal this would have a direct and substantial impact on Moses’ Chapter 13 bankruptcy proceedings. Therefore, as the bankruptcy court had first impression for this claim, its denial of arbitration was not a violation of its discretion.

The Problem of the Claim of Damages and a Flurry of Opinions

Moses’ claim for damages was based on the North Carolina Debt Collection Act, and the majority’s opinion found no inherent conflict between the Bankruptcy Code and the effect that arbitration would have on Moses’ bankruptcy proceeding. However, even the two-judge majority split in their reasoning for this conclusion.

Judge Gregory relied on the Ninth Circuit’s opinion in Ackerman v. Eber in stating that bankruptcy courts generally have no discretion in refusing to arbitrate a claim that is found to not be constitutionally core. His concurrence went on to state that, while the claims shared a common question, the claim of damages did not pose an inherent conflict with the reorganization of Moses’ estate under the Chapter 13 bankruptcy proceeding. Additionally, Judge Gregory saw no issue with conflicting results, as the arbitrator’s order would be subject to enforcement by the district court. In this case, any conflicts that may arise would not be “inherent” and “sufficient” to the point that they overrode the presumption in favor of arbitration.

Judge Davis relied on a previous Fourth Circuit decision from 2005, In re White Mountain Mining Co., L.L.C., which spoke indirectly on the subject. Judge Davis’ opinion, while reflecting on the “odiousness” of CashCall’s practices and perhaps faulty arbitration procedures, emphasized the fact that the non-core claim of damages that Moses had in this case would in no way be frustrated by arbitration itself, and therefore the lack of direct conflict required deference to the FAA.

Judge Niemeyer’s dissent argued that the district court’s exercise of discretion to retain the damages claim presented the same question as the declaratory judgment. So in this view, if the loan agreement were invalid, separating the two claims would be inefficient and create issues of collateral estoppel. Therefore, the district court had not abused its discretion.

Bankruptcy Court May Keep Declaratory Judgment But Must Lose Damages Claim

The Fourth Circuit concluded that resolution of Moses’ claim for a declaratory judgment could directly impact the claims against her estate, and arbitration with the Cheyenne River Sioux Tribe would “significantly interfere” with the bankruptcy reorganization. Therefore, the district court was not in error in upholding the bankruptcy court’s decision. However, the money damages sought were not in direct conflict with the Bankruptcy Code and its procedures for Moses under Chapter 13, and the question of damages was one for an arbitrator and not the bankruptcy court.

By Evelyn Norton

Today, in Hutcherson v. Lim, the Fourth Circuit affirmed the decision of the United States District Court for the District of Maryland to deny Hutcherson’s motion for a new trial.

In the District Court, Hutcherson sought relief for personal injuries sustained during a routine traffic stop.  Specifically, Hutcherson alleged that Lim, a Washington Metropolitan Area Transit Authority police officer, assaulted Hutcherson while issuing a citation for illegal window tints.

Following a three-day jury trial, the jury found that Hutcherson had proven assault and battery claims against Lim.  Yet, the jury awarded Hutcherson zero dollars in compensatory damages because Hutcherson’s wife failed to prove loss of consortium.  Twenty-nine days later, Hutcherson moved for a new trial pursuant to Rule 59 of the Federal Rules of Civil Procedure.  The District Court denied the motion.

On appeal, Hutcherson alleged that (1) the District Court improperly admitted a medical evaluation into evidence; and (2) the jury’s award of zero damages is inconsistent with its verdict.

First, Hutcherson argued that a final medical evaluation from his physician was inadmissible hearsay.  The medical evaluation expressed uncertainty as to whether Hutcherson’s partial rotator cuff tear occurred during the incident at issue.  However, testimonial evidence was also offered.

In considering the District Court’s actions, the Fourth Circuit stated that it will not “set aside or reverse a judgment on the grounds that evidence was erroneously admitted unless justice so requires or a party’s substantial rights are affected.” Creekmore v. Maryview Hosp., 662 F.3d 686, 693 (4th  Cir. 2011).  The Fourth Circuit concluded that, even assuming that the District Court erred, the evidence was not sufficiently prejudicial to affect the outcome of the case.  As a result, the medical evaluation’s admission did not affect Hutcherson’s substantial rights. Thus, the Fourth Circuit would not set aside the District Court’s judgment on this basis.

Second, Hutcherson argued that the jury’s award of zero damages is inconsistent with its verdict. While the jury found that Hutcherson proved his assault and battery claims, Hutcherson did not object to the damages award until after the jury’s discharge.  As a result, the Fourth Circuit concluded that Hutcherson waived his objection to any alleged inconsistencies.

Thus, the Fourth Circuit affirmed the District Court’s order denying Hutcherson’s motion for a new trial.