Wake Forest Law Review
18Nov

Fourth Circuit Affirms Coal Company’s Liability in Employment Benefits Case

Categories: 4th Cir. Blog Civil Cases
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By: Kristina Wilson

On Friday, November 18, 2016, the Fourth Circuit issued a published opinion in the civil case RB&F Coal, Inc. v. Mullins. The Fourth Circuit affirmed the U.S. Department of Labor’s Benefits Review Board’s finding that a coal miner, Turl Mullins, and his wife, Deloris Mullins, were entitled to employment and survivors’ benefits under 30 USC § 901 et seq (Black Lung Benefits Act). While the parties agreed that the Mullinses should be compensated, on appeal, the parties disputed whether RB&F Coal, Inc. should be responsible for paying the benefits.

The Statutory Scheme

The Fourth Circuit’s analysis was governed by the Black Lung Benefits Act (“BLBA”) and Virginia’s Guaranty Act. Under the BLBA, a mine operator that employs a miner who becomes disabled by pneumoconiosis is responsible for compensating the miner. 30 USC §§ 901(a), 922(a), 932(b), 932(c). Where multiple coal companies employ a miner, the most recent company to employ the miner is liable for the payments, as long as the company qualifies as a “potentially liable operator.” 20 C.F.R. § 725.495(a)(1). To be a “potentially liable operator,” the coal company and/or its insurer must be financially capable of assuming liability. Id. § 725.494(e).

Virginia’s legislature established the Virginia Property and Casualty Insurance Guaranty Association (VPCIGA), a state chartered non-profit association that provides payment of “covered claims” resulting from insolvent insurers. Va. Code Ann. § 38.2-1603. Virginia state laws require all insurance companies conducting business in Virginia to join the VPCIGA. Id. §§ 38.2-1604. The VPCIGA is only responsible for the claims of an insolvent insurer that are “covered claims,” as defined in the Guaranty Act. Id. § 38.2-1606(A)(1). “Covered claims” include “. . . any claim filed with the VPCIGA after the final date set by the court for the filing of claims against the liquidator or receiver of an insolvent insurer.” Id. § 38.2-1606(A)(1)(b).

Facts and Procedural History

Between 1985 and 1988, Turl Mullins worked for several different coal companies, including RB&F Coal, Inc. (“RB&F”) and Wilder Coal (“Wilder”). Mullins developed pneumoconiosis in 2009 and filed a Black Lung Benefits Act (“BLBA”) claim in that same year. At the time of filing, Mullins’s most recent employer, Wilder, was out of business and its insurer declared insolvent. Therefore, the Department of Labor district director imposed liability on RB&F for payments to the Mullinses. RB&F challenged the finding and transferred the case to an Administrative Law Judge.

The Administrative Law Judge affirmed the Department of Labor’s finding because RB&F failed to prove that Wilder Coal was capable of financially assuming the liability. RB&F appealed the Administrative Law Judge’s finding with the Department of Labor’s Benefits Review Board, but the Benefits Review Board affirmed. This appeal followed.

Wilder Is Not a “Responsible Operator” under the BLBA

On appeal, RB&F first argued that Wilder qualified as a “responsible operator” because Wilder’s claims are still “otherwise guaranteed,” under Virginia’s Guaranty Act. However, Virginia’s Guaranty Act excluded claims filed after the final date set by a court for claims against an insolvent insurer. Va. Code Ann. § 38.2-1606(A)(1)(b). The final date set by a court for claims against Wilder’s insurer was August 26, 1992. Mullins did not file his claim until 2009. Therefore, Mullins’ claim was not “otherwise guaranteed.”

The BLBA Does Not Preempt the Guaranty Act

RB&F next argued that the BLBA preempted the Guaranty Act’s limitation of liability for black lung claims. In so arguing, RB&F assumed that the VPCIGA was an insurer under the BLBA. The Department of Labor regulations implementing the BLBA provide that an insurer is any fund, including a State fund, that is authorized under a state’s workers’ compensation laws to insure employers’ liability. 20 C.F.R. § 725.101(a)(18). However, Virginia’s workers’ compensation laws prevented the VPCIGA from covering Wilder’s insurer’s claims past a certain date. In fact, the Guaranty Act precluded the VPCIGA from providing full coverage of all the claims of an insolvent insurer. Thus, the VPCIGA is not an insurer under the BLBA, and as such, the BLBA does not preempt the Guaranty Act.

Disposition

Therefore, because RB&F established neither that Wilder was a “responsible operator” nor that the BLBA preempted the Guaranty Act, the Fourth Circuit affirmed the Benefits Review Board’s imposition of liability on RB&F.

 

 

 

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16Nov

The Fourth Circuit Remands Qui Tam Proceedings Based on Possible Fraud Leading to Successor Corporate Liability

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By M. Allie Clayton

On November 15, 2016, the Fourth Circuit released a published opinion in the civil case of United States v. Government Logistics N. V., and held that, while the substantial continuity test for successor corporate liability did not apply, the factual allegations regarding the fraudulent transaction test could not be resolved in this case except by a fact finder, and thus reversed.

Facts and Procedural History

This complex case began over fifteen years ago as a bid-rigging scheme by shipping businesses in order to defraud the United States. The Fourth Circuit has entertained appeals from decisions in this case at three different points throughout the litigation.

This case began in the year 2001, when Gosselin Group N. V. (then known as Gosselin World Wide Moving, N. V.) and at least one other entity, the Pasha Group, implemented a bid-rigging scheme with regard to two government programs—the International Through Government Bill of Lading (“ITGBL”) program and the Direct Procurement Method (“DPM”) program—that facilitate the trans-Atlantic shipping of household goods that belong to military and domestic personnel. The ITGBL program involves the Department of Defense (“DOD”) soliciting bids from domestic freight forwarders, and those domestic forwarders subcontract foreign operations to businesses overseas. The DPM program involves the DOD soliciting bids from international businesses. Both programs were administered by the Army’s Military Transport Management Command (the “MTMC”).

The Gosselin defendants (Gosselin Group N. V., Gosselin World Wide Moving N. V., and Gosselin Group’s CEO and former managing director, Marc Smet) and the Pasha Group (“Pasha”) implemented a bid-rigging scheme in which they increased the prices that the DOD paid to ship goods to and from Europe under the ITGBL and DPM programs. This led to the DOD paying millions of dollars more than it should have paid. Those bid-rigging schemes did not go undetected, and led to the qui tam proceedings in this case, and successful criminal prosecutions. Qui tam proceedings are lawsuits in which a whistleblower brings a civil claim pursuant to the False Claims Act (“FCA”). Under the FCA, 31 U.S.C. § 3730, whistleblowers are rewarded for assisting the United States in recovering any money lost to the defendants, up to 25% of the proceeds if the government participates, and up to 30% of the proceeds if the government does not participate.

The Criminal Prosecutions

In November of 2003, a grand jury returned a two-count indictment against Gosselin Group and Smet that charged each with “conspiracy to restrain trade, in violation of 15 U.S.C. § 1, and conspiracy to defraud the United States, in contravention of 18 U.S.C. § 371.” In February 2004, Gosselin Group and Pasha agreed to be charged and prosecuted by criminal information for the conspiracy offenses. Gosselin Group N. V. and the Pasha Group entered conditional guilty pleas to a pair of criminal conspiracy offenses. Smet signed the plea both for himself and for the Gosselin Group, thereby escaping further criminal prosecution. Pursuant to that plea agreement, both the Gosselin Group and Pasha admitted to various elements of the conspiracy. The plea agreement was accepted on February 18, 2004. As a result of a contemporaneous agreement between Smet and the Army, Smet was barred from doing business with the United States for three years (March 2004-March 2007). A United States Management Team—consisting of four Gosselin Group employees: COO Stephan Geurts St., Stephan Geurts Jr., Timotheus Noppen, and Ludi Bokken—was created within Gosselin Group to allow Gosselin Group to continue working with DOD, in the absence of Smet.

Under the plea agreement, Gosselin Group and Pasha were able to pursue an immunity claim in the district court to seek dismissal of both the charges lodged in the information. The two defendants claimed that the bid-rigging scheme was immune from federal prosecution. In August 2004, the Eastern District of Virginia dismissed one of those charges, finding that certain provisions of the Shipping Act granted Gosselin Group and Pasha immunity from federal prosecution on the antitrust conspiracy. However, the district court also found that the defendants did not have immunity from prosecution on the charge of conspiracy to defraud the United States. Therefore, the two defendants were sentenced only on the latter charge. This decision led to cross appeals from the defendants and the United States. The Fourth Circuit determined that immunity did not apply to either charge, and further held that the defendants were both criminally liable for both conspiracies and remanded to the district court for resentencing. United States v. Gosselin World Wide Moving, N. V., 411 F. 3d 501 (4th Cir. 2005). The resentencing proceedings began in 2006. The district court imposed a $6 million dollar fine on Gosselin Group, and two separate $4.6 million dollar fines on Pasha. The court also ordered both defendants to make restitution to the DOD in the sum of $865,000.

The Qui Tam Proceedings

In 2002, realtors Kurt Bunk and Ray Ammons (the “Realtors”) brought qui tam proceedings against the Gosselin defendants under the FCA. Bunk filed his qui tam action alleging an FCA claim related to the DPM program in the Eastern District of Virginia in August of 2002. Ammons filed his qui tam action alleging an FCA claim related to the ITGBL program (“ITGBL claim”) and to Gosselin Group exerting pressure on Covan International (“Covan claim”) and Cartwright International Van Lines (the “Cartwright claim”) to submit higher ITGBL claims. These cases were sealed, pursuant to 31 U.S.C. § 3730, and remained under seal and pending while the criminal cases were resolved.

Once the criminal proceedings were resolved in 2006, the Department of Justice (“DOJ”) gave the Gosselin defendants notice of the two pending qui tam actions. The DOJ not only detailed the false claims and bid rigging evidence that was underlying the qui tam actions, but also advised the Gosselin defendants that the United States might intervene. In January 2007, the DOJ sent a settlement demand to the Gosselin defendants.

Smet conveyed his frustration regarding the criminal liability and pending civil matters to Geurts Jr. Later Smet approached Jan Lefebure, the Managing Director of International Freight Forwarding Service—the company that handled Gosselin Group’s commercial exports—with a proposal to move Gosselin Group’s business as it related to the United States to another business entity. Lefebure owned another corporation called Brabiver—described as a “company doing nothing” but that had “a license for transportation or freight forwarding.” Smet proposed to Lefebure a scheme to rebrand and reopen Brabiver and move all of his [a.k.a. Gosselin Group’s] government contracts into Brabiver.

On June 27, 2007, Smet made several interest free loans, totaling over €100,000 to the four principles involved in the Brabiver venture, Noppen, Geurts Jr., Lefebure, and Rene Beckers. The loans were not secured, and only repayable on Smet’s demand, but that never occurred. The next day, Smet’s principles used the loans to purchase shares in Brabiver and formalize the change from Brabiver to GovLog. The very next day, GovLog and Gosselin Group entered into a series of agreements that were memorialized by contracts with terms dictated by Smet, not negotiated, and drafted by Smet’s attorneys and presented by Smet to the GovLog principals. These agreements transferred Gosselin Group’s business with the DOD to GovLog, and also committed GovLog to exclusively use Gosselin Group and its related entities to perform said DOD contracts. In exchange for Gosselin Group’s business with DOD, GovLog did not pay, but promised Gosselin Group a percentage of its future net revenue—“all of those revenues received by GovLog . . . minus the amount of the [services] invoiced by [Gosselin Group] to GovLog in connection with the services provided to GovLog by Gosselin Group and its subsidiaries.” Once GovLog obtained Gosselin Group’s DOD contracts, it began its shipping operations on behalf of Gosselin Group on July 1, 2007—approximately four days after Smet made loans to the GovLog Principals.

GovLog consisted of 20 employees, all but one of whom were previous Gosselin Group employees. Their sole business was signing contracts with DOD and arranging shipping services for DOD, but GovLog was not responsible for any actual shipping, nor did it have any warehouses (GovLog leased warehousing facilities from Gosselin Group). All GovLog actually owned was a couple of automobiles, a chair, and a table. GovLog earned no net revenues during 2007 or 2008, and thus was not obligated to pay any funds to Gosselin Group in exchange for Gosselin Group’s business with the DOD. However, GovLog did pay for the leased warehouse facilities and other services provided by Gosselin Group, which essentially meant that any “money that’s going to GovLog is actually ending up being paid to Gosselin.”

Later that year, on November 7, 2007, Ammons’s qui tam action was transferred to the Eastern District of Virginia and consolidated with Bunk’s qui tam action. In 2008, the Realtors’ complaints were unsealed, but on July 18, 2008 Ammons’s qui tam action was superseded by the government’s Complaint in Intervention under 31 U.S.C. § 3730(b)(2). The government did not intervene in Bunk’s qui tam suit. In the Complaint in Intervention, the government named GovLog as a defendant, and alleged that GovLog was “a successor/transferee in interest of Gosselin [Group].” On October 2, 2008, Bunk filed his Second Amended Complaint, which included GovLog as a named defendant and alleged successor corporation liability claim against GovLog.

The Bunk Complaint pleaded numerous FCA theories of liability against the Gosselin defendants and others. Bunk joined several additional complaints, including a 42 U.S.C. § 1985 claim and state law claims. However, only his DPM claim was not superseded by the government’s Complaint in Intervention. In 2011, the government and the Relators moved for summary judgment on the issue of whether GovLog was liable as a successor corporation of Gosselin Group. The district court severed the claims against GovLog from those against the Gosselin defendants, and then proceeded to conduct a trial to first resolve the claims against the Gosselin defendants.

On July 18, 2011, the jury trial for the Gosselin defendants began on the DPM, ITGBL, and Covan claims. At the close of the government’s case, the district court awarded judgment as a matter of law to the defendants on the ITGBL claim, and submitted the DPM and Covan claims were submitted to the jury. On August 4, 2011, the jury returned a verdict against the Gosselin defendants on the DPM claim and in favor of the Gosselin defendants on the Covan claim. Despite evidence establishing that the defendants had submitted over 9,000 false invoices to the DOD, the district court did not impose any civil penalties, reasoning that such an award would be unconstitutionally punitive (each false claim authorized a minimum civil penalty of $5,500, which would have resulted in a cumulative penalty in excess of $50 million dollars).

Both parties appealed. Bunk challenged the district court’s denial of civil penalties, the government challenged the court’s award of judgment on the ITGBL claim, and the Gosselin defendants argued that Bunk lacked standing. The Fourth Circuit rejected the Gosselin defendants’ standing argument, and directed the court to amend its civil penalties judgment and award $24 million dollars in civil penalties on the DPM claim. The Fourth Circuit also vacated the grant of judgment in favor of the Gosselin defendants on the ITGBL claim and remanded the matter for further proceedings.

Once the claims against the Gosselin defendants were resolved, the district court proceeded to determine the successor corporation liability claims pending against GovLog. The district court initially focused on identifying the applicable legal test for successor corporation liability claim. In September 2014, the district court ruled that application of Carolina Transformer’s substantial continuity test would be inconsistent with the Supreme Court’s decision in Bestfoods. United States v. Carolina Transformer Co., 978 F.2d 832 (4th Cir. 1992); United States v. Bestfoods, 524 U.S. 51 (1998). The court then found that only traditional common law principles governed the issue of GovLog’s liability as a successor corporation.

On November 3, 2014, the Relators and the government moved for summary judgment, relying on the common law’s fraudulent transaction theory of successor corporation liability. Bunk presented two theories of successor corporation liability against GovLog: (1) the substantial continuity theory, and (2) the fraudulent transaction theory. GovLog cross-moved for summary judgment, stating that the theory proposed by the government and the Relators was entirely speculative. On December 23, 2014, the district court granted judgment to GovLog under two theories: (1) neither complaint had properly alleged that GovLog was liable as a successor corporation under any recognized legal theory; and (2) GovLog was entitled to summary judgment for want of a genuine dispute of material fact. The court ruled that the transactions between GovLog and Gosselin Group were not shown to have been pursued with a fraudulent intention because there was “no evidence sufficient to establish any of the recognized ‘badges of fraud’” in regard to the creation or operation of GovLog. On December 29, 2014, the court entered judgment in favor of GovLog. The Relators appealed from the judgment, and the Fourth Circuit has jurisdiction under 28 U.S.C. § 1291.

The Initial Jurisdictional Question

Initially, the Fourth Circuit addressed whether or not the district court had subject matter jurisdiction over Bunk’s successor corporation complaint. The Fourth Circuit found that the court possessed supplemental jurisdiction over Bunk’s claim. Bunk’s FCA claim provided original jurisdiction under 28 U.S.C. § 1331. The question remained whether the successor corporation liability claim revolves around the same central fact pattern as the original FCA claim against the Gosselin defendants. The Fourth Circuit held that GovLog’s successor corporate entity liability is wholly dependent on the Gosselin defendants’ liability. Because the “successor corporation liability question is part and parcel of Bunk’s original qui tam action,” the district court did not err in exercising supplemental jurisdiction on this claim.

The Alleged Errors

The Fourth Circuit had to decide whether or not the district court erred by entering judgment in favor of GovLog on the successor corporation liability issue. Bunk challenged the three rulings of the District Court: (1) that the substantial continuity test is inconsistent with Supreme Court precedent; (2) that Bunk had not adequately pleaded the fraudulent transaction theory; and (3) that the fraudulent transaction theory was without evidentiary support, thus leaving no genuine issue of material fact and entitling GovLog to summary judgment.

Successor Corporation Liability Theories

There are four exceptions from the general rule that a corporation that acquires the assets of another corporation does not acquire its liabilities. Under federal common law, a successor corporation takes on the liabilities of its predecessor if: (1) the successor agrees to assume the liabilities; (2) the transaction is a de facto merger; (3) the successor may be considered a “mere continuation” of the predecessor; or (4) the transaction is fraudulent. United States v. Carolina Transformer Co., 978 F.2d 832 (4th Cir. 1992).

Under exception (3), the mere continuation theory states that liability can pass to the successor if “after the transfer of assets, only one corporation remains.” This is not applicable to Bunk’s case because two corporations were viable after the transfer of assets. However, there was another theory proposed in Carolina Transformer—the substantial continuity theory. Substantial continuity theory allows a court to look at eight factors to determine whether successor corporation liability should be imposed. However, the Supreme Court stated in United States v. Bestfoods that “‘[i]n order to abrogate a common-law principle, the statute must speak directly to the question addressed by the common law.’” United States v. Bestfoods, 524 U.S. 51 (1998) (quoting United States v. Texas, 507 U.S. 529 (1993)). Because the FCA doesn’t speak to successor corporation liability, it has “no impact on the traditional common law principles governing successor corporation liability.” Therefore, the district court did not err in declining to apply the substantial continuity test.

Bunk also relied on exception (4), the “fraudulent transaction theory of successor corporation liability.” Because this was dismissed on a motion for summary judgment, the Fourth Circuit reviewed whether the pleadings were legally sufficient under a de novo standard of review. The Fourth Circuit did not decide whether the heightened standard of pleading in Fed. R. Civ. P. 9(b) applied because the Court stated that even if there was a heightened standard it was satisfied in this case. The Bunk Complaint sufficiently outlined the dealings between GovLog and Gosselin Group that formed a solid foundation for the fraudulent transaction theory. Therefore, the district court erred in dismissing Bunk’s successor corporation liability claim as insufficiently pleaded.

The Fraudulent Transaction Theory

However, because the district court ruled in the alternative that GovLog was entitled to summary judgment on Bunk’s fraudulent transaction theory, the Fourth Circuit had to also address whether the summary judgment award was warranted.

Because direct evidence of intent to defraud is rare, courts have developed recognized “badges of fraud” that constitute indirect and circumstantial evidence. Those “badges of fraud” include; (1) the conveyance is to a spouse or near relative; (2) inadequacy of consideration; (3) transactions different from the usual method of transacting business; (4) transfers in anticipation of suit; (5) retention of possession by the debtor; (6) transfer of all or nearly all of the debtor’s property; (7) insolvency caused by the transfer; (8) failure to produce rebutting evidence when the circumstances surrounding the transfer are suspicious; or (9) transactions in which the debtor retains benefits.

In this situation the court found that the evidence did not simply fail to dispel the required fraudulent intention, but it could easily establish it. The Fourth Circuit found that “[a]t least four of the badges of fraud are readily apparent on the evidence . . .:” (1) inadequacy of consideration; (2) transactions different from the usual method of transacting business; (3) transactions in anticipation of suit or execution; and (4) transactions through which the debtor retains benefits. The consideration was found to be grossly inadequate because, in effect, GovLog paid nothing for the business interests it received from Gosselin Group. The transaction was made in haste and with little input from GovLog or any GovLog owners, and Smet was in control of every facet of the transaction—which is not something that occurs in the usual mode of transacting business. Also, the Fourth Circuit found that a reasonable juror could find that Gosselin Group continued to reap the benefits of the business that it transferred to GovLog. But the most suspicious aspect, according to the Fourth Circuit, was the timing of the transaction. “[T]he temporal proximity of the Gosselin defendants’ being advised of the qui tam actions and the GovLog transaction being consummated suggests that the transaction was made to defraud Bunk and the United States out of civil penalties.”

Disposition

According to the Fourth Circuit, the various factual disputes in this case cannot be resolved by anyone except a factfinder. Therefore, the district court erred in awarding summary judgment to GovLog. The Fourth Circuit vacated the judgment and the case was remanded to the district court for further proceedings.

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4Nov

Fourth Circuit Affirms Denial of Protective Order in Debt Collection Judgment Case

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By: Kristina Wilson

Earlier today, November 4, 2016, the Fourth Circuit issued a published opinion in the civil case Wells Fargo Equipment Finance v. Asterbadi. The Fourth Circuit affirmed the District Court’s decision in favor of Wells Fargo. On appeal, the parties disputed whether the statute of limitations on a debt collection judgment against Asterbadi had restarted upon registration in a new district.

Facts and Procedural History

On October 4, 1993, the District Court of Virginia entered a debt collection judgment against Asterbadi for over 2 million dollars. Under Virginia law, the judgment was enforceable for twenty years. Asterbadi made several payments on the judgment, but it remained mostly unsatisfied. The creditor, CIT/Equipment Financing Inc. (“CIT”), registered the debt in Maryland in 2003, pursuant to 28 U.S.C. § 1963. At the time of registration, Asterbadi still owed over 1.5 million dollars on the debt, most of which was interest. After unsuccessful attempts to enforce the judgment against some of Asterbadi’s stocks in Maryland, CIT took no further action to enforce the judgment.

In June of 2007, CIT sold and assigned the judgment to Wells Fargo. Starting in April of 2015, Wells Fargo attempted to enforce the judgment. It filed a notice of assignment and a copy of the assignment in the Circuit Court of Montgomery County, as well as a notice of assignment in the District Court of Maryland. In May of 2015, Asterbadi sought a protective order, stating that Wells Fargo was attempting to enforce a Virginia judgment that was outside Virginia’s and Maryland’s statutes of limitations. In August of 2015, Wells Fargo filed a renewal of its registered judgment in the district court.

The district court ultimately held that the statute of the limitation on the judgment began when the judgment was registered with the district court , which was in August of 2003. Thus, the District Court denied Asterbadi’s motion for a protected order because the judgment was still enforceable against him.

Asterbadi Can Appeal the Protective Order

The Fourth Circuit considered two jurisdictional issues on appeal. First, Wells Fargo argued that Asterbadi’s appeal was limited to an injunction entered against him by CIT in September of 2015. Second, Asterbadi contended that Wells Fargo lacked standing to enforce the judgment.

In September of 2015, the District Court entered an injunction against Asterbadi, and in October of 2015, the District Court denied Asterbadi’s motion for a protective order. Asterbadi appealed the entry of the injunction, but Wells Fargo argued that Asterbadi should have appealed the denial of the protective order instead. However, in its September of 2015 order, the District Court explicitly rejected Asterbadi’s claims that Wells Fargo did not have standing and that the statute of limitations had run on the judgment. The Fourth Circuit stated that these claims were “ necessary conditions precedent” to a grant of injunctive relief. Thus, the Fourth Circuit concluded that Asterbadi could challenge the District Court’s rulings on those two claims.

Wells Fargo Does Have Standing

Asterbadi argued that Wells Fargo lacked standing because it did not comply with Maryland Rule 2-624. Under Maryland Rule 2-624, an assignee may enforce a judgment in its own name when it files the assignment in the court where the judgment was entered. Asterbadi contended that Wells Fargo had only submitted a notice of assignment and not the actual copy of assignment to the District Court. However, Asterbadi himself provided the District Court with a copy of the assignment in an earlier proceeding. Therefore, the District Court had both the notice and the copy of the assignment. The District Court consequently held that Wells Fargo had satisfied Maryland Rule 6-264, and the Fourth Circuit affirmed.

The Judgment’s Statute of Limitations Restarted under Maryland Law

Asterbadi argued that the statute of limitations on the judgment had expired, while Wells Fargo contended that registering the judgment in Maryland constituted a “new judgment” and that the statute of limitations therefore started tolling upon its registration in Maryland.

The Fourth Circuit evaluated both arguments under 28 U.S.C. § 1963. Under this section, debt collection judgments from one district are enforceable in a different jurisdiction if they are registered by filing a certified copy of the judgment in the other jurisdiction’s District Court. The statute’s intent was to minimize the inefficiency and awkwardness of requiring creditors to obtain new judgments against a debtor in order to enforce a judgment in a different jurisdiction. In interpreting § 1963 in this manner, the Fourth Circuit rejected Asterbadi’s contention that the registration was simply a “ministerial act” and a procedural mechanism to enforce the Virginia judgment. The Fourth Circuit reasoned that if registration was just a “ministerial act,” § 1963 would not need to explicitly provide that registered judgments are equally as enforceable as other judgments entered in the registration court.

Because the statute allowed creditors to obtain “new judgments,” without litigation, the Fourth Circuit treated Wells Fargo’s judgment as a “new judgment” upon its registration in Maryland. The Fourth Circuit applied Maryland law and held that debt collection judgments are enforceable for twelve years, pursuant to Maryland Rule 2-625. Accordingly, the judgment against Asterbadi would only have been enforceable until August 27, 2015. However, Wells Fargo filed for renewal on August 26, 2015. Thus, the Fourth Circuit held that Wells Fargo’s judgment will remain enforceable for twelve more years.

Disposition

Therefore, the Fourth Circuit affirmed the District Court’s denial of Asterbadi’s motion for a protective order.

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28Oct

Fourth Circuit Denies Petition for Review of an Order Denying Request for Asylum

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By Mike Stephens

In a civil case, Zhikeng Tang v. Loretta E. Lynch, decided today, October 28, 2016, the Fourth Circuit denied petition for review of an order from the Board of Immigration Appeals (“Board”) denying requests for asylum, withholding of removal, and protection under the United Nations Convention Against Torture and Other Cruel, Inhuman or Degrading Treatment or Punishment (“CAT”). The Court ultimately denied the Petitioner’s petition for review because substantial evidence supported the Board’s decision.

Facts and Procedural History

The Petitioner, Zhikeng Tang (“Tang”), is a native and citizen of China. In July 2009, Tang entered the United States illegally. Tang was introduced to Catholicism in 2011 and began attending a church. In 2011, Tang filed for asylum and the United States government began removal proceedings.

At a hearing before an immigration judge (“IJ”), Tang requested asylum, withholding of removal, and CAT protection based on his religious practice. Tang produced evidence of his membership in the Catholic Church and testified that his faith was genuine. Tang argued that his practice of the Catholic faith required attendance in an underground church in China and not a church sanctioned by the Chinese government. Tang claimed that removal to China would result in persecution from the Chinese government due to his participation in an underground church. In support of this argument, Tang provided the IJ with letters from his family that showed underground churches in China were persecuted. In addition, Tang also produced two State Department reports that criticized the Chinese government’s treatment of religious groups in China.

While the IJ found Tang’s testimony to be credible, the IJ rejected Tang’s asylum request. The IJ found that Tang did not provide sufficient evidence to show that Tang “faces an objectively reasonable risk of persecution on account of his Roman Catholicism.’ Additionally, because Tang’s claim for asylum failed, the IJ determined Tang had failed to meet the higher standard required for withholding of removal. Lastly, the IJ also concluded that Tang did not show sufficient evidence that his chances of torture were “more likely than not” upon removal to China.

The Board, on administrative appeal, upheld the IJ’s conclusion that Tang had failed to meet his burden for asylum or withholding of removal. The Board noted that Tang had not shown that the Chinese government knew or would gain knowledge of Tang’s faith and that Tang had not “established that there is a pattern or practice of persecution in China of persons similarly situated to him.” In addition, the Board concluded that Tang had waived his CAT claim because he did not challenge the IJ’s ruling on this claim. Tang appealed, challenging the Board’s denial of asylum, withholding of removal, and CAT protection.

Asylum

Tang argued the Board erred in denying his request for asylum, claiming that he met his burden of proof required for showing a fear of persecution in China. Tang claims that the instances of persecution evidenced in the letters from China and the State Department reports show a “pattern or practice of persecution in China.”

The Fourth Circuit rejected Tang’s argument and upheld the Board’s denial of asylum. The Court held that Tang’s evidence was not sufficient to allow a reasonable fact-finder “to conclude that the requisite fear of persecution existed.” While the Fourth Circuit found that Tang satisfied the subjective component required for asylum, the Court determined that Tang had failed to demonstrate an objective fear of persecution.

The Court found that Tang did not meet either of the requirements to satisfy the objective component provided for within 8 C.F.R. § 1208.13(b)(2). First, the Court concluded that Tang had waived a challenge to the Board’s conclusion that he would face individual persecution from the Chinese government because he failed to raise this argument. Second, the Fourth Circuit determined that Tang did not satisfy his burden of proving “an objectively reasonable chance” of facing a pattern or practice of persecution in China. The Court noted that the two State Department reports that Tang provided showed that the Chinese government recognized the Catholic faith and also permitted practice of the faith in churches and at home. Additionally, the reports and the letters from Tang’s family only showed “random” or “isolated and sporadic” instances of harassment. Thus, because the persecution was not “thorough or systematic,” the Fourth Circuit declined to “disturb the Board’s conclusion that Tang failed to establish a well-founded fear of persecution.”

Withholding of Removal

Tang also claimed the Board’s refusal to grant his application for withholding of removal was erroneous. Tang argued that the evidence he provided in support of his claim for asylum was sufficient to grant his withholding of removal.

The Fourth Circuit held that Tang did not meet the necessary burden to entitle him to a withholding of removal. The requisite burden of proof in a withholding of removal claim is that of a “clear probability,” which means “it is more likely than not that [Tang’s] life or freedom would be threatened in the country of removal.” The Fourth Circuit noted that this burden of proof “is more demanding than that of asylum” and that an applicant’s claim for withholding of removal would fail when their claim for asylum failed. Therefore, the Fourth Circuit held that Tang had failed to satisfy his burden or proof and was not entitled to a withholding of removal.

Protection Under CAT

Lastly, Tang appealed the Board’s denial of protection under CAT. Tang asserted that his evidence showed that the Chinese government’s torture of unregistered church members was “prolific in China.”

The Fourth Circuit refused to review this claim due to lack of jurisdiction. Under 8 U.S.C. § 1252(d)(1), courts can only review an order of removal once the “alien has exhausted all administrative remedies available to the alien as of right.” The Court held that Tang did not exhaust his administrative remedies because he failed to bring this issue on appeal before the Board.

Disposition

The Fourth Circuit ultimately denied Tang’s petition for review of the Board’s decision.

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7Oct

Fourth Circuit Clarifies Definition of “Debt Collectors,” Affirms Dismissal of Truth in Lending Act Claims

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paper-trail-1557043

By Mike Stephens

This afternoon, October 7, 2016, the Fourth Circuit issued a published opinion in the civil case McCray v. Federal Home Loan Mortgage Corp. The Fourth Circuit affirmed the district court’s decision to dismiss the Plaintiff’s Truth in Lending Act (“TILA”) claims regarding notice. However, the Fourth Circuit reversed and remanded the district court’s decision that two of the defendants, the White Firm and the “Substitute Trustees,” were not “debt collectors” under the Fair Debt Collection Practices Act (“FDCPA”).

Facts and Procedural History

In October 2005, Renee McCray took out a loan to refinance her house. The loan documents were sold to the Federal Home Loan Mortgage Corporation (“Freddie Mac”). Wells Fargo was retained to service the loan. After several years of payments, McCray disputed a billing statement in June 2011 and sent Wells Fargo several requests for information regarding the costs contained within the statement. Wells Fargo either failed to respond or did not respond adequately to McCray’s requests. Eventually, McCray stopped making payments after April 2012 and the loan went into default. Wells Fargo employed the White Firm to initiate the foreclosure.

The White Firm sent McCray a letter dated September 28, 2012, notifying McCray that the firm had been retained to begin the foreclosure proceedings on her home. The letter ended by stating, “This is an attempt to collect a debt. This is a communication from a debt collector. Any information obtained will be used for that purpose.” The White Firm also sent McCray another letter notifying her that the loan was “154 days past due” and that $4,282.91 was needed to cure the default. Members of the White Firm were placed as trustees on the deed of trust and filed a foreclosure action in February 2013, which is still pending. McCray filed suit in 2013, alleging violations of FDCPA and TILA. The district court dismissed four of McCray’s claims and granted summary judgment on the fifth. McCray raised three issues on appeal.

Defendants Were Debt Collectors Subject to the FDCPA’s Regulation

McCray first alleged that the the district court erred in concluding the White Firm and the Substitute Trustees were not “debt collectors” as defined within the FDCPA. McCray argued that the facts contained within the complaint regarding the firm’s letter were sufficient to show that the White Firm “regularly collect[ed] or attempt[ed] to collect debts” that were owed to another, consistent with the definition in 15 U.S.C. § 1692a(6). The White Firm responded that their actions did not qualify them as debt collectors as they never actually sought collection of money because, as the district court concluded, there was no “express demand for payment or specific information about [McCray’s] debt.” The White Firm also argued that their foreclosure action was “incidental to [their] fiduciary obligation,” placing them within an exception in § 1692a(6)(F)(i).

The Fourth Circuit reversed and remanded the district court’s dismissal, holding that McCray’s complaint sufficiently alleged that the White Firm were debt collectors and that their actions in initiating the foreclosure constituted debt collection activity for the purposes of the FDCPA. The Court rejected the White Firm’s argument for two reasons. First, the Court held that the FDCPA did not require an “express demand for payment.” Instead, activities “taken in connection with the collection of a debt or in an attempt to collect a debt” are actionable under the FDCPA. Second, the Court held that foreclosure is not merely “incidental,” but instead “central to the trustee’s fiduciary obligation under the deed of trust.” Thus, because McCray’s complaint alleged facts showing the White Firm was retained to collect the loan in default, and because the firm’s letter concluded that it was “an attempt to collect debt,” their actions fell within debt collection activity that is regulated by the FDCPA.

The District Court Properly Dismissed McCray’s TILA Claim

McCray also alleged that the district court wrongfully dismissed her TILA claim against Freddie Mac. McCray argued that Freddie Mac failed to give her notice of its purchase of the loan in violation of § 1641(g). This provision was added by Congress in 2009, which provides that:

not later than 30 days after the date on which a mortgage loan is sold or otherwise transferred or assigned to a third party, the creditor that is the new owner or assignee of the debt shall notify the borrower in writing of such transfer.

The district court found that McCray’s complaint failed to allege that Freddie Mac acquired the loan after Congress amended TILA to require notice. Additionally the district court found that McCray received notice of her claim in October 2011 because Wells Fargo sent her a letter notifying her that Freddie Mac was the “investor” on the loan. Because McCray filed suit in 2013 after receiving notice of the TILA claim in October 2011, the district court held, in the alternative, that her claim was barred by TILA’s one-year limitations period.

The Court affirmed the district court’s initial conclusion because McCray did not challenge the district court’s dismissal for failure to allege that her loan was sold after Congress amended TILA in 2009.  The Court affirmed the district court’s alternative holding as well. McCray did challenge the district court’s alternative conclusion, alleging hat the district court erred by not allowing her the opportunity to amend her complaint.  McCray pointed out that the October 2011 letter was not included in her complaint and instead was contained within the defendants’ motion to dismiss. Yet, McCray submitted an affidavit in her response where she stated she received a letter in December 2011 which repeated that “[t]he investor/noteholder for this loan is [Freddie Mac].” The Court found McCray’s claim was barred by the statute of limitations because McCray conceded notice that Freddie Mac was the owner of the loan in December 2011.

Wells Fargo Did Not Hold Legal Title

Lastly, McCray argued the district court wrongfully dismissed her claim that Wells Fargo violated § 1641(g) when it failed to give her notice that it had been assigned the deed of trust. The district court concluded that § 1641(g) was not applicable because Wells Fargo only received a “beneficial interest” to service the loan and “not legal title.” McCray claimed that a line in the deed of trust granted Wells Fargo an ownership interest and that failure to notify her of this interest was in violated of TILA.

The Fourth Circuit affirmed the district court, holding that the Wells Fargo did not obtain an ownership interest because the note was not sold to Wells Fargo. The Court found that simply because the note “can be sold” does not mean “the note was in fact sold to Wells Fargo.” The Court also highlighted that this claim contradicted McCray’s previous claim that Freddie Mac owned the note and failed to provide timely notice of ownership.

Disposition

The Court ultimately reversed and remanded McCray’s FDCPA claim that the White Firm and the Substitute Trustees were acting as “debt collectors.” The Court was careful to note that this reversal was not to indicate whether or not the defendants actually violated the FDCPA. The Court affirmed the district court’s dismissal of McCray’s TILA claims.

Judge Johnston Concurring in Part and Dissenting in Part

Judge Johnston, District Judge for the Southern District of West Virginia, sitting by designation, only dissented on the portion of the decision to affirm dismissal of McCray’s TILA claim against Wells Fargo for failing to provide notice of its interest in the loan. Judge Johnston noted that McCray’s complaint was filed pro se, and as such, should have been construed liberally. Because of this, the complaint could be read to infer that McCray could not identify the actual owner of the mortgage loan. In essence, the TILA claim regarding notice was nothing more than a pro se litigant attempting to “cast a wide net” by alleging both Wells Fargo and Freddie Mac failed to provide her notice of which entity owned the loan. Judge Johnston found the majority opinion’s reading of a pro se complaint to be “unduly strict” at the pleading stage when discovery would surely reveal whether Wells Fargo did receive an ownership interest.

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21Mar

Fourth Circuit Reverses Lower Court’s Sua Sponte Consideration of Diversity Jurisdiction

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courtroom

By Daniel Stratton

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

The Case Bounces Between State and Federal Courts

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

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

Procedural or Jurisdictional: The Threshold Question for Reviewing Removal Orders

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

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

How Have Other Circuits Tackled This Question?

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

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

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

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

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

The Fourth Circuit Remands the Case Back to Federal District Court

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

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13Mar

Fourth Circuit Holds That Arbitrators Have Opportunity to Resolve Liability and Damage Disputes Before Moving to Federal Court

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mining

By Daniel Stratton

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

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

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

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

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

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

Peabody and United Mine Workers Take Their Dispute to the Courts

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

The Limits and Scope of the Complete Arbitration Rule

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

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

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

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

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

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

The Fourth Circuit Remands the Case Back to the Arbitrator

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

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8Feb

Oil and Gas Lease Not Divisible into Separate Segments for Production and Storage, Fourth Circuit Says

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Oil Pumps

By Daniel Stratton

Today, the Fourth Circuit issued a published opinion in the civil case K & D Holdings, LLC v. Equitrans, L.P. In K & D Holdings, the court held that an oil and gas lease granted to defendants, Equitrans and EQT, by plaintiff, K & D Holdings, was not divisible into separate components. In reaching that conclusion, the court reversed and remanded the case to the district court with instructions to enter judgment in favor of Equitrans and EQT.

The Terms of the Original Lease

In December 1989, Henry Wallace and Sylvia Wallace signed a lease granting Equitrans the oil and gas rights to an area of land covering 180 acres in Tyler County, West Virginia. Currently, K & D is the successor in interest to the Wallaces. Additionally, Equitrans L.P., the successor-in-interest to Equitrans Corp., subleased the rights to produce and store gas on the land to EQT Corp. Essentially, the terms of the lease now govern a relationship between K & D and EQT.

The terms of the lease grant EQT the right to use the land to explore and produce oil and gas, store gas, and protect stored gas. The lease’s initial term ran for five years and would continue on for as long as a portion of the land was used for “exploration or production of gas or oil, or as gas or oil is found in paying quantities thereon or stored thereunder, or as long as said land is used for the storage of gas or the protection of gas storage on lands in the general vicinity.” After taking control of the land, EQT never engaged in exploration, production, or gas storage, but has engaged in gas storage protection.  Equitrans owns the nearby Shirley Storage Field, a natural gas storage facility. The Federal Energy Regulatory Commission established a buffer zone of 2000 feet around the storage area for protection of the storage facility. The leased land falls within that buffer zone.

Due to EQT and Equitrans not using the leased land for gas or oil production, K & D sought to end the arrangement and enter into a more lucrative contract with another company. On September 20, 2013, K & D filed a lawsuit in state court against EQT, arguing that it was entitled to a rebuttable presumption under West Virginia state law that EQT had abandoned the land after not producing or selling gas or oil from the property for more than twenty-four months. EQT removed to the United States District Court for the Northern District of West Virginia. EQT and K & D filed cross motions for summary judgment.

On September 30, 2014, the court denied both cross motions. Acting sua sponte, the district court found as a matter of law that the lease was divisible. The court argued that because the lease had two primary purposes, (1) exploration and production and (2) storage and protection, the lease could be divided into two separate leases. The lease for exploration and production of oil and gas had expired in the district court’s view, because the initial five-year term had elapsed without EQT exploring for or producing oil or gas. The court held however, that the second lease, for storage and protection, was still in force because EQT had used the land for that purpose.

On January 21, 2015, the district court issued its final order, stating that K & D was entitled to drill exploration and production wells in areas that were not within the buffer zone of the Shirley Storage Field. EQT appealed.

West Virginia is for Lessors

Because this case was heard under diversity jurisdiction, West Virginia state law applies. Under West Virginia law, contract law principles apply equally to the interpretation of leases. The primary criterion for determining if a contract is severable is whether such an intention was reflected by the parties in the terms of the contract itself, the subject matter of the contract, and the circumstances giving rise the question.  A contract is not severable when it has material provisions and considerations that are interdependent and common to each other. Additionally, under West Virginia state law, there is a presumption against divisibility unless the contract explicitly states that it is divisible or the parties intent of divisibility is clearly manifested. As a general matter, West Virginia law regarding oil and gas leases are liberally construed in favor of the lessor, but only when there is ambiguity as to the lease terms.

A Lease Divisible Cannot Stand

On appeal, EQT made two arguments. First, it argued that the district court erred as a matter of law in holding the lease divisible. Second, EQT contended that the district court was wrong in determining that the exploration portion of the lease had terminated after its initial five-year term. Reviewing the district court’s findings of fact for clear error and its conclusions of law de novo, the Fourth Circuit agreed with both of EQT’s arguments.

Starting with its first argument, EQT pointed to the language of the lease itself. The lease’s use of the word “or” between each act required of EQT in order to continue the lease indicated that the acts were alternatives, and that only one would be required to keep the entire lease in effect. Applying West Virginia’s test for determining if a contract is severable, the Fourth Circuit concluded that the lease was intended to be entire and not divisible.  The Fourth Circuit applied the plain, ordinary meaning of the word “or,” holding that in this case it was a disjunctive and could not be considered to have the same meaning as the word “and.”

K & D argued that because EQT paid different rents depending on what activities it was engaging in, the lease was divisible. The court found this argument to not be persuasive, noting that the activities EQT could engage in under the lease were interrelated. Additionally, because the Fourth Circuit found no ambiguity in the lease, it did not need to liberally interpret in favor of the lessor.

Having decided that the lease was not divisible, the court then turned to the question of whether EQT had continuing rights under the lease. The terms of the lease dealing with renewal stated that the lease would continue beyond the initial five-year term if “(1) the lessee explores for or produces gas or oil; (2) ‘gas or oil is found in paying quantities thereon or stored thereunder’; or (3) the ‘land is used for the storage of gas or the protection of gas storage on lands in the general vicinity.” Again noting the use of the disjunctive “or,” the court found that because it was undisputed that part of the land was being used for protection, EQT continued to hold all rights under the original lease.

The Fourth Circuit Hold the Lease is Not Divisible and Valid; Reverses and Remands 

Having determined that the lease was not divisible and that EQT still held all rights under the original lease, the Fourth Circuit reversed and remanded the lower court’s decision, instructing that court to enter judgement in favor of EQT and Equitrans.

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3Feb

Fourth Circuit Affirms Summary Judgment in Case of Pesticide Application to Peanuts

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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.

 

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2Feb

Fourth Circuit Declares Arbitration Agreement Unenforceable in Payday Loan Case

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gavel

By George Kennedy

Today, in the civil case of Hayes v. Delbert Services Corporation, the Fourth Circuit reversed the order of the district court compelling arbitration under the Federal Arbitration Act. The Fourth Circuit held that the arbitration agreement at issue was unenforceable as a matter of law, and accordingly reversed the district court order and remanded for further proceedings.

The Origin of the Dispute: Payday Loans Issued by Western Sky

The plaintiff, James Hayes, received a payday loan from Western Sky Financial, LLC, a lender owned and operated by the Cheyenne River Sioux Tribal Nation. Under the terms of the loan, Hayes received a loan of $2525 at an annual rate of 139.12% over four years, meaning that Hayes was set to pay over $14,000 for a loan of just $2525.  The exorbitant rates charged by Western Sky were not the issue of this case. Western Sky’s lending practices violated a number of federal and state laws. Eventually, extended litigation and prosecution caused Western Sky to stop issuing loans in 2013.

The issue in this case, however, concerned Western Sky’s use of collection agencies. Notwithstanding the end of Western Sky’s lending business, the corporation continued to pursue unpaid loan balances through the use of these agencies. One of these agencies was Delbert Services Corporation, the defendant. Delbert’s actions as a debt collector raised issues of their own, and Hayes filed several claims against Delbert in federal district court, prompting the litigation of this case.

The District Court Compels Arbitration

Hayes filed a putative class action with a number of similarly situated plaintiffs in the Eastern District of Virginia. In the class action, Hayes sought to obtain relief from Delbert’s allegedly unlawful collection practices. Hayes alleged that Delbert violated both the Fair Debt Collection Practices Act and the Telephone Consumer Protection Act in the carrying out of its debt collection practice. Delbert countered that Hayes was precluded from suing in federal court because of a binding arbitration clause and forum selection clause in the loan agreement Hayes had previously signed with Western Sky. In response, Hayes argued that the  forum selection and arbitration provisions in the loan agreement were unenforceable.

The district court agreed with Hayes that the loan agreement’s forum selection clause was unenforceable, but ultimately sided with Delbert in ruling that it would enforce the arbitration clause. Accordingly, Hayes appealed the order compelling arbitration.

Fourth Circuit Holds that The Arbitration Agreement Is Unenforceable as a Matter of Law

The Fourth Circuit disagreed with the district court’s ruling, and held that the arbitration agreement was legally unenforceable.   In its analysis, the Fourth Circuit focused on two key provisions of the loan agreement. The first provision stated that “[t]his Loan Agreement is subject solely to the exclusive laws and jurisdiction of the Cheyenne River Sioux Tribe.” The second provision stated “no United States state or federal law applies to this Agreement.” The Fourth Circuit held that these two provisions were extremely problematic. As the court explained, these provisions allow the “disavowal of state and federal law,” and the substitution of the law of the Cheyenne River Sioux Tribe in its place.

The Fourth Circuit adamantly maintained that arbitration agreements may never be used to totally circumvent federal and state law. While the court acknowledged that the Federal Arbitration Act gives parties fairly wide discretion to structure arbitration in the way they wish, the court explained that this discretion does not allow parties to dodge federal and state law completely. Doing so, the Fourth Circuit argued, would endanger the federally protected civil rights of individuals privy to arbitration awards. The Fourth Circuit held that this issue of the arbitration agreement circumventing state and federal law was so problematic and so central to the “essence” of the contract that the arbitration agreement as a whole was unenforceable.

Reversed and Remanded

Accordingly, the Fourth Circuit reversed the order of the district court compelling arbitration, and remanded the case for further proceedings.

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21Jan

Fourth Circuit Upholds Refunds and Attorneys Fees Against Water Utility

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By Malorie Letcavage

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

Davis Objects to Paying Invalid Impact Fees

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

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

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

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

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

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

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

Cape Fear’s Collection of Fees was Ultra Vires

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

Court Upholds Award of Attorney’s Fees

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

Judgment Affirmed

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

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17Nov

Fourth Circuit Vacates Maryland District Court’s Decision, Compels Arbitration in Franchise Dispute

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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.

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