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Continuing Breach Theory

Continuing Breach Theory Does Not Apply to Disability Insurance Policy and Plaintiff’s Entire Claim Is Time-Barred  

In Curry v. Trustmark Insurance Company, No. 13-1995 (U.S. Court of Appeals for the Fourth Circuit, Feb. 6, 2015), the Court considered the statute of limitations to a disability insurance policy and specifically rejected the continuing breach theory, which in this case meant that Plaintiff’s entire suit was time-barred.  Plaintiff had filed a lawsuit contending that Trustmark (the “Insurer”) breached the parties’ contract by refusing to pay benefits to Plaintiff under a disability insurance policy.  The district court granted summary judgment on procedural grounds, i.e., disposing of Plaintiff’s claim based on Maryland’s statute of limitations.  With respect to the portion of Plaintiff’s action that fell within the limitations period, the district court ruled against Plaintiff on the merits.  The appellate court affirmed the district court’s judgment, but based on the conclusion that Plaintiff’s lawsuit was time-barred in its entirety.

Factually, the Plaintiff was a chiropractor who operated his own practice.  Pursuant to his disability insurance policy, the Insurer would pay monthly benefits to Plaintiff if a physical disability prevented him from working as a chiropractor.  In order to determine Plaintiff’s eligibility for benefits, the Policy also required him to submit written and continuing proof of loss and, if necessary, to submit to an independent medical examination (“IME”).  In 2003, Plaintiff injured his back while performing an adjustment on a patient.  He underwent spinal surgery and applied for disability benefits in early 2004.  The Insurer began paying benefits to Plaintiff, subject to his providing information regarding the extent of his injury, condition, and expected recovery.  For the next three (3) years, the Insurer paid Plaintiff monthly benefits under his insurance policy, all while attempting to establish his continued disability.  The information provided by Plaintiff was inconsistent and incomplete.  Consequently, in July 2007, the Insurer notified Plaintiff that it had discontinued his benefits, effective June 26, 2007, until it received the information it requested under the Policy.  For the next year, the Insurer and Plaintiff exchanged correspondence regarding the discontinuation of benefits and the scope of the information requested by the Insurer.  During that period, the Insurer extended three (3) additional months of benefits to Plaintiff.  Finally, in the spring of 2008, the Insurer requested that Plaintiff undergo an IME to determine his continued eligibility for benefits, but the Plaintiff refused to submit to the IME unless the Insurer paid him additional benefits that he argued were owed to him from the Insurer.  When Plaintiff failed to attend the IME, the Insurer denied any additional benefits, effective June 30, 2008, and closed Curry’s claim on September 29, 2008.

On July 27, 2011, Curry filed suit against the Insurer, alleging breach of contract.  In ruling on the Insurer’s motion for summary judgment, the district court determined that Plaintiff’s cause of action for breach of contract accrued anew each month benefits were not paid.  Consequently, although the court concluded that Plaintiff’s action for breach between September 25, 2007, and July 27, 2008, was untimely under Maryland’s three (3) year statute of limitations, it addressed on the merits all alleged monthly breaches occurring after July 27, 2008.  Because it found no breach of contract in the Insurer’s requirement that Plaintiff submit to an IME and provide continuing proof of loss as a prerequisite for payment of his benefits, the district court granted summary judgment to the Insurer.

On appeal, the Fourth Circuit observed that the Maryland three (3) year statute of limitations typically begins to run from the date of the alleged breach.  Actions arising from alleged breaches of a continuing contractual obligation, however, are not wholly barred by the statute of limitations merely because one or more of those alleged breaches occurred earlier in time.  Rather, where a contract provides for continuing performance over a period of time, each successive breach of that obligation begins the running of the statute of limitations anew, with the result being that accrual occurs continuously and a plaintiff may assert claims for damages occurring within the statutory period of limitations.  In this case, the district court determined that the Insurer breached the contract each time it failed to pay benefits for a period during which Plaintiff was disabled.  Because it concluded that each failure to pay monthly benefits was a separate and independent breach, the district court found timely the claims for payment that were not due until after July 27, 2008.

The appellate court disagreed.  Although it found no authoritative Maryland precedent applying the continuing breach theory to an insurance disability policy, the Maryland Court of Appeals had opined, in the context of a tort action that a similar theory does not apply to the continuing effects of a single earlier act.  Maryland federal courts had also rejected a broad application of a continuing breach theory of accrual.  In the insurance context, both the Tenth and Eleventh circuits rejected the idea that disability policies are installment contracts giving rise to continuing breaches for each monthly unpaid benefit.  Further, in this situation, the issue was whether the disability benefits were owed in the first place.  While Plaintiff contended that he was disabled under the insurance policy and owed benefits, the policy did not provide Plaintiff with an unconditional right to receive benefits in perpetuity—rather, his receipt of benefits was subject to his providing adequate continuing proof of loss, and the Insurer maintained that it did not owe Plaintiff additional benefits because he failed to provide continuing proof of loss.  Because the alleged breach arose from the Insurer’s denial that it owed Plaintiff benefits at all, no installment contract existed, and the continuing breach theory was not applicable.  The Court was not persuaded by Plaintiff’s argument that his claim accrued only after the Insurer formally closed his claim for benefits on September 29, 2008.  The Court held that Plaintiff’s cause of action for breach of contract arose, and the statute of limitations began to run, when the Insurer terminated Plaintiff’s monthly benefit payments on June 30, 2008.  Thus, the Fourth Circuit affirmed the decision of the district court granting summary judgment in favor of the Insurer, albeit on different grounds than the district court.

Curry v. Trustmark Insurance Company, No. 13-1995 (United States Court of Appeals for the Fourth Circuit), Available at:  http://www.ca4.uscourts.gov/Opinions/Unpublished/131995.U.pdf

Submitted by Marisa A. Trasatti and Colleen K. O’Brien, Semmes, Bowen & Semmes

Trial Court Abused Discretion

In Product Liability Case, Trial Court Abused Discretion by Admitting Opinion of Plaintiff’s Expert In Hyundai Motor Co., Ltd. v. Duncan, No. 140216, 2015 WL 110597 (Va. Jan. 8, 2015), a product liability case involving an automobile crash, the Supreme Court of Virginia held that Plaintiff’s expert’s opinion that the automobile was unreasonably dangerous based on the location of the side airbag sensor was inadmissible because it was premised on an unfounded assumption.  Therefore, the appellate court reversed the judgment of the trial court which had permitted the expert’s testimony after which the jury returned a verdict in favor of Plaintiff.

Factually, Plaintiff alleged injury after he lost control of his vehicle and struck a tree on the driver's side of the vehicle.  Although the vehicle was equipped with a side airbag system, the airbag did not deploy.  The Plaintiff brought an action against the automobile manufacturer Defendant and initially asserted claims for negligence, failure to warn, breach of implied warranty of merchantability, breach of implied warranty of fitness for a particular purpose, and breach of express warranties.  At trial, Plaintiff pursued only the claim for breach of implied warranty of merchantability in which Plaintiff asserted that the vehicle was “defective, unreasonably dangerous, was not fit for the ordinary purpose for which it was intended, and did not pass without objection in the industry in which it was sold.”  Specifically, Plaintiff contended that if the sensor for the side airbag system had been placed in a different location, the airbag would have deployed and prevented Plaintiff’s injury. 

Plaintiff designated Geoffrey Mahon (“Mahon”), a mechanical engineer, as an expert in airbag design to testify that the vehicle was defectively designed.  Mahon expressed the opinion that if Defendant had located the sensor for the side airbag system on the B-pillar of the vehicle (the pillar where the front door closes), approximately 4 to 6 inches from the floor, instead of on the cross-member underneath the driver's seat, the side airbag would have deployed.  Therefore, according to Mahon, the location of the side airbag sensor on the cross-member rendered the vehicle unreasonably dangerous.

Prior to trial, Defendant moved to exclude Mahon's opinions as having an insufficient foundation because Mahon did not conduct any analysis to determine whether the side airbag would have deployed if the sensor had been located where Mahon proposed.  The circuit court denied Defendant’s Motion to Exclude Mahon's testimony, and permitted him to express his opinions at trial, over Defendant's objections.  The jury returned a verdict against Defendant and Defendant appealed. 

The appellate court examined the trial court’s decision to admit the expert opinion for an abuse of discretion.  The Court noted that the expert failed to perform any analysis or calculations to support his assumption about the supposedly proper location for the airbag sensor. Further, the expert admitted that a crash sensing system depends upon a combination of the structure of the vehicle, the sensors themselves, and any algorithm, but the expert did not perform any tests to determine whether a different sensor location, structure, or algorithm would have caused the side airbag to deploy in Plaintiff’s crash.  In short, Mahon's opinion that the vehicle was unreasonably dangerous was without sufficient evidentiary support because it was premised upon his assumption that the side airbag would have deployed if the sensor was at his proposed location—an assumption that clearly lacked a sufficient factual basis and disregarded the variables he acknowledged as bearing upon the sensor location determination.  Therefore, the expert’s opinion was “connected to existing data only by the ipse dixit of the expert” and the “analytical gap” between the data Mahon relied upon and the opinion he proffered was “simply too great.”  Therefore, Mahon's opinion was inadmissible, and the circuit court abused its discretion in admitting it.

Plaintiff relied on the expert’s opinion that the vehicle was unreasonably dangerous to satisfy their burden of proving that Defendant breached its implied warranty of merchantability, and the expert’s opinion was the only support for this claim.  The inadmissibility of the expert’s opinion as a matter of law was fatal to the Plaintiff’s claim and entitled Defendant to judgment as a matter of law.  Accordingly, the appellate court reversed the judgment of the trial court and entered final judgment for Defendant. 

Hyundai Motor Company, Ltd. v. Duncan, No. 140216 (Supreme Court of Virginia, January 8, 2015),Available at:  http://www.courts.state.va.us/opinions/opnscvwp/1131869.pdf

Submitted by Marisa A. Trasatti and Colleen K. O’Brien, Semmes, Bowen & Semmes

Purposeful Availment

Purposeful availment found where foreign corporation solicited business beginning two year relationship In 2009, Universal Leather, LLC (“Universal”), a North Carolina leather wholesaler, was approached by representatives from Koro AR, S.A.(“Koro”), an Argentine company selling finished leather goods.  As a result of in-person solicitations at Universal’s office in North Carolina, Universal and Koro began transacting millions of dollars in business over the course of the next two years.  In 2011, the relationship faltered, and Universal brought suit against Koro in the North Carolina State Court alleging breaches of contract for late deliveries, nonpayment of certain shipping costs, impermissible price increases and defective products.

Koro removed the action to Federal Court and filed a Motion to Dismiss for lack of personal jurisdiction, including affidavits of its employees stating that Koro did not have offices, property or businesses in the United States, that it had never sent representatives to the United States, and that all the work under the contracts were performed in Argentina.  The goods were all sent “F.O.B.,” requiring acceptance of the goods in Argentina.  Universal opposed the motion with affidavits stating that Koro had sent representatives to Universal’s offices in April 2010, and one of the representatives returned at least six (6) times between 2009 and 2010 for the purpose of soliciting business from Universal.  Universal also maintained that Universal and Koro were in regular email contact and had transacted over $5 Million in business.

The Magistrate Judge, in reviewing the conflicting affidavits, found that Koro had not purposefully availed itself of North Carolina jurisdiction, noting that no contract was entered while Koro’s employees were in North Carolina, the contracts were all performed in Argentina and the terms of the shipments declined responsibility for the goods outside of Argentina.  The email communications did not satisfy the necessary minimum contacts, and the representatives’ in-state contacts were not automatically sufficient.  The Court agreed with the Magistrate Judge’s conclusions and dismissed the case.  Universal appealed the dismissal.

The Fourth Circuit first reviewed the law of personal jurisdiction, stating:

A federal district court may exercise personal jurisdiction over a foreign corporation only if: (1) such jurisdiction is authorized by the long-arm statute of the state in which the district court sits; and (2) application of the relevant long-arm statute is consistent with the Due Process Clause of the Fourteenth Amendment.

Universal, __ F.3d at 3.  North Carolina’s long arm statute permits jurisdiction to the extent permitted by due process under the Constitution, so the Court was only required to conduct one analysis.   N.C. G.S. § 1-75.4(1)(d).  The Court also observed that Universal had claimed that jurisdiction was based on “specific jurisdiction,” and stated 

[W]e employ a three-part test to determine whether the exercise of specific personal jurisdiction over a nonresident defendant comports with the requirements of due process. Under this test, we analyze: “(1) the extent to which the defendant purposefully availed itself of the privilege of conducting activities in the forum state; (2) whether the plaintiff’s claims [arose] out of those activities; and (3) whether the exercise of personal jurisdiction is constitutionally reasonable.”

Universal, __ F.3d at 4 (internal citations removed). The Court observed that the trial court had only conducted analysis as to the first prong and limited its own analysis accordingly.  The Court noted that the minimum contacts analysis was case specific and in the business context the court looked at eight (8) factors:

(1) “whether the defendant maintains offices or agents in the forum state;” (2) “whether the defendant owns property in the forum state;” (3) “whether the defendant reached into the forum state to solicit or initiate business;” (4) “whether the defendant deliberately engaged in significant or long-term business activities in the forum state;” (5) “whether the parties contractually agreed that the law of the forum state would govern disputes;” (6) “whether the defendant made in-person contact with the resident of the forum in the forum state regarding the business relationship;” (7) “the nature, quality and extent of the parties’ communications about the business being transacted;” and (8) “whether the performance of contractual duties was to occur within the forum.”

Id.  Typically, a foreign defendant has been found to have purposely availed itself of the jurisdiction when these factors have demonstrated that the defendant substantially collaborated with the resident and that venture is the basis for the dispute.

In finding that Universal had met its prima facie burden of demonstrating purposeful availment, the Court held that Universal was entitled to the benefit of the inferences on contested facts, since there had been no evidentiary hearing prior to the grant of the motion to dismiss.  The Court held that the facts proffered by Universal, when considered as a whole, including the allegations that Koro initiated the contacts and repeatedly reached into the forum to transact business, were sufficient to demonstrate purposeful availment.  The Appellate Court expressly refused to address the remaining two prongs of the personal jurisdiction analysis and remanded the matter with instructions for the trial court to complete the analysis.

Work Product Protection

United States District Court finds that memorandum drafted before the inception of litigation fell within the work product protection

In Parker v. United States Department of Justice Executive Office for the United States Attorneys, the United States District Court for the District of Columbia examined the scope of the attorney client privilege and work product doctrine in the context of a Freedom of Information Act ("FOIA") request.  Writing the opinion of the Court, Judge Amy Berman Jackson held that a memorandum between assistant United States attorneys fell within the attorney-client privilege and work product doctrine, even though no suit had been filed when the requested document had been drafted.  Because the requested document fell within the work product doctrine, it likewise fell within a FOIA exemption that permits an agency to deny disclosure for "memorandums (sic) or letters which would not be available by law to a party other than an agency in litigation with the agency."  5 U.S.C. § 552 (b) (5).

This case stems from a FOIA request filed by Lonnie Parker ("Plaintiff") to the United States Department of Justice Executive Office for United States Attorneys ("Defendant") seeking documents related to the unauthorized practice of law by former Assistant United States Attorney Lesa Gail Bridges Jackson.  Plaintiff's FOIA request sought, inter alia, documents pertaining to disciplinary actions taken against Ms. Jackson.  Defendant did not produce any documents in response to Plaintiff's FOIA request.  Over the course of four (4) years, the parties engaged in litigation regarding the disclosure of documents under Plaintiff's FOIA request.  The only remaining issue between the parties was whether a particular memorandum, called "Document 2," was amendable to disclosure.  Document 2 is a type written memorandum that was located in a file with the Ms. Jackson's name on the folder.  Document 2 was exchanged between assistant Unites States attorneys, and discussed documents involved in the discipline of Ms. Jackson.  With respect to Document 2, Defendant denied disclosure pursuant to Exception 5 under FOIA, which permits agencies to withhold “inter-agency or intra-agency memorandums or letters which would not be available by law to a party other than an agency in litigation with the agency.”  5 U.S.C. § 552 (b) (5).  Specifically, Defendant argued that Document 2 was protected by the attorney-client and work product privileges.

The Court held that Document 2 fell within the scope of the attorney-client privilege and work product protection.  The Court noted that, in order to prevail in a FOIA action, an agency must show that materials withheld from disclosure fall within a FOIA exemption.  Exemption 5 protects from disclosure documents that fall within the ambit of the attorney-client and work product privileges.  The Court found that the attorney-client privilege protects confidential communications from clients to their attorneys made for the purpose of securing legal advice or services.  The Court also found that the attorney work product doctrine protects materials that reflect the mental processes of the attorney.  In this case, the Court held that Document 2 fell within the scope of both privileges.  In the context of the attorney-client privilege, the Court held that the agency, itself, was the "client," and the agency's lawyers were the "attorneys."  Therefore, Document 2 fell within the attorney client privilege.  As to the work product privilege, the Court held that the "prepared in anticipation of litigation" standard is satisfied by demonstrating that a lawyer prepared a document in the course of an investigation that was undertaken with litigation in mind, even though no specific lawsuit has been filed.  In this case, the Court held that Document 2 was prepared in the course of an investigation that was undertaken with litigation in mind.

Submitted by Marisa A. Trasatti and Wayne C. Heavener, Semmes, Bowen & Semmes

Issue of arbitrability to the arbitrator

Virginia Federal Court holds that parties to requirements contract agreed to confer the issue of arbitrability to the arbitrator.

In Innospec Ltd. v. Ethyl Corp., the United States District Court for the Eastern District of Virginia held that parties to a contract agree to arbitrate the issue of arbitrability when incorporating specific rules allowing for the arbitration of arbitrability into an agreement to arbitrate.  Writing for the Court, District Judge John A. Gibney, Jr. held that an American manufacturer of tetraethyl lead (“TEL”) would have to arbitrate its declaratory judgment action seeking a declaration that it could terminate a requirements contract with a British buyer.  As a matter of first impression in the Fourth Circuit, the Court held that the incorporation of the Rules of the London Court of International Arbitration in the arbitration provision of the parties’ supply contract offered clear and convincing evidence that the parties intended to arbitrate the issue of arbitrability.

Innospec, Ltd. (“Innospec”) is an American company engaged in the business of manufacturing and selling TEL.  Innospec entered into a requirements contract (the “Contract”) with the British company Ethyl Corporation.  The Contract contained an arbitration provision that, in pertinent part, stated:  “Any dispute between the parties with respect to this Agreement . . . may be submitted by either party for arbitration in London in accordance with the Rules of the London Court of International Arbitration by one arbitrator to be appointed by agreement between the parties.”  Innospec filed a declaratory judgment action in the United States District Court for the Eastern District of Virginia seeking a declaration that it had a right to unilaterally terminate the Contract due to unforeseeable economic conditions; namely, the weakening of the global appetite for leaded motor fuel.  Ethyl moved to compel the matter to arbitration and either stay proceedings or dismiss the claim outright.  Additionally, Ethyl asked the Court to determine the arbitrability of Innospec's claim.

The Court granted Ethyl’s Motion to Compel Arbitration, but declined to decide the issue of arbitrability.  In declining to reach the issue of arbitrability, the Court stated that it must determine from the terms of the Contract whether the parties intended to arbitrate the issue of arbitrability.  While acknowledging a general presumption in favor of arbitration, the Court stated that there is also a presumption against assuming that parties agreed to arbitrate the issue of arbitrability.  In order to overcome that presumption, parties must show a “clear and unmistakable” intent to arbitrate the issue of arbitrability.  The Court held that the Contract met the “clear and unmistakable” standard by incorporating the Rules of the London Court of International Arbitration, which confers upon the arbitrator jurisdiction to determine arbitrability.  The Court acknowledged that this issue had yet to be ruled upon by the Fourth Circuit, but found that a majority of circuit courts have held that the incorporation of specific rules that allow arbitrators to determine arbitrability meets the “clear and unmistakable” standard.  Therefore, the Court compelled arbitration of this matter, dismissing Innospec’s action without prejudice.

Innospec Ltd. v. Ethyl Corp., No. 3:14-cv-158, 2014 WL 5460413 (E.D. Va. Oct. 27, 2014), Available athttp://scholar.google.com/scholar_case?case=7080216707967463157&q=Innospec+Ltd.+v.+Ethyl+Corp.&hl=en&as_sdt=20000006&as_vis=1

Submitted by Marisa A. Trasatti and Wayne C. Heavener, Semmes, Bowen & Semmes

Districts EMTs acting in an emergency

District’s EMTs acting in an emergency during firefighter physical ability test protected by public duty doctrine

The decedent, Eric Allen, was a participant in the physical ability test (PAT) as part of his application to become a District of Columbia (“District”) firefighter.  As part of the PAT, the participants’ vitals were taken before and after the PAT by on-scene emergency medical personnel (“EMTs”), retained by the District of Columbia Fire and EMS Department (“FEMS”) for that purpose.  Prior to the PAT, Allen had his vitals taken, which were normal.  At the conclusion of the PAT run, however, Allen began to exhibit signs of illness.  The FEMS personnel called for the EMTs, who had set up their equipment in a nearby schoolroom, who indicated that they needed to get their equipment, including oxygen tank, from their ambulance.  When they arrived, Allen’s vitals were taken and he was given an EKG.  At that point, he was designated a “Priority 3,” the lowest priority, but the EMTs indicated that Allen needed to go to the hospital.  As there was an ambulance on the scene, a basic life support vehicle arrived and transported him to Greater Southeast Community Hospital.  While enroute, his priority level was not changed and, as a result, Allen waited in the emergency waiting room for over an hour.  His conditioned worsened and he was flown by helicopter to Washington Hospital Center, where he died of acute exertional rhabdomyolysis.

Allen’s parents brought a survival and wrongful death suit based on negligence against the District, Greater Southeast Community Hospital and the doctors who attended Allen at the hospital.  While the other defendants settled the claims against them, the District filed a motion to dismiss, which the court treated as a motion for summary judgment as discovery had been completed.  The court concluded there was no “special relationship” that would exempt the case from the “public duty doctrine,” which rendered the District immune.  The Plaintiffs appealed.

First, the District of Columbia Court of Appeals reviewed whether the public duty doctrine applied.  The Court initially noted “that this court has never addressed whether the public duty doctrine is applicable with respect to conduct by EMT personnel who are assigned to provide on-site vital-signs monitoring of firefighter candidates during administration of a PAT.” Allen, ___ A.3d at 3.  “The public duty doctrine ‘operates to shield the District and its employees from liability arising out of their actions in the course of providing public services.’”  Allen, ___ A.3d at 2.  The existence of a “special relationship” between the emergency personnel and the citizen renders of the doctrine inapplicable.  In holding that the public duty applied to the case, the Court noted that the EMTs stepped into their role as emergency responders when they were called to attend to Allen, and went to their ambulance to get the necessary equipment.  These actions were outside the intended roll requested for the PAT, which was limited to taking vitals before and after the test.  This roll as emergency responders was the type contemplated by the “public duty doctrine,” and therefore the District was immune.

The Court then determined that there was no special relationship between the District and Allen.  In order to establish a special relationship, or “special duty,” “a plaintiff must allege and prove two things: (1) a direct or continuing contact between the injured party and a governmental agency or official, and (2) a justifiable reliance on the part of the injured party.”  Allen, __ A.3d at 4, citing Klahr v. District of Columbia, 576 A.2d 718, 720 (D.C.1990).  The Court held that Allen, as a volunteer to the firefighter examinations, was similar to a 911 caller who emerges from the general public with whom emergency personnel had no special relationship.  The Court dismissed the relationship between FEMS and Allen as ongoing and continuous, as it would result in holding that FEMS had a “special” relationship with all 100 recruits.  The Court also held that the Plaintiffs had failed to show that Allen justifiably relied upon the EMTs in acting or failing to act in any way because of the presence of the EMTs.  As such, the special relationship exception to the public duty doctrine did not apply and the claim against the District was barred.  The Court affirmed the trial court’s grant of summary judgment in the District’s favor.

Judge Easterly filed a dissent chastising the Court for applying the public duty doctrine, and for determining issues of fact in a summary judgment motion.  Judge Easterly noted that the application of the public duty doctrine, as implemented by the majority opinion, conflicted with the jurisprudence on the District’s sovereign immunity and greatly expanded the application of the public duty doctrine without justification.  Judge Easterly requested that the opinion be revisited by the Court of Appeals en banc, to clarify the scope of the public duty doctrine, and evaluate if the doctrine should continue to be recognized in the District.

Allen v. District of Columbia,___ A.3d___ (2014), Available at: http://www.dccourts.gov/internet/documents/10-CV-1425.pdf

Submitted by Marisa A. Trasatti and Gregory S. Emrick, Semmes, Bowen & Semmes

Applying the Kapiloff factor test

Upon Applying the Kapiloff factor test, the District Court Abstained for Exercising Jurisdiction in a Declaratory Judgment Action and Granted Defendant’s Motion to Dismiss

In First Mercury Insurance Co. v. The Earleigh Heights Volunteer Fire Co. of Anne Arundel County, the United States District Court for the District of Maryland granted Defendant’s Motion to Dismiss Plaintiff’s filing seeking a declaratory judgment.  The Plaintiff, First Mercury Insurance Co. (“Mercury” or “Insurer”), initiated this action against Defendant Earleigh Heights Volunteer Fire Company of Anne Arundel County (“Fire Company”) to settle a question of insurance coverage that related to a tort action pending in the Circuit Court for Anne Arundel County.

The underlying tort litigation arose from a tragic accident that occurred during a carnival sponsored by the Fire Company and operated by Frank Joseph & Sons, Inc. d/b/a Jolly Shows, (“Jolly”).  A pedestrian was crossing Ritchie Highway to attend the carnival when a car fatally struck her.  Her surviving family filed a wrongful death action against the Fire Company and Jolly alleging both parties were negligent in failing to secure a safe crossing at a roadway adjacent to the carnival.  Mercury, Jolly’s insurer, defended Jolly, as an insured, and the Fire Company as a named “additional insured.”

The Plaintiffs in the tort action, however, voluntarily dismissed their claims against Jolly. As a result, Mercury stopped defending Jolly and the Fire Company, although the latter was still a Defendant in the tort action.  Mercury communicated to the Fire Company that it ceased its defense because the remaining claims were solely against the Fire Company and did not arise out of the insured’s operations. Mercury claimed it did not have a duty to defend the Fire Company.

When the Fire Company disputed Mercury’s removal, Mercury filed a declaratory judgment action in this court asserting that it had no duty to defend and/or indemnify the Fire Company regardless of the dismissal of Jolly.  In response, the Fire Company filed a Motion to Dismiss arguing that the declaratory action should be litigated in state court where the Fire Company had previously (three months prior) filed a request for declaratory judgment on the same issue and the request is still pending.

With regard to the state action, the Fire Company filed a motion in the state declaratory action to consolidate the case with the tort action and, further, it requested a stay of the state declaratory action pending resolution of the tort action.[1]

For guidance, the court looked to the rules, case law and other statutes governing federal jurisdiction.  The court reiterated that federal courts may not exercise jurisdiction absent a statutory basis, but, when they have a basis, they must usually exercise it.  In other words, federals courts have a “virtually unflagging obligation . . . to exercise the jurisdiction given them” absent “exceptional circumstances” yet, the court explained that a different set of guidelines exist in the declaratory judgment context.  Colorado River Water Conservation Dist. v. United States, 424 U.S. 800, 817 (1976). 

The Supreme Court reaffirmed this framework by stating that district courts have “greater discretion” to abstain from exercising jurisdiction “in declaratory judgment actions than that permitted under the ‘exceptional circumstances’” test that district courts must otherwise satisfy to abstain.  Wilton v. Seven Falls. Co., 515 U.S. 277, 286 (1995).  In other words, the “normal principle that federal courts should adjudicate claims within their discretion yields to considerations of practicality and wise judicial administration” in the declaratory judgment context. Wilton, 515 U.S. at 288.

In declaratory judgment actions, federal courts’ jurisdiction springs from the Declaratory Judgment Act, 28 U.S.C. § 2201 (a) that, in its statutory language, reflects a “textual commitment to discretion.”  Wilton, 515 U.S. at 286.  The Act provides that where a federal action that seeks only discretionary declaratory relief is before a federal court, and there is a parallel proceeding pending in a state court, the district court may either stay the suit in favor of state court action or abstain from exercising jurisdiction by dismissing the federal suit.  Myles Lumber Co. v. CNA Fin. Corp., 233 F.3d 821, 823 (4th Cir. 2000). 

The Fourth Circuit has instructed district courts that such an abstention, referred to as a Wilton/Brillhart abstention, is appropriate when it will settle legal issues and afford relief.  Specifically, the Fourth Circuit noted that when there is a related state court proceeding pending, courts should also bear in mind considerations of “federalism, efficiency, and comity.”  Penn-America Ins. Co. v. Coffey, 368 F.3d 409, 412 (4th Cir. 2004).

The Fourth Circuit set forth a balancing test that included several factors, referred to as the “Kapiloff factors,” to assist district courts in evaluating whether to exercise their discretion as to declaratory judgment actions.  The factors include: (1) whether the state has a strong interest in having the issues decided in its courts; (2) whether the state court could resolve the issues more efficiently than the federal courts; (3) whether the presence of the “overlapping issues of fact or law” might create unnecessary “entanglement” between state and federal courts; and (4) whether the federal action is mere “procedural fencing,” in the sense that the action is merely the product of forum shopping.  United Capitol Ins. Co. v. Kapiloff, 155 F.3d 488, 493-94 (4th Cir. 1998).

In the case at bar, the court found that the facts weighed in favor of granting Defendant’s motion to dismiss the Federal action in light of the pending state court action.  In reaching this conclusion, the court applied each of the above factors.

With regard to the first factor, the court found that although Maryland had an interest in having the matter of insurance coverage decided in state court, that the state interest was not strong enough to weigh against the exercise of federal jurisdiction.  While many factors of the case connected it to the state, including that the coverage involved conduct occurring in Maryland that allegedly caused damages to Maryland residents, the court honed in on the legal issues.  The Fire Company failed to frame the legal issues present, i.e., contract interpretation and agency, as complicated or non-standard legal matters.  The court noted that in order for this factor to weigh in favor of the state, the question of law must involve more than a routine application of “settled principles of law.”

The next factor, however, the court found weighed heavily in favor of dismissing the action so that it could be resolved in state court.  The court found that the matters overlapped and, further, that a federal declaration that an insurer had no duty to indemnify could be rendered moot by a later state verdict for the insured.  Additionally, the Fire Company’s assertion that it will only seek indemnification after resolution of the tort action if there was a judgment against it gave the court reason to conclude that allowing the litigation to continue in state court would be the more efficient avenue of resolution.

Similarly, the next factor weighed in favor of dismissing the action, as there were several overlapping issues of fact and law that would create unnecessary entanglement between federal and state courts.  The court found that the federal and state courts would consider the same issues, albeit perhaps under different standards, rendering state and federal entanglement impossible to avoid.

Last, the fourth factor weighed in favor of dismissing the Federal declaratory action as well.  The court found evidence to support that the Insurer filed the action in order to avoid being summoned to state court as the Insurer brought the action after a state action had been pending for months.

The court abstained from exercising jurisdiction and granted the Defendant’s motion to dismiss Plaintiff’s declaratory judgment action so as to allow the tort and coverage claims litigation to continue to state court.

First Mercury Insurance Co. v. The Earleigh Heights Volunteer Fire Co. of Anne Arundel County, No. ELH—14—3156 (D. Md. December 22, 2014), Available at: http://cases.justia.com/federal/district-courts/maryland/mddce/1:2014cv03156/293086/13/0.pdf?ts=1419083808

Submitted by Marisa A. Trasatti and Sarah M. Grago, Semmes, Bowen & Semmes

Defendants Removal is Frustrated by Plaintiff's Multiple Amendments to Complaint

Defendant’s Removal Is Frustrated by Plaintiff’s Multiple Amendments to Complaint and an Action that Was Proceeding in Three (3) Courts Simultaneously

In Johnson v. Citibank, N.A., No. PWG-14-3024 (U.S. District Court of Maryland, December 5, 2014), the Court examined a complicated case of unsuccessful federal removal.  After initially filing a case pro se in Maryland State District Court setting forth, inter alia, violation of the Fair Credit Billing Act (“FCBA”), Plaintiff prayed a jury trial and amended his claimed damages, and so the case was transferred to the Maryland State Circuit Court, where the complaint was thereafter amended several additional times. 

Defendant sought to remove the case to the Maryland Federal Court on the basis of federal question jurisdiction based on the FCBA.  Defendant filed a notice of removal and provided notice to Plaintiff and the State District Court—but not to the State Circuit Court.  While the docket reflected that the case had been transferred from the State District Court to the State Circuit Court after the jury demand was prayed, the Defendant’s attorney was advised by the State Court Clerk that the case file remained with the State District Court, and therefore, the Defendant filed the notice of removal with the State District Court instead of the State Circuit Court.  After the notice of removal was filed, Plaintiff again amended the Complaint and stripped the Complaint of its federal claims.  Plaintiff moved to remand the case back to State Court on the grounds that there was no case pending in the State District Court to remove after the jury demand was filed. 

In ruling on the motion to remand, the Court disagreed with the Plaintiff’s argument, and found that although jurisdiction transferred from State District Court to State Circuit Court with the filing of the jury demand, the case remained pending and was removable to this court.  However, because Defendant did not provide notice to the State Circuit Court (in which the case was pending) until after Plaintiff amended his complaint to remove all of his federal claims, there was no basis for federal jurisdiction at the time that the removal was effected. 

Specifically, the Federal Court held that jurisdiction of the case was immediately transferred from the State District Court to the State Circuit Court upon the filing of the jury demand, and so the Notice of Removal ought to have been filed in the State Circuit Court.  The Court sympathized with Defendant who was left in a “state of limbo” in which the State Circuit Court had jurisdiction over the case but the State District Court retained custody of the physical case file.  Although Defendant timely filed its Notice of Removal in the Maryland Federal Court within thirty (30) days of being served with process, and immediately served a copy of the Notice of Removal on Plaintiff, the removal was not effective unless and until Defendant “[p]romptly . . . file[d] a copy of the notice with the clerk of such State court” as required by 28 U.S.C. § 1446(d).  Defendant did not strictly comply with 28 U.S.C. § 1446(d), but the Court noted that failure of notice to the state court is a procedural defect that does not defeat federal jurisdiction, and that several courts have found substantial compliance with 28 U.S.C. § 1446(d) where a state court has actual notice of the removal notwithstanding a defendant’s failure properly to file a notice of removal.

Although Defendant promptly provided notice of removal to the State District Court, it did so after jurisdiction transferred to the State Circuit Court.  The State Circuit Court was not made aware of the removal until Defendant filed its Motion to Stay State Proceedings over a month after the Notice of Removal was filed in this Court and over two (2) weeks after Plaintiff filed his Fifth Amended Complaint which eliminated his federal law claims.  Removal was effected on the date that the Motion to Stay State Proceedings was filed in State Circuit Court, and not before.

The delay between filing the Notice of Removal in the Federal Court and providing notice to the State Circuit Court was crucial because the validity of a removal must “be determined according to the plaintiffs’ pleading at the time of the petition for removal.”  Were removal complete on the day the Notice of Removal was filed in Federal Court, there is no question that Plaintiff’s FCBA claim would provide a basis for federal jurisdiction.  But, Plaintiff filed three amended complaints in State Circuit Court since that date, which eliminated the federal claims.  The Court did recognize that Plaintiff likely manipulated the Complaint to avoid federal jurisdiction, however, such liberal amendments are permitted in State Court, and so in this case, the amendments removing the federal claims were able to defeat removal based on the procedural irregularity with the filing of the Notice of Removal in the wrong Maryland State Court.  Accordingly, the case was remanded back to State Court.

Johnson v. Citibank, N.A., No. PWG-14-3024 (U.S. District Court for Maryland, December 5, 2014), Available athttp://www.mdd.uscourts.gov/Opinions/Opinions/Johnson%20v%20Citibank%20Mem%20Op%20on%20Remand.pdf

Submitted by Marisa A. Trasatti and Colleen K. O’Brien, Semmes, Bowen & Semmes

Short-Term Disability Claim Administrator Abuses Discretion

Short-Term Disability Claim Administrator Abuses Discretion in ERISA Case When It Fails to Access Readily Available Information That May Confirm Plaintiff’s Theory of Disability

In Harrison v. Wells Fargo Bank, N.A., No. 13-2379 (U.S. Court of Appeals for the Fourth Circuit, December 5, 2014), the Court determined that Defendant abused its discretion by terminating the Plaintiff’s short term disability benefits.  Specifically, the Court held that Defendant did not give the Plaintiff’s claim a full and fair review pursuant to the Employee Retirement Income Security Act (“ERISA”).

Factually, Plaintiff worked for Defendant Wells Fargo as an Online Customer Service Representative.  In 2011, she was diagnosed with an enlarged thyroid and large mass that extended into her chest causing chest pain and tracheal compression.  She had a thyroidectomy surgery first, and a second chest surgery was scheduled for approximately two (2) months later to address the chest mass.  Wells Fargo paid Plaintiff short-term disability benefits for three (3) weeks after the first surgery, but terminated benefits prior to the second surgery, since it determined that three (3) weeks was the typical recovery period for this type of operation.  Additionally, while Plaintiff was facing her surgeries, her husband died unexpectedly, triggering a recurrence of depression and post-traumatic stress disorder (PTSD) related to the death of her mother and her children in a house fire in 2004.  Her primary care physician doubled her dosage of antidepressants and referred her to a psychologist for additional treatment.  Between those two (2) surgeries, Plaintiff sought continued short-term disability benefits on the basis of both physical and psychiatric complaints.

Defendant denied Plaintiff’s continued receipt of short-term disability benefits between the surgeries.  Plaintiff filed an internal appeal of the adverse claims decision.  She noted that she continued to have chest pain from the recent thyroid surgery and suffered emotional trauma from the death of her husband.  Her primary care physician and thoracic surgeon provided additional documentation to this effect.  Plaintiff also provided Wells Fargo with the contact information for her psychologist.  Additionally, Plaintiff also provided a detailed letter from her sister, who was her primary caretaker, outlining Plaintiff’s continuing pain, disability, and severe panic attacks.

During the appeal process, Defendant sought an independent psychological peer review of Plaintiff.  The psychological reviewer did not contact Plaintiff’s psychologist; he determined that the evidence in the record suggested that the recent events could have triggered PTSD; and he overall concluded that in the absence of psychiatric/psychological records or a telephone conference with Plaintiff’s psychologist, no opinion could be provided on whether Plaintiff’s psychiatric status limited Plaintiff’s functional capacity.  Wells Fargo upheld its previous decision to deny benefits.

Plaintiff filed an ERISA lawsuit claiming that Defendant abused its discretion in denying her short term disability benefits.  Defendant moved for summary judgment.  The trial court found there was insufficient evidence of disability under the plan and granted summary judgment in favor of the Defendant.  Plaintiff appealed to the Fourth Circuit.

The Fourth Circuit held that Defendant abused its discretion because it failed to contact Plaintiff’s psychologist when it was on notice that Plaintiff was seeking treatment for mental health conditions and when it had the psychologist’s contact information, as well as properly signed release forms from Plaintiff.  Here, the Defendant “chose to remain willfully blind to readily available information that may well have confirmed [Plaintiff’s] theory of disability.”  The Court recognized that “the primary responsibility for providing medical proof of disability undoubtedly rests with the claimant,” but also observed that the plan administrator cannot ignore medical information that may confirm the Plaintiff’s theory of disability where “there is no evidence in the record to refute that theory.”  Claim administrators should “notify a claimant of specific information that they were aware was missing and that was material to the success of the claim.”

Under past precedent, claim administrators are not under a duty to secure evidence supporting a claim for disability benefits when there is reliable evidence that a claimant is not, in fact, disabled.  In such cases, however, there is typically sufficient evidence in the record to refute the claimant’s theory of disability.  The present case, however, was distinguishable, as even the Defendant’s peer reviewer stated that the record was incomplete and his opinion as to whether the Plaintiff’s psychiatric status limited her functional capacity could not be provided.  The Defendant was “repeatedly” put on notice that Plaintiff was seeking psychiatric treatment, and even though the Defendant commissioned a psychiatric peer review, the psychiatric peer reviewer never contacted Plaintiff’s treating psychologist for further information that he determined was needed to render an opinion.  Unlike in prior cases, the record in this case did not refute Plaintiff’s claim of disability.

Even though Defendant was on notice that Plaintiff was receiving treatment for potential debilitating psychological trauma, it never made clear to Plaintiff that records from her psychologist were missing and needed.  Defendant noted “vaguely” and “deep into a long letter” that Plaintiff should provided relevant medical information “without ever once mentioning” the Plaintiff’s psychologist by name.  Instead, Defendant “should have made clear that records from [the psychologist] were absent from the record and necessary to perfect [Plaintiff’s] claim.”  Here, the Defendant breached its fiduciary duty to Plaintiff because it “neither sought readily available records” that “might have confirmed her theory of disability” nor “informed her in clear terms that those records were necessary.”  Accordingly, the judgment of the trial court was reversed and the claim was returned to Defendant for proceedings consistent with this decision.

Harrison v. Wells Fargo Bank, N.A., No. 13-2379 (U.S. Court of Appeals for the Fourth Circuit, December 5, 2014), Available athttp://www.ca4.uscourts.gov/Opinions/Published/132379.P.pdf

Submitted by Marisa A. Trasatti and Colleen K. O’Brien, Semmes, Bowen & Semmes

Bad Law from the Eleventh Circuit

Yesterday, the Eleventh Circuit decided St. Paul Mercury Ins. Co. v. FDIC.  While the case is disappointing to industry-side lawyers who handle D&O coverage disputes involving failed banks, the court’s ambiguity analysis should be of greater concern.. 

 

According to the Eleventh Circuit, the fact that other courts disagree regarding the correct interpretation of policy language means it’s ambiguous.  That is a gross oversimplification.  But, it’s part of a disturbing trend as other courts reach similar conclusions.  See e.g., St. Paul Mercury  v. Hahn, 2014 WL 5369400 (C.D. Cal. 2014); Annotation, 4 A.L.R.4th 1253 (collecting cases).  The superficial “courts disagree, so it must be ambiguous” mode of analysis is wrong because each case involves the application of specific policy language to a specific factual pattern.  For example, in the failed bank D&O litigation context, many of the cases cited to show judicial disagreement regarding the Insured vs. Insured exclusion involve materially different policy language, because there is little uniformity in policy terms.  When courts simply tally conflicting decisions without considering whether they are on point, they err. 

 

Ambiguity doesn’t exist in the abstract.  It exists when there are multiple reasonable interpretations of contractual language in the context of the particular case.  As one California decision explained:

 

The [courts disagree] argument is unpersuasive. Different jurisdictions apply different rules governing the issue of textual ambiguity, and so may reach different results which are not necessarily logically inconsistent. The mere fact that judges of diverse jurisdictions disagree does not establish ambiguity under the particular principles which govern the interpretation of insurance contracts in California (see typed opn. at pp. 212–213).

 

ACL Technologies, Inc. v. Northbrook Prop. & Cas. Co., 17 Cal.App.4th 1773, 1787, n. 39 (1993). 

 

One flaw in the analysis by the 11th Circuit here, by the Central District of California in Hahn and by other courts is they did not analyze the following factors:  (a)was the policy language the same; (b)was the context of the court’s analysis similar; and (c)is the law being applied the same?  Without at least that level of congruence, the fact that courts hearing different cases reach different results does not mean the language at issue in a particular case is susceptible to multiple reasonable interpretations in that particular case.  Judicial disagreement does not compel a finding of ambiguity.  Just as juries are instructed not to make a decision based on the number of witnesses who testify on one side or the other, courts should not substitute counting conflicting decisions by other courts in place of analysis of the particular language at issue in the context of the particular case.  

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