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Construction Bankruptcy Case

In Construction Bankruptcy Case, Fourth Circuit Holds That Subcontractors Can Perfect Materialman and Mechanic’s Liens After General Contractor Filed For Bankruptcy. Branch Banking & Trust Company v. Construction Supervision Services, Inc. (In re: Construction Supervision Services, Inc.) No. 13-1560 (United States Court of Appeals for the Fourth Circuit, May 22, 2014), available at:

In Branch Banking & Trust Company v. Construction Supervision Services, Inc., the Fourth Circuit Court of Appeals held that subcontractors with unperfected state law materialman and mechanic’s liens could perfect their liens after the general contractor filed for bankruptcy under 11 U.S.C. §§ 362(b)(3) and 546(b).  The Court rejected Defendant’s contention that the subcontractors lacked an “interest in property” under Sections 362(b)(3) and 546(b) because they had not yet served notice of, and thereby perfected, their liens when the bankruptcy petition was filed.  The appellate court agreed with the district court’s affirmance of the bankruptcy court’s ruling that the subcontractors were not prohibited by the automatic stay imposed by 11 U.S.C. § 362(a)(4) to perfect their liens.  Judge Wynn wrote the opinion, in which Judges King and Shedd joined.

By way of factual background, in January 2012, Construction Supervision Services (“CSS”), a full-service construction company, filed a Chapter 11 bankruptcy petition.  CSS, acting as a general contractor, placed orders with several subcontractors for building materials and fuel.  The subcontractors delivered the requested materials to CSS on an open account basis, later invoicing CSS for the amounts owed them.  After CSS’s January 2012 bankruptcy filing, the subcontractors sought to serve notice of, and thereby perfect, their state law materialman and mechanic’s liens on funds others owed CSS.  Branch Banking & Trust Company (“BB&T”), which had loaned CSS over one million dollars, secured by, among other things, CSS’s accounts and real property, objected to the subcontractors’ post bankruptcy petition notice and perfection of their liens.

Section 362(a)(4) of the federal bankruptcy code provides for an automatic stay of any attempts by creditors to collect their claims against a debtor who has filed a bankruptcy petition; however, exceptions exist. Section 362(b)(3) provides an exception for “any act to perfect, or to maintain or continue the perfection of, an interest in property to the extent that the trustee’s rights and powers are subject to such perfection under section 546(b)….”  Section 546(b), in turn, subjects the bankruptcy trustee’s rights and powers to generally applicable laws that “permit perfection of an interest in property to be effective against an entity that acquires rights in such property before the date of perfection . . . .”  In essence, Sections 362(b)(3) and 546(b) provide an exception for those with an interest in property that predates the bankruptcy petition but is not yet perfected at the time the debtor files for bankruptcy if, in the absence of the bankruptcy filing,  the perfected interest would be effective under state law against a third party acquiring rights prior to that perfection.

BB&T argued that the subcontractors lacked an interest in property because they had not yet served notice of, and thereby perfected, their liens by the time CSS filed its bankruptcy petition.  The subcontractors argued that the stay did not block them from noticing and perfection post-petition because doing so fell under the Section 362(b)(3) exception.  The bankruptcy court ruled against BB&T, holding that the subcontractors had an interest in property upon delivery of the requested materials, i.e., before lien notice and perfection, and thus the subcontractors were not stayed from providing notice and perfecting their liens under Section 362(b)(3).  BB&T appealed to the district court, which affirmed the order of the bankruptcy court.  BB&T further appealed to the Fourth Circuit Court of Appeals.

On appeal, BB&T contended that because the subcontractors failed to notice their liens on funds before CSS filed for bankruptcy, the subcontractors lacked an “interest in property” at the time CSS filed its petition, and therefore the Section 362(b)(3) exception was not applicable.  The appeal turned on the meaning of the phrase “an interest in property,” referred to in Sections 362(b)(3) and 546(b).  If the subcontractors had an “interest in property” when CSS filed for bankruptcy, the parties agreed that it would then be permissible for the subcontractors to give notice and perfect their interests post-petition under Section 362(b)(3).

To the Court, it was clear that the Fourth Circuit precedent had established that the broad term “interest in property” encompassed more than just liens.  The Court noted that while “interests” and “liens” are related, they are nonetheless logically distinct as a lien is a mechanism to secure an interest that already exists.  The question left for the Court to answer was whether the subcontractors had an “interest in property” despite their not yet having served notice of, i.e., perfected, their  liens under North Carolina law prior to CSS’s filing for bankruptcy.  To answer that question, the Court looked to the pertinent North Carolina law.  Under North Carolina General Statutes 44A-18, like the materialman or mechanic’s lien statutes of most states, the liens vested as soon as construction materials were delivered.  There was no dispute that the subcontractors delivered materials and equipment to CSS for its building work before CSS filed for bankruptcy.  Because the subcontractors were entitled to a lien securing the funds earned as a result of having delivered said materials and equipment to CSS, and that entitlement to a lien arose upon delivery, the Court concluded that the subcontractors had an “interest in property” when CSS filed its bankruptcy petition.

In reaching its conclusion, the Court rejected BB&T’s argument that any rights or interests that the subcontractors had were meaningless until noticed, and thereby perfected, because, without a perfected lien, the subject funds could be diluted or extinguished.  The Court noted that just because a right or interest may be lost does not mean it therefore fails to exist. Thus, because the subcontractors had an interest in property at the time CSS filed its bankruptcy petition, and because the parties agreed all other conditions for Section 362(b)(3)’s bankruptcy stay exception were met, the bankruptcy court and district court correctly ruled that the Section 362(b)(3) exception to the automatic stay was applicable.  The Court affirmed the district court’s affirmance of the bankruptcy court’s order.

By Marisa A. Trasatti and Richard J. Medoff, Semmes, Bowen & Semmes

Sail Zambezi

Trial Court interpreted proper maritime law correctly, and properly excluded damage summary Sail Zambezi, Ltd. v. Maryland State Highway Administration, --- A.3d --- (April 30, 2014) (not yet published), available at:

Sail Zambezi, Ltd.'s sole asset was a 60 foot Oyster boat that was captained by Guy Kalron. On October 16, 2010, the owner of Sail Zambezi took his wife and a friend out for a day of sailing. During the trip, the boat passed the Spa Creek Bridge, and after several hours of sailing returned to the bridge. Sail Zambezi waited in the harbor until the next scheduled opening when the bridge tender opened it to allow the waiting boats through. After the downstream boats had passed the bridge, the Sail Zambezi followed another boat under the bridge. While the other boat was able to clear the bridge, the bridge tender closed the bridge while the Sail Zambezi was still in the closure path, causing damage to the oyster boat. The bridge tender indicated he had never seen the Sail Zambezi on any of the mirrors or monitors, and the boat had never signaled that it was there, as required by federal regulation. Sail Zambezi filed suit for the damages to the boat, against the Maryland State Highway Association ("SHA"), who was responsible for the operation of the drawbridge. SHA filed a third-party complaint against Kalron as the captain of the boat for failing to signal properly. During the trial, two issues arose that lead to appellate review. First, the parties disputed the interpretation of the regulations contained in 33 C.F.R. § 117.19-21 governing procedures surrounding boat operator's obligations at drawbridges. Sail Zambezi argued that the regulation exempted the Spa Creek Bridge from the requirement applied to the other bridges in the State, by not requiring the boat to signal that it intended to pass the bridge, since the regulation provided for definitive times that the bridge would open. SHA argued there was no exemption and the boat was required to signal a request to open the bridge, regardless of the times indicated. The Trial Court issued a jury instruction based on SHA's interpretation. Secondly, the Court addressed the issue of the admissibility of Sail Zambezi's evidence of damages. Sail Zambezi stated that it intended to prove its damages by moving the invoices for its repairs into evidence, and entering a spreadsheet that summarized the invoices that was prepared by Kalron, both as business records. SHA opposed the admission, arguing that the invoices were not business records because they were created by another company and received by Sail Zambezi. The spreadsheet was also inadmissible because it was based on the inadmissible invoices, and was not itself a business record because it was created for litigation. While the Court permitted Sail Zambezi to use the summary to refresh Kalron's memory on the stand, the documents were not admitted into evidence. The jury returned a verdict finding both Sail Zambezi and SHA comparatively negligent under Maritime Law, apportioning 85 percent fault to Sail Zambezi and 15 percent to SHA. However, the jury also concluded that no dollar damages had been proven. Sail Zambezi appealed. The Court of Special Appeals noted that the determination of the federal regulation was a question of law reviewed de novo. In finding that SHA's position was correct, the Court noted the plain language of the statute did not exempt the Spa Creek Bridge from the requirement that a boat signal to pass, but merely set predetermined opening times for the bridge. Further, it noted that holding otherwise would create havoc with the boats and road traffic attempting to cross the bridge, as it would be impossible to tell whether a boat was going to go through the bridge, or merely wait in the harbor. The Court then addressed the evidentiary matter and noted that since Sail Zambezi had not availed themselves of the procedures in MD. CODE ANN., CTS. & JUD. PROC. § 10-105, they were obligated to present testimony sufficient to authenticate the spreadsheet as a business record, and expert testimony explaining the reasonableness of the expenses. The Court noted that it would have been improper to admit the spreadsheet, which was based on inadmissible invoices, as a business record. Further, it did not have the presumption of trustworthiness because it was created by Kalron for the sole purpose of the litigation. The Court of Special Appeals held that the trial court was correct in his holdings and affirmed the judgment. By: Gregory S. Emrick Associate, Semmes, Bowen & Semmes

Maryland Federal District Court

Maryland Federal District Court Grants In Part Insurers’ Motion for Summary Judgment as it Pertained to the Reasonableness of Insurance Claims Settlement

National Union Fire Insurance Company of Pittsburgh, PA., et al. v. Porter Hayden Company, et al., Civil Nos. CCB-03-3408, CCB-03-3414(April 11, 2014), available at

In National Union Fire Insurance Company of Pittsburgh, PA., et al. v. Porter Hayden Company, et al.,National Union Fire Insurance Company of Pittsburgh, Pa. and American Home Assurance Company (collectively, “the Insurers”) sought summary judgment to bar coverage for settlements made by the Porter Hayden Bodily Injury Trust (“the Trust”), arguing that: (1) those settlements violated the “voluntary obligation” provision and (2) the settlements were unreasonable. Also pending before the court was Porter Hayden Company’s (“Porter Hayden”) motion for summary judgment.  After hearing the arguments of the parties, the Honorable District Judge Catherine C. Blake granted in part the Insurers’ motion for summary judgment—as to their ability to challenge the reasonableness of the Trust’s settlements, and denied the motion as to Porter Hayden shouldering the ultimate burden of persuasion to show that the settlements were reasonable.  Further, Porter Hayden’s motion was granted in part, as it pertained to whether the Trust paid claimants reasonable values to resolve claims and whether the Insurers had waived their right to object to settlements paid by the Trust, and denied in part, as to the Insurers’ waiver of the voluntary obligation provision.

By way of background, Porter Hayden ceased installing asbestos-containing insulation materials after involvement in thousands of lawsuits for alleged injuries related to asbestos exposure.  In March 2002, Porter Hayden filed a petition for Chapter 11 bankruptcy in the United States Bankruptcy Court for the District of Maryland. On June 30, 2006, the bankruptcy court confirmed Porter Hayden’s Third Amended Second Modified Plan of Reorganization (“the Plan”).  Although the Insurers initially objected to the Plan, they eventually withdrew their objections in exchange for Porter Hayden’s stipulation that confirmation of the Plan would not deprive them of any defenses under applicable non-bankruptcy law.  The Plan established the Trust to resolve asbestos claims against Porter Hayden pursuant to Trust Distribution Procedures (“TDP”).  The TDP outlined “the qualifications for an asbestos claim, the evidence needed to support the existence of such a claim, standards ranking the relative severity of claims . . . , and an associated schedule of values for each severity-level of claim.”  According to the Insurers, Level I nonmalignant claims do not require a showing of physical impairment in the form of decreased lung function.  Instead, Level I nonmalignant claims require X-ray changes, which may only reflect the condition of pleural plaques that do not cause pain and have no health significance. The Insurers maintained that these kinds of claims are not compensable in the Maryland tort system. In Maryland, a claim cannot move off the inactive docket without a showing of physical impairment.

In February 2009, before the Trust began resolving claims, Porter Hayden wrote a letter to the Insurers, requesting their assistance in evaluating and resolving claims. The letter indicated that Porter Hayden had already given the Insurers access to submissions through a claims database, provided multiple reports regarding the submissions, and invited their participation in evaluating submissions.  Nevertheless, Porter Hayden was providing the Insurers with “one last opportunity” to be involved. Porter Hayden did not hear from the Insurers regarding the resolution of any asbestos claims.

In analyzing the Insurers’ Motion for Summary Judgment, the Maryland district court cited Federal Rule of Civil Procedure 56(a) for the applicable summary judgment standard.  That rule provides that summary judgment should be granted “if the movant shows that there is no genuine dispute as to any material fact . . . .” Fed. R. Civ. P. 56(a) (emphasis added). Whether a fact is material depends upon the substantive law.  Anderson v. Liberty Lobby, Inc., 477 U.S. 242,247–48 (1986).  Accordingly, “the mere existence of some alleged factual dispute between the parties will not defeat an otherwise properly supported motion for summary judgment.” Id.

Next, the court addressed the Insurers’ argument that the Trust assumed obligations to claimants without their consent, in violation of the policies’ voluntary obligation provision.  The district court rejected this argument, citing to U.S. Fid. & Guar. Co. v. Nat’l Paving and Contracting Co., 228 Md. 40, 48, 178 A.2d 872, 875 (1962), which states:

It is settled law that where there is a denial of liability and a refusal to defend on the part of the insurer . . . , the insured is no longer bound by a provision of a policy prohibiting settlement of claims without the insurer’s consent, or a provision making the insurer’s liability dependent on the obtaining of a judgment against the insured. The insured under such circumstances may make a reasonable compromise of the suit without losing his right to recover from the insurer under the policy.

The federal district court stated that Porter Hayden notified the Insurers of the claims presented to the Trust, but, like the insurers in Nat’l Paving, “the Insurers simply chose not to respond.”  Accordingly, the court held that the Insurers waived the voluntary obligation provision, and were not permitted to rely on that provision to disclaim coverage.  Nevertheless, although the Insurers were not permitted to disclaim coverage under the voluntary obligation provision, the court determined that they were permitted to challenge the reasonableness of the settlements.  The Insurers preserved the right to challenge the settlements’ reasonableness when they entered into the stipulation with Porter Hayden that confirmation of the Plan would not deprive them of any applicable non-bankruptcy law defenses.  Moreover, according to the district court, Nat’l Paving held that even an insurer that refuses to defend the insured reserves the ability to challenge the reasonableness of the insured’s settlement.  Nat’l Paving, 228 Md. at 48, 178 A.2d at 875 (stating that, “where there is a denial of liability and a refusal to defend on the part of the insurer,” the insured may make a “reasonable compromise of the suit”); see also Gildenhorn v. Columbia Real Estate Title Ins. Co., 271 Md. 387, 394–95, 317 A.2d 836, 840 (1974).

Turning to which party had the burden of proof as to reasonableness, the court determined that the Insurers had the burden of production, but Porter Hayden had the ultimate burden of proof.  Applying the reasoning of Port E. Transfer v. Liberty Mut. Ins. Co., 330 Md. 376, 624 A.2d520 (1993), the court recognized the difficulties inherent in requiring a party settling many claims to show the reasonableness of each settlement. Nonetheless, the court could not conclude, based on Port E. Transfer, that the Insurers must shoulder the ultimate burden of persuasion.  Accordingly, to the extent that the Insurers’ motion for summary judgment sought a ruling that they may challenge the reasonableness of the Trust’s settlements and that Porter Hayden bore the ultimate burden of persuasion on reasonableness, the motion was granted by the district court.  The court stated that it could not, however, determine whether the Trust’s settlements were reasonable or unreasonable as a matter of law.  Rather, the court reiterated that the Insurers had the burden of production at trial; and if they satisfied this burden, then Porter Hayden would have the ultimate burden of proof to show the settlements were reasonable.  For these reasons, the Insurers’ motion for summary judgment was  granted in part and denied in part, and Porter Hayden’s motion for summary judgment—as it pertained to the reasonableness of the Trust’s settlements and whether the Insurers had waived their right to object to those settlements—was granted in part and denied in part.

Submitted by Marisa A. Trasatti and Jhanelle A. Graham, Semmes, Bowen & Semmes, Baltimore, Maryland

Court Forgives Plaintiff for Failing to Respond

Court Forgives Plaintiff for Failing to Respond to Discovery from Defendant, But Cautions Against Further Delays

Onyeneho v. Farmers Ins. Exchange, No. JKB-12-3692 (United States District Court for the District of Maryland, May 13, 2014), available at,%20deny%2041b%20DWP%200514.pdf

In Onyeneho v. Farmers Ins. Exchange, the Court granted the Defendant’s Motion to Compel, but denied the Defendant’s Motion to Dismiss for Lack of Prosecution, where Plaintiff failed to respond to Defendant’s discovery requests. 

Proceeding pro se, Plaintiff filed this case alleging employment discrimination and retaliation against Defendant.  The Scheduling Order provided that all depositions and other discovery were to be completed by December 20, 2013.  On December 16, 2013, Defendant filed a letter requesting a sixty-day extension of the discovery period on grounds that it had served discovery requests on Plaintiff in September 2013, which were due in October 2013, however, as of December 2013, Defendant had received no discovery responses even though it had correspondence with Plaintiff about the discovery requests.  Defendant requested additional time to try to resolve the discovery dispute, or if unsuccessful, to file a Motion to Compel.  The Defendant’s Motion was granted.  Thereafter, in January 2014, Defendant filed a Motion to Dismiss for Lack of Prosecution, or, alternatively, to Compel Plaintiff’s Discovery Responses.  In February 2014, an attorney entered an appearance on Plaintiff’s behalf, and a Consent Motion to Extend the Time for Plaintiff to respond to Defendant’s Motion to Extend the time for Completion of Discovery, which indicated that the discovery problems could be “easily resolved” by counsel’s entry of appearance and by the parties’ additional time to conduct discovery, which could be readily addressed without wasting Court time or resources.  The Court extended the discovery deadline until April 2014.  After another brief extension of the response deadline as to Defendant’s Motion, Plaintiff filed both a response as well as a Motion for Voluntary Dismissal without Prejudice.  Following a final briefing on the motions, Defendant requested that all case deadlines be stayed until after the Court ruled on the two pending motions.

Judge Bredar denied Plaintiff’s Motion for Voluntary Dismissal Without Prejudice on the grounds that Plaintiff showed a “profound” lack of diligence in litigating the case, both while pro se and after being represented by counsel.  To the Court, there was no judicial economy in dismissing the case and allowing Plaintiff to have a “fresh start” with the filing of a new Complaint.   It would have been unduly prejudicial to Defendant to be subjected to another round of litigation when the first round—already in progress—had already proven an inadequate vehicle for resolution of the dispute. 

The Court also denied Defendant’s Motion to Dismiss for Lack of Prosecution under Fed. R. Civ. P. 41(b), which allows involuntary dismissal with prejudice if a Plaintiff fails to prosecute or to comply with the Federal Rules or Court Order.  The Fourth Circuit has cautioned that dismissal with prejudice is a “harsh sanction” which should not be invoked lightly in view of the public policy of deciding cases on their merits.  While Plaintiff and his counsel bore most of the responsibility for the delay in the case, the degree of prejudice to Defendant was fairly minimal, and Defendant would be fully able to defend itself on the merits as long as Plaintiff made full and complete discovery responses.  Further, there was not a drawn out history of deliberately proceeding in a dilatory fashion, and sanctions less drastic than dismissal were more appropriate under the circumstances.  Therefore, the Court denied the Motion to Dismiss, but granted Defendant’s alternative Motion to Compel.  The Court, however, put Plaintiff and his counsel “on notice” that any future failure to comply with either the governing rules or the Court’s orders would “weigh heavily” against Plaintiff should involuntary dismissal with prejudice again be contemplated, either because of a defense motion or because the Court acts sua sponte.

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

Real Estate Cooperative Was Not Contractually Required

 Real Estate Cooperative Was Not Contractually Required to Repair Unit Owner’s Pipes

Robinson-Huntley v. George Washington Carver Mutual Homes Association, Inc., Record No. 131065(Court of Appeals of Virginia, April 17, 2014), available at:

In this appeal, the Court considered whether a contract obligated a real estate cooperative to make certain plumbing repairs requested by Plaintiff.

Plaintiff Carol Robinson-Huntley inherited an interest in the George Washington Carver Mutual Homes Association, Inc. (“the Association”), a real estate cooperative created in 1949.  She executed a mutual ownership contract (“the Contract”) with the Association.  A paragraph of the Contract (“the Provide and Pay Provision”) required that “[t]he Association shall . . . provide and pay for property including the [m]ember’s dwelling,  except that the [m]ember shall make minor interior repairs and provide all interior and decorating.”

In 2011, Plaintiff began experiencing significant plumbing problems in her unit.  Deteriorated pipes needed to be replaced which would cost $6,000.  Plaintiff informed the Association but the Association refused to pay for the needed repairs.  Plaintiff filed a Complaint alleging that the Provide and Pay Provision obligated the Association to replace the pipes. 

Following a bench trial, the Court entered judgment for the Association on the Provide and Pay argument, finding that the Provide and Pay Provision did not obligate the Association to replace pipes.  Plaintiff appealed. 

The appellate court concluded that the Contract between Plaintiff and the Association was ambiguous, and so it consulted extrinsic evidence.  An earlier version of the Contract had included an explicit requirement to repair, which had been removed from the contract signed by Plaintiff.  Also, in a practical sense, Plaintiff was unable to prove that the Association had in the past made repairs similar to the kind that she sought.  Therefore, the appellate court affirmed the determination by the trial court that the Association was not obligated to replace the pipes.

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

Removal of safety guard was not a modification

Removal of safety guard was not a “modification” of product where guard had been previously rendered useless through normal wear and tear.

Plaintiff, a 16-year old girl, was assisting her father in using a tractor-driven digger to drill post holes in her yard. Plaintiff’s step-father, Gary Hoover, had borrowed the digger from a family friend, Smith, but was not aware that Smith had previously removed a safety shield from the gearbox and never replaced it.   While assisting her stepfather, Plaintiff’s jacket was caught by a nut on the rotating drive line which dragged Plaintiff into the gearbox.  Plaintiff suffered severe injuries including severing her arm  above the elbow.   Plaintiff brought suit against the manufacturer of the digger and the manufacturer of the missing safety guard for products liability.  Plaintiff also filed a complaint against Smith for removing and failing to replace the shield, which the court consolidated after the manufacturers filed third-party actions against Smith. 

At the close of discovery, the Defendants moved for summary judgment, claiming that under New York law, they were not liable, because Smith made post-sale modifications.  Defendants argued that the digger was safe when sold, and Smith’s alterations of removing the shield and not replacing it made the product dangerous.  The Defendants further argued that Smith misused and abused the machine letting the shield come into contact with the ground with such force as to cause it to become damaged.

 The Plaintiff responded with an affidavit from her expert in support of her position that the digger contained manufacturing defectives despite Smith’s removal of the shield. The shield protected the user from the gearbox, but had broken on Smith’s machine during “normal” usage when the digger would get stuck and pull the shield into the ground, causing it to break.  All parties agreed the accident would not have occurred if the shield had been in place.  Plaintiff argued that the digger’s shield should have been designed to either last the life of the machine, or prevent usage when it was removed to prevent misuse.  Further, the shield was “inadequately tested” and “not reasonably safe,” according to Plaintiff’s expert, because it failed after two to three years of “normal use,” during which it was foreseeable that the shield would contact the ground and become damaged. Plaintiff also alleged that it was reasonably foreseeable by the manufacturer that the user would remove the shield when it was broken and not replace it.

 The trial court held that the Plaintiff had met its burden to overcome summary judgment and permitted the case to go to trial on the product liability counts.  At the conclusion of the trial, the jury found in Plaintiff’s favor and awarded her $8,811,587.29, and apportioned liability:  35 percent to the digger distributor, 30 percent to manufacturer of the digger, and 30 percent to Smith, 3 percent to the Plaintiff’s stepfather, and 2 percent to the seller of the digger.  The other defendants had settled the claims against them on the third day of trial.  The Defendants moved to have the verdict set aside, which the trial court denied.  The Defendants timely appealed to the Appellate Division, who affirmed the trial court’s holding on the motion for summary judgment.   The Defendants thereafter appealed to the Court of Appeals of New York.

 To begin its analysis, the Court of Appeals reviewed New York’s law regarding products liability claims.   When a plaintiff is injured by a defectively designed product the manufacturer and others in the chain of distribution are held strictly liable.  “[A] defectively designed product is one which, at the time it leaves the seller’s hands, is in a condition not reasonably contemplated by the ultimate consumer and is unreasonably dangerous for its intended use,” and “whose utility does not outweigh the danger inherent in its introduction into the stream of commerce.”  However, a manufacturer’s liability will be severed if the consumer makes substantial materials alterations or modifications to the product, thus making it unsafe.   The manufacturer’s obligation was to put a

 The Court then held that Plaintiff had presented evidence sufficient to defeat summary judgment based on the substantial modification defense, as there was evidence that the damaged shield was removed because it failed to provide protection from the rotating gears.  While the court disagreed with the Plaintiff that “no safety device is reasonably safe unless it is designed to last the lifetime of the product on which it is installed, defendants did not adequately refute Plaintiff’s assertions that the plastic shield failed prematurely under the circumstances presented here.”   The Court further held that Defendants had failed to show that they were entitled to judgment as a matter of law on the basis that Smith’s misuse was unforeseeable or that Smith’s failure to replace the shield was a substantial modification, absolving Defendants of liability. Notably, the court observed that “this may have been a different case if defendants had established as a matter of law that the shield was reasonably designed yet expected to wear and required replacement prior to the accident.”  The Court affirmed the Appellate Divisions holding.

 Judge Smith dissented and argued that the case of Robinson v. Reed-Prentice Division of Package Machinery Company, 49 N.Y.2d 471 (1980), was controlling and directly on point.  Defendant Smith’s act of removing a safety device, in violation of the warnings on the machine and in the manual, was a substantial alteration under Robinson.   The Defendants were only obligated to “use reasonable care to design a product that is safe at the time it leaves the manufacturer’s hands. A manufacturer is not liable for dangers created by substantial alterations to the product thereafter.   That principle should have controlled this case.”

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

Recent Developments in Court Decisions on E-discovery Issues

The duty to preserve and collect data that may be discoverable once litigation is reasonably anticipated is well established.  The following are highlights form recent Court decisions affecting the eDiscovery process. In Riley v. City of Prescott,Arizona, CV-11-08123-PCT-JAT (D. Ariz. Feb 18, 2014), Judge James Teilborg granted Plaintiff’s Motion for Discovery sanctions against the City of Prescott in the form of a spoliation instruction to the jury.  The Court found that the City of Prescott became obligated to preserve emails between city employees and Plaintiff’s employer prior to the date plaintiff first publicized his protest against the City.  From the facts presented, the Court found that multiple emails potentially relevant to the litigation were deleted from the Mayor of Prescott’s city-assigned email account and spoliation of those emails had occurred.  The City argued that there was no evidence emails were deleted, except in the exercise of normal City practice and this did not constitute destruction with any culpable state of mind.  But the Court found that Prescott’s Mayor acted willfully and in bad faith when he continued to refuse production of email accounts and these emails were thereafter deleted.  Plaintiff established, through a subpoena to Google, the existence of nine emails which indicated that Prescott’s Mayor was corresponding with his assistant during a critical period prior to the litigation and that the Defendant produced none of these emails.  The Court found that an adverse inference instruction was warranted to the extent Defendant’s spoliation affected Plaintiff’s ability to prove her claim.

In McCann v. Kennedy Universal Hospital, Inc., 2014WL282693 (D.N.J. January 24, 2014), Judge Joel Schneider was faced with a Motion for Sanctions from Plaintiff because of Defendant’s alleged failure to preserve emergency room lobby surveillance footage.  Plaintiff claimed that he arrived at the Defendant’s hospital in great pain and was left untreated for hours.  He alleged that the hospital staff left him lying on the floor for more than ten minutes after he entered the emergency room.  The following day, Plaintiff emailed the hospital threatening to sue for unfair and inhumane treatment.  Plaintiff filed suit against the hospital and requested production of the emergency room surveillance camera footage.  The hospital had erased the footage claiming that this was the normal course of business.  Plaintiff claimed the hospital spoliated evidence.  Judge Schneider determined that Defendant did not have a duty to preserve the surveillance footage because Plaintiff’s email did not trigger the hospital’s duty to maintain this evidence.  The Court found that Plaintiff’s email only indicated that he “intended to sue.”  Id at 6.  Judge Schneider determined that Defendant did not erase the footage in bad faith or with the intent to destroy relevant evidence.  Id at 7.

In Calderon v. Corporation Puertorrique a De Salud, 2014WL171599 (D.P.R. January 16, 2014), United States District Court Judge Francisco Besosa granted Defendant’s Request for a Spoliation instruction based on Plaintiff’s admission that he deleted text messages and failed to produce approximately thirty eight relevant text messages which Defendant obtained by subpoenaing Plaintiff’s mobile carrier.  The Court determined that Plaintiff intentionally spoliated evidence because he failed to produce and/or deleted text messages amounting to a conscious abandonment of potentially useful evidence which may have been unhelpful to his case.

Finally, District Court Judge David Bury entered summary judgment against Defendant as a spoliation sanction in Slep-Tone Entertainment Corp. v. Granito, 2014WL65297 (D. Ariz., January 8, 2014).  Plaintiff had requested that Defendant produce computer hard drive information containing karaoke tracks which Plaintiff alleged contained approximately 150,000 counterfeit tracks.  Defendant claimed that the hard drives could not be produced because they had been wiped clean one to two months prior to the lawsuit.  Plaintiffs sought, as a sanction, summary judgment against Defendant because of the alleged spoliation.  Defendant filed a counter motion for summary judgment on grounds that Plaintiff could not prove he possessed counterfeit karaoke tracks.  Judge Bury entered summary judgment in favor of Plaintiff stating that Defendant had control over the evidence, had a duty to preserve the hard drives once he was served with the Complaint, and that Defendant had a culpable state of mind when he utilized specialized software to completely wipe the drives clean of information.

By: William G. Caravetta, Partner at Jones, Skelton & Hochuli, PLC
Bill Caravetta handles both national and state-wide bad faith class action litigation, bad faith litigation, insurance coverage disputes, coverage opinions and complex civil litigation. Mr. Caravetta has substantial experience in advising corporate risk managers on insurance coverage issues, indemnity agreements and risk transfer options through commercial contracts. 

Exceptionally Deferential Standard of Reviews

Fourth Circuit Applies “Exceptionally Deferential” Standard of Review to District Court’s Award of Attorneys Fees and Costs to Defendant Under Lodestar Analysis Best Medical International v. Eckert & Ziegler Nuclitec GmbH, Case No. 13-1708 (April 8, 2014), available at

In Best Medical International v. Eckert & Ziegler Nuclitec GmbH,the Fourth Circuit was asked to determine whether the district court properly granted fees and costs to Eckert & Ziegler Nuclitec GmbH (“EZN”), the prevailing party in its litigation against Best Medical International, Inc. and Best Vascular, Inc. (collectively “Best”), by applying the required analysis under Johnson v. Ga. Highway Express, Inc., 488 F.2d 714, 717-19 (5th Cir. 1974).  Applying an “exceptionally deferential” standard of review to the district court’s decision, and after a thorough review of the record, the Fourth Circuit affirmed the district court’s judgment for Defendant, EZN.

In 1999, AEA Technology-QSQ GmbH (“QSA”) entered into a manufacturing agreement with one of Best’s predecessors. Under that agreement, QSA was to manufacture “sources” or “source trains” of strontium and sell that product to Best’s predecessor. At the end of that contract, Best was obligated to decontaminate and decommission QSA’s manufacturing production lines in Germany used to make these sources.  Best failed to decontaminate the manufacturing line as agreed, so QSA sued to enforce the contractual covenant.  QSA and Best settled QSA’s suit under a 2008 Settlement Agreement that provided Best was to complete its decontamination work by a certain date and post a performance bond.  Best was also required to buy minimum orders of “source trains” that met defined specifications.  Furthermore, the Settlement Agreement provided that “the prevailing party [would] be entitled to recover . . . reasonable attorneys’ fees and costs incurred” in “any litigation” “brought for breach” of the agreement.

The Settlement Agreement soon unraveled. Best did not timely perform the required decontamination work, which caused EZN (having acquired QSA in 2009) to notify Best in 2010 that it planned to do the work at Best’s expense.  Best also did not post the performance bond.  For its part, Best complained that EZN was producing strontium sources that did not meet the specifications found in the parties’ original manufacturing agreement.  Best then initiated a lawsuit raising three (3) principal complaints: (1) that EZN was equitably estopped from conducting the decontamination and decommission task and from disposing of the production line in the course of decontaminating and decommissioning the production line; (2) that EZN breached the Settlement Agreement by not cooperating with Best; and (3) that EZN breached the Settlement Agreement by not providing Best with source trains and sources that met the specifications of the original Manufacturing Agreement.  Best Med. Int’l, Inc. v. Eckert & Ziegler Nuclitec GmbH, 505 F. App’x 281, 283 (4th Cir. 2013).  Best sought certain injunctive relief (including an injunction to stop EZN from breaking the line down), sought “any monetary damages that [Best] sustained as a result of [EZN]’s actions,” and sought a refund of payments that it made for the supposedly “non-compliant” sources.  The parties agreed that Best’s requested relief would have been valued at no less than $8 million.

In response, EZN filed a four-(4) count compulsory counterclaim under Federal Rule of Civil Procedure 13, alleging: (1) that Best breached the Settlement Agreement by failing to post a performance bond; (2) that Best breached the Settlement Agreement by failing to decontaminate and decommission the production line; (3) that Best fraudulently induced EZN to enter into the Settlement Agreement; and (4) that EZN should be awarded declaratory relief stating that Best had defaulted under the Settlement Agreement and that its default relieved EZN from any obligation to dispose of sources. Best Med., 505 F. App’x at 283.

Upon cross motions for summary judgment, the district court ruled largely for EZN.  See Best Med. Int’l., Inc. v. Eckert & Ziegler Nuclitec GmbH, No. 1:10-cv-617, 2011 WL 3951675 (E.D. Va. Sept. 7, 2011).  The district court held that Best had not adequately established any of its claims. Further, the court determined that two (2) of the four (4) EZN counterclaims had not been shown.  As to EZN’s second counterclaim, the court concluded that Best had defaulted on its obligation under the Settlement Agreement to decommission and decontaminate the German production lines, but found that any damages claim should be arbitrated?under an arbitration clause in the Settlement Agreement?once EZN completed its own cleanup efforts.  The district court dismissed the declaratory judgment count as “moot” because the court had “ruled on all points raised” in that count. Id. at *7.

EZN and Best each moved for attorneys’ fees and costs under the Settlement Agreement. After determining that EZN was the prevailing party, the district court proceeded to determine an appropriate amount of attorneys’ fees and costs.  The district court began by detailing the appropriate lodestar analysis—i.e., multiplying the number of reasonable hours by a reasonable fee.  The district court acknowledged that it was to assess reasonableness by looking to the twelve (12) factors in Johnson v. Hugo’s Skateway, 974 F.2d 1408, 1418 (4th Cir. 1992). Second, the district court explained that it was to deduct fees for time spent on unsuccessful claims.  Third, the district court stated that it was to award some percentage of the remaining fees to account for the degree of success enjoyed by the prevailing party.  Applying this analysis, the district court then awarded EZN attorneys’ fees of $584,735.08 and costs of $32,892.61.

In the initial appeal, the Fourth Circuit affirmed all of the district court’s decisions except as to attorneys’ fees and costs.  The appellate court concluded that EZN’s fees and costs request “might be unreasonably excessive in the absence of an analysis of the applicable factors,” which the district court had conducted “only in the most conclusory manner.”  Best Med., 505 F. App’x at 284.  Therefore, the Fourth Circuit vacated the fee and cost award so that the district court could fully consider the Johnson factors on remand.  Thereafter, the district court awarded EZN all of its requested fees and costs after the voluntary reductions, under Johnson, were applied. 

On appeal from the district court for a second time, the Fourth Circuit explained that the standard of review in an appeal from an award of attorneys’ fee is “exceptionally deferential,” as it applies a “sharply circumscribed” version of the Court’s traditional abuse-of-discretion standard.  Robinson v. Equifax Info. Servs., LLC, 560 F.3d 235, 243 (4th Cir. 2009).  Under that standard, “the fee award must not be overturned unless it is clearly wrong.” Id.  In addition, “[the Court] will not ordinarily disturb the award even though [it] might have exercised th[e] discretion [to award fees] quite differently.” Johnson, 974 F.2d at 1418 (quotation marks omitted).  The appellate court noted that under this standard of review, Best had a heavy burden to present a case on appeal that warrants our overturning the district court’s determinations.  Further, the Fourth Circuit stated that not only would another reversal continue this long-running dispute, but it would also invite future litigants to transform their attorneys’ fees disputes into standalone pieces of major appellate litigation.  According to the Court, encouraging this sort of never-ending review would conflict with one (1) of the most often repeated maxims in the attorneys’ fee context: “[a] request for attorney’s fees should not result in a second major litigation.” Hensley v. Eckerhart, 461 U.S. 424, 437 (1983).  Keeping this deferential standard of review in mind, the appellate court turned to the merits of the dispute.

The Court opined that, “The proper calculation of an attorney’s fee award involves a three-step process.”  McAfee v. Boczar, 738 F.3d 81, 88 (4th Cir. 2013).  “First, the court must determine the lodestar figure by multiplying the number of reasonable hours expended times a reasonable rate.”  Id. (quotation marks omitted).  At this step, the court should consider the Johnson factors:

(1) The time and labor expended, (2) the novelty and difficulty of the questions raised, (3) the skill required to properly perform the legal services rendered, (4) the attorney’s opportunity costs in pressing the instant litigation, (5) the customary fee for like work, (6) the attorney’s expectations at the outset of the litigation, (7) the time limitations imposed by the client or circumstances, (8) the amount in controversy and the results obtained, (9) the experience, reputation, and ability of the attorney, (10) the undesirability of the case within the legal community in which the suit arose, (11) the nature and length of the professional relationship between attorney and client, and (12) attorneys’ fees awards in similar cases.

Johnson, 488 F.2d at 88 n.5.  Second, the court “must subtract fees for hours spent on unsuccessful claims unrelated to successful ones.”  McAfee, 738 F.3d at 88 (quotation marks omitted).  Third, and finally, the court “should award some percentage of the remaining amount, depending on the degree of success enjoyed by the [party].”  Id. at 88 (quotation marks omitted).  

After carefully reviewing the record and the parties’ arguments, the appellate court found no basis to reverse the district court’s determination that the attorneys’ fee award was reasonable.  Rather, the Fourth Circuit observed that the district court applied the correct legal and factual criteria.  Best did not raise any objection to half of the lodestar analysis?the reasonableness of the rates of EZN’s counsel?but instead directed many of its objections to the reasonableness of EZN’s claimed hours.  Finding that the district court carefully applied the Johnson factors to measure the reasonableness of those hours and appropriately determined that they reflected an exercise of billing judgment, the Fourth Circuit affirmed the district court’s judgment on attorneys’ fees and costs.

Submitted by Marisa A. Trasatti and Jhanelle A. Graham, Semmes, Bowen & Semmes, Baltimore, Maryland

Learned Intermediary Doctrine Bars Plaintiff's Claim

Learned Intermediary Doctrine Bars Plaintiff’s Claims Against Zyprexa Manufacturer

 In Boehm v. Eli Lilly & Co., No. 13-1350 (8th Cir., Mar. 10, 2014), Plaintiff Timothy Boehm’s doctors prescribed him Zyprexa, an antipsychotic drug manufactured and sold by Defendant Eli Lilly & Company (“Eli Lilly”), to treat his bipolar disorder from January 2003 until March 2007, when he developed symptoms later diagnosed as tardive dyskinesia (“TD”)—an involuntary movement disorder long-recognized as a side effect of antipsychotic drugs.  Plaintiff brought an action against Eli Lilly asserting personal injury and product liability claims, and the case was removed by Eli Lilly from state court to federal court.  The district court granted summary judgment dismissing the failure-to-warn claim, applying the Arkansas learned intermediary doctrine, and concluding that Eli Lilly adequately warned Plaintiff’s treating and prescribing physicians of the risk of developing movement disorders like TD.  The learned intermediary doctrine provides that a drug manufacturer may rely on the prescribing physician to warn the ultimate consumer of the risks of a prescription drug so long as the warnings provided by the manufacturer are reasonable.  The physician acts as the ‘learned intermediary’ between the manufacturer and the ultimate consumer.  Plaintiff appealed the summary judgment order, including the district court's decision to exclude expert testimony that fifteen percent of Zyprexa users will develop TD after three years of use.

 With respect to the learned intermediary issue, Eli Lilly presented evidence that its FDA-approved package insert for Zyprexa expressly warned about the risk of developing TD.  Two (2) of Plaintiffs’ treating doctors who prescribed him with Zyprexa had the practice of either reading the product’s package insert or the Physicians’ Desk Reference (which contains package insert information), prior to prescribing any product.  Both doctors also testified in deposition that they learned about Zyprexa's side effects from their own clinical experience and from speaking with their colleagues.  Both doctors testified that an alternative warning about the risk of movement disorders would not have changed their decisions to prescribe Zyprexa to treat Boehm's bipolar disorder.  Based on the express TD warning it gave all physicians, and the testimony of Plaintiff's prescribing physicians that they read the warning and considered it adequate in deciding to prescribe Zyprexa, Lilly moved for partial summary judgment on the failure-to-warn claim, relying on the learned intermediary doctrine.

 Plaintiff opposed on grounds that Eli Lilly failed to adequately warn physicians of the risk of developing TD after long-term use of Zyprexa.  Plaintiff focused on additional deposition testimony by Plaintiff’s doctors.  After the first doctor described certain side effects that can occur with long-term Zyprexa use, he was asked by Plaintiff’s counsel whether he was aware that fifteen percent of those who have taken a drug such as Zyprexa, for three years, developed TD.  The first doctor responded that he was aware of this statistic.  The second doctor stated that he never received this information, and that had he known it, he would not have prescribed Zyprexa for Plaintiff for as long as he did. 

 After initial briefing, the district court concluded that the testimony by the second doctor on the fifteen percent risk figure, if supported, could create a triable issue as to the adequacy of Eli Lilly’s TD warning.  Since the physician did not offer the fifteen percent risk figure on his own and it was part of a leading question, the Court asked for supplemental briefing about whether the alleged fifteen percent risk figure was supported by scientific evidence that would be admissible under Daubert.  Plaintiff offered an affidavit by his expert supported by a blog post and a website advertising, which the trial court determined were a deficient foundation to support the expert’s opinion under Daubert.  Although Plaintiff’s second supplement was a peer-reviewed study from a well-respected journal, the Court reasoned that it was not designed to establish a risk of a particular drug, like Zyprexa, but only the risk of a class of drugs to which Zyprexa belonged.  There was too great an analytical gap to extract from the study the fifteen percent incidence rate the doctor said would have changed his prescribing decisions, so the Court excluded all evidence of that risk percentage under Daubert. The court then granted summary judgment dismissing Plaintiff’s failure-to-warn claims because there was no genuine issue of material fact as to the adequacy of Eli Lilly's TD warnings.

 The appellate court agreed and affirmed.  The district court reasonably concluded that Plaintiff had not provided sufficient scientific support for the fifteen percent-risk opinion and so the fifteen percent-risk opinion was properly excluded under Daubert.  Furthermore, the district court properly applied the learned intermediary doctrine to dismiss the failure to warn claim.  Finally, the appellate court held that even if Arkansas were to recognize the “overpromotion” exception to the learned intermediary doctrine, the Plaintiff failed to prove that Eli Lilly overpromoted Zyprexa, that its promotional efforts negated the written warnings, or that these promotional efforts had any effect on the decisions by Plaintiff’s doctors to prescribe Zyprexa for the continued treatment of Plaintiff’s bipolar disorder. Therefore, the district court properly granted summary judgment in favor of the Defendant, Eli Lilly.

 Boehm v. Eli Lilly & Co.       decided 3/10/14

U.S. Court of Appeals for the Eighth Circuit

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

Amicus Brief--Removal is Important

I'm pleased that the Federation of Defense & Corporate Counsel is weighing in on the importance of out-so-state defendants being allowed to remove cases from state to federal court.    This is an essential right guaranteed in the U.S. Constitution.  However, some courts are attempting to restrict the opportunity to remove cases.  In the case of Dart Cherokee Basin Operating Company v. Owens, the U.S. Court of Appeals for the 10th Circuit affirmed the remand of a removed case citing a so-called "presumption again removal."   The FDCC does not believe there is any such presumption against removal.  Accordingly, the FDCC has joined the Washington Legal Foundation and the International Association of Defense Counsel in urging the U.S. Supreme Court to reverse the 10th Circuit decision, which has the effect of restricting an out-of-state defendant’s ability to remove a case to federal court.   Their amicus brief argued that there is no “presumption against removal,” as stated by the 10th Circuit.   Removal should be permitted and encouraged in appropraite cases, and there should be no restriction on the right to remove based on a claimed "presumption."  

Removal is a right to be preserved.   Congress supported this principle when it adopted the Class Action Fairness Act, which allows for the removal of most large class actions filed in state courts.   The presumption against removal is not supported by Constitutional interpretation, Congressional action or Supreme Court precedent. 

The FDCC’s Amicus and Public Policy Committee, chaired by Stacy Broman, looks for opportunities for the FDCC to participate in matters, like the present case, where the interests of fairness and justice can be advanced.  I am hopeful that the U.S. Supreme Court will grant cert and correct the foundational errors committed by the lower courts. 

Link to Amicus Brief

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