The U.S. District Court for the District of Maryland Denied Motion to Stay Under the Long and Real Truth Tests
In Rose v. Logan, the United States District Court for the District of Maryland denied Appellant’s Motion to Stay under both the Long and Real Trust tests. Appellant, Rainer T. Rose (“Rose”), sought relief from the sale of real property owned by the Debtor, Blackwater Enterprises, Inc. (“Blackwater”). This case arose out of Rose’s opposition to the sale of 9843 Wades Point Road, Claiborne, Maryland (“the Property”), the sole asset of Blackwater. Blackwater filed a voluntary petition for bankruptcy on August 23, 2012 under Chapter 11 of the United States Bankruptcy Code, later converted to a Chapter 7 proceeding with Sean Logan (“Logan”) designated as the Trustee for the estate. Logan filed a Motion to Sell the property in Bankruptcy Court, though Blackwater wanted the property sold at auction. Ultimately, the Bankruptcy Court granted Logan’s Motion to Sell. On August 26, 2013, Rose filed a Motion to Reconsider Sale of the property, arguing that Logan’s marketing efforts had been deficient; however, the Bankruptcy Court rejected the motion, as Rose’s argument had not been raised at the previous hearing.
Rose filed a timely appeal of the Bankruptcy Court’s ruling along with a Motion for Stay Pending Appeal in the Bankruptcy Court, though the latter was denied on December 17, 2013. On March 25, 2015, on appeal, the United States District Court for the District of Maryland found that the Bankruptcy Court did not err when it granted the Motion to Sell or when it denied Rose’s Motion to Reconsider; thus, it denied Rose’s appeal.
Rose appealed the March 25, 2015 order granting Trustee’s Motion to Sell Debtor’s Real Property to the United States Court of Appeals for the Fourth Circuit. In the interim, Rose filed a Motion for Stay Pending Appeal and Waiver of Supersedeas Bond or Alternatively to Establish a Bond (“Motion to Stay”) before this Court.
In its analysis, the court discussed the correct standard for motions to stay pending appeal. It observed that the Fourth Circuit had not recently devoted any attention to the standard, and, thus, the court endeavored to tease out the standard in light of previous decisions. The court looked to the standards set forth in two previous cases as guideposts, yet it noted that even the two “guiding” standards had been applied inconsistently across districts.
First, it took note of the Long standard for considering motions to stay. This standard, rooted in the holding of Long v. Robinson, 432 F.2d 977 (4th Cir. 1970), set forth a four factor sliding-scale test to guide courts considering motions to stay. Courts applying this test have looked to the Blackwelder standard, established in Blackwelder Furniture Co. Statesville, Inc. v. Seilig Manufacturing Co., 550 F.2d 189 (4th Cir. 1997), used for granting preliminary injunctions for instruction guided by the notion that both stays and preliminary injunctions are forms of preliminary equitable relief making similar standards appropriate.
The court then parsed out the four factors of the Long test. The test weighed the following four factors: (1) that the movant will likely prevail on the merits of the appeal, (2) that the movant will suffer irreparable injury if the stay is denied, (3) that other parties will not be substantially harmed by the stay, and (4) that the public interest will be served by granted the stay. Although courts employing the Long test evaluate the same four factors, they have differed in how they apply them. For instance, some courts apply the four factors on a sliding scale where the strength of one factor can compensate for the lack of another. In contrast, this court, and others, has required a showing of all four factors.
Second, the court considered the Real Truth standard primarily used to consider preliminary injunctions for additional guidance. Although established to assist courts considering preliminary injunctions, this court and other courts have looked to the test when considering a stay pending appeal. Under this test, the movant must satisfy each of the following four (4) requirements: (1) that he is likely to succeed on the merits, (2) that he is likely to suffer irreparable harm in the absence of preliminary relief, (3) that the balance of equities tips in his favor, and (4) that an injunction is in the public interest.
The court acknowledged that three (3) of the four (4) factors of the Real Truth standard paralleled those in the Long test. The third factor in each test differs. The Long test requires a party to show that other parties will not be substantially harmed by the stay, whereas the third factor of the Real Truth test calls on the movant to show that the balance of equities will tip in his favor. In assessing the latter, courts must balance the claims of injury while evaluating the impact of granting or withholding the requested relief on each party. The Real Truth also imposes a higher burden than the Long test in that it does not operate as a sliding scale, but requires the movant satisfy each of the four (4) factors in every application.
Given that the two tests are substantially similar, aside from the one factor, the court engaged in its analysis using both, and ultimately concluded that Rose could meet neither so as to merit a stay pending appeal.
First, the court assessed the first factor of both tests— the likelihood of success on merits. The court points to the procedural history of the case as an indication that the appellant’s claim did not appear likely to succeed. It recalled that the Bankruptcy Court made multiple findings of fact in favor of the appellee. It noted that Rose failed to offer little to counter the holdings of the Bankruptcy Court and as such, this court affirmed the Bankruptcy Court’s holdings on March 25, 2014. Additionally, the court observed that Rose lacked standing to bring an appeal to which Rose proffered no argument to the contrary.
Next, the court concluded that Rose also fell short of demonstrating that he would suffer irreparable harm as required by the second element of both tests. While the court conceded that the sale of the property at issue might harm Rose, it failed to accept such harm as an automatic showing of the requisite irreparable harm. The court then dismissed Rose’s contention that he would have no other recourse on appeal if the sale continued because Rose had an opportunity to object to the sale on prior occasions, yet he refrained. The court reasoned that it would not grant a stay where the appellant was the cause of the irreparable injury alleged.
The court then considered the third factors from both tests and concluded that Rose failed to meet either. Merging the factors from both tests, the court considered the injury to other parties (Long test) and the balance of equities (Real Truth test) concurrently. The court considered other parties who may have been vulnerable to an injury should the stay be granted. It reasoned that a stay would substantially injure creditors as it would delay the payments due by Rose and the Debtor. Concerning the balance of equities, the court concluded the balance weighed in favor of Logan as he needed to administer the estate and pay the creditors, rather than Rose who failed to demonstrate a threshold finding of irreparable harm.
Last, the court held that Rose failed to demonstrate that a stay pending appeal would serve the public interest. Rather, Rose based his claim on unsubstantiated accusations against the Trustee’s conduct during the sale. Rose did not offer any further evidence proving the stay of the sale of the property would further any public interest, but instead only focused on his personal stake in the matter.
Upon application of both the Long and Real Truth tests, the court concluded that the appellant failed to meet its burden under either test so as to warrant a stay pending appeal. As such, the court denied Rose’s Motion to Stay.
Rose v. Logan,No. RDB-13-3592 (D. Md., July 21, 2014), available at: http://www.mdd.uscourts.gov/Opinions/Opinions/Rose%20v.%20Logan%207-21-14%20Memo%20&%20order.pdf
Submitted by: Marisa A. Trasatti and Sarah M. Grago, Semmes, Bowen & Semmes
A Foreign Manufacturer May be Subject to Personal Jurisdiction in the United States Under the “Stream of Commerce” Theory Where It Is Closely Affiliated with Its Intermediary Distributer
In Valichka v. Kettler Int’l, Inc., et al., the United States District Court for the District of Maryland denied Defendant’s Motion to Dismiss for Lack of Personal Jurisdiction. Plaintiff William Valichka (“Valichka”) sued Defendants Kettler International, Inc., (D/B/A “Kettler USA”) and Heinz Kettler GmbH & Co. KG (“Heinz”) for negligence and strict product liability, alleging that a defective plastic folding chair manufactured and distributed by the Defendants injured him. Valichka is a New Jersey resident, but he sustained injuries from the allegedly defective chair while on his yacht docked in St. Michael’s, Maryland. Neither Defendant is a resident of Maryland. Kettler USA, the distributor, is a Virginia corporation and Heinz is a German corporation. Heinz moved to dismiss the claim against it on the basis of lack of personal jurisdiction. The court denied Defendants’ Motion to Dismiss for it concluded that the Plaintiff had made a prima facie showing that Heinz was subject to personal jurisdiction.
In reaching its conclusion, the court first considered the fundamental requirements for a finding of personal jurisdiction. First, it must be authorized by the forum state’s long arm statute. Next, the court’s exercise of personal jurisdiction must be consistent with due process. The court noted that the plaintiff need only make a prima facie showing of personal jurisdiction to survive a Motion to Dismiss. Further, it explained that it must make all reasonable inferences and resolve all factual disputes in favor of the Plaintiff.
The court found that the Plaintiff adequately identified the Maryland long arm statute, albeit not explicitly, to satisfy the requirements for a finding of personal jurisdiction. Although the court recognized that it is preferable for plaintiffs to identify the statute authorizing jurisdiction in its complaint or response to a Motion to Dismiss, here, the court found that the plaintiff used language that mirrored that of the Maryland statute. The Plaintiff alleged that the Defendants “suppl[ied] and/or contract[ed] to supply goods, services and/or manufactured products in Maryland and derive[d] substantial revenue from the sale of goods and/or manufactured products, used, consumed, or purchased in Maryland.” Similarly, the Maryland long arm statute grants a court personal jurisdiction over a person who “regularly does or solicits business, engages in any other persistent course of conduct in the State or derives substantial revenue from goods, food services, or manufactured products used or consumed in the State.” Thus, the court concluded that the Plaintiff sufficiently identified the statute, even though he failed to reference it specifically.
Next, the court concluded that a finding of personal jurisdiction over Heinz would not offend due process requirements of the Fourteenth Amendment. It underscored that due process requires that a nonresident defendant have “certain minimum contacts” with the forum state “such that the maintenance of the suit does not offend ‘traditional notions of fair place and substantial justice.’” Int’l Shoe Co. v. Washington, 326 U.S. 310, 316 (1945) (internal quotations omitted). To discern whether the Defendants had sufficient minimum contacts, the court considers the number and relationship of their contacts to the forum state and the nexus between the contacts and the pending cause of action.
Although Defendant Heinz contended that he lacked sufficient minimum contacts, the court found that the Plaintiff made a prima facie showing that Heinz was subject to personal jurisdiction before the court. Heinz argued that he had no connection to Maryland as he manufactured the products in Germany and then sold the products to a separate corporate entity, Kettler USA and, thus, he did not receive any revenue from product sales in Maryland. Instead, Kettler USA, controlled which markets the product entered. In contrast, the Plaintiff argued that Heinz had sufficient minimum contacts. First Plaintiff posited that Heinz used Kettler USA as an intermediary to market and sell its product in Maryland. Additionally, Plaintiff offered proof of Defendant’s internet website that indicated at least some of the goods were manufactured in Virginia, not Germany.
Interpreting the facts presented in the light most favorable to the non-moving party, the court concluded that the Plaintiff demonstrated that Heinz subjected himself to jurisdiction in Maryland by way of the “stream of commerce” theory of personal jurisdiction. Under this theory, a foreign manufacturer may be subject to personal jurisdiction if it “delivers its products into the stream of commerce with the expectation that they will be purchased by consumers in the forum state” even though it may lack direct contact with that state. World-Wide Volkswagen Corp., 444 U.S. 286 (1980)(emphasis added). The court echoed the warning of the Supreme Court by noting that the mere foreseeability that a product may appear in the forum state does not trigger personal jurisdiction. (citing J. McIntyre Mach., Ltd. v. Nicastro, ___ U.S.___, 131 S.Ct. 2780 (2011)). The contact must not be fortuitous, but intended and purposeful. Copiers Typewriters Calculators, Inc. v. Toshiba Corp., 576 F.Supp. 312, 320 (D. Md. 1983).
In an effort to determine whether Defendant’s contacts with Maryland were sufficiently purposeful, the court considered the facts of a similar case. It found the facts of Copies Typewriters Calculators, Inc. sufficiently analogous to provide guidance. In Copies, this court found that a Japanese manufacturer, Toshiba, that distributed products in the United States by way of a wholly-owned subsidiary, intended its products to reach the United States. While Toshiba did not enter the forum state, this court found that Toshiba intended its products to reach the forum state as its own subsidiary marketed products there. Here, although Heinz did not own Kettle USA, the Plaintiff offered evidence that the two (2) Defendants maintained a close affiliation. Additionally, the court noted that use of an intermediary does not insulate a foreign manufacturer from being subject to personal jurisdiction in forum states in which the product is sold. The court found the facts here sufficiently alike to warrant a similar finding; the court’s exercise of jurisdiction did not offend “traditional notions of fair play and substantial justice.” Int’l Shoe Co., 326 U.S. at 316.
The court held that Plaintiff presented a prima facie case that Heinz “purposefully directed its products to, and had a reasonable expectation of sales in, the United States as whole, and Maryland specifically.”
Valichka v. Kettler Int’l, Inc., et al., No. RDB-13-0618 (D. Md., June 24, 2014), available at: http://www.mdd.uscourts.gov/Opinions/Opinions/Valichka%20v.%20Kettler%20MEMO%20AND%20ORDER.pdf
Submitted by: Marisa A. Trasatti and Sarah M. Grago, Semmes, Bowen & Semmes
Court Finds That A Wrongful Death Action May Arise From Suicide And Denies Motion For Summary Judgment On The Grounds That The Jury Is Best Suited To Weigh Expert Testimony In Deciding Whether Defendant’s Negligence Proximately Caused The Suicide
In Young v. Swiney, the United States District Court for the District of Maryland faced the issue of whether suicide may be the basis for a wrongful death action in the context of the impact of expert testimony on deciding a motion for summary judgment. The court held that Maryland law conforms to the majority position that one may not recover damages in negligence for another’s suicide, in that the suicide serves as an intervening act that precludes a finding of proximate cause. The court further held that this general rule does allow for an exception for suicide committed during insanity or delirium, if that mental state was caused by the defendant’s negligent conduct. In addition, the court admitted Plaintiff’s expert’s testimony, despite Defendant’s challenges to its reliability, explaining that Defendant’s challenges went to the expert’s credibility and not admissibility, which is for a jury to weigh. Judge Hollander authored the opinion of the court.
By way of procedural background, Decedent’s widow brought suit individually, as Personal Representative for the estate of Mr. Young, and as parent of minors Chelsea and Jenna Young against Swiney; Swiney’s employer, Industrial Transport Services, LLC (“Defendant”); and Warehouse Services (“Warehouse”). Plaintiff voluntarily dismissed Swiney and Warehouse from the case in exchange for Industrial Transport conceding fault of its employee; Defendant also did not dispute the events of the accident or the nature and extent of the resulting injuries. The complaint contained a survival action and four counts of wrongful death. Defendant unsuccessfully filed a motion for summary judgment (“Motion”) to, inter alia, dismiss all wrongful death claims.
On June 16, 2010 in Cecil County, Maryland, Decedent Joseph Young was stopped in his pick-up truck when an eighteen-wheel tractor trailer, driven by Donn Swiney, struck him from behind. The tractor trailer was traveling at a high speed when it hit the rear of Decedent’s truck, creating a chain-reaction collision, and forcing the pick-up truck into the vehicle in front of his. The tractor trailer continued to strike Decedent’s vehicle on the driver’s side, pushing the vehicle to the right until it stopped, partially resting on the tractor trailer’s saddle tank. Decedent complained to the rescue crew of neck pain, left forearm pain, and a laceration to the back of his head, before slipping into unconsciousness. The rescue team removed the roof of the pick-up truck to extract Decedent safely. At the time of the accident, Decedent was a forty-three-year-old carpenter and millwright, married to Plaintiff for eleven years with whom he fathered of two teenage girls.
Decedent was unable to return to work due to his injuries, and was terminated in December 2010. Decedent underwent surgeries on his elbow and spine in 2011. On March 5, 2012, still unable to work due to his injuries, Decedent lost his health insurance, which impacted his ability to obtain the prescribed physical therapy to rehabilitate his cervical spine. On May 10, 2012, Decedent met with Dr. Janet Anderson, Ph.D. (later referred to as “Plaintiff’s expert”), a psychologist and certified rehabilitation counselor with prior experience counseling individuals for insanity, delirium, depression, uncontrollable impulses, and suicide. In her experience, many post-injured patients eventually did commit suicide, typically several years after the accident. At that meeting, Dr. Anderson interviewed Decedent, who spoke of the “knife-like, dagger-like ripping feeling” in his dominant hand, his incomplete cervical fusion, bulging disks in his lumbar area that may require more surgery, feeling suicidally depressed, not being able to control his angry behavior, and that his whole family had been destroyed because he would never be able to return to work. After administering various psychological tests, Dr. Anderson concluded that Decedent was totally and completely disabled and would never be able to work any job again, while also very strongly recommending psychotherapy for “very suicidal depression, which [was] suicidal at times.”
Decedent’s family members reported the effects of Decedent’s post-accident injuries, stating that he had experienced “a complete personality change”; unable to control his anger, Decedent frequently fought with his wife about money and yelled at his daughters until his wife and daughters moved to Florida some time before his May 2012 evaluation. In August 2012, a neurosurgeon recommended surgery for the neck and upper back pain. Also that month, a vocational assessment revealed that, not only was Decedent unable to return to his occupation, but also that “his significant physical limitations, pain, depression and lack of high school diploma make him a poor prospect for successful return to work.” Decedent’s family was visiting in September 2012. On September 6, Decedent had a heated fight with his daughter. Police were called to the house, and before the family left to stay with a neighbor, Plaintiff requested that police stay with or take Decedent because she was worried about what he might do while upset. That night, Decedent committed suicide by ingesting alcohol, Flexeril (a muscle relaxant), and Tramadol (a pain medication). The medications taken were prescribed, but, according to Defendant’s expert, the alcohol likely exacerbated the depressive effects of the medicines; Decedent twice referred to himself in his suicide note as a “loser.”
As is well-settled, a judge makes preliminary determinations concerning the admissibility of evidence and qualifications of experts per Federal Rule of Evidence 104(a). In this gatekeeper role, a judge ensures that the jury will hear reliable, probative evidence, rather than unsupported assumptions, using the Daubert factors as a guide for evaluating proffered expert testimony. See Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579, 593-94 (1993). These factors “focus on the expert’s principles and methodology, and not on the conclusions that they generate.” McDowell v. Brown, 392 F.3d 1283, 1298 (11th Cir. 2004). Importantly, though, this gatekeeper role should not supplant the role of the jury or the adversary system, as cross-examination, contrary evidence, and careful instruction are the appropriate means for combating shaky evidence. Daubert, 509 U.S. at 596.
In its Motion, Defendant request dismissal of the wrongful death claims because, as a matter of law, the motor vehicle accident of June 2010 was not the proximate cause of Decedent’s suicide in September 2012. In Maryland, a successful wrongful death action requires a plaintiff beneficiary to show by a preponderance of the evidence that the defendant’s conduct was negligent and such negligence proximately caused the death of the decedent. Parties agree that proof of causation standards for suicides as a basis for a wrongful death action are found in the case of first impression, Sindler v. Litman, 166 Md. App. 90 (2005), in which the victim of a car accident committed suicide allegedly due to her injuries. In that case, the Maryland Court of Special Appeals examined both existing approaches to when a wrongful death claim may arise from suicide. The minority approach declares suicide a common law crime and maintains that it is a per se bar to a wrongful death action; this approach was not favored because it was based on Virginia sustaining suicide as a common law crime, a stance abandoned long ago in Maryland. The Sindler court adopted the majority approach that suicide of one may not be grounds for damages based on the negligence of another, subject to this exception: the negligent actor is liable for the suicide when the negligent conduct causes the decedent’s insanity, delirium, or uncontrollable impulse to commit suicide. Restatement (Second) of Torts § 455. The court referred to the comments to § 455, stating that this exception neither applies to mere recurring acts of extreme melancholy, nor to a negligent incident simply starting in motion a chain of events that culminated in suicide. Whether a decedent was insane or delirious at the time of suicide—the suicide being the result of uncontrollable impulse or lack of realization—and whether the mental condition was caused by the defendant’s negligent conduct are questions for a jury that require expert testimony. Summary judgment on this issue is only appropriate when there is no evidence supporting a finding of liability for the suicide. In this case, evidence supporting such a finding was proffered by Plaintiff’s expert, a psychologist and certified rehabilitation counselor.
Plaintiff’s expert first submitted her opinion that Decedent, then alive, was incapable of returning to work and that the accident caused his incapacity. Following the suicide, Plaintiff’s attorney asked whether Decedent was suffering from a psychotic break from reality at the time of his suicide. The expert concluded that Decedent’s suicide was “directly and proximately caused by the psychosis he sustained as a result of the automobile accident.” Along with an affidavit, the expert submitted a timeline that detailed the stressful events between the accident and suicide, including the September 6 family argument as just one event of the many contributors to, rather than the direct causes of the suicide.
Defendants challenged the opinions offered by Plaintiff’s expert, deeming the opinions to be unreliable. Defendants alleged that her opinions were without foundation, were not the product of any reliable methodology, and were not based on sufficient facts or data. The court rejected Defendant’s classification as “mere conjecture,” reiterating the laundry list of sources that the expert used to arrive at her opinions, including the autopsy, depositions, and police reports on record; her personal meetings with Decedent and his family; and her training, knowledge, and experience in similar matters. --Moreover, Defendant produced no expert testimony to refute the opinions of Plaintiff’s expert. Although Defendant’s expert arrived at a different conclusion, Defendant’s expert stated in his deposition that the methodologies employed by Plaintiff’s expert were accepted in their field and that he had no criticisms about how Plaintiff’s expert interviewed or tested Decedent in May 2012.
Defendant further claimed that Plaintiff’s expert’s opinions were inconsistent, in that in May 2012 she found him to be merely suffering from depression, but then post-suicide deemed him the victim of a psychotic break. Dr. Anderson countered, explaining that she did not find him to be psychotic at the time of the May 2012 testing; however, it is perfectly normal for someone to later have a psychotic episode after overwhelming pressure, as was the case with Decedent. In addition, Defendants posited that the fact that Decedent left a detailed suicide note could only mean that his act was deliberate and realized, solely caused by depression. The court responded that no authority supports that conclusion, while a bounty of case law suggests otherwise. Further, the court noted that several other courts hold that impulses need not be sudden in order to be characterized as irresistible or uncontrollable.
After declining to accept any of Defendant’s allegations in support of its Motion, the court denied the Motion because Plaintiff produced sufficient evidence to create a jury question. The court echoed the Daubert and Sindler courts, stating that Maryland law clearly mandates this issue be tried before a jury with expert testimony. The court found that each of Defendant’s arguments went to the credibility of the expert testimony, not admissibility, explaining that “[d]efendant has pointed to a host of issues that it could raise in the course of ‘vigorous cross-examination of [Plaintiff’s expert] and through the testimony of its own expert witnesses.”
Young v. Swiney, -- F. Supp. 2d --, 2014 WL 2458405 (D. Md., May 30, 2014), available at: http://www.mdd.uscourts.gov/Opinions/Opinions/Young%20v.%20Swiney%20MSJ%20Mem%20Op.pdf
Submitted by Marisa A. Trasatti and Morgan N. Gough, Semmes, Bowen & Semmes
In In re Norfolk Southern Railway Co., a case involving the removal of a personal injury case to Virginia Federal Court and subsequent remand to Virginia State Court, the Fourth Circuit Court of Appeals held that the order remanding the case according to 28 U.S.C. § 1445(a) was the type of ruling included under 28 U.S.C. § 1447(c), and as such, was not reviewable by appeal or via mandamus, under 28. U.S.C. § 1447(d). Accordingly, the Court dismissed the appeal and denied the mandamus petition. Judge Traxler wrote the opinion, in which Judges Niemeyer and Duncan joined.
By way of factual background, after applyingfor and being awarded federal workers' compensation benefits under the Longshore and Harbor Workers' Compensation Act (LHWCA), Gilbert Bynum, an injured railroad worker, filed suit in state court against his employer, Norfolk Southern Railway Co., pursuant to the Federal Employers' Liability Act (FELA). Norfolk Southern removed the case to federal court arguing that the LHWCA covered Bynum’s injury and barred any recovery under FELA, and asserting that whether Bynum's injury was covered by the LHWCA was exclusively a federal question.
After removal, Bynum moved to remand the case to state court, alleging that the district court lacked jurisdiction to determine coverage under the LHWCA34 because Congress had specifically eliminated the jurisdiction of the federal district court concerning the LHWCA, and asserting that his claim was not removable pursuant to 28 U.S.C. § 1445(a). That same day, Norfolk Southern filed a motion in the district court to dismiss Bynum's complaint, arguing that, although his claim was filed under FELA, his injury actually fell within the scope of the LHWCA's coverage and the LHWCA therefore provided the exclusive remedy for his injury.
Noting that 28 U.S.C. § 1445(a) prohibits the removal of a civil action arising under FELA which is filed in state court against a railroad, the district court concluded that Bynum's FELA claim must be remanded to state court. Accordingly, the district court granted Bynum's remand motion and denied as moot Norfolk Southern's motion to dismiss. Norfolk Southern appealed to the Fourth Circuit, and also filed a petition for a writ of mandamus requesting the Court to vacate the district court's order and either dismiss the case or, alternatively, remand the case to the district court to address the merits of its federal defense to the FELA claim. The Court agreed to consider the mandamus petition together with the related appeal, and thus the two cases were consolidated. Bynum subsequently moved to dismiss the appeal as barred by 28 U.S.C. § 1447(d) and to have the mandamus petition denied for the same reason.
On appeal, the Court first addressed whether it was authorized to review the merits of the district court’s remand order, concluding that it was not. The Court noted that the district court's decision was based on the simple fact that a FELA claim brought in state court cannot be removed to a federal court under § 1445(a). The Court explained that § 1447(c) authorizes remand based on lack of subject matter jurisdiction and remand based on any defect other than lack of subject matter jurisdiction that was raised by a party within 30 days after the filing of the notice of removal. The Court further explained that § 1447(d) generally bars appellate review of a remand that is ordered on one of those bases. The Court noted, however, that the § 1445(a) bar does not deprive courts of subject matter jurisdiction over cases to which it applies. The Court thus faced the question of whether nonremovability based on § 1445(a) is a “defect other than lack of subject matter jurisdiction” within the meaning of § 1447(c). The Court concluded that it was. To the Court, it was apparent from the context of § 1447, that “defect” referred to a failure to comply with the statutory requirements for removal provided in 28 U.S.C. §§ 1441–1453. Because that scope encompassed § 1445(a), the Court concluded that the § 1447(d) bar applied, and thus, the Court lacked jurisdiction to review the remand order on appeal.
Second, the Court addressed whether it was authorized to grant mandamus relief, concluding that it was not. The Court noted that § 1447(d)’s restriction on review of remand orders applies to review “on appeal or otherwise,” and that the Supreme Court has interpreted that language to forbid the use of mandamus to circumvent the requirements of § 1447(d). The Court added that granting mandamus relief would also be inappropriate because Norfolk Southern had not made the requisite showing that its “right to the issuance of the writ is clear and indisputable.” Specifically, the Court found that Norfolk Southern had not shown that it was clearly entitled to have the district court dismiss Bynum's FELA claim rather than remand it to the state court. Thus, because § 1447(d) barred review of the district court’s order by appeal or via mandamus, the Court dismissed Norfolk Southern’s appeal and denied its mandamus petition.
In re Norfolk Southern Railway Co., Nos. 13–2112 & 13–2127 (United States Court of Appeals for the Fourth Circuit, June 23, 2014), available at: http://www.ca4.uscourts.gov/Opinions/Published/132112.P.pdf
Submitted by: Marisa A. Trasatti and Richard J. Medoff, Semmes, Bowen & Semmes
In Part 1, we discussed the mob rule aspects of social media. Not long afterwards, an interesting article in appeared in the New York Times on that very subject. http://nyti.ms/19clfkw It discussed how those with the ability to quiet an on-line mob often fail to do so. In Part 2 we focus on what the defense or corporate attorney can do to mitigate the harm resulting from social media criticism of the client or its defense strategy.
Usually, social media criticism can’t be stopped. Efforts to stop that criticism are likely to inflame it instead. What the defense or corporate attorney can do is be prepared for it. In many ways the fundamental strategy is not appreciably different for social media than it is for traditional media. The difference is social media is immediate and impatient. There are no “news cycles” in social media.
Preparation begins with risk assessment before the social media storm. Is the case or situation one in which the client will be perceived as having disproportionate power, influence or wealth? Can the client’s position be characterized as unfair, unjust or oppressive? Is the justice of the client’s position difficult to explain in a sound bite? If the answer to any of these questions is “yes,” there may be a significant risk.
The second part of risk assessment is to study the opponent. Is the opponent articulate? Appealing? Does he, she or it have powerful or influential friends or supporters? Is there a history of social media commentary on the part of the opponent or its friends or supporters? Does opposing counsel have a history of using the press or social media to advance his or her goals?
Once the risk has been assessed, identify the available tools and assess their efficacy. Many institutional clients centralize their public communications in corporate public relations or communication departments and forbid defense counsel, much less corporate counsel, from making public statements. If the case presents a significant risk of adverse social media exposure, outside defense counsel should discuss this risk with the client at an early stage so appropriate internal alerts can be provided and the client’s communication department can be included in the planning process.
In litigation, parties speak through their court filings. When drafting pleadings and motions, defense counsel needs to consider the risk that the content of the defendant’s pleadings will be quoted out of context by individuals lacking in legal training. One feature of social media is out of context statements develop lives of their own. Once disseminated in social media, they are difficult to explain, clarify or correct. When feasible, it’s beneficial to draft pleadings that won’t provide the “twitterverse” and bloggers with material.
The third step in preparation is planning the response in the event there is social media criticism. Not all social media criticism deserves a response, but a response strategy should be considered before the criticism surfaces. Usually the lawyer won’t be the conduit for the response, but the lawyer who has a coherent and considered response strategy will be more valuable to the client at a time when action may need to be swift and well thought out.
After preparation comes monitoring. Social Media criticism builds quickly and the defendant needs as much notice of that criticism as is feasible. Institutional clients with corporate communications and social media presences often already monitor social media for references to the client. Other clients do not have an institutional tool available. In those circumstances, defense counsel needs to take action. The available tools are evolving continuously and what works today may be passé tomorrow. Available options include Google Alert e-mails (setting an alert in Google for new mentions of the client, the opponent or the incident that gave rise to the lawsuit), or manually monitoring the opponent’s Twitter account without officially following that account. There are apps and webpages designed to automate this process, but the author has not used them and cannot comment on their utility.
The bottom line is defense lawyers cannot ignore social media. It can be as dangerous, if not more dangerous to the client as traditional press coverage, only without the professional and ethics standards to which the mainstream press aspires.
In Nursing Home Negligence Case, West Virginia’s Highest Court Relaxes the State’s Limits on Punitive Damages and Clarifies the Scope of West Virginia’s Medical Professionals Liability Act, Nursing Home Act, and Law of Fiduciary Duty
In Manor Care, Inc. v. Douglas, a case involving the appeal of a $91.5 million jury verdict in a nursing home negligence case, the Supreme Court of Appeals of West Virginia held that: (1) the verdict form did not allow the jury to award damages to non-parties; (2) the Medical Professionals Liability Act (“MPLA”) did not provide the exclusive remedy for the plaintiff’s negligence claims; (3) the Nursing Home Act (“NHA”) portion of the verdict form was fatally vague; (4) nursing homes do not owe a fiduciary duty to provide adequate healthcare; and (5) the punitive damages award was constitutional after being reduced by the Court. The Court affirmed, in part; reversed, in part; and remanded the case to the trial court for further proceedings consistent with its opinion. Chief Justice Davis wrote the majority opinion, in which Judge Moats joined; however, Justice Benjamin wrote an opinion concurring in part and dissenting in part, Justice Workman wrote a concurring opinion, and Justice Loughry wrote a lengthy dissenting opinion.
By way of factual background, on September 4, 2009,eighty-seven-year-old Dorothy Douglas was admitted to Heartland Nursing Home ("Heartland") in Charleston, West Virginia. Although Ms. Douglas had Alzheimer’s, she was able "to walk with the use of a walker, able to recognize and communicate with her family, well-nourished, and well-hydrated," when she entered Heartland. After nineteen (19) days in Heartland, "Ms. Douglas had become dehydrated, malnourished, bed ridden, and barely responsive ... she had fallen numerous times, sustained head trauma and bruises, and suffered from sores in her mouth and throat..." After those nineteen (19) days in Heartland, Ms. Douglas was transferred to a hospice care facility where she passed away eighteen (18) days later as a result of severe dehydration.
Mrs. Douglas' son sued the owner of Heartland as well as the companies responsible for Heartland's budgeting and staffing (collectively, the "defendants"). Mr. Douglas asserted claims including medical negligence, corporate negligence, violations of the NHA, and breach of fiduciary duty. After a ten-day trial, the jury returned a verdict in favor of Mr. Douglas in the amount of $11.5 million in compensatory damages and $80 million in punitive damages. The defendants filed a motion for judgment as a matter of law, which the trial court denied. The defendants appealed, claiming errors related to the language and format of the verdict form, to the legitimacy of Mr. Douglas' fiduciary duty and NHA claims, and to the jury's punitive damages award.
On appeal, the Supreme Court first addressed the verdict form. The defendants argued the inclusion of Mrs. Douglas' children on the verdict form improperly permitted the jury to award damages to "nonparties," claiming the only proper plaintiff was the estate’s personal representativeunder West Virginia's Wrongful Death Act, W.Va. Code 55-7-5 et seq. The Court was not persuaded, however, noting that the personal representative was merely a nominal plaintiff and any recovery would pass to her beneficiaries, the Douglas children, under the wrongful death statute, not to the estate.
Second, the Court addressed the plaintiff's corporate negligence claim against the nursing home for failing to properly manage the staff of Heartland. The defendant's argued this claim was subject to the MPLA's presuit procedural requirements and cap on noneconomic damages; however, the Court disagreed. The Court noted that the MPLA only applied to claims "based upon health care services rendered or which should have been rendered," and not to claims "related to business decisions, such as proper budgeting and staffing, by entities that do not qualify as healthcare providers under the MPLA."
Third, the Court considered the plaintiff’s statutory claim for violations of the NHA. The defendants argued that the plaintiff's claim that Ms. Douglas died as a result of NHA violations was also covered by the MPLA. The Court did not address this issue, however. Instead, the Court found that the verdict form's language with regard to the NHA claim was "fatally" vague as it simply asked if any NHA violations "substantially contributed to injury to Dorothy Douglas?" Consequently, the Court dismissed the plaintiff's NHA claim and vacated the accompanying $1.5 million award for compensatory damages.
Fourth, the Court considered the plaintiff's breach of fiduciary duty claim. The defendant's argued this claim lacked "legal or evidentiary support," and urged the Court not to expand the law of fiduciary duty to cover nursing homes. The Court sided with the defendants on this issue, concluding that nursing homes do not owe a fiduciary duty to provide adequate healthcare. Accordingly, the Court dismissed the plaintiff's fiduciary duty claim and vacated the $5 million of damages awarded under it.
Finally, the Court reviewed the jury's $80 million punitive damages award for compliance with federal due process. The Court, following the guidelines established in Garnes v. Fleming Landfill, Inc., 186 W.Va. 656 (1991), reduced the punitive damage award to "approximately $32 million." The Court reached that figure by applying the 7:1 ratio of punitive to compensatory damages the jury had originally awarded the plaintiff, to the $4,594,615 of compensatory damages which remained after the Court vacated the plaintiff's NHA and fiduciary duty causes of action. In making that decision, the Court noted that the “outer limit” on the allowable ratio of punitive to compensatory damages “of roughly 5 to 1” discussed in TXO Production Corp. v. Alliance Resource Corp., 187 W.Va. 457 (1992), was merely a "guide" rather than a "strict standard. The Court gave the plaintiff thirty (30) days to choose either to accept the reduced punitive damage award or to submit to a new trial. Accordingly, the Court affirmed, in part; reversed, in part; and remanded the case to the trial court for further proceedings consistent with its opinion.
Judge Workman issued a concurring opinion, agreeing with the majority's decision to set aside the plaintiff's NHA claim, but disagreeing with the majority's reasoning. Judge Workman chastised the majority for discarding the plaintiff's NHA claim and accompanying damages improperly "like so much garbage simply because it claims to be confused by it," and instead found that the claim was duplicative as it provided compensation for injuries for which the plaintiff's had already received compensation.
Justice Benjamin issued an opinion concurring in part and dissenting in part. Justice Benjamin stated the verdict form was "woefully inadequate" and did not provide a "proper legal basis" for an award of punitive damages, as the verdict formed contained "a punitive damages multiplier on a verdict in which the jury only made findings of simple negligence."
Justice Loughry issued a dissenting opinion, complaining that the verdict form was an "inscrutable mess." Overall, Justice Loughry would have reversed the entire judgment and remanded the case for a new trial.
Manor Care, Inc. v. Douglas, No. 13–0470 (Supreme Court of Appeals of West Virginia, June 18, 2014), available at: http://www.courtswv.gov/supreme-court/docs/spring2014/13-0470-corrected.pdf
Submitted by: Marisa A. Trasatti and Richard J. Medoff, Semmes, Bowen & Semmes
Constructive Delivery Did Not Exist When Husband Deeded House to Himself and His Wife, Informed His Wife, and Placed the Unrecorded Deed in Couple’s Shared Filing Cabinet.
In Daniels v. Daniels, the Maryland Court of Special Appeals affirmed the decision of the Baltimore County Circuit Court in favor of the personal representative of the decedent’s estate. The personal representative brought suit against the decedent’s surviving spouse seeking to quiet title to a residence and have the residence included as an asset of the estate. Although the surviving spouse proved donative intent and acceptance of the gifted deed, she was unable to establish the other necessary elements of conveyance: delivery and relinquishment. Judge Sharer authored the opinion, to which Judges Meredith and Nazarian joined.
James H. Daniels (Decedent) and Lana Daniels (Appellant) were married for forty (40) years and resided together on Hammonds Ferry Road. Decedent also owned a house on Frederick Road (Residence), which is the property at issue. Recorded in 1987, Decedent and his mother owned the Residence as joint tenants. Upon the mother’s death in 2005, Decedent became the surviving owner. On March 3, 2006, Decedent executed a new deed to the Residence, naming himself and Appellant as tenants by the entireties. Although advised to do so, Decedent failed to record the deed; rather, he placed the paper in a filing cabinet in the Hammonds Ferry home with the couple’s other important documents, such as insurance policies and the deed to their Hammonds Ferry home. Appellant proffered that the deed went unrecorded because, as there was no lien on the property, Decedent may have assumed that recordation was not necessary. After executing the deed, which was witnessed and notarized, Decedent informed Appellant that he “had added her name to the deed.” While searching the filing cabinet upon Decedent’s death for his life insurance policy, Appellant discovered the unrecorded deed. Appellant then recorded the deed after Decedent’s death. As Decedent died intestate, his daughter from a former marriage, Brenda (Appellee), qualified to be the personal representative of his estate. After recordation of the deed, Appellee filed suit to quiet title on the grounds that the unrecorded deed was not effective for lack of delivery, therefore the property should be an asset of the estate.
In conveying a valid and effective title to real property, each element is equally indispensable, thereby requiring the donee to prove execution, donative intent, delivery, acceptance by the donee, and full relinquishment of control. Delivery of the title documents, presumably a deed, may be actual or constructive. Neither party disputed the execution of the deed and Appellant conceded that there was no actual delivery. There is a common law presumption in favor of a gift to the other spouse when a spouse titles property as tenants by the entireties. Coupled with Appellee’s acknowledgement of the executed deed, the court found that she had accepted the gift. Further, appellate court maintained the trial court’s findings that donative intent existed. The trial judge stated, “I, I am sorry because . . . [t]here’s been no question in the Court’s mind that [Decedent] intended to transfer the interest to his, his spouse of forty years. But I am without power to change that under the law.”
Appellant argued that Decedent’s actions constituted constructive delivery; more specifically, she argued that “construct delivery of a deed occurs when the husband deeds his property to himself and his wife, as tenants by the entireties, informs his wife, and places the unrecorded deed with the couple’s important papers.” In rejecting this argument, the court explained that delivery requires some act by the grantor that puts the deed beyond his power to revoke. If the grantor retained some control over the deed, there was no delivery. It is immaterial whether the grantor passed the instrument to the grantee or a third party, so long as the grantor relinquished all dominion and control over the deed.
Daniels v. Daniels, --- A.3d ---, 2014 WL 2873937 (Maryland Court of Special Appeals, June 24, 2014), available at: http://www.mdcourts.gov/opinions/cosa/2014/0415s12.pdf.
Decedent did not fully divest himself of control over the deed, thus maintaining a right of recall because he could have, at any time, taken the deed back from the filing cabinet and tore it up. The court explained that, in order to accomplish relinquishment, Decedent could have given the deed to Appellant with instructions for future recordation, Decedent could have handed over the deed for placement in her own files or own safety deposit box, or Decedent could have given the deed to his step-daughter with instructions for future recordation. Instead, Decedent placed the deed in a cabinet to which he had equal access, without completely divesting himself of and completely investing Appellant with control of the deed. The lack of constructive delivery rendered the deed void and inoperative, thus it was properly an asset of the estate.
Submitted by: Marisa A. Trasatti and Morgan N. Gough, Semmes, Bowen &Semmes
Over the past several years, the use of social media has expanded dramatically to the point where it now can have a significant impact on business decisions, corporate public relations and how litigants are perceived. For those reasons, defense lawyers need to be social media aware.
Being social media aware isn’t confined to using social media for marketing or personal purposes. It includes being aware of the impact social media has on the public discourse and the public perception of the defense attorney’s clients. The defense lawyer should think of social media as a untraditional crowed-sourced form of journalism not necessarily subject to the professional standards of traditional print and broadcast journalism. Blogs, including this one, are a form of social media. So too is Twitter, BuzzFeed, Facebook, Instagram and the like. And, other forms of social media are being invented continuously. Have you hear of Pheed, a tool for people to monetize their posts? I hadn’t until I researched this post. Thumb, a crowd sourced decision making application? Path? Not all have “journalistic” uses today, but then, neither did Twitter initially.
The untraditional, crowd-sourced (or less politely, mob) aspects of social media make it particularly challenging for civil defendants and corporations because they can create a surge of public and consumer opinion that influence corporate or litigation decisions. For example, just this last weekend a woman in corporate communications lost her job for sending a racially and socially insensitive tweet just before boarding a flight to South Africa. By the time her flight landed and she was once again connected, it was too late because her tweet had been widely circulated and discussed. Indeed a hashtag regarding her location was one of the top trending items on Twitter and parody accounts for her appeared even before she landed. http://dailym.ai/1jAg7As Similar issues affected an insurance company defending an underinsured motorist claim when the deceased’s sibling accused her insurer of “defending her killer” in court. http://bit.ly/J8URBG
While it’s easy to discount last week’s incident as the product of poor decision making, agitating the social media world doesn’t require poor decision making – the party simply needs to be in the wrong place at the wrong time. Defendants and corporations can’t eliminate all social media risk but defense attorneys and corporate counsel need to be attuned to how a particular dispute could play out in the social media arena in order to avoid increasing the risk of adverse social media exposure.
Next up: A few social media management ideas.
In Asbestos Personal Injury Case, Fourth Circuit Holds That District Court Could Not Strike Remand Order and Retrieve Remanded Case from State Court as Sanction Against Plaintiffs
Barlow v. Colgate Palmolive Co. & Mosko v. Colgate Palmolive Co, Nos. 13-1839 & 13-1840 (United States Court of Appeals for the Fourth Circuit, April 30, 2014), available at: http://www.ca4.uscourts.gov/Opinions/Published/131839.P.pdf
In Barlow v. Colgate Palmolive Co. and Mosko v. Colgate Palmolive Co., two (2) cases involving the removal of an asbestos personal injury case to Maryland Federal Court and subsequent remand to Maryland State Court, the Fourth Circuit Court of Appeals held that the order remanding the case for lack of subject matter jurisdiction was not reviewable on appeal or otherwise, under 28 U.S.C. § 1447(d). The Court rejected Defendants’ collateral attack on the remand orders seeking sanctions against Plaintiffs’ counsel under Fed. Rules Civ. P. 11 and 60 for making alleged misrepresentations to the federal court relating to the existence of subject matter jurisdiction. The Court affirmed the order of the district court insofar as it ruled that it lacked jurisdiction. Judge Davis wrote the majority opinion, in which Judge Cogburn joined, however, Judge Floyd wrote a dissenting opinion agreeing with the Defendant’s position.
By way of factual background, Joyce Barlow and Clare Mosko separately sued Colgate and a variety of other companies in Maryland state court, asserting that each of the defendants’ products had at some point exposed them to asbestos. With respect to Colgate, the plaintiffs’ theory was that its “Cashmere Bouquet” line of powder makeup products contained unhealthy levels of asbestos and had thereby contributed to the plaintiffs’ health problems. Despite plaintiffs’ joinder of in-state defendants, Colgate removed the two cases to federal court on the basis of diversity of citizenship, asserting fraudulent joinder as to the in-state defendants, and alleging that the plaintiffs’ deposition testimony and interrogatory responses demonstrated that they did not intend to pursue a claim against any defendant other than Colgate, a citizen of Delaware and New York.
After removal, the plaintiffs’ lawyers moved to remand the cases to state court, arguing that they had viable claims against the nondiverse defendants. The district court agreed, finding that although only Colgate’s Cashmere Bouquet products had been identified by the plaintiffs as the source of their asbestos exposure, there was still more than a “glimmer of hope,” that the plaintiffs could identify a basis to recover against the nondiverse defendants as discovery proceeded. The cases were remanded.
Just days after the remand orders were handed down, counsel for the plaintiffs asked the State Court to consolidate the two (2) cases because, among other reasons,“[a]ll [plaintiffs] allege exposure to asbestos-containing Cashmere Bouquet powder products only and do not allege exposure to any other asbestos, asbestos-containing products or asbestos-containing dust in any other form.” (emphasis added). Colgate then promptly moved in the district court for vacatur of the remand order as a sanction. The district court denied the motion, finding that reconsideration of the remand order is prohibited by the removal statute and pertinent Circuit law. The district court stated further that it was “not convinced that counsel’s conduct is sanctionable” because the alleged misrepresentations were “attributable to different attorneys in markedly different litigation contexts.”
On appeal, Colgate contended that it was error for the district court to rule that it did not have the authority to consider whether plaintiffs’ counsel committed misconduct and whether such misconduct warranted relief from the Remand Orders. Colgate maintained that the district court had authority, pursuant to its inherent authority and Rules 11 and 60(b)(3) of the Federal Rules of Civil Procedure, to strike the remand orders as a sanction for counsel’s alleged misrepresentation regarding the existence of subject matter jurisdiction.
The federal removal statute generally prohibits review of orders remanding removed cases. To the majority, it was a long standing principle that entry of an order remanding a case to state court divests the district court “of all jurisdiction in [the] case and preclude[s] it from entertaining any further proceedings of any character, including the defendants’ motion to vacate the original remand order.” This provides for finality so that jurisdictional litigation comes to an end and the parties can proceed to the merits and avoid unnecessary delay and expense. If Congress wanted to carve out an attorney-misconduct exception to the prohibition on review of remand orders, it would have done so. Thus, because the remand orders were not reviewable on appeal or otherwise, the district court correctly ruled that it lacked jurisdiction to revisit its remand orders. The Court affirmed the order of the district court insofar as it ruled that it lacked jurisdiction. Judge Floyd dissented, however, citing to numerous cases where other circuits and even the Supreme Court had spoken on the propriety of Rule 11 sanctions even when a district court was without jurisdiction.
In a scathing dissent, Judge Floyd opined that the district court had, at a minimum, jurisdiction to consider Colgate’s Rule 11 motion for sanctions and to fashion appropriate relief, if any. In addition, since Colgate never argued that the district court erred in remanding the cases—only that the district court erred in subsequently denying Colgate’s post-remand motions—§ 1447(d) did not prohibit the Court from vacating the remand orders pursuant to Fed. R. Civ. P. 60(b)(3) if it was determined that such relief was warranted. According to Judge Floyd: “If a litigant could flout his duty of candor before a district court and secure remand by misrepresentation, knowing that such remand is never subject to vacatur, he would lose all incentive to present the facts of a case honestly to the court during removal. Righting this wrong and protecting the sanctity and integrity of judicial proceedings overrides the value of any purported finality of a remand order.” Under the facts of this case, it would be an abuse of a district court’s discretion to not award sanctions. Overall, Judge Floyd would have: 1) reversed the district court’s denial of Colgate’s Rule 11 motion for sanctions and would have sanctioned plaintiffs and their counsel; 2) would reverse the district court’s denial of Colgate’s Rule 60(b)(3) motion for lack of jurisdiction; and, 3) would vacate the remand orders and return the cases back to the district court.
Submitted by: Marisa A. Trasatti and Colleen K. O’Brien, Semmes, Bowen & Semmses
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: http://www.ca4.uscourts.gov/Opinions/Published/131560.P.pdf
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