Argument Report: Illinois Supreme Court Appears Skeptical of Due Process Challenge to Liquor License Revocation

The Illinois Supreme Court appeared skeptical of a due process challenge to revocation of a liquor license during the recent oral argument in WISAM 1, d/b/a Sheridan Liquors v. Illinois Liquor Control Commission. Our detailed preview of the facts and underlying court opinions in WISAM 1 is here.

WISAM 1 involves a liquor store whose license was revoked by the City of Peoria pursuant to Section 3-28 of the city ordinances, which forbids any “officer, associate, member, representative, agent or employee” of a liquor licensee from violating a city ordinance, state or federal law “in or about the licensed premises.” The administrative charges were based upon the federal criminal conviction of a former manager of the plaintiff store for “structuring” currency deposits – deliberately manipulating deposits to keep them under the $10,000 limit which triggers an automatic currency transaction report. The Appellate Court affirmed the revocation, finding that although the proceedings below were somewhat dubious (the Commissioner entered a directed finding of the violation at the outset of the hearing based upon the federal trial transcript), the defendant had suffered no prejudice as a result. The court pointed to the testimony of the plaintiff’s president, who conceded that the plaintiff deliberately kept withdrawals for its check cashing business below $10,000 because of the limits on the store’s insurance. The court held that the Commission permissibly concluded that the true purpose of the withdrawal pattern was structuring.

Counsel for the defendant began the argument, explaining that before opening statements at the administrative hearing, three volumes of testimony from the federal trial were admitted pursuant to stipulation. Justice Thomas asked why the decision couldn’t be affirmed on the basis that the stipulations were sufficient to support revocation. Counsel responded that the stipulation had been misrepresented in the record, with some suggesting that the stipulation admitted that the charges in the federal indictment were true. Justice Thomas asked whether it was disputed that the former manager was convicted at his trial of offenses relating to the financial and business operations of the store. Counsel said that it was not. Justice Thomas then repeated his question – why isn’t the stipulation enough. Counsel responded that it was not sufficient because the Municipal Code required that the offense occur “in or about” the licensed premises. Justice Theis pointed out that counsel had framed the issue as one of due process in the petition for leave to appeal, not as sufficiency of the evidence. Counsel responded that sufficiency of the evidence was part of the due process violation. Justice Theis asked whether it was true that the main thrust of the defendant's argument was being denied the opportunity to be heard. Counsel agreed that the hallmark of due process was the opportunity to be heard. Justice Theis pointed out that defendant had the opportunity to present evidence, so how was defendant denied the opportunity to be heard? Counsel answered that the evidence was given in an offer of proof; the Commissioner agreed that the principal question had already been settled in favor of finding a violation. The defendant's offer of proof was never considered, defendant argued. Justice Theis questioned whether that was a due process violation; the defendant was allowed to offer exhibits. Counsel again argued that defendant was merely making an offer of proof after already having lost. Justice Theis pointed out that defendant's offer of proof was to show that the pattern of bank deposits was explained by the insurance limits - so what was the prejudice?   Counsel answered that no one ever considered the evidence. Justice Theis asked whether the evidence was presented to the federal jury and rejected. Counsel agreed that it was, albeit inartfully. The defendant merely stipulated to things which were not subject to question, according to counsel. Justice Burke asked whether the Liquor Commission had considered the defendant's offer of proof, and counsel answered that he had tried to lay out in his initial brief exactly what happened. Justice Burke asked whether defendant's position was that the Commission had not been allowed to consider defendant's evidence. Counsel answered that the Appellate Court had concluded that the evidence had been considered by the Liquor Commission. Justice Theis asked what specific statements the defendant objected to. Counsel noted one witness' comments that he had worked at the store in the 1990s and recalled the store was charging 2% for cashing checks, although the liquor license hadn't been granted until 2002. Justice Theis asked what the due process violation was, and counsel answered that the Liquor Commission used transcripts to find a violation. Justice Theis suggested that the defendant had testified that checks were being cashed at the store, and the store owner had to figure out how to structure deposits. Counsel agreed, and Justice Theis asked then what was wrong with admitting the transcript? Counsel again answered that nobody at the hearing had said that violations occurred in or about the licensed premises. Justice Thomas asked whether the fact finder could make a reasonable inference from the stipulation, and counsel answered that the stipulation never said that anything had happened at the store; even the federal prosecutors alleged that the unlawful conduct occurred solely at the bank.

Counsel for the state Liquor Commission followed, arguing that the stipulation plus the indictment was sufficient evidence for the fact finder to infer the needed facts. Justice Burke asked whether the Commission had made its decision based totally on the stipulation, thus making proof unnecessary. Counsel answered that the Commission did have a hearing; the hearing officer did make an initial finding, which the Commission agreed was premature. The defendant was permitted to offer additional information, including insurance documents and the owner's testimony. The Commission looked at all evidence that had been submitted. Justice Theis asked whether the Commission has any rules for hearings. Counsel answered that the Municipal Code governed. Justice Burke asked whether the defendant was allowed to cross-examine witnesses before the Commission. Counsel responded that the defendant could cross-examine any witness, and pointed out that if the stipulation was sufficient support for the judgment, there was no need to reach the question of whether the transcripts had been incorrectly admitted. Justice Burke asked what proof the City had without the federal transcripts, and counsel pointed to the stipulation. Justice Burke suggested that there were no live witnesses needed, and counsel argued that the owner of the liquor store had testified and acknowledged the handling of the store's money; that was enough for a reasonable inference. Justice Kilbride asked what evidence there was that the conduct had occurred in or about the premises. Counsel answered that the parties' stipulation provided that the offenses were convicted as charged in the indictment, and involved the operations of the store. Based on that, the Commission could make a reasonable inference that the two-year conspiracy of the manager must have occurred, at least in part, at the store. Justice Kilbride suggested that the stipulation didn't really concede that the offenses occurred in or about the premises. Counsel agreed, but again argued that it was a reasonable inference, further supported by the transcript.

Counsel for the City of Peoria argued next, insisting that every act of the manager was imputable to the licensee. Justice Burke asked whether the licensee was part of the federal case, and counsel answered no.   The defendant had argued that the withdrawals had been structured to stay under $10,000 for insurance reasons, counsel argued, but in fact, the limit for amounts held outside the store was only $5,000. So if insurance limits were the reason for the pattern, why wouldn't withdrawals have been half as high?

In rebuttal, counsel for the defendant argued that the Deputy Commissioner's finding had indeed been based on the federal indictment and transcripts. Justice Theis asked counsel what additional evidence he would have introduced but for the due process violation, and counsel answered that he would have cross-examined the witnesses presented in federal court. Justice Theis asked whether the heart of the defendant's case was that there needed to be a retrial of the federal claim, and counsel said essentially, yes - the defendant was not present for the federal trial, so its result was not binding upon the defendant. Counsel asked what other evidence the defendant would have presented, and counsel answered that defendant would have confronted every witness with the insurance policies. Justice Theis noted that the defendant had presented the insurance policies to the Commissioner - what else would defendant have done? Counsel again answered that the defendant would have cross-examined the witnesses. Justice Burke asked whether it was a structural error in an administrative hearing where the defendant is not permitted to present a defense, and counsel agreed that the error was fundamental. Chief Justice Garman asked whether the federal indictment and conviction had any effect on the case, and counsel answered that since the indictment said that the structuring occurred at the Bank, it actually supported the opposite of the inference needed to justify the violation finding. Justice Kilbride asked about counsel's earlier statement that the criminal verdict hadn't ripened into a judgment. Counsel answered that the sentencing hadn't occurred at the time of the hearing, but has now happened. The manager has not appealed, according to counsel; he has already completed his sentence. Justice Thomas noted that the Liquor Commission has held that licensees are strictly accountable for all violations on the premises - does that bring the employer into the mix? Counsel answered no - the question would still be whether a violation occurred on the premises.

We expect WISAM 1 to be decided in three to four months.

Image courtesy of Flickr by josephleenovak.

Argument Report: Illinois Supreme Court Likely to Find Wrongful Death Lawyer Owes Duty to Next of Kin

Based upon the especially heavy questioning directed at the appellant during the recent oral argument in Estate of Powell v. John C. Wunsch, P.C., the Illinois Supreme Court seems to be contemplating holding that counsel who brings a wrongful death action owes a duty of care not only to the administrator or administratrix of the estate, but also to the next of kin. Our detailed summary of the facts and lower court opinions in Estate of Powell is here.

The plaintiff in Estate of Powell was adjudicated disabled in 1997.  The plaintiff’s father died two years later, and his mother retained the defendants to bring a wrongful death action. The action was settled in two steps in 2005 – first, a $15,000 settlement with three defendants, split between the plaintiff, his mother and sister; and second, a $350,000 settlement which the mother and the plaintiff split equally, with the sister waiving her share. By 2008, a dispute had arisen between the plaintiff’s sister and his mother, who was plaintiff’s guardian, about whether the mother was still capable of caring for plaintiff, and whether his share of settlements was being expended towards his care. Plaintiff’s sister was substituted as his guardian in 2009. She then sued the defendants for malpractice. Plaintiff’s theory was that the defendants had failed to ensure that plaintiff’s share of the settlements was supervised by the probate court pursuant to the Wrongful Death Act, and plaintiff had accordingly lost access to the funds. The trial court dismissed, finding that the defendants owed the plaintiff no duty of care, since it was his mother who had brought the action as administratrix of the estate, not the plaintiff himself. The Court of Appeal reversed in part, finding that a duty of care was owed, and that plaintiff had stated a claim for relief pursuant to the second settlement.

Counsel for the first group of defendants began the argument, noting that the majority of jurisdictions have declined to extend an attorney’s duty of care beyond the person administering the deceased’s estate to unnamed and sometimes unknown heirs. Justice Thomas asked how the Court should get around the statute and case law stating that wrongful death actions are brought for the benefit of next of kin as the real parties in interest. Counsel responded that extending the duty to heirs carried with it considerable risk of creating conflicts between a single beneficiary’s best interest and that of the estate. Justice Karmeier asked whether there was any dispute between the heirs in the case at bar, and counsel responded that matters had never reached that point. Justice Karmeier asked whether the attorney has a duty to ensure that a recovery is properly paid out, and counsel answered no. Justice Burke suggested that the Court had previously found a fiduciary duty to next of kin in DeLuna v. BurciagaCounsel disagreed, arguing that DeLuna had merely addressed the duty to beneficiaries. Justice Thomas again pointed out that previous cases had said that next of kin are the real parties in interest, and they are statutorily prohibited from representing their own interest. Isn’t this a textbook example of attorneys being hired to represent a third party? Counsel disagreed, arguing that if an attorney is representing the administratrix, duties flow only to her. To extend those duties across the board to all possible beneficiaries creates a real risk of conflicts of interest – counsel pointed, for example, to the need to advise plaintiff’s sister about her eventual waiver of any interest in the second settlement. Justice Thomas pointed out that one could hold that the counsel for the estate owed a duty to advise beneficiaries to get their own attorneys. Counsel responded that no across-the-board duty was justified, and briefly concluded by arguing that plaintiff had failed to establish proximate causation as well.

Counsel for the second group of defendants followed. He addressed the DeLuna issue, stating that his firm had represented the defendant, and the case related to statute of repose, not duty. Counsel stated that he didn’t believe DeLuna was wrongly decided, it was simply distinguishable. Counsel then turned to Justice Thomas’ question about heirs’ status as the real party in interest, arguing that while next of kin are the intended beneficiaries of a wrongful death action, there is too much potential for conflict involved in holding that counsel owes them a duty of care. Justice Thomas asked whether there was a duty to investigate if knowledge came to the attorney’s attention suggesting a possible conflict between the estate and the next of kin. Counsel responded that there was no duty to investigate a mere possibility of a conflict. Counsel argued that the system only works if obtaining a recovery is kept separate from the issue of distributing it to next of kin. The heirs’ remedy is against a person who distributed the money wrongfully, not against the attorney.

Counsel for the plaintiff began by commenting that it was “telling” that the defendants didn’t perceive a conflict until suit was filed; at no time did they advise the plaintiff or his sister of any possible conflict. Chief Justice Garman asked counsel to describe the scope of the defendant’s duty. Counsel answered that the duty was to represent the estate in connection with the claim, and at the time of distribution, should a conflict arise, to describe the conflict to beneficiaries, and advise them to seek separate counsel. The Chief Justice asked about minors, and counsel answered that for such beneficiaries, a minor’s estate must be opened in the probate division. Chief Justice Garman asked whether in plaintiff’s view there was always a potential for conflict, and counsel said yes; the Chief then suggested that counsel will always be advising beneficiaries to seek their own attorneys. Justice Thomas asked whether the plaintiff was arguing that the defendants should have been aware that the plaintiff’s mother was wrongfully expending funds from the plaintiff’s part of the settlement. Counsel answered that if the matter had been properly handled through a probate estate, there would have been no opportunity to misappropriate anything. Justice Karmeier asked counsel how he responded to the defendant’s contention that its duties were fully satisfied once the recovery was properly paid to the guardian. Counsel responded that in the case of a disabled person, payment to a plenary guardian was not sufficient; a probate estate must be opened so that the court can supervise the settlement. Justice Karmeier asked whether another estate and another guardian was needed; counsel answered that it could be the same guardian, but the guardian would be required to post a bond. Justice Karmeier asked whether the attorney has an obligation to confirm that the guardian has a bond. Counsel answered that that’s what the probate court does. Counsel briefly concluded by arguing that proximate causation was adequately pled by the allegations that the mother would have had no opportunity to misappropriate funds if the settlement had been properly handled.

Counsel for the first defendants group began her rebuttal by explaining that defendants hadn’t addressed any conflict because, as the law then stood, there wasn’t one. Justice Theis asked how the Wrongful Death Act and the Probate Act fit together in this instance. Counsel answered that the defendant’s duty was to the administratrix. The trial judge was advised of the plaintiff’s disability. As for the interplay between the Acts, counsel answered that the only workable solution was to find that the lawyer’s duty was to the estate only. Justice Theis asked whether there was a duty to consider the Probate Act and the Rules of Court re distribution of the settlement. Counsel answered that such a duty was met here. Justice Theis asked counsel whether she was conceding that there is a duty to follow the Probate Act and the Rules of Court, and counsel agreed that defendants had a duty to follow the law. Justice Burke asked whether there was a probate action, and counsel said that there was not after the settlement. Counsel argued that the plenary guardian was responsible for the plaintiff’s needs, but Justice Burke said she did not have responsibility for the plaintiff’s money. Counsel concluded by once again arguing that there was no basis for believing that any misappropriation would have been prevented if the settlements had been distributed differently.

Counsel for the second group of defendants began by addressing Justice Theis’ earlier question about duty. He argued that there is certainly a duty, but the question is to whom. If the Local Rules or the Wrongful Death Act were not followed, then it’s the administrator who has a cause of action against the attorney. Justice Thomas asked whether there was no duty to open a probate estate because the plaintiff already had a guardian – or is there never a duty?  Counsel responded that there is a duty to the administrator, nothing more. Justice Thomas wondered whether counsel’s position was contrary to rule, but counsel responded that the rules don’t create a duty. Justice Thomas pointed out that attorneys were opening up probate estates all the time. Counsel answered that only Cook County bifurcates the process – in other places, the same judge handles everything. Justice Thomas asked whether counsel had a duty to tell an administratrix that a probate estate was needed.   Counsel answered that if so, it was only owed to the administratrix. Counsel responded that that wasn’t what was pled here. Any duty has to be uniform in all cases, otherwise attorneys don’t know how to handle potential conflicts. Justice Theis pointed out that this wasn’t just any kind of conflict, the case involved specifically a disabled adult – and there’s a statutory procedure for dealing with that sort of conflict. Counsel responded again that if there is a mistake in distributing the recovery, it’s the administratrix’s cause of action. Thus, the wrong party was suing.

We expect Estate of Powell to be decided in three to four months.

Image courtesy of Flickr by tracie7779.

Argument Report: Illinois Supreme Court Seems Undecided on Child Support for Non-Custodial Parents

Actively questioning both sides, the Justices of the Illinois Supreme Court seemed conflicted during the recent oral argument in In re Marriage of Turk. Turk poses a potentially important question of domestic relations law: when the non-custodial parent of a child has significantly fewer financial resources, can the custodial parent be ordered to pay child support? The Justices seemed sympathetic to the less affluent mother’s situation, while at the same time questioning whether the Illinois Marriage and Dissolution of Marriage Act authorizes such payments. Our detailed discussion of the facts and underlying court decisions in Turk is here.

The parents in Turk were divorced in mid-2005. Pursuant to the parties’ agreement, the father agreed to pay maintenance and child support for 42 months. At the end of that period, any further child support obligations would be calculated pursuant to the Illinois Marriage and Dissolution of Marriage Act. In 2011, the father petitioned to have his support obligations terminated and sought child support from the mother on the grounds that he was custodial parent of both children. The trial court granted in part and denied in part the motion, ordering the father to continue paying child support, despite the custodial situation. Division Five of the First District of the Appellate Court affirmed the trial court’s conclusion that a custodial parent could, in appropriate circumstances, be ordered to pay child support, but reversed and remanded for recalculation using updated expense data.

Counsel for the father began, arguing that the statute repeatedly distinguished between the custodial and non-custodial parents in describing support obligations. Justice Burke asked whether the real measure wasn’t the best interest of the child and pointed out that the record suggested that at least one child spent substantial time with the non-custodial parent. Counsel responded that it was not a split custody arrangement; one child spent no time at all with the non-custodial parent, the other split time about equally. Counsel acknowledged that the court was free to deviate from the standard statutory support percentage, but could not deviate past zero and reverse the support obligation. Chief Justice Garman asked whether it was counsel’s position that a non-custodial parent was never entitled to support, and counsel responded that that was what the statute said. Justice Theis asked counsel to describe the terms of the custody order, and counsel answered that the father had sole custody, with one child spending significant visitation time with the mother. Justice Kilbride asked whether the custody order was permanent or temporary, and counsel responded that it was permanent. Chief Justice Garman asked counsel whether he was arguing that the court had erred both in ordering payment of child support to the mother, and in not ordering payments from the mother to the father. Counsel responded yes. The Chief Justice asked whether it was proper for the court to consider the significant disparity in income, and that the non-custodial parent would need resources to allow the child to visit without a significant drop-off in lifestyle, and counsel once again argued that the court’s only option was to deviate down to zero – it could not order payments to the non-custodial parent. Justice Thomas asked what recourse a trial judge had if a destitute mother had a child fifty percent of the time - how could the mother put food on the table for visits? Counsel argued that because of the statute’s repeated references to custodial and non-custodial parents, the only option was to deviate from the statutory percentage down to zero. Justice Burke noted that the statute says both parents should pay a reasonable amount for support, but counsel answered that such language was only found in a portion of the statute addressing the situation where a non-parent had custody. The rest of the statute maintains the distinction between custodial and non-custodial parents in discussing support. Justice Karmeier asked whether the statute was ambiguous, and counsel answered no. Justice Karmeier pointed out that custody wasn’t one of the statutory factors to be used in calculating child support. Counsel answered that nevertheless, there was no authority in the statute to deviate past zero and order payment of child support to the non-custodial parent.

Counsel for the mother began by arguing that in fact, the statute provides that either or both parents can be required to pay child support. Justice Karmeier asked counsel to respond to the appellant’s point about the statute using custodial vs. non-custodial.  Counsel answered that the statute uses a variety of terms to refer to the parents. Justice Theis pointed out that Section 6 of the statute – the enforcement section – refers only to custodial and non-custodial parents. Counsel responded that not all of the enforcement section used those terms. Justice Theis asked counsel to direct her specifically to the portion of the enforcement section that uses any term other than custodial and non-custodial , and counsel cited part (b) of Section 6. The body of the text makes it clear that either or both parents can owe child support, counsel claimed. Justice Freeman pointed out that the financial disclosure forms were now seven years old, and counsel stated that while the forms were admittedly stale by the time of the hearing, neither side had objected to their use.   Justice Freeman asked whether, if the court were to agree that a non-custodial parent could be awarded child support, the proper result was a remand for reconsideration using current data. Counsel responded that although her client would be better off if the matter was calculated again using current data, a remand was not essential. Justice Thomas wondered whether affirmance would open up the domestic relations divisions to parsing through income statements rather than focusing solely on the best interests of the child. Counsel answered no, that this case represented an atypical situation.   Justice Thomas noted the argument made by counsel for the father, that the judge had discretion to deviate to zero, but no further. Counsel responded that that wasn’t what the statute says – support is a joint and several obligation. Chief Justice Garman asked whether there was any difference between support to a non-custodial parent and maintenance. Counsel answered that a maintenance payment would be considerably higher. Justice Theis asked counsel whether she would concede that most of the references in the statute refer only to custodial and non-custodial parents. Was the statute ambiguous? Counsel answered that is was not; the statute was neutrally and broadly drawn. Would affirmance amount to reading the references to custodial and non-custodial parents out of the statute, Justice Theis asked? Counsel answered that on the contrary, holding that there was no discretion to separate the support obligation from custody created superfluous language in the statute. Justice Theis pointed out that subsection (b) of the enforcement section actually talked about discovering assets of non-custodial parents. How should that be read under the mother’s position – as either parent? Counsel answered yes, noting that language just above the quoted passage referred to “parent,” not custodial or non-custodial. If the legislature had intended to tie support to custody, it would have said so.

On rebuttal, counsel for the father stated that opposing counsel was arguing equity, not law. Counsel predicted a flood of petitions from less affluent parents if the mother’s position was accepted. The statute contemplated only one result: a custodial parent receiving support. The order under review, counsel argued, was nothing more than a thinly disguised maintenance order.

We expect Turk to be decided in four to five months.

Image courtesy of Flickr by banjo d.

California Supreme Court to Clarify What's In, What's Out in the Five-Years-to-Trial Rule

According to Section 583.310 of the California Code of Civil Procedure, "An action shall be brought to trial within five years after the action is commenced against the defendant."

On the surface, it seems like a simple rule. But as with so many things, the devil is in the details. During last week's conference, the California Supreme Court agreed to further clarify how to calculate the five-year period, granting a petition for review in Gaines v. Fidelity National Title Insurance Company.

According to Section 583.340, there are only three situations in which the five-year clock pauses – during times that (1) the jurisdiction of the court to try the action was suspended; (2) prosecution or trial of the action was stayed or enjoined; or (3) bringing the action to trial, for any other reason, was impossible, impracticable, or futile.  Once the clock runs out, dismissal is mandatory. Gaines involves the application of the second and third exclusions.

Gaines started in 2006 when two senior citizen homeowners fell behind on their mortgage. An individual defendant contacted the homeowners and identified herself as an employee of the loan holder. She explained that she had given a copy of the homeowners' refinance application to her fiance, who helped homeowners find refinancing loans. Within a few months, after a complicated series of transactions, the fiance and his business partners wound up owning the homeowners' home - which they allegedly bought for $300,000 less than it was worth - and the homeowners held only a month-to-month lease with no option to buy. Around this time, the husband homeowner died.

The surviving wife filed suit in November 2006 against the original loan holder, the loan holder's employee, her fiance and his business partners, and various others. In January 2008, the plaintiff filed a fourth amended complaint adding additional defendants. In April 2008, the plaintiff's counsel successfully obtained an order staying the action for 120 days, excepting only outstanding discovery, and directing the parties to participate in good faith in a mediation. The stay was terminated in November 2008 after the mediation failed to produce a settlement.

The new presiding judge set an August 2009 trial date. Around that time, one of the newly added defendants indicated that it didn't have title to the property after all, and the trial date was vacated. In a declaration filed in November 2009, counsel for that defendant indicated that a bankrupt entity in New York owned the relevant loan, and his client had no interest in the property or the loan.

The wife died in November 2009. Leave was granted two months later to substitute her son as the successor in interest and plaintiff, and the court set yet another trial date in 2010. At a mid-2010 status conference, with the real loan holder still in bankruptcy, the plaintiff's counsel suggested a further continuance to allow time to bifurcate proceedings, carving out the claim against the bankrupt entity and proceeding against the other defendants. Three months later at another status conference, plaintiff's counsel said they were ready to proceed to trial, but one of the defense counsel pointed out that plaintiff had made no attempt to proceed against the bankrupt entity. By February 2011, plaintiff's counsel indicated he had authorization to retain New York counsel to seek relief from the bankruptcy stay as to the missing party. In October 2011, the bankruptcy court entered an order lifting the bankruptcy stay for the missing party as to the plaintiff's claims. Plaintiff amended her complaint to name the bankrupt entity in mid-November 2011, and trial was finally set for August 2012.

In May 2012, one group of defendants moved to dismiss the action under Section 583.310 on the grounds that it had been pending five years without being brought to trial. The trial court granted the motion and - concluding that violation of the five-year statute was jurisdictional - dismissed the remaining defendants as well. A divided Court of Appeal (Second District, Division Eight) affirmed in part and reversed in part.

The trial court declined to exclude the seven-month 2008 stay from the five-year calculation. The Court of Appeal agreed. The Supreme Court had held in Bruns v. E-Commerce Exchange, Inc. that a partial stay was not enough to pause the five-year clock, the court pointed out. Since the 2008 stay in Gaines exempted already-outstanding discovery, it was a partial stay, and Bruns governed. Nor were the defendants estopped from arguing that the 2008 stay counted in the calculation just because they had agreed to it.

The Court of Appeal further held that the trial court was within its discretion to find that it was not impossible, impractical or futile to bring the case to trial during the 2008 partial stay.  The plaintiff had failed to establish a causal connection between the stay and missing the five-year deadline, the court found. Moreover, even if the causal connection existed, the court agreed with the trial court's finding that plaintiff had not been reasonably diligent at all times in prosecuting the case. Nor was the fact that certain defendants hadn't formally joined the motion to dismiss a barrier to dismissal, the Court held. As long as those defendants were named in the original complaint, they were entitled to dismissal, even on the court’s own motion.

The Court of Appeal reversed the dismissal only with respect to the bankrupt defendant. That defendant had been named for the first time in the Fourth Amended Complaint, the court pointed out. There's an additional wrinkle here for counsel to be aware of here, however. When a defendant is brought into the action by being identified as a previously sued Doe defendant, the five-year clock begins when the Doe defendant is sued, not when the defendant is finally identified.

Associate Justice Laurence D. Rubin dissented, writing that he would have reversed the trial court's judgment in its entirety. Justice Rubin's dissent is noteworthy to appellate practitioners for its initial section - a scholarly discussion of the abuse of discretion standard and its shortcomings as a guide for appellate decision-making.

We expect Gaines to be decided in eight to ten months.

Image courtesy of Flickr by Alan Cleaver.

One Step Forward, One Step Back: Court of Appeal Denies Arbitration in Imburgia

Fresh on the heels of signs during the Iskanian oral argument that the California Supreme Court might at least partially fall in line behind the rule of Concepcion (subscr. req.), we received a reminder that arbitration clauses continue to receive an uncertain reception in the Courts of Appeal. In Imburgia v. DirecTV, Inc., Division One of the Second Appellate District affirmed a trial court decision invalidating a consumer arbitration clause in its entirety. (See here for a quick sketch of the background law at the federal and California state level.)

The plaintiff in Imburgia filed a putative class action complaint alleging a laundry list of consumer claims: unjust enrichment, declaratory relief, false advertising, and violation of the Consumer Legal Remedies Act, the unfair competition law and Civil Code Section 1671(d). Plaintiff’s theory was that the defendant improperly charged early termination fees to its customers.

The parties litigated for two and a half years, but less than a month after Concepcion was handed down in 2011, the defendant petitioned to compel arbitration. The trial court denied the motion.

Two provisions of the defendant’s then-standard customer agreement were at issue. Section 9 provided that “any legal or equitable claim” relating to the Agreement or service would first be addressed informally, and then through “binding arbitration” under JAMS rules. The clause barred all class claims, both in litigation and arbitration:

Neither you nor we shall be entitled to join or consolidate claims in arbitration by or against other individuals or entities, or arbitrate any claim as a representative member of a class or in a private attorney general capacity . . . If, however, the law of your state would find this agreement to dispense with class arbitration procedures unenforceable, then this entire Section 9 is unenforceable.

Section 10 was called “Applicable Law”:

The interpretation and enforcement of this Agreement shall be governed by the rules and regulations of the Federal Communications Commission, other applicable federal laws, and the laws of the state and local area where Service is provided to you . . . Notwithstanding the foregoing, Section 9 shall be governed by the Federal Arbitration Act.

The plaintiffs’ argument on appeal went like this. Class action waivers are unenforceable under the Consumer Legal Remedies Act. The final sentence of Section 9 referring to “the law of your state” means “the law of your state disregarding any impact of the FAA.” Since California law bars class waivers in CLRA cases, “this agreement to dispense with class arbitration procedures [is] unenforceable,” and the entire arbitration clause falls.

The Court of Appeal agreed. The court based this conclusion on two general principles. First, the final sentence of Section 9 is a specific exception to the general invocation of the FAA in Section 10, and a specific contract clause always governs a more general one. Second, the clause was ambiguous as written, and ambiguities must be resolved against the drafter – here, the defendant. In so holding, the Court of Appeal declined to follow directly contrary decisions from the federal district court hearing the parallel MDL action and the Ninth Circuit.

The California Supreme Court should grant review in Imburgia and reverse. Defendants made two arguments before the Court of Appeal which seem to me to dispose of the plaintiff’s “imagine there’s no FAA” argument.

First, the plaintiffs’ arguments, adopted by the Court of Appeal, depend on the proposition that the last sentence of Section 9 and Section 10 conflict. But they don’t. The plaintiff argues that the CLRA bars class waivers. But that tells us nothing. Section 9 does not invoke California law in a vacuum. The clause asks whether “the law of your state would find this agreement . . . unenforceable.” Well, California law couldn't find the defendant's subscriber agreement unenforceable.  The agreement deals with interstate commerce and is therefore subject to the FAA.  If the Supremacy Clause means anything, it's that Concepcion is the law of every jurisdiction, including California.  The class waiver is perfectly valid under Concepcion and Concepcion preempts the CLRA.

Second, Section 10 provides that “Section 9 shall be governed by the Federal Arbitration Act.” As the federal MDL court held, the plaintiffs’ interpretation of Section 9 renders that clause completely meaningless, in violation of the most fundamental principles of contract construction. The Court of Appeal disagreed, describing Section 9 as a “narrow and specific exception to the general provision” of Section 10, which “[i]t does not render . . . meaningless,” but this seems conclusory. Before the Supreme Court, the plaintiffs are likely to have considerable difficulty explaining what practical impact the FAA clause of Section 10 can ever have if their construction of the contract is correct.

The likely petition for review in Imburgia adds another element of uncertainty to the Court’s deliberations over what to do about Iskanian. The Appellate Strategist will be following both cases closely.

Image courtesy of Flickr by Yale Law Library.

California Supreme Court Agrees to Decide Temp Disability Benefits for Police Officers

In the only civil review grant from last week’s conference, the California Supreme Court agreed to review the Third District’s decision in Larkin v. Workers’ Compensation Appeals Board. Larkin involves an issue of what temporary disability payments might be available to full-time, salaried peace officers.

The petitioner filed a claim for temporary disability payments after he sustained various injuries in the course of his employment as a police officer for the City of Marysville. The workers’ compensation judge denied the claim, the Workers Compensation Appeals Board affirmed, and the Court of Appeal affirmed the Board.

The claim turned on the meaning of Labor Code Section 4458.2, which provides:

If an active peace officer of any department as described in Section 3362 suffers injury or death while in the performance of his or her duties as a peace officer . . . then, irrespective of his or her remuneration from this or other employment or from both, his or her average weekly earnings for the purposes of determining temporary disability indemnity and permanent disability indemnity shall be taken at the maximum fixed for each, respectively, in Section 4453 . . .

Section 3362 simply deemed police officers as “employees” of the relevant government: “Each male or female member registered as an active policeman or policewoman of any regularly organized police department . . . shall . . . be deemed an employee of such county, city, town or district for the purpose of this division and shall be entitled to receive compensation from such county, city, town or district in accordance with the provisions thereof.”

The petitioner argued that he was an active peace officer, so the statute authorized temporary disability benefits at the set rate for him. But that “would be an absurd result,” the Court of Appeal found.

The Court pointed out that Section 3362 appears in an Article of the Labor Code called “Employees.” The Code offers the broadest possible definition of “employee” – “every person in the service of an employer” – and carves out limited exceptions for volunteers and independent contractors. So it was undisputed that the petitioner was an “employee” of the City. There was no need for Section 3362 to separately say so.

The Sections in the immediate neighborhood of 3362 are concerned with deeming certain persons who would not ordinarily be considered employees to be such for purposes of entitlement to workers compensation benefits. Section 3361 addresses volunteer firefighters, Section 3364 volunteer members of a sheriff’s reserve, and Sections 3365, 3366 and 3367 those who voluntarily assist law enforcement and firefighters upon request. In each section, the affected individuals are deemed employees and awarded temporary disability at the maximum rate. The idea, the Court wrote, was to encourage public service by volunteers. Without these provisions, one injured in the voluntary service of a government entity might lose his or her income for a time and have no means of support, since workers’ comp from his or her regular employer wouldn’t be available.

If Section 3362 was intended to apply only to salaried officers, volunteer peace officers would have no recourse if injured while they were working. This would “punish them for their service,” the Court wrote, and “leave such volunteers in a markedly different position than volunteers of other public safety agencies. This cannot be what the Legislature intended.”

We expect Larkin to be decided in eight to ten months.

Image courtesy of Flickr by Nic Walker.

California Supreme Court Depublishes Decision on Finality from the Register of Actions

Depublication orders usually aren’t exactly the most earthshaking thing on the California Supreme Court’s weekly conference summaries. Nevertheless, I took particular notice of one on last week’s summary: Dattani v. Lee. Dattani is worthy of note for a couple of reasons. First, the Court took the unusual step of depublishing the Court of Appeal’s opinion on its own motion – nobody had filed a depub request. Second (and more importantly), Dattani underlines one of the most important lessons in all of appellate law (see the end of this post for the takeaway).

It’s not uncommon for those of us in the defense bar to find that a common legal theory serves as the foundation for many but not all of a plaintiff’s claims. If the trial court rejects that theory pre-trial, the plaintiff faces a dilemma: go to trial with what are often sideshow claims before getting appellate review, or seek an interlocutory appeal.

Every jurisdiction has various avenues to possible interlocutory review; in California, it’s usually through a petition for writ of mandate, while in Illinois, Rules 304, 306, 307 or 308 might serve, depending on the facts. But the thing is, in most cases, review is discretionary. The appellate court can simply refuse to hear the matter – and usually, that’s exactly what happens. Interlocutory orders that are reviewable as of right are rare.

To understand the significance of Dattani, it’s necessary to briefly revisit a major decision the Supreme Court handed down last year: Kurwa v. Kislinger. In Kurwa, the plaintiff sued for breach of fiduciary duty and assorted related claims. The parties traded claims and cross-claims for defamation.

Before trial, the court held that once the parties formed a corporation, they didn’t owe each other any fiduciary duties. That was pretty much that for the fiduciary duty count and all the related stuff. But there was nothing final about the ruling: the defamation counts were still viable.

So the parties worked out a deal. The plaintiff dismissed the fiduciary duty and related claims with prejudice. Both parties dismissed their defamation claims without prejudice and swapped waivers of the statute of limitations. Then off the plaintiff went to the Court of Appeal.

Ultimately, it didn’t work. The Supreme Court pointed out that given the statute of limitations waiver, the parties were apparently planning to go right back to court regardless of what happened on appeal, so the dismissals weren’t final and appealable.

Fast forward to Dattani.

Dattani arose from a four-count complaint. In 2012, the trial court granted the defendant summary adjudication on the first count. When the defendant appeared for trial in September 2012 on the remaining claims, the plaintiff’s attorney said he was dismissing those claims to pursue an appeal.

The request for dismissal was filed on the proper Judicial Council form. The court’s register of actions for that day stated that “a dismissal of all the other causes of action” had been filed and removed the matter from the master calendar. But the section of the Judicial Council form for the clerk to note whether dismissal had been entered as requested was never filled in.

Seven months later, on April 16, 2013, the trial court filed a take-nothing judgment prepared by the plaintiffs’ counsel stating that the “remaining causes of action” had been dismissed on September 10. On May 6 – less than thirty days later – the plaintiffs filed a notice of appeal.

The defendants moved to dismiss the appeal, arguing that the plaintiff’s mere request for dismissal of all remaining claims was the equivalent of a final judgment as of the day it was filed – in September 2012, long before the notice of appeal was filed. The Court of Appeal agreed.

There’s a line of cases going back thirty years allowing plaintiffs or cross-plaintiffs to in essence manufacture finality after losing on a key point of law by voluntarily dismissing the remaining claims. The rationale is that even though voluntary dismissals aren’t generally appealable, in such cases it’s not really a voluntary act – it amounts to a request for entry of judgment on the adverse ruling of law.

The Court of Appeal concluded that Kurwa isn’t to the contrary. Sure, the Supreme Court refused to allow an appeal from a voluntary dismissal, but in the Dattani court’s view, finality hadn’t been destroyed in Kurwa by the voluntary dismissal itself – the problem was the mutual statute of limitations waivers.

Bottom line, the Dattani court held, even though no judgment was filed until seven months later, the mere filing of the notice of voluntary dismissal, coupled with the earlier loss on the pretrial order, amounted to a final and appealable judgment. Since that happened in September 2012 and the notice of appeal wasn’t filed until May 2013, the notice of appeal was untimely, and the appeal was dismissed for lack of jurisdiction.

Although the Supreme Court regularly reminds us that an order to depublish isn’t an expression of their opinion one way or the other about the Court of Appeal’s opinion, it seems clear that the Supreme Court didn’t want a published Dattani opinion knocking around in the Official Reports. Nevertheless, the takeaway seems clear. Consider the Dattani facts one more time. There was no judgment entered at the time the Court of Appeal says finality happened. The plaintiff had filed a notice of dismissal, but the section of the form reserved for the clerk to note that dismissal had actually occurred hadn’t been filled in. The only indication anywhere (apparently) that the court staff regarded the matter as concluded was the register of actions.

A timely notice of appeal is jurisdictional everyplace I’m aware of. In most jurisdictions, there’s no remedy for an untimely filing; even in places where one exists, it’s extremely limited.

So if you’re even in the same zip code as anything that seems remotely like the end of the line in a case, extraordinary caution is called for. Confirm everything, assume nothing, and check everywhere (remember that register of actions from Dattani). Finality – and the possible tolling of the time to appeal – is an intricate area of the law. Nevertheless, it’s a question counsel has to get right.

Image courtesy of Flickr by John Morgan.

Florida Supreme Court Strikes Down Wrongful Death Non-Economic Damages Cap for Med Mal Cases


On March 13, 2014, the Florida Supreme Court, in a 5-2 ruling, issued its long-awaited opinion following review of the Eleventh Circuit Court of Appeal’s decision in Estate of McCall v. United States, 642 F.3d 944 (11th Cir. 2011), and answered the following rephrased certified question in the affirmative:

Does the statutory cap on wrongful death noneconomic damages, Fla. Stat. §766.118, violate the right to equal protection under Article I, Section 2 of the Florida Constitution?


The Supreme Court did not address three additional questions certified by the Eleventh Circuit.


To read the Court’s opinion, click here. 


Background and Earlier Court Proceedings

Hours after giving birth, Michele McCall went into shock and cardiac arrest as a result of severe blood loss.  She never regained consciousness and was removed from life support. The Estate of Michele McCall, Mrs. McCall’s parents, and the father of Mrs. McCall’s son sued the United States under the Federal Tort Claims Act, as Mrs. McCall’s care took place at a military hospital.  The United States District Court for the Northern District of Florida found the United States liable and determined that the plaintiffs’ economic damages totaled $980,462.40 and that their non-economic damages totaled $2,000,000.00.  However, the district court limited the plaintiffs’ total recovery of non-economic damages to $1,000,000.00 pursuant to Florida Statutes §766.118(2) (2005), which imposes a cap on wrongful death non-economic damages in medical malpractice cases. 


§766.118(2) provides:


(2) Limitation on noneconomic damages for negligence of practitioners.--


(a) With respect to a cause of action for personal injury or wrongful death arising from medical negligence of practitioners, regardless of the number of such practitioner defendants, noneconomic damages shall not exceed $500,000 per claimant. No practitioner shall be liable for more than $500,000 in noneconomic damages, regardless of the number of claimants.


(b) Notwithstanding paragraph (a), if the negligence resulted in a permanent vegetative state or death, the total noneconomic damages recoverable from all practitioners, regardless of the number of claimants, under this paragraph shall not exceed $1 million. In cases that do not involve death or permanent vegetative state, the patient injured by medical negligence may recover noneconomic damages not to exceed $1 million if:


1. The trial court determines that a manifest injustice would occur unless increased noneconomic damages are awarded, based on a finding that because of the special circumstances of the case, the noneconomic harm sustained by the injured patient was particularly severe; and


2. The trier of fact determines that the defendant's negligence caused a catastrophic injury to the patient.


(c) The total noneconomic damages recoverable by all claimants from all practitioner defendants under this subsection shall not exceed $1 million in the aggregate.


On appeal to the Eleventh Circuit, the plaintiffs argued that the statutory cap violates the Equal Protection Clause and constitutes an unlawful taking.  They also asserted that the cap violates numerous provisions of the Florida Constitution.  The Eleventh Circuit held that §766.118 does not constitute a taking in violation of the Florida Constitution and that it does not violate either the Equal Protection Clause or the Takings Clause of the U.S. Constitution.  However, the court certified to the Florida Supreme Court four questions regarding the remaining challenges to the statutory cap under the Florida Constitution.


Supreme Court Proceedings

The Florida Supreme Court found that §766.118 violates the Equal Protection Clause of the Florida Constitution, which provides that all natural persons are equal before the law, because the cap on wrongful death non-economic damages imposes unfair, illogical burdens on injured parties when medical negligence gives rise to multiple claims.  Claimants in cases involving multiple claims do not receive the same rights or full compensation as compared to claimants in cases involving one claim.  In this case, three separate non-economic damage determinations were assessed by the district court.  The damages suffered by Mrs. McCall’s parents were determined to be $750,000.00 each and the damages suffered by Mrs. McCall’s surviving son were determined to be $500,000.00.  Applying the caps, the federal court reduced these amounts so that each claimant would receive only half of his or her respective damages.  However, if Mrs. McCall had been only survived by her son, he would have recovered the full amount of his non-economic damages:  $500,000.00.  Thus, the cap limited the recovery of a surviving child simply because others also suffered losses. 


The Court stated that in addition to causing discrimination between classes of claimants, the caps also violate Florida’s Equal Protection Clause because they bear no rational relationship to a legitimate state objective.  In analyzing this issue, the Court analyzed at length the Florida Legislature’s justification for the caps – the alleged medical malpractice insurance crisis in Florida – and found that there was no support for such a conclusion.  Moreover, even if there were such a crisis, there was no evidence that the statutory caps alleviated the crisis.  Finally, even if there were a crisis when §766.118 was enacted, no rational basis existed to justify the continued use of the caps. 




In sum, the Court held that the caps on wrongful death non-economic damages set forth in §766.118 violate the Equal Protection Clause of the Florida Constitution.  As the Court made clear, however, “The legal analyses for personal injury damages and wrongful death damages are not the same.  The present case is exclusively related to wrongful death, and our analysis is limited accordingly.”  As such, the Court’s opinion is not applicable to the caps in place when a medical malpractice claimant does not die.




Florida High Court Liberally Construes Self-Insured Retention Endorsement


             On February 6, 2014, the Florida Supreme Court took a liberal view of self-insured retentions (SIRs) and held that an insured can apply indemnification payments from a third party to satisfy its SIR under a general liability policy.  See Intervest Constr. of Jax, Inc. v. Gen. Fid. Ins. Co., 39 Fla. L. Weekly S75, 2014 WL 463309 (Fla. Feb. 6, 2014) (to read the slip opinion click here).  The Court decided the case on two certified questions from the Eleventh Circuit Court of Appeals. 

            General Fidelity issued a general liability insurance policy to a homebuilder with an SIR of $1 million.  The SIR endorsement stated that General Fidelity would provide coverage only after the insured had exhausted the $1 million SIR.  The homebuilder contracted with a third-party to, among other things, install attic stairs in a house under construction.  The contract between the homebuilder and the subcontractor contained an indemnification provision requiring the subcontractor to indemnify the homebuilder for any damages resulting from the subcontractor’s negligence.

            After the house was built, the homeowner fell while using the attic stairs and sued only the homebuilder for her injuries.  The homebuilder sought indemnification from the subcontractor.  Following mediation the parties and their insurers agreed to settle the homeowner’s claim for $1.6 million with the subcontractor’s insurer paying the homebuilder $1 million to settle the homebuilder’s indemnification claim against the subcontractor; the homebuilder would then pay the $1 million to the homeowner.  A dispute then arose as to whether the homebuilder or its insurer was responsible for paying the $600,000 settlement balance.

            The homebuilder argued that the $1 million contribution from the subcontractor’s insurer satisfied its SIR obligation and that General Fidelity was required to pay the remaining $600,000.  General Fidelity, on the other hand, argued that the $1 million payment to settle the indemnity claim did not reduce the SIR because the payment originated from the subcontractor, not its insured.  Thus, General Fidelity maintained that the terms of the policy required its insured—the homebuilder—to pay the additional $600,000 to settle the homeowner’s claim.

            The Court adopted the position advanced by General Fidelity.  While the SIR endorsement required that the payment be “made by the insured,” the Court looked to other policies’ SIR provisions that contained more restrictive language.  These other policies specify that the SIR must be paid from the insured’s “own account” or make clear that payments from additional insureds or insurers could not satisfy the SIR.  Because the General Fidelity policy did not employ this more restrictive language, the Court took a more expansive view of General Fidelity’s SIR endorsement.

            The second prong of the dispute centered around whether the transfer of rights provision in the General Fidelity policy gave General Fidelity priority over its insured to the $1 million that the subcontractor’s insurer paid.  If it did, then the homebuilder could not claim the $1 million as satisfying the SIR.  The majority found that the provision did not give General Fidelity priority over its insured.  The majority rested it conclusion on the fact that the provision “does not address the priority of reimbursement nor does the clause provide that it abrogates the ‘made whole doctrine.’”

            Justices Polston and Canady dissented.  They believed the majority had “rewritten” the SIR provision “to allow satisfaction of the self-insured retention limit in a manner other than the manner specifically provided for in the policy.”  They also characterized the majority’s reasoning as creating a “legal fiction” that “effectively reads the phrase ‘by you’ out of [the SIR endorsement].”

            To view the history of this case in the Florida Supreme Court, please click here. 

            Image courtesy of Flickr by Alan Cleaver.


Illinois Supreme Court Agrees to Decide Complex Landfill Dispute

Can the Illinois state courts order mandatory cleanups of older landfills? The Illinois Supreme Court agreed to decide that issue late last month, allowing a petition for leave to appeal in People ex rel. Madigan v. J. T. Einoder, Inc.

Einoder involves a husband and wife and two corporations which they control. The landfill site was held in a land trust for the benefit of one of the corporate defendants, which was wholly owned by the husband. The other corporate defendant - owned 90% by the wife and 10% by the husband - leased equipment and operators to the first corporation for use at the site.

In 1995, two years after the site was purchased, the state Environmental Protection Agency received anonymous reports of open dumping there. An inspector visited and issued a citation for dumping without a permit. Additional citations were issued in 1996 and 1997. The Agency conducted a multi-hour inspection in 1998, and subsequently, another citation was issued for alleged dumping and disposal of waste without a permit.

The Agency initially threatened suit in 1998, but agreed to dig test pits first to determine the content of material at the site. After sporadic inspections in 1999 and 2000 revealed an increasing amount of "clean" construction and demolition debris ("CCDD") above the grade of the surrounding land, the Attorney General filed suit in 2000, alleging open dumping, unpermitted waste disposal operations, development and operation of a solid waste management site without a permit, and various other violations.

Following a bench trial, the Circuit Court found for the State on all counts relating to waste disposal and operation of a waste disposal site without a permit, but directed a verdict for the defendants on various more minor charges. The court then proceeded to the remedies portion of the bifurcated trial, and ultimately issued a permanent injunction requiring the defendants to remove the above-grade waste pile and undertake groundwater testing. The court also imposed substantial fines against both corporations and both individuals.

The Appellate Court affirmed the trial court. The court began by rejecting the defendants' claim that the trial court lacked jurisdiction over the agency's complaint because the agency had not properly notified the defendants of its intent to sue the individuals in their individual capacities. The court found that the notice requirements were not jurisdictional, and given the extensive contact between the agency and the defendants leading up to the suit, the defendants could not show prejudice.

The Circuit Court's finding that defendants had operated a waste disposal site without a permit depended on a finding that defendants' CCDD didn't constitute "waste." The statute provided that CCDD was exempt from permit requirements (to the degree Federal law didn't provide differently) only when "used as fill materials below grade." The defendants attempted to avoid this language by pointing to three excerpts of testimony, but the Appellate Court concluded that two statements had been taken out of context, and the third snippet of testimony from the bench trial was contrary not only to the plain language of the statute, but even to the remainder of that witness' testimony. The defendants challenged the finding of personal liability against the wife, but the Appellate Court found sufficient evidence to support the court's finding that the wife had been involved in the operations.

The court then turned to what is likely to be the central issue before the Supreme Court: the availability of mandatory injunctive relief. The parties agreed that the pre-2004 form of the Environmental Protection Act didn't authorize such relief, while the post-2004 form of the Act did authorize it. So the question was whether the 2004 amendments applied retroactively - a simple question of statutory construction. Although Section 42(e) of the Act, the provision directly at issue, didn't indicate a temporal reach, the Court concluded that several other clauses of the 2004 Act suggested that the legislature intended the statute to apply retroactively: the Act was intended to "restore, protect and enhance" Illinois' environment, and to require that "adverse effects" be mediated by "those who cause them." In so holding, the court followed the decision of the Second District in State Oil Co. v. People.

The Court concluded by upholding the fines assessed against the corporate and individual defendants. Sufficient evidence supported the view that the defendants had derived economic benefit from their violations, the Court found, and the defendants' continued operations for five years after receiving their initial violation notices suggested that severe penalties were needed. Justice Mary Anne Mason dissented solely from the portion of the opinion holding that the 2004 Act applied retroactively.

We expect Einoder to be decided in six to eight months.

Image courtesy of Flickr by Ell Brown.

Illinois Supreme Court to Decide If Innocent Insured Doctrine Applies to Renewal Application

The concept behind the innocent insured doctrine is simple: where there are multiple insureds on an insurance policy, a breach by one does not necessarily eliminate coverage for those not personally involved in the breach. But what if the breach occurs in conjunction with a renewal application? That's the question the Illinois Supreme Court agreed to decide late last month in Illinois State Bar Association Mutual Insurance Co. v. Law Office of Tuzzolino & Terpinas.

The case began when a former client filed a malpractice suit against one of the partners. The attorney persuaded the former client to drop the suit and instead retain the attorney to sue the attorney who handled a related bankruptcy. That suit was dismissed, however. When the client discovered the dismissal, the attorney made an offer to settle the malpractice claim, but the offer was rejected.

Not long after, the same partner filed a renewal form with the firm's malpractice insurance carrier. In response to a question on the form, "[h]as any member of the firm become aware of a past or present circumstance[s] which may give rise to a claim that has not been reported," the attorney answered "no." The attorney signed the form, but the second partner was not required to do so.

A month after completion of the renewal form, the second partner received a lien letter from the attorney hired to represent the first partner in the impending malpractice claims. The second partner forwarded the information to the insurer. He alleges that this was the first time he was aware of any potential claims arising out of his partner's representation of the client.

The insurer filed suit seeking rescission of the policy with respect to both partners and the firm, arguing that the first partner's failure to disclose the potential claim voided the policy ab initio. The second partner counterclaimed for a declaratory judgment that he was covered by the policy in connection with the client's suit.

The plaintiff moved for summary judgment on all counts against all defendants.   The trial court granted the motion, finding that the insurance contract was indivisible, and could not be rescinded with respect to one partner only. The court accordingly held that the insurer had no obligation to defend the firm or the innocent partner. The innocent partner and the firm appealed.

The Appellate Court reversed.

The attorney argued that the innocent insured clause contained in the policy preserved coverage. The court pointed out, however, that the attorney was ignoring the distinction between a misrepresentation during the life of the policy and one in the application process. Therefore, the question was not whether the language of the policy covered the innocent partner, but rather whether the common law innocent insured doctrine permitted the policy to remain in place as to him.

The common law innocent insured doctrine applies when two or more insureds maintain a policy and one commits an act that would normally void the policy but a "reasonable person would not understand that the wrongdoing of [the] coinsured would prevent recovery." The doctrine is often applied, for example, where one of multiple owners sets fire to a property without his or her co-owner's knowledge.

The Appellate Court rejected the insurer's claim that the first partner's misrepresentation rendered the policy void ab initio. In fact, the Court held, the policy was voidable, not void. For that reason, the Court chose to follow Economy Fire & Casualty Co. v. WarrenIn Warren, a husband and wife co-owned a house destroyed by fire. The couple settled their claim with their homeowner's policy insurer. When it became known that the wife has set the fire, the insurer tried to rescind the settlement agreement on grounds of fraud. The Court applied the innocent insured doctrine to hold that the husband - who claimed to have no knowledge of his wife's actions - was entitled to retain half of the settlement.

The Court further held that Section 154 of the Insurance Code (215 ILCS 5/154) - which provides that no misrepresentation or false warranty in an insurance application can defeat coverage unless material or made with an intent to deceive - supported application of the common law innocent insured doctrine.

Finally, the Court held that public policy favored application of the doctrine, since allowing rescission would mean that the innocent party had no coverage not only in connection with the plaintiff's claim, but in connection with any claim during the policy period.

We expect Tuzzolino & Terpinas to be decided in six to eight months.

Image courtesy of Flickr by Alan Cleaver.

The Future is Here - Is the Internet a Place?

The California Supreme Court has certified a question for review posed by the Ninth Circuit – Is the internet a “place of public accommodation” as described in the California Disabled Persons Act (“DPA”), Civil Code §§ 54, et seq.? The DPA provides at § 54.1(a)(1) that “[i]ndividuals with disabilities shall be entitled to full and equal access, as other members of the general public, to accommodations, advantages, facilities . . . and privileges of . . . places of public accommodation . . . and other places to which the general public is invited.” Finding no resolution in existing California law, the Ninth Circuit asked for guidance on the question of whether DPA’s reference to “places of public accommodation” includes web sites, which, at best, are “non-physical places.”

In Greater Los Angeles Agency on Deafness (GLAD) v. Cable News Network (CNN), GLAD filed a class action suit against CNN for failing to provide closed captioning with all of its online videos, and thereby limiting access to those materials by hearing impaired viewers. GLAD alleged violations of DPA and the California Unruh Civil Rights Act, Cal. Civ. Code §§ 51 et seq. (“Unruh Act”) and sought declaratory and injunctive relief. CNN removed the matter to federal court and filed an unsuccessful motion to strike under California’s anti-SLAPP statute. The district court found that the provision of closed captioning did not raise a free speech issue for CNN and it did not address the merits. In a published opinion, the Ninth Circuit reversed, finding that forcing CNN to add closed captioning to its news content arose from its freedom of expression because it would necessarily change how CNN presented the news. The court then struck the Unruh Act claim, finding that GLAD had not shown it would probably satisfy the intentional discrimination requirement.

Turning to the DPA claim, the Ninth Circuit concluded that GLAD had demonstrated a probability of success regarding the constitutional and preemption defenses raised by CNN. However, to address the merits of the DPA claim, the court first needed to determine whether the DPA even applied to a “virtual location” on the internet. While the internet was certainly not considered when the DPA was originally passed in 1968, it is also true that, as presently used, internet websites often operate as “non-physical places,” such as stores, classrooms, gaming halls and public forums. Since lower California courts, state and federal, are divided on this issue, the Ninth Circuit certified the question for the California Supreme Court. The increasing importance of the internet for commerce and public discourse demonstrate the potential significance of this ruling, and allow a prediction of multiple amicus briefs.

Image courtesy of Flickr by LearnerWeb.

Waiting for Iskanian, Part 5: The Parties' Briefs on the Merits

With tomorrow’s oral argument before the California Supreme Court in Iskanian v. CLS Transportation Los Angeles, LLC, our series of previews concludes with a look at the parties’ merits briefs. To read all the briefs in Iskanian, check out the National Chamber Litigation Center’s page on the case here.

The argument in plaintiff’s opening brief begins with a quotation from Armendariz: “California law, like federal law, favors enforcement of valid arbitration agreements.” Plaintiff describes Gentry as no more than a “limited qualification” to that proposition.

The plaintiff's centerpiece argument boils down to three propositions: (1) arbitration clauses are solely about forum selection and do not affect any substantive rights under federal or state law; (2) the right to file a PAGA suit seeking recovery on behalf of the State and one's fellow employees is a substantive right which cannot be waived; and (3) therefore, the FAA has nothing to say about the enforceability of the plaintiff's agreement not to file a class or representative claim.

Plaintiff's argument is based on a couple of dubious propositions: that whatever importance California state law places on an unrelated cause of action is relevant to FAA preemption, and that the right to bring a collective claim is somehow not only substantive (as opposed to procedural) but also unwaivable.

Like the plaintiff’s amici we considered here, the plaintiff relies heavily upon the U.S. Supreme Court’s decision in Mitsubishi as supporting the “effective vindication” theory. The plaintiff argues that the theory is “fully applicable” to state-law rights, citing Armendariz and Little v. Auto Stiegler from the California Supreme Court, as well as Preston v. Ferrer – a case which enforced an arbitration agreement – from the United States Supreme Court.

According to plaintiff, the FAA merely requires that arbitration clauses - which are nothing more than specialized forum selection clauses - be enforced; it affects no substantive rights at all. Since the FAA does not require the waiver of any substantive rights, it cannot preempt state law protecting such rights. Since Concepcion does not disturb “the Supreme Court’s repeated holdings” that the FAA does not require enforcement of agreements preventing effective vindication of statutory rights, Concepcion has no impact on Gentry. Given that, plaintiff argues, the agreement's ban on representative actions could not be enforced against him. Plaintiff acknowledges the Appellate Court's view that he could pursue an individual PAGA claim, but insists that there is no such thing.

Plaintiff also argues that any ban on representative actions by employees violates federal labor law, relying heavily on the NLRB’s opinion in D.R. Horton. (Like the amicus briefs, the merits briefs were filed before the Fifth Circuit reversed in D.R. Horton.) Finally, plaintiff argues that the defendant’ s pursuit of the litigation between Gentry and Concepcion waived any right to arbitrate, both because “futility” is not a basis for opposing waiver under California law, and because a pre-Concepcion motion to compel arbitration wouldn’t have been futile even under federal law.

According to the appellee's brief, the plaintiff’s brief rests on the “misguided premise” that the FAA treats waiver of representative claims in employment cases differently than it does such waivers in consumer cases.

The federal cases plaintiff cites for his claim that the effective vindication theory is well established at the federal level are “irrelevant,” the defendant argues – each involved a federalstatutory right, not a state statute. Not only that – those cases hold that an arbitration agreement can’t be invalidated on the grounds that arbitration would somehow be a less desirable forum, since that conclusion embodies the kind of judicial skepticism of arbitration that the FAA was intended to end.

Gentry is no longer good law, the defendant argues; its test “derives its meaning from the fact that an agreement to arbitrate is at issue,” and besides, there’s no principled distinction between Gentry and Discover Bank.

Nor did Iskanian’s decision to bring a PAGA claim impact the enforceability of the party's arbitration agreement. First, PAGA is an unconstitutional delegation of governmental power; second, the plaintiff's claim is time-barred; and third, the opportunity to bring a PAGA claim on behalf of the State and fellow employees is neither mandatory, nor a substantive right.

The defendant next turns to the labor law issue, attacking D.R. Horton on multiple grounds. The “unambiguous” Federal right to pursue class or collective action doesn’t exist, defendant argues. “Concerted” activity means being engaged with other employees; a class or representative action was thus “the antithesis” of concerted action. Although the NLRB’s interpretations of federal labor law are traditionally given deference in the courts, the defendant argues that the courts owed no deference at all to the NLRB’s interpretation of the FAA.

The defendant concludes by attacking the plaintiff’s waiver claim. Defendant litigated when it was forced to by Gentry and immediately moved to compel when Concepcion was handed down, according to the defendant; there was no conduct inconsistent with an intent to arbitrate. Besides, plaintiff could show no prejudice from the delay, since merely being required to litigate isn’t enough under California law.

The plaintiff replies that the defendant "misunderstands Mr. Iskanian's argument." Conducting a class action is not a substantive right, plaintiff argues, but "the availability of class actions is sometimes essential to the vindication of substantive rights." Concepcion didn't settle the issue, he claims, since if it did, "the Court's decision to receive full briefing and argument" in Italian Colors "would be inexplicable." According to the plaintiff, the defendant's constitutional and statute of limitations challenges to the PAGA claims are not properly before the Court.

As for defendant's remark that plaintiff remained free to bring an individual PAGA claim, plaintiff responds that "all PAGA claims are representative claims."  Even if the parties' agreement permitted such an action, the plaintiff argues, it still bars "a substantial portion of the recovery PAGA authorizes" - penalties for the State or other employees.

The plaintiff closes its reply by again arguing that the agreement violates federal labor law, and that defendant has waived its right to arbitrate anyway. The plaintiff notes that even reversal of D.R. Horton by the Fifth Circuit (which has now happened) wouldn't settle the labor law issue, since the losing party would seek Supreme Court review, and the NLRB doesn't follow adverse opinions in cases not involving the same parties anyway.

Iskanian will be argued tomorrow morning at 9:00 A.M. West Coast time in the Third Floor Courtroom of the Ronald Reagan State Office Building, 300 South Spring Street, North Tower, Los Angeles.

Image courtesy of Flickr by Sam Howzit.

Illinois Supreme Court to Decide Whether Self-Critical Analysis Privilege Exists in Illinois

We continue our previews of the civil cases accepted for review in the closing days of the Illinois Supreme Court’s March term with Harris v. One Hope United, Inc. In Harris, the First District declined to recognize the existence of a self-critical analysis privilege in Illinois, calling the recognition of new common law privileges “a matter best left to the legislature.”

The self-critical analysis privilege is a relatively recent innovation in the common law, as privileges go. The privilege seems to have been first recognized by the federal district court in Washington, D.C. in a 1970 medical malpractice case, Bredice v. Doctors Hospital, Inc. Since that time, a few jurisdictions have adopted narrow versions of the privilege. As a general rule, courts require proponents of the privilege to prove at least three elements: (1) the information sought comes from a critical self-analysis undertaken by the party seeking protection; (2) the public has a strong interest in preserving the free flow of the type of information sought; and (3) the information must be of the type whose flow would be curtailed if discovery were allowed. Some courts have added a fourth element: the document was prepared with the expectation that it be kept confidential, and it has in fact been kept confidential.

The principal defendant in Harris is a private contractor which works with the state Department of Children and Family Services providing services to troubled families. DCFS received a complaint in late 2009 alleging neglect and/or abuse of a small child. The DCFS assigned the matter to the defendant, which commenced an investigation. Two months later, the child was hospitalized, and upon release, was sent to live with her aunt. The child was soon returned to her mother, however, and not long after, was accidentally drowned when her mother left her unattended.

The plaintiff – the Public Guardian of Cook County - filed a wrongful death suit against the defendant and various others. The plaintiff alleged that the defendant was negligent in permitting the child to be returned to her mother, given the mother’s history and failure to complete parenting classes.

During a deposition, the executive director of the defendant testified that the defendant maintains a “continuous quality review department” which investigates cases and prepares reports. The reports evaluate the quality of the defendant’s services, identify “gaps in service delivery” and assess outcomes. The defendant refused to produce the report, the plaintiff moved to compel production, and the defendant opposed, citing the self-critical analysis privilege.

The trial court found that the privilege did not apply. At defendant’s request, the trial court held defendant in “friendly contempt” and fined defendant $1 per day pending production of the report. The defendant then appealed the contempt order.

The Appellate Court began by observing that nothing in the Illinois Rules of Evidence suggests the existence of a self-critical analysis privilege. Nor do any court rules support such a privilege claim. The court observed that what case law there was in Illinois on self-critical analysis had consistently refused to recognize the privilege.

The defendant argued that the privilege arises from the “intersect[ion]” of statute, public policy, discovery rules and evidence. Recognizing the privilege would further the purposes of legislation like the Child Death Review Team Act (20 ILCS 515/1), defendant suggested, but the Court concluded that the Act actually favors disclosure of the circumstances of an accidental death in hopes of preventing future tragedies. Defendant pointed out that the Medical Studies Act (735 ILCS 5/8-2101) specifically allows withholding of internal quality control documents by hospitals, but the Court declined to apply the Act by analogy to the defendant’s situation.

Although the court affirmed the order compelling production of the report, it recognized that the defendant had shown “no disdain” for the trial court, and had merely refused to comply “in good faith to secure appellate interpretation of this rather novel issue.” Accordingly, the court vacated the contempt finding.

Given the stakes, we should see multiple amicus curiae briefs before the Supreme Court. The case is likely to be argued in the fall, with a decision near the end of the year.

Image courtesy of Flickr by j3net.

Illinois Supreme Court to Clarify Mailing Standards for Notice of Appeal

The Illinois Supreme Court has decided a number of cases in recent years involving choices between form and substance or strict and substantial compliance. In most (but not all) cases, a majority of the Justices have sided with substantial compliance and proceeded to the merits. The Court took one more such case as the March term wound down. Huber v. American Accounting Association, a decision from the Fourth District, poses a question of considerable interest to appellate lawyers: what proof of timely filing is required when a notice of appeal is mailed before the due date, but not received by the clerk until after?

The defendant association incorporated in 1935. In 1996, the State dissolved the Association for failure to file an annual report. Six years later, the Association incorporated again, but the new entity appears to have been a shell; the Association deposited all dues paid by members into the 1935 Association's account, and no assets were merged. In June 2011, the Association sought to voluntarily dissolve the 2002 entity and reinstate the 1935 entity. Both requests were granted.

Two months later, the plaintiff petitioned to dissolve the 1935 entity and vacate the dissolution of the 2002 entity, and then to judicially dissolve the 2002 Association for misconduct. The Association moved to dismiss, arguing (1) that there was no jurisdiction over the long-dissolved 2002 entity; (2) the plaintiff had no standing, having never been a member of the 2002 Association; (3) plaintiff was not entitled to any relief against the 1935 Association, having alleged no misconduct by the earlier entity; and (4) plaintiff failed to make the necessary showings for a preliminary injunction. The trial court granted the motion to dismiss.

The plaintiff appealed, but the defendant raised a preliminary issue: whether the plaintiff had timely filed a Notice of Appeal sufficient to give the Appellate Court jurisdiction over the appeal.

The judgment in Huber was filed on March 6. Rule 303(a) provides that a notice of appeal has to be filed within 30 days of the entry of the judgment or final order appealed from.

But Illinois also has a mailbox rule of sorts. According to Rule 373:

If received after the due date, the time of mailing, or the time of delivery to a third-party commercial carrier for delivery to the clerk within three business days, shall be deemed the time of filing. Proof of mailing or delivery to a third-party commercial carrier shall be as provided in Rule 12(b)(3).

Rule 12(b)(3) provides that proof of service consists of a “certificate of the attorney, or affidavit of a person other than the attorney, who deposited the document in the mail or delivered the document to a third-party commercial carrier, stating the time and place of mailing or delivery, the complete address which appeared on the envelope or package, and the fact that proper postage or the delivery charge was prepaid.”

The clerk received the plaintiff’s Notice of Appeal on April 9, thirty-four days after judgment. The envelope in which the NOA arrived clearly showed a postmark date of April 3 – twenty-seven days after entry of judgment, three days before the deadline.

What the NOA didn’t have, however, was either of the required proofs from Rule 12(b)(3) – an attorney’s certificate or a non-attorney affidavit.

So: is a NOA clearly mailed before the deadline nevertheless untimely because it didn’t prove mailing in the proper way?

The Appellate Court districts are split on the issue. The Second District held in People v. Hansen that a clearly legible postmark was good enough, notwithstanding the lack of an appropriate proof of service. The First (People v. Tlatenchi) and Fourth (People v. Smith and People v. Blalock)Districts have held that an attorney certificate or affidavit is necessary in every case.

The Huber Court sided with the Fourth District, following Blalock. Because the plaintiff didn't comply with Rule 12(b)(3), the limited mailbox rule in Rule 373 didn’t apply. "[P]roof of a postmarked envelope contained within the record does not correct this defect," the Court wrote, "nor does it serve as a substitute for the omitted affidavit." The plaintiff's notice of appeal was accordingly untimely, and the appeal was dismissed.

We expect a decision in Huber in eight to twelve months.

Image courtesy of Flickr by WallyGrom.