The Lawletter Vol 38 No 2
Alistair Edwards, Senior Attorney, National Legal Research Group
Some states have statutes prohibiting a merchant from requiring its credit card customers to give or write certain "personal identification information" in a credit card transaction or on a credit card form. For example, pursuant to section 105 of chapter 93 of Massachusetts General Laws, the Massachusetts General Court has declared:
(a) No person, firm, partnership, corporation or other business entity that accepts a credit card for a business transaction shall write, cause to be written or require that a credit card holder write personal identification information, not required by the credit card issuer, on the credit card transaction form. Personal identification information shall include, but shall not be limited to, a credit card holder's address or telephone number. The provisions of this section shall apply to all credit card transactions; provided, however, that the provisions of this section shall not be construed to prevent a person, firm, partnership, corporation or other business entity from requesting information [that] is necessary for shipping, delivery or installation of purchased merchandise or services or for a warranty when such information is provided voluntarily by a credit card holder.
Mass. Gen. Laws Ann. ch. 93, § 105(a). Similarly, California's Song‑Beverly Credit Card Act ("Credit Card Act") provides:
(a) Except as provided in subdivision (c), no person, firm, partnership, association, or corporation that accepts credit cards for the transaction of business shall do any of the following:
(1) Request, or require as a condition to accepting the credit card as payment in full or in part for goods or services, the cardholder to write any personal identification information upon the credit card transaction form or otherwise.
(2) Request, or require as a condition to accepting the credit card as payment in full or in part for goods or services, the cardholder to provide personal identification information, which the person, firm, partnership, association, or corporation accepting the credit card writes, causes to be written, or otherwise records upon the credit card transaction form or otherwise.
Cal. Civ. Code § 1747.08(a)(1)-(2).
Several courts have recently considered whether a Zone Improvement Plan code ("ZIP code") constitutes personal identification information. For example, in Pineda v. Williams‑Sonoma Stores, 246 P.3d 612 (Cal. 2011), the California Supreme Court held that a business's act of requesting and recording a cardholder's ZIP code could violate the Credit Card Act and that the customer's ZIP code constituted personal identification information. There, the court explained:
Section 1747.08, subdivision (a) provides, in pertinent part, "[N]o person, firm, partnership, association, or corporation that accepts credit cards for the transaction of business shall . . . : [¶] . . . [¶] (2) Request, or require as a condition to accepting the credit card as payment in full or in part for goods or services, the cardholder to provide personal identification information, which the person, firm, partnership, association, or corporation accepting the credit card writes, causes to be written, or otherwise records upon the credit card transaction form or otherwise." (§ 1747.08, subd. (a)(2), italics added.) Subdivision (b) defines personal identification information as "information concerning the cardholder, other than information set forth on the credit card, and including, but not limited to, the cardholder's address and telephone number." (§ 1747.08, subd. (b).) Because we must accept as true plaintiff's allegation that defendant requested and then recorded her ZIP code, the outcome of this case hinges on whether a cardholder's ZIP code, without more, constitutes personal identification information within the meaning of section 1747.08. We hold that it does.
Id. at 616 (footnote omitted).
Likewise, in Tyler v. Michaels Stores, 840 F. Supp. 2d 438 (D. Mass. 2012), the U.S. District Court for the District of Massachusetts, applying the Massachusetts statute, recently held that the collection of ZIP codes by a retail chain violated the Massachusetts law prohibiting the writing of personal identification information on a credit card transaction form. In reaching this conclusion, the court held that a ZIP code constitutes "personal identification information." There, the court explained:
Therefore, this Court holds that ZIP code numbers are "personal identification information" under Section 105(a), because a ZIP code number may be necessary to the credit card issuer to identify the card holder in order to complete the transaction. This construction is more consistent with the Massachusetts legislative intent to prevent fraud than a statutory construction that simply views the ZIP code as a component of an address that later can be used to obtain a full address for marketing purposes.
Id. at 446; see also see also Tyler v. Michaels Stores, Civ. Act. No. 11‑10920‑WGY, 2012 WL 397916, at *4 (D. Mass. Feb. 6, 2012) (certifying to the Massachusetts Supreme Judicial Court the questions under Mass. Gen. Laws. Ann. ch. 93, § 105(a): "1. . . . [M]ay a ZIP code number be 'personal identification information' because a ZIP code number could be necessary to the credit card issuer to identify the card holder in order to complete the transaction? 2. . . . [M]ay a plaintiff bring an action for this privacy right violation absent identity fraud? [and] 3. . . . [M]ay the words 'credit card transaction form' refer equally to an electronic or a paper transaction form?").
Of course, the above discussion is relevant only to those states, like California and Massachusetts, that have statutes prohibiting a merchant from writing, collecting, causing to be written, or otherwise recording a credit card customer's personal identification information. Therefore, the first step for any attorney faced with this issue would be to research the statutory law of his or her state.
Interestingly, the California Supreme Court recently held that the Credit Card Act provision prohibiting merchants from requesting and recording personal identification information concerning the cardholder does not apply to online purchases in which the product is downloaded electronically, since the safeguards against fraud that are provided in the Credit Card Act, such as visually inspecting the credit card, are not available to online merchants selling downloadable products. Apple Inc. v. Superior Court, 292 P.3d 883 (Cal. 2013).
March 21, 2013
Charlene Hicks, Senior Attorney, National Legal Research Group
The advent of a new year marks the introduction of new state legislation that impacts business and commercial transactions, sometimes in significant ways. A few newly enacted statutes that change existing laws and ways of doing business within the state are highlighted below.
On January 1, 2013, Senate Bill 474 came into effect. Under this new law, a construction contract is void if it requires a subcontractor to insure, indemnify, or defend a general contractor, construction manager, or other subcontractor from its own active negligence or willful misconduct, design defects, or claims that do not arise out of the subcontractor's own work. This law effectively eliminates "Type I," or active negligence, indemnity clauses in construction contracts. The law does not affect "Type II," or passive negligence, indemnity clauses, nor does it apply to design professionals.
Also effective on January 1, 2013, Assembly Bill 1396 requires all employee commission agreements to be set forth in writing and to explain the method by which commissions will be computed and paid. For purposes of this law, "commissions" are defined as compensation paid to any person in connection with the sale of the employer's property or services and based proportionately on the amount or value thereof. However, commissions do not include short-term productivity bonuses or bonus and profit-sharing plans unless such payments are based on the employer's promise to pay a fixed percentage of sales or profits as compensation for work.
Effective April 1, 2013, a new Mechanic's Lien Statute, codified at N.C. Gen. Stat. §§ 44A-7 to -24.14, will come into effect. The new statutory scheme is largely patterned after Virginia's Mechanic's Lien Statute and will apply to all construction projects except those having a value of less than $30,000 or involving improvements to existing residential dwellings. Among other things, the new statute requires potential lien claimants to notify an owner identified as a "lien agent" prior to filing a mechanic's lien on real property. In a change from North Carolina's former law, notice to the lien agent will be required to preserve the lien claimant's priority over a bona fide purchaser or mortgage lender.
In addition, a separate piece of legislation, HB 1052, effective January 1, 2013, amends the Mechanic's Lien Statute by expressly stating that a lien on funds "arises, attaches, and is effective immediately upon the first furnishing of labor, materials, or rental equipment at the site of the improvement." This amendment was passed to effectively overrule bankruptcy court determinations that a lien on funds was not effective at such an early period and serves to protect a subcontractor in the event of a general contractor's declaration of bankruptcy.
Within the employment setting, an increasing number of states are taking action to protect employee privacy rights in social media. In 2012, six states—California, Delaware, Illinois, Maryland, Michigan, and New Jersey—enacted legislation that prohibits employers from requesting or requiring an applicant or employee to disclose a username or password for a social media account such as Facebook or Twitter. As of January 28, 2013, several other states have introduced legislation to protect an individual's right to social media privacy in the educational or employment setting. These states include Colorado, Hawaii, Kansas, Massachusetts, Mississippi, Missouri, Montana, Nebraska, New Hampshire, New York, North Dakota, Oregon, Texas, Vermont, and Washington.
It should also be noted that other bills currently under consideration by state legislatures could potentially change the law in certain business settings. Some of the more noteworthy bills are listed below.
: California employers would be prohibited from discriminating against an applicant or employee due to his or her condition of being homeless, lack of a permanent mailing address, or current income level.
SB 51: A noncompetition agreement between an individual and a former employer would be rendered unenforceable if the individual is unemployed and has applied for, and is found eligible to receive, unemployment benefits. If passed, the law would take effect on October 1, 2013 and would apply only to noncompete agreements executed on or after that date.
HB 1913: If a license is required for a contractor to perform work and the contractor does not have a valid license or certificate issued by the board of contractors, the contractor cannot record a valid mechanic's lien.
The Lawletter Vol 37 No 11
Alistair Edwards, Senior Attorney, National Legal Research Group
The Truth in Lending Act ("TILA"), 15 U.S.C. §§ 1601 et seq., imposes certain obligations upon the holder/owner of a mortgage (the mortgagee) as well as upon the servicer of the mortgage loan. Recently, in Kievman v. Federal National Mortgage Ass'n, No. 1:12-cv-22315-UU, 2012 WL 5378036 (S.D. Fla. Sept. 14, 2012), the court considered whether a mortgagee could be liable for the servicer's TILA violation.
In that case, the plaintiff-mortgagors alleged a violation of 15 U.S.C. § 1641(f)(2) and attempted to hold the mortgagee and the servicer liable for this violation. That statutory section, referring only to the servicer, provides:
Upon written request by the obligor, the servicer shall provide the obligor, to the best knowledge of the servicer, with the name, address, and telephone number of the owner of the obligation or the master servicer of the obligation.
15 U.S.C. § 1641(f)(2). Moreover, § 1640 imposes liability for noncompliance with § 1641(f)(2):
[A]ny creditor who fails to comply with any requirement imposed under this part, including . . . subsection (f) or (g) of section 1641 of this title . . . with respect to any person is liable to such person[.]
Id. § 1640(a). Confusingly, although § 1641(f)(2) refers only to a servicer, § 1640(a) refers only to a creditor (the mortgagee). The plaintiffs emphasized this fact to argue that a creditor-mortgagee should be held liable for its servicer's violation of § 1641(f)(2). Rejecting this argument, the court stated:
This Court . . . declines to extend liability to obligation owners—be they creditors or assignees—for their servicers' failures to comply with § 1641(f)(2). The reference to "subsection (f)" in § 1640(a) is best explained by the fact that the owner of an obligation may sometimes act as the servicer of that obligation. The statute contemplates this scenario in the first paragraph of subsection (f), which reads: "A servicer of a consumer obligation . . . shall not be treated as an assignee of such obligation for the purposes of this section unless the servicer is or was the owner of the obligation." 15 U.S.C. § 1641(f)(1). In the case of an owner‑servicer, then, failure to comply with subsection (f) does subject it to liability. See Khan, 849 F.Supp.2d at 1382 n. 2 ("The Court notes that an entity that is both the servicer and lender on a loan would clearly be liable for damages."); Davis v. Greenpoint Mortg. Funding, Inc., No. 1:09-cv-2719, 2011 WL 707221 at *3 (N.D.Ga. Mar. 1, 2011) (noting that subsection (f)(1) "limits a servicer's liability to situations in which the servicer was once an assignee or owner of the loan"). But there is no question of vicarious liability for the servicer's violation if the servicer could not itself be held liable. See Holcomb, 2011 WL 5080324, at *7 ("[I]t remains unclear what liability would transfer given that [the servicer] itself bears no liability under the facts alleged.").
Kievman, 2012 WL 5378036, at *3. As the court logically pointed out, a mortgagee that services its own loan could be liable for a violation of § 1641(f)(2). "[T]his Court's interpretation recognizes that § 1640(a)'s reference to subsection (f) creates a private right of action against those obligees who might employ unfair practices in servicing their loans[.]" Id. at *4 (court's emphasis).
Thus, a mortgagee may very well not be liable under TILA for its servicer's violation of the Act. However, it should be noted that there is likely a division of authority on this issue. In fact, the same district responsible for the Kievman decision had previously held that a creditor-mortgagee could be held vicariously liable for damages under TILA for a loan servicer's failure to properly respond to a borrower's request for information about the loan owner under § 1641(f)(2). Khan v. Bank of N.Y. Mellon, 849 F. Supp. 2d 1377 (S.D. Fla. 2012).
The Lawletter Vol 37 No 9
Charlene Hicks, Senior Attorney, National Legal Research Group
As judgment creditors throughout the nation have experienced firsthand, it is often more difficult to enforce a judgment against a financially strapped debtor than it is to obtain the judgment in the first place. To further complicate matters, state and federal laws protect certain assets, such as retirement pensions, from garnishment. In an effort to circumvent such measures, creditors may attempt to garnish the debtor's bank account into which protected monies have been deposited. On a nationwide basis, these efforts have met with mixed success. Some courts have held that protected funds cannot be garnished even after they have been deposited in the debtor's account, whereas other courts have ruled that the monies lose their protected status once they have been deposited.
This split of authority was highlighted in the recent case of Anthis v. Copland, 270 P.3d 574 (Wash. 2012). There, Bonnie Anthis won a wrongful death lawsuit against Walter Copland, a retired police officer. To enforce the judgment, Anthis attempted to garnish Copland's only known asset, his retirement pension, which had been deposited in Copland's personal bank account. Copland, in turn, claimed that the funds were exempt from garnishment or attachment. The relevant Washington state statute states that a person's right to a retirement allowance "shall not be subject to execution, garnishment, attachment, . . . or any other process of law whatsoever." Wash. Rev. Code § 41.26.053(1).
In analyzing the merits of Copland's claim, the Washington Supreme Court conducted a detailed exploration of how other state and federal courts have dealt with benefits-exemption statutes. As a general rule, these courts have held that "some unambiguous reference to money actually paid to or in the possession of the pensioner is necessary in order to find that pension funds retain their exempt status postdistribution." Anthis, 270 P.3d at 578 (¶ 14). Federal courts, for example, have ruled that the language of the Social Security Act prohibiting garnishment of "the moneys paid or payable" to a beneficiary mandates the continued protection of such funds "even after deposit" in the beneficiary's personal bank account. Id. (citing Philpott v. Essex County Welfare Bd., 409 U.S. 413, 415-17 (1973)).
In contrast, the language of the ERISA statutes simply requires that employee benefits plans prohibit the assignment or alienation of benefits. The First, Second, Third, Ninth, and Tenth Circuits have held that this language is not an antialienation provision and, therefore, does not prohibit garnishment after funds are deposited into pensioners' personal bank accounts. Id. at 578-79 (¶ 15). The Fourth Circuit, however, has ruled that a pensioner cannot be required to turn over ERISA benefits that have been paid to him. Id.; see United States v. Smith, 47 F.3d 681, 684 (4th Cir. 1995).
Cases decided under state law "have tended to follow the federal holdings requiring explicit language to exempt benefit payments deposited into a personal bank account or otherwise placed into the personal possession of the debtor." Anthis, 270 P.3d at 579 (¶ 16). A Michigan court of appeals, for example, had held that its state exemption statute protected only a retiree's right to a benefit and, therefore, did not prohibit garnishment of monies paid as a retirement benefit. Id. (discussing Whitwood, Inc. v. S. Blvd. Prop. Mgmt. Co., 701 N.W.2d 747 (Mich. Ct. App. 2005)).
A minority of state courts, however, have held that "even where the statutory language is somewhat ambiguous, . . . 'statutorily exempt funds do not lose their exempt status by voluntary deposit into a checking account, as long as the source of the exempt funds is known or is reasonably traceable.'" Id. at 579 n.11 (¶ 17) (quoting Haggarty v. George, No. 00-C.A.-86, 2001-Ohio-3481, 2001 WL 1647216, at *2 (Ct. App. Dec. 13, 2001) (unpublished)). According to this minority view, the "placement of [protected] funds in a bank does not strip them of their protected character." Id.
Following the majority line of cases, the Anthis court ruled that because the Washington Legislature did not unambiguously extend exemption protection to pension monies deposited in a bank account, such funds were not protected from garnishment. Thus, Copland's pension payments lost their protected status at the moment they were deposited into his personal bank account. Hence, Anthis could legitimately garnish those monies.
demonstrates, judgment creditors may successfully garnish or attach a debtor's previously protected assets, such as retirement funds, once the asset is converted into monies and deposited in the debtor's bank account. A creditor's ability to satisfy its judgment through this means is largely dependent on the exact language of the state or federal benefits-exemption statute in question. A judgment creditor interested in pursuing this avenue of relief should carefully review the status of the law in the governing jurisdiction prior to taking any enforcement action.
October 30, 2012
Charlene Hicks, Senior Attorney, National Legal Research Group
In recent days, federal officials have launched an all-out effort to halt the fraud and corruption plaguing the nation's bank mortgage industry. On October 9, 2012, the Federal Trade Commission ("FTC") filed three separate federal court lawsuits against allegedly phony mortgage-relief companies. These suits accuse the companies of having engaged in deceptive business practices by falsely assuring struggling homeowners that they could save their homes from foreclosure, charging thousands of dollars in up-front fees, and then providing little or no actual assistance. On the same day, the U.S. Attorney General, the Federal Bureau of Investigation ("FBI"), and the Department of Housing and Urban Development ("HUD") announced the results of the Distressed Homeowner Initiative, a year-long, coordinated, multilevel investigation targeting predatory foreclosure-rescue and mortgage-modification schemes. Meanwhile, on another front, the U.S. attorney's office in Manhattan filed a mortgage fraud lawsuit against Wells Fargo, accusing the major bank of having engaged in improper underwriting of home loans for over a decade. The following day, October 10, the FTC announced that it had reached a settlement with Equifax on allegations concerning the improper sale of information on late borrowers. The FTC alleged that Equifax had sold more than 17,000 lists of consumers who met specific criteria, such as being late on their mortgage payments, to Direct Lending Source, which, in turn, had sold the lists to various third parties.
A major source of ammunition in these federal efforts against mortgage fraud is the newest provision of the FTC's Mortgage Assistance Relief Services ("MARS") Rule, which was issued in November 2010. See 12 C.F.R. § 1015.5. This Rule prohibits mortgage-relief companies from collecting any fees until the homeowner has a written offer from his or her lender or servicer that the individual deems acceptable. Mortgage-relief services that charge advance fees to consumers may be held civilly or criminally liable for violation of the MARS Rule. See id. § 1015.10.
Notably, attorneys are generally exempt from MARS Rule prohibitions. Id. § 1015.7. To qualify for exemption from all MARS disclosure rules except the advance-fee ban, an attorney must satisfy three conditions: (1) The attorney must be engaged in the practice of law; (2) the attorney must be licensed in the state where the consumer or dwelling is located; and (3) the attorney must comply with state laws and regulations governing attorney conduct relating to the MARS Rule. Id. § 1015.7(a). To qualify for an exemption from the ban against advance fees, the attorney must also meet a fourth requirement: Any up-front fees collected must be placed in a client trust account, and the attorney must abide by state laws and regulations governing such accounts. Id. § 1015.7(b).
Broadly speaking, the sweeping actions just taken by various federal agencies may signal a general change in attitude from one that is "procreditor" to a more lenient "prodebtor" perspective. Such a shift in the law could potentially benefit debtors seeking relief from seemingly harsh creditor-imposed penalties of all types.
It should also be noted that the FBI's announcement of October 9, 2012 emphasized the role that unscrupulous attorneys have played in perpetrating mortgage fraud upon desperate consumers. In that announcement, the agency specifically stated it has "noticed a disturbing trend among these [distressed homeowner fraud] cases—an increasing number of lawyers playing primary or secondary roles in the fraud." Distressed Homeowner Initiative: Don't Let Mortgage Fraud Happen to You, http://www.fbi.gov/news/stories/2012/october/don't-let-mortgage-fraud-happen-to-you. According to the FBI, phony mortgage modification services have attempted to circumvent the MARS Rule advance-fee ban by "using attorneys—which by itself adds an air of legitimacy to their fraudulent schemes—and calling their upfront fees 'legal retainers.'" Id.
The FBI's singling out of the attorney exemption to the MARS Rule may be taken as a sign that the federal government intends to take steps to close this "loophole" by imposing more stringent requirements on attorneys engaged in the practice of assisting financially troubled homeowners. Attorneys for consumer-debtors should take care to stay abreast of any new developments in this regard. At a minimum, the imposition of more stringent federal regulations that limit, or even outright prohibit, the collection of advance or retainer fees from clients who may wish to obtain a modification of their underlying home mortgages would significantly impact the risks associated with the pursuit of such cases and the maintenance of client trust accounts.
The Lawletter Vol 37 No 7
Charlene Hicks, Senior Attorney, National Legal Research Group
Precision is essential in drafting effective legal contracts of any type. If the contract language is not sufficiently expansive to include a particular party or situation, contractual obligations that were intended to be binding may be set aside as inapplicable. At the same time, however, there has been a great movement toward "plain language" contracts as opposed to agreements comprised of "legalese." The interplay between these potentially conflicting themes was recently highlighted by the First Circuit's opinion in Gove v. Career Systems Development Corp., 689 F.3d 1 (1st Cir. 2012), a case involving the applicability of an employer's mandatory arbitration clause to an unsuccessful job applicant.
In that case, Ann Gove applied for a job with Career Systems Development Corporation ("CSD"). The final section of the electronic job application contained the following arbitration clause:
CSD also believes that if there is any dispute between you and CSD with respect to any issue prior to your employment, which arises out of the employment process, that it should be resolved in accord with the Dispute Resolution Policy and Arbitration Agreement ("Arbitration Agreement") adopted by CSD for its employees. Therefore, your submission of this Employment Application constitutes your agreement that the procedure set forth in the Arbitration Agreement will also be used to resolve all pre-employment disputes.
Id. at 3. Gove duly checked the "accept" box next to the statement, indicating that she accepted the terms of the agreement, including the arbitration clause.
Gove was pregnant throughout the period in which her job application was processed. After she was not hired by CSD, Gove filed an employment discrimination lawsuit in federal district court against CSD. CSD moved to compel arbitration on the basis of the arbitration clause contained in the electronic job application. The district court denied CSD's motion on the grounds that the arbitration clause was ambiguous as to whether it applied to Gove, a job applicant who was never hired, and the ambiguity had to be construed against CSD as the drafter of the clause.
On appeal, the First Circuit affirmed. In reaching this decision, the court began by emphasizing that the dispute concerned "the scope of the arbitration clause, not its validity." Id. at 5. In other words, the arbitration clause was clearly valid and effective in at least some circumstances.
In analyzing the scope of CSD's arbitration provision, the court noted that the arbitration clause was devoid of any reference to job "applicants." Id. at 6. "Instead, every reference is to 'your employment,' 'the employment process,' or 'pre-employment disputes.'" Id. Based on this language, the court determined that a reasonable basis existed for Gove's conclusion that she would be bound by the arbitration clause only in the event that she was ultimately hired.
Because the contract language was susceptible to different interpretations and, therefore, was ambiguous, the court concluded that the contract had to be construed against the drafter, CSD. Although Maine has a broad presumption favoring arbitration as a method of dispute resolution, this broad presumption does not take precedence over the equitable rule favoring the construction of contracts against the drafter, particularly where such contracts are presented to the nondrafting party on a take-it-or-leave-it basis. As a result, Gove was not required to arbitrate her claims against CSD.
indicates, any ambiguities in the scope of "plain language" contracts will likely be construed against the drafting party. As a result, it is critical that counsel retained to draft a contract take steps to ensure that foreseeable contingencies are clearly and unreservedly accounted for in the express terms of the contract. The desire for plain contract terms does not negate the need to expressly document the expansive reach of a party's contractual obligations.
The Lawletter Vol 37 No 5
Tim Snider, Senior Attorney, National Legal Research Group
There are occasions when it pays to plead a state law cause of action, even though the main claim arises predominantly under federal law. In Belk, Inc. v. Meyer Corp., U.S., 679 F.3d 146 (4th Cir. 2012), Meyer claimed that Belk had infringed certain of its copyrights, trademarks, and trade dress in selling at retail a certain line of high-end cookware. After a nine-day trial, the court found, based on the jury's factual findings, that Belk had engaged in unfair and deceptive trade practices as a matter of law. The jury found that Belk had distributed, marketed, and sold a private‑label cookware line that was "deceptively similar" to Meyer's trademarked product line. Belk did so after receiving product, sales, and market information, as well as images and samples of Meyer's line. Finally, Belk purchased a cookware design from a third party that was "deceptively similar" to Meyer's product line, even after learning that proposed designs sold by the third party were being sold by Meyer.
After the jury rendered its verdict, the district court observed that the jury had made its findings regarding Meyer's claim for unfair and deceptive trade practices, and the court invited argument from the parties as to whether those findings were sufficient as a matter of law to establish that Belk had engaged in unfair and deceptive trade practices under North Carolina law. After argument, the district court determined that, based on the jury's findings, Belk had engaged in unfair and deceptive trade practices as a matter of law and that Meyer was entitled to treble damages. As a procedural matter, the Fourth Circuit concluded that Belk had forfeited its argument that the judgment was not supported by the evidence by failing to timely file a motion for a new trial under Federal Rule of Civil Procedure 50(b). As the court put it, "[a] lawyer has a duty to preserve issues on the record for his client." Id. at 160.
Under the Lanham Trademark Act, 15 U.S.C. § 1117(a), damages normally will not be trebled or attorney's fees awarded absent a finding that the case is exceptional or that the defendant's conduct warrants an enhanced award. Upon a finding of a violation of North Carolina General Statutes section 75-1.1, however, treble damages are assessed automatically pursuant to section 75-16. Once the jury found that Belk's conduct was unfair or deceptive, within the meaning of the statute, the award of treble damages was not discretionary.
Prudent counsel should always look to state law for additional or augmented remedies, even when the claim predominantly sounds in federal law. Particularly in the field of unfair competition, state remedies can enhance or augment the remedy awarded for conduct that violates both federal and state law.
The Lawletter Vol 37 No 5
Anne Hemenway, Senior Attorney, National Legal Research Group
Stringent federal anti-money-laundering laws, many of which were originally passed to control mob and other underground financial transactions and activities, have existed for some time. After September 11, 2001 and the passing of the USA PATRIOT Act, several of these laws were amended and expanded, although the connection with terrorism and the controls on domestic banking have long been questioned and scrutinized. See Megan Roberts, Big Brother Isn't Just Watching You, He's Also Wasting Your Tax Payer Dollars: An Analysis of the Anti-Money Laundering Provisions of the USA PATRIOT Act, 56 Rutgers L. Rev. 573 (Winter 2004).
Today, these federal laws are being reviewed by ordinary small bank customers and investors who are innocent victims of Ponzi schemes and other fraudulent investment scams. Some of the provisions are being looked at as a possible means of asserting claims against banks that may themselves be directly or indirectly involved in the scams, particularly when the fraudulent investment companies turn out to be insolvent and judgment-proof.
Title 31 U.S.C. § 5318 arises under the Department of the Treasury and sets forth the general powers of the Secretary of the Treasury to address and monitor monetary transactions. This statute, the Annunzio-Wylie Anti-Money Laundering Act, popularly known as the Bank Secrecy Act, requires banks to issue a Suspicious Activity Report ("SAR") to the Secretary of the Treasury to report suspicious financial transactional activity at their banks. It also provides immunity to financial institutions from civil liability for making the proper disclosures regarding both suspicious cash transactions and electronic transfers. See Gregory v. Bank One Corp., 200 F. Supp. 2d 1000 (S.D. Ind. 2002).
Numerous regulations have been promulgated under 31 U.S.C. § 5318(g) to implement the Bank Secrecy Act within the financial market. The regulation that pertains directly to banks is 12 C.F.R. § 21.11(k), which details regulations for national banks for filing a SAR.
Unfortunately, for the small investors caught up in one of the many Ponzi schemes that have arisen in recent years under the banks' so-called watchful eye, the Bank Secrecy Act's requirement that banks monitor activity and prepare SARs for the Treasury Department does not create a private right of action and does not impose a special duty of care on the banks upon which they could be liable. In re Agape Litig., 681 F. Supp. 2d 352 (E.D.N.Y. 2010); see also 2 Corporate Counsel Guidelines § 5:20 (Westlaw database updated Nov. 2011) (commentary on SARs required by federally insured financial institutions). In Union Bank of California, N.A. v. Superior Court, 29 Cal. Rptr. 3d 894 (Ct. App. 2005), the court addresses a bank's privilege under the federal law from producing into evidence any SARs it prepares.
In addition, apart from the Bank Secrecy Act, there are numerous decisions that hold that a bank's failure to investigate a customer's suspicious activity does not give rise to liability to a third-party, nonbank customer who has been injured by the customer's fraud. See Pub. Serv. Co. of Okla. v. A Plus, Inc.
, No. CIV-10-651-D, 2011 WL 3329181 (W.D. Okla. Aug. 2, 2011) (and citations therein).
July 3, 2012
Charlene Hicks, Senior Attorney, National Legal Research Group
Environmentally friendly, "green" products have become embedded in our culture, and the "green" concept now extends to the building construction industry. Indeed, many localities now mandate that building construction projects conform with specified standards of green construction. Although virtually no reported court cases on green issues in the building construction context have arisen to date, it seems only a matter of time before a new body of law develops around such issues.
Because the engineering and technology behind green construction is so new, the lack of any documented product history poses thorny problems of risk allocation. If the green building product does not perform at the desired or expected level, should the ensuing cost be borne by the architect/engineer, the contractor, or the owner? This dilemma has been explained by one commentator as follows:
With the hyper-growth of [Leadership in Energy and Environmental Design ("LEED")] certifications and laws encouraging green building, the construction industry is flush with new products aimed at cashing in on the sustainable movement. Manufacturers are putting new products on the market, with limited time for research and virtually no product history of performance. Go to the Energy Star website, and you will find a link to new products, with this note, "products in more than 50 categories are eligible for the ENERGY STAR. They use less energy, save money, and help protect the environment." Architects and engineers who specify such products rely on the manufacturer's data but have no actual experience with the product performance. So who bears the risk of specifying experimental products? The client or the design professional? While permeable paving allows more water to return to the earth, how does it hold up under freeze/thaw cycles? Who pays to tear up a two-foot thick "green" roof to get access to a leaking roof membrane? What happens when a "grey water" system does not produce enough water to fixtures, or, worse yet, spreads some virus to those who come in contact with "dirty" water?
G. William Quatman & Paula Vaughan, Legally Green: What Lawyers Need to Know About Sustainable Design (47th Annual Meeting of Invited Attorneys) 163, 170 (2008).
In instances where a green component or building fails to fulfill preconstruction expectations, property owners are likely to pursue negligence or breach-of-contract claims against the architect, engineer, or general contractor. In anticipation of such claims, all parties involved in the green construction project should carefully negotiate the allocation of future liability during the contract negotiation process.
As a first step in reducing exposure to potential liability, "[d]esign professionals must be leery of agreeing to meet a specific third-party certification standard. Warranting that the design will achieve a certain standard jeopardizes one's insurance coverage, as liability may no longer be determined by a breach of standard of care, but rather the failure to achieve what one has warranted." 5 Philip L. Bruner & Patrick J. O'Connor Jr., Construction Law § 17:38.62 (Westlaw database updated June 2012). Stated another way, if a professional within the building construction industry warrants or guarantees that a green product or building will achieve a specific certification standard, such as certification by the U.S. Green Building Council pursuant to its LEED program, failure to meet that standard exposes the professional to great risk of personal liability for breach of warranty and breach of contract. Notably, liability for this risk may lie outside the scope of the professional's insurance coverage.
Other potential areas of dispute that may be addressed during the contract negotiation process include the following:
—Damages for Delays Arising from Certification Process. If a building construction contract does require LEED or other certification, the property owner may seek delay damages against a contractor, architect, or engineer for the damages arising from any delay the contractor experiences in obtaining the required certification.
—Changing Legal Standards. Green construction standards are constantly evolving, and local laws that govern the construction project may change prior to project completion. A change in the governing legal standards will likely result in construction delays and/or an increase in the costs associated with project completion in conformance with specified green standards or related incentives.
—Conflict Between Green Objectives and Other Program Requirements. To achieve a "green" rating, the building must include certain structural components. These components, however, may compromise the owner's security or aesthetic requirements. This conflict will likely frustrate the owner's expectations and/or result in delays and increased costs to the project.
—Consumer Protection Laws. Advertisement by industry professionals of green credentials or green design may constitute fraudulent inducement within the scope of the State's consumer protection law. This, in turn, may serve to expose the professional to liability for multiplied or punitive damages.
In an effort to address these problems of risk allocation, the ConsensusDOCS organization released a Green Building Addendum in 2009. Entitled "The ConsensusDOCS 310," the Addendum basically competes with standard American Institute of Architects ("AIA") form building construction contracts. Under Article 8.2 of the Addendum, all contracting parties are subject to any limitations on liability that are included in the underlying contract. Article 8.2 further specifies that the owner's "loss of . . . profit or inability to realize potential reductions in operating, maintenance or other related costs, tax or other similar benefits or credits, . . . resulting from a failure to attain the [project's green building goals] shall be deemed consequential damages subject to any applicable waiver of consequential damages" in the underlying contract. ConsensusDOCS 310 art. 8.2.
Notably, the Addendum recognizes the unique damages that may arise from the breach of a green building contract and classifies such damages as consequential rather than direct in nature. The Addendum also expressly authorizes the parties to negotiate the allocation of risk for these special kinds of losses prior to the start of construction. Thus, the parties may expressly agree that the architect, engineer, and general contractor are not liable for any consequential losses sustained by the owner due to the failure of the green building or component to achieve an expected result. By the same token, the parties are free to place the risk of such consequential losses on a specified professional, such as the engineer or building architect.
On March 28, 2012, a new green building code entitled the "International Green Construction Code" ("IgCC") was published. The IgCC, which was cosponsored by the AIA, has been described as follows:
The IgCC is a national model overlay code to cover minimal sustainable design provisions for commercial buildings and some residential buildings. It will apply to new construction as well as existing building alterations and additions and will become law in jurisdictions (local municipalities and states) that adopt it. Its mandatory provisions are expected to push the commercial building sector towards a broader degree of sustainability unattainable through voluntary measures alone.
Sara Fernández Cendón, IgCC: A New Baseline for Green Design, AIArchitect (Mar. 30, 2012) The IgCC focuses on the end product, that is, the actual building constructed. At this time, it does not appear that the IgCC addresses the problems of risk allocation described above. Even so, IgCC provisions, if enacted in a specific jurisdiction, may intersect with various provisions of the underlying construction contract and may thereby indirectly impact the issue as to which party bears the risk of a specific type of loss.
As the above discussion indicates, the legal landscape in the area of green building construction is in a state of constant flux and uncertainty. Traditional concepts of contract, tort, and property law will be challenged as disappointed owners of green buildings that in some way fail to meet with expectations seek recompense for their losses. All parties involved in any phase of green construction should be forewarned of the potential risks they face upon engaging in such projects, and attorneys within the building construction industry are well-advised to keep abreast of this evolving body of law.
The Lawletter Vol 36 No 12
Tim Snider, Senior Attorney, National Legal Research Group
[For a different perspective on the Auriga case, infra, see the article by Charlene Hicks in the March Lawletter, entitled A Manager's Fiduciary Duty Under the Delaware LLC Act, 36 Lawletter No. 9.
Although all States have enacted statutes authorizing the creation of limited liability companies ("LLCs") (and in fact a number of States have enacted the Revised Uniform Limited Liability Company Act (2006) or its predecessor, see Larry E. Ribstein, An Analysis of the Revised Uniform Limited Liability Company Act, 3 Va. L. & Bus. Rev. 35 (2008)), there still has not yet been an abundance of reported cases involving the organization, structure, and operation of LLCs. For example, there is a substantial body of litigation defining the obligation owed by corporate officers and directors to the corporation and to the shareholders. But there is little reported litigation discussing the correlative duties owed by the manager of an LLC to the other members.
In Auriga Capital Corp. v. Gatz Properties, LLC, No. C.A. 4390-CS, 2012 WL 361677 (Del. Ch. Jan. 27, 2012), an LLC owned the rights to sublease a valuable golf course property to a golf management company. The controlling interest in the LLC was acquired by the managing member and members of his family. There came a time when it became apparent that the sublease would not be renewed since the sublessee management company was not operating the property as profitably as it could have done. The LLC had invested heavily in the property, and it occurred to the managing member that if he could get rid of the unaffiliated members of the LLC, the property could be sold and developed in a lucrative transaction. The managing member brought some deliberately low-ball bids for the property to the minority members, who rejected them and insisted that the manager attempt to secure better offers for the property.
Frustrated by the refusal of the minority members to play along with his scheme, the managing member orchestrated a sham auction for the property at which he was the only bidder at a distress sale price. The minority members brought suit for damages, alleging that the managing member had breached the fiduciary duty he owed to the minority members. The managing member initially denied that he owed any fiduciary duty to the minority, but later he modified his position. He argued that even if he had breached his fiduciary duty, his actions were taken in good faith and with due care, thus insulating him from liability. The court was not persuaded by his arguments.
The court initially observed that Delaware's LLC statute authorizes the LLC to disclaim any fiduciary duties owed by the members to each other. The statute provides that "[i]n any case not provided for in this chapter, the rules of law and equity, including the law merchant, shall govern." Del. Code Ann. tit. 6, § 18‑1104. If those duties are not disclaimed by contract, the duties subsist and are applied by default. The court reasoned that
the statute allows the parties to an LLC agreement to entirely supplant those default principles or to modify them in part. Where the parties have clearly supplanted default principles in full, we give effect to the parties' contract choice. Where the parties have clearly supplanted default principles in part, we give effect to their contract choice. But, where the core default fiduciary duties have not been supplanted by contract, they exist as the LLC statute itself contemplates.
Id. at *9.
The implication is that a Delaware LLC could be created in which the managers could by contract disclaim any fiduciary duties they owed to the passive investor members. The court was not convinced of the wisdom of that result, but it observed that it was for the legislature to change the statute if, on reflection, it concluded that the provisions of the statute permitting disclaimers of fiduciary duty would lead to unacceptable results for investors. Because the LLC agreement in the case before it did not explicitly displace the fiduciary duties owed by a manager that are implied at common law, the court concluded that the defendant was bound by those duties. The court found that those duties had been breached, and it awarded damages and attorney's fees to the plaintiffs.
Most LLC statutes provide that the duties owed by the members to each other may be modified by contract, but few would permit an outright disclaimer of all duties that would otherwise be recognized at common law. Still, prudent counsel in advising clients organizing an LLC should carefully consider language that clearly defines the nature and extent of the duties owed by the members to each other and to the LLC.