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EMPLOYMENT DISCRIMINATION: Religious Harassment in Workplace—Cautionary Tale for Employers

The Lawletter Vol 39 No 2

John Buckley, Senior Attorney, National Legal Research Group

     Although sexual harassment is now a well‑known pitfall for employers, the potential exposure to liability for harassment based on religion often receives less attention. Recent decisions from state and federal courts show, however, that employers must be proactive to avoid potential claims based on religious harassment. See May v. Chrysler Group, LLC, 716 F.3d 963 (7th Cir. 2013); Cowher v. Carson & Roberts, 40 A.3d 1171 (N.J. Super. Ct. App. Div. 2012).

     The case of Detail v. Best Chevrolet, Inc., 655 F.3d 435 (5th Cir. 2011), serves as a cautionary example for employers. In that case, a used-car salesman asserted a claim of religious harassment against his former employer. More specifically, he claimed that when his supervisor learned of his request for time off to attend a church event on the morning of July 4, the supervisor declared, "[I]f you go over there, I'll fire your f‑‑‑ing ass." Id. at 438. The plaintiff claimed that the supervisor's preventing him from attending his church on July 4 under the guise of requiring him to be at work had been pretext, because he had been forced to come in early that day, well before anyone else. Further, when the supervisor admonished the plaintiff early that morning to get out on the floor, the plaintiff replied that he was reading his Bible. The supervisor made other disparaging comments related to the plaintiff's religion, such as "God would not put food on your plate" and "go to your f‑‑‑ing God and see if he can save your job." Id. The plaintiff alleged that these comments created a hostile environment and resulted in his constructive discharge.

     The district court granted summary judgment, finding that these and other comments, which were made over a two‑month period, were stray remarks and did not create a hostile environment. The Fifth Circuit Court of Appeals reversed the grant of summary judgment. Although the disparaging comments, considered separately, may not have been sufficiently severe or pervasive to establish an actionable claim, the court explained that a continuous pattern of less severe incidents can create a hostile work environment in violation of Title VII.

     A simplistic approach to the issue, such as barring religious expression at work, is more likely to backfire and result in a discrimination claim than it is to insulate an employer from liability. See EEOC v. Univ. of Chi. Hosps., 276 F.3d 326 (7th Cir. 2001) (finding that prohibition of religious articles in office constituted evidence of religious discrimination); Altman v. Minn. Dep't of Corr., 251 F.3d 1199 (8th Cir. 2001) (finding discrimination based on employer reprimand of Christian employees for expressing religious objection to diversity training related to homosexuality). Thus, employers must be circumspect in the promulgation and enforcement of a policy prohibiting religious harassment in the workplace.

ADMIRALTY: Limitation of Liability—Third-Party Practice

The Lawletter Vol 39 No 2

Matt McDavitt, Senior Attorney, National Legal Research Group

     The federal Shipowner's Limitation of Liability Act ("Limitation Act"), 46 U.S.C. §§ 30501–30512 (formerly cited as 46 U.S.C. app. §§ 183 et seq.), is a useful, if often criticized, tool enabling owners of vessels involved in injurious maritime accidents to obtain complete exoneration from liability or to cap their financial liability at the value of the vessel(s) involved, plus any cargo. A shipowner faced with a tort, personal injury, or wrongful death suit may invoke the Limitation Act by filing suit in the appropriate federal district court, forcing all potential claimants to appear in order to decide the limited issues of (a) whether the vessel owner/petitioner may indeed attain the protections of the Act and, if so, (b) what maximum damages may properly be assessed against the shipowner if it is found liable in the tort, personal injury, or wrongful death suit.

     A question that often arises in the Limitation Act proceeding to determine the scope and value of vessel owner liability is whether third-party practice is allowed in such limited-issue actions. A shipowner accused by an injured plaintiff may wish to implead codefendants for the purpose of securing indemnity and contribution from alleged joint tortfeasors. A common scenario in vessel accidents is that shipowners wish to implead the manufacturer or designer of the vessel or its components, the negligence of whom was alleged to be the proximate cause of the injury.

     A review of the spare authority on this topic nationally confirms that a clear split of authority exists regarding this issue. In the Fifth Circuit, the rule is that limitation-of-liability petitioners cannot implead joint tortfeasors into the limitation action, because it is a special statutory proceeding, intended solely to allow a shipowner the opportunity to limit its liability in a separate, defensive action. The leading case nationally asserting this position is Louisiana Department of Highways v. Jahncke Service, 174 F.2d 894 (5th Cir. 1949). In that case, the shipowner/limitation petitioner sought to implead a third person alleged to be jointly liable with the petitioner into the limitation action. The limitation action respondent, Jahncke Service, moved to strike the third-party petition, the court granted Jahncke's motion, and the Department of Highways appealed.

     On appeal, the Fifth Circuit Court of Appeals upheld the decision below, noting that because limitation proceedings are special actions with limited scope, a third party may not be impleaded by the claimant for exoneration from, or limitation of, liability. A later district court decision from New York cites the Jahncke opinion in its explanation as to why limitation-of- liability claimants are not allowed to implead alleged joint tortfeasors into the limitation action:

     Rule 56 of the Admiralty Rules, 28 U.S.C.A. provides: 'In any suit, whether in rem or in personam, the claimant or respondent (as the case may be) shall be entitled to bring in  any other vessel or person (individual or corporation) who may be partly or wholly liable either to the libelant or to such claimant or respondent by way of remedy over, contribution or otherwise, growing out of the same matter.'

     It has been held that a limitation of liability proceeding is a special statutory proceeding and is not a 'suit' within the meaning of the above quoted language. Department of Highways of State of Louisiana v.Jahncke, 5 Cir., 1949, 174 F.2d 894. In that case a claimant in a limitation of liability proceeding sought without success to implead a third party. The decision in the Jahncke case is consonant with the nature and purpose of a limitation of liability proceeding. It is a special proceeding created by statute for a special purpose. It is intended to enable a shipowner to assert his statutory right to limitation of liability in a single proceeding against all claimants. It is a defensive action. Judge Learned Hand pointed this out in Algoma Central & Hudson Bay Ry. Co. v. Great Lakes Transit Corp., 2 Cir., 1936, 86 F.2d 708, 710, where he observed: 'At no time can the  owner recover a dollar by means of it from anybody.' Thus a petitioner may not seek affirmative recovery by filing a cross-libel against a damage-claimant. The Steel Inventor, D.C.S.D.N.Y., 1925 A.M.C. 226; see 2 Benedict on Admiralty 455 (6th Ed. 1940). It has  also been held that a petitioner in a limitation of liability proceeding cannot implead a third party, as petitioner seeks to do here. Petition of Texas Co., D.C.S.D.N.Y.1948, 81 F.Supp. 758; Poling Bros. No. 5-Tom Wogan, D.C.E.D.N.Y., 1937 A.M.C. 1513; but cf., The Clio-The Springhill, D.C.S.D.N.Y., 1948 A.M.C. 75; The City of Boston, D.C.D.Mass.1909, 182 F. 171. . . . [A]llowance of impleading would broaden the issues beyond those appropriate to the limitation proceeding.

N.J. Barging Corp v. T.A.D. Jones & Co, 135 F. Supp. 97, 99 (S.D.N.Y. 1955) (emphasis added). According to this line of authority, because the sole goal of the limitation proceeding is to establish whether the vessel owner claimant is entitled to full exoneration from, or to limitation of, its liability, this factual determination must be made absent other alleged joint tortfeasors, and the findings of fact developed regarding the vessel owner's proportional fault during the limitation proceeding are res judicata in other legal proceedings. In re Tex. Co., 81 F. Supp. 758, 762 (S.D.N.Y. 1948).

     Another line of cases, however, has unequivocally allowed impleader in Limitation Act proceedings. See, e.g., In re Klarman, 270 F. Supp. 1001 (D. Conn. 1967) (on motion to implead, the district court held that shipowner, as petitioner in limitation proceeding, was entitled to implead deceased's fellow officer, the person petitioner claimed to be truly at fault, together with the town that was the employer of both police officers); In re McAninch, 392 F. Supp. 96 (S.D. Tex. 1975) (owner of shrimping vessel found adrift on the high seas with master and crew all dead from asphyxiation was entitled to implead manufacturer and installer of refrigeration equipment in use on vessel, alleging that this manufacturer was negligent and had breached its contract for the installation and manufacture of such equipment); In re Sandra & Dennis Fishing Corp., 227 F. Supp. 620 (D. Mass. 1964) (corporations that supplied allegedly defective navigational equipment to Coast Guard vessel, and contributed to loss of fishing vessel during rescue operations, could be impleaded on petition of vessel owner in the limitation-of-liability proceeding).

     This split of authority regarding whether impleader is available to Limitation Act petitioners so as to bring alleged joint tortfeasors into the limitation proceeding will likely continue until the Supreme Court addresses the issue or until a clear rule regarding impleader of joint tortfeasors is drafted into the applicable statutes and/or regulations.

CONTRACTS: Forum-Selection Clause—Enforcing by 28 U.S.C. § 1404(a) Motion to Transfer Venue

The Lawletter Vol 39 No 1

Charlene Hicks, Senior Attorney, National Legal Research Group

     Forum-selection clauses are commonly used in contracts to specify the location in which the parties agree to resolve any disputes that may arise between them. These clauses are important to businesses that wish to establish predictability and potential cost-savings in future litigation. Even so, until recently a split existed amongst the various federal circuit courts of appeals over the method by which a contracting party can enforce a forum-selection clause when the opposing party has filed a lawsuit in a federal forum other than the one specified in the contract. On December 3, 2013, the U.S. Supreme Court resolved this uncertainty by issuing its opinion in Atlantic Marine Construction Co. v. U.S. District Court, 134 S. Ct. 568 (2013).

     In Atlantic Marine, a subcontract between Atlantic Marine and J-Crew Management called for all disputes arising under the contract to be resolved in state or federal court in Norfolk, Virginia, where Atlantic Marine was based. J-Crew, however, filed a breach-of-contract action against Atlantic Marine in the District Court for the Western District of Texas, invoking that court's diversity jurisdiction. In response, Atlantic Marine asked the district court to dismiss the case or transfer venue to the Eastern District of Virginia. The district court denied this request, and the Fifth Circuit denied a writ of mandamus, which sought to require the district court to transfer venue or dismiss the case.

     In a unanimous opinion written by Justice Alito, the Supreme Court reversed. In so doing, the Court determined that a forum-selection clause is not enforceable by a motion to dismiss under 28 U.S.C. § 1406(a) or Rule 12(b)(3) of the Federal Rules of Civil Procedure. "Instead, a forum selection clause may be enforced by a motion to transfer venue under § 1404(a)[.]" 134 S. Ct. at 575. Under 28 U.S.C. § 1404(a), a district court may transfer a case to another district or division for the convenience of the parties, in the interest of justice.

     In reaching this decision, the Court stated that proper venue under 28 U.S.C. § 1391 is unaffected by contractual forum-selection clauses. Hence, when a case is filed in a district in which venue is proper under § 1391, a party seeking to enforce a forum-selection clause should move to transfer venue to a more convenient federal forum under § 1404(a). If the moving party wishes to transfer the case to a state forum, the motion should be made under the equivalent common-law doctrine of forum non conveniens.

     The Court then described the appropriate standard for granting the transfer request. In ordinary cases seeking the transfer of venue under § 1404(a), courts balance the convenience of the parties and various public-interest considerations to determine whether the transfer would promote the interest of justice. "The calculus changes, however, when the parties' contract contains a valid forum-selection clause, which represents the parties' agreement as to the most proper forum." Id. at 581 (internal quotation marks omitted). In such cases, the parties have preselected the forum they consider most advantageous. Thus, where a forum-selection clause exists, courts are limited to considering public interest factors only in determining whether a transfer of venue is appropriate. Further, the court is to apply the choice-of-law rules of the state that the parties selected as their forum in the contract. Under these standards, the parties' contractual choice of forum "should be given controlling weight in all but the most exceptional cases." Id. (internal quotation marks and bracketing omitted).

     Atlantic Marine is notable because it establishes the framework applicable to any case in which a contracting party seeks to transfer venue from a federal court not specified as the parties' agreed choice of venue in a forum-selection clause to the venue identified in the contract. This should serve to increase contracting parties' confidence that an agreed-upon forum-selection clause will be enforced by the courts, thereby leading to greater predictability and stability in contractual relations.

CONSTITUTIONAL LAW: To Be "Clearly Established" or Not "Clearly Established": That Is the Question

The Lawletter Vol 39 No 1

Steve Friedman, Senior Attorney, National Legal Research Group

     The doctrine of qualified immunity shields governmental officials "from liability for civil damages insofar as their conduct does not violate clearly established statutory or constitutional rights." Harlow v. Fitzgerald, 457 U.S. 800, 818 (1982). For qualified immunity purposes, "clearly established" means that "[t]he contours of the right must be sufficiently clear that a reasonable official would understand that what he is doing violates that right." Anderson v. Creighton, 483 U.S. 635, 640 (1987).

     As recently summarized by the U.S. Court of Appeals for the Eleventh Circuit, there are several ways a plaintiff can prove that a right was clearly established for qualified immunity purposes.

He can, for instance, produce a materially similar case decided by the Supreme Court, this Court, or the highest court of the relevant state. Hoyt [v. Cooks, 672 F.3d 972, 977 (11th Cir. 2012)]. A right can be clearly established, however, even in the absence of precedent. A plaintiff can point to a "broader, clearly established principle [that] should control the novel facts in [his] situation." Mercado v. City of Orlando, 407 F.3d 1152, 1159 (11th Cir. 2005). Finally, a plaintiff may show that an "official's conduct 'was so far beyond the hazy border between excessive and acceptable force that [the official] had to know he was violating the Constitution even without caselaw on point.'" Priester v. City of Riviera Beach, 208 F.3d 919, 926 (11th Cir. 2000) (alteration in original) (quoting Smith v. Mattox, 127 F.3d 1416, 1419 (11th Cir. 1997) (per curiam)).

Morton v. Kirkwood, 707 F.3d 1276, 1282 (11th Cir. 2013).

     Most frequently, however, the parties will attempt to prove whether or not the relevant law was clearly established by citing to factually analogous case law. Typically, this is done by citing to case law that predates the defendant's allegedly unlawful conduct. But can an analogous case that is decided after the events at issue ever be relevant to the clearly established analysis? That question was recently answered in the affirmative as a matter of first impression in the U.S. Court of Appeals for the Sixth Circuit.

     In T.S. ex rel. J.S. v. Doe, No. 12-5724, 2014 WL 443376 (6th Cir. Feb. 5, 2014), the parents of two minor children who had been detained for underage drinking brought a 42 U.S.C. § 1983 suit against the juvenile detention facility and several individuals at the facility, alleging that the suspicionless strip search performed as part of the facility's routine intake process had violated the children's Fourth Amendment rights. On cross-motions for summary judgment, the individual defendants asserted qualified immunity. In support of their motion, the plaintiffs relied on Masters v. Crouch, 872 F.2d 1248 (6th Cir. 1989), which had "held that the suspicionless strip search of pretrial detainees held on minor, nonviolent offenses violated the Fourth Amendment." T.S., 2014 WL 443376, at *2 (citing Masters, 872 F.2d at 1250).

     Significantly, however, before the trial court ruled on the parties' cross-motions for summary judgment, the U.S. Supreme Court rendered its decision in Florence v. Board of Chosen Freeholders, 132 S. Ct. 1510 (2012), in which a narrow majority "held that officials may conduct suspicionless strip searches of pretrial detainees regardless of the severity of the offense on which they are held, during their initial entry into the general population of a prison facility." T.S., 2014 WL 443376, at *2 (citing Florence, 132 S. Ct. at 1523). Yet the trial court ruled that Florence was irrelevant to the case at hand and, thus, that Masters remained the controlling law. The court granted partial summary judgment in favor of the plaintiffs and denied the defendants' claim of qualified immunity. The defendants filed a timely interlocutory appeal.

     Without even reaching the question of the constitutionality of the subject strip searches, the Sixth Circuit reversed. First, the court held that Florence abrogated Masters. "The reasoning of [the] holding in Masters contemplates that prison officials must do exactly what the Supreme Court [in Florence] held they need not—screen out detainees from a blanket strip-search policy based upon the seriousness of their offense. It is simply not possible to square [the] decision in Masters with that in Florence." Id. at *4. Second, the court rejected the plaintiffs' contention that the court "put on judicial blinders and ignore Florence because it was rendered nearly three years after the conduct at issue and, thus, cannot displace the prevailing law of June 2009." Id. The court rejected that argument as being too simplistic. "Florence . . . did not involve an issue of first impression in the federal courts. Rather, the Court granted a writ of certiorari in the case to resolve a circuit split that first emerged in 2008."  Id.

     Citation to Florence is, in large respect, a shorthand for the fundamental shift in the law that has taken place over the past three decades and that so weakened the foundation of Masters as to bring about its final collapse in Florence. By June 2009, a reasonable official could have consulted the numerous Supreme Court opinions . . . or the more recent opinions of our sister circuits, and, in objective good faith, concluded that Masters was no longer good law. Florence did nothing more than articulate this fact.

Id. at *7. Therefore, the Sixth Circuit held that the relevant law was not clearly established as of June 2009 and, thus, that the defendants were entitled to qualified immunity on the Fourth Amendment claims.

CIVIL RIGHTS: Free Speech in the Public Workplace

Suzanne Bailey, Senior Attorney, National Legal Research Group

The Lawletter Vol 39 No 1

     A recent decision from the Fourth Circuit Court of Appeals illustrates the risk a public employer takes when it attempts to suppress an employee's speech in order to avoid a potential lawsuit from a member of the public. Ironically, in Durham v. Jones, 737 F.3d 291 (4th Cir. 2013), there is no indication that the feared lawsuit by an arrestee was ever filed, but the defendant county sheriff was held liable to a terminated deputy sheriff for $1.1 million.

     The 42 U.S.C. § 1983 suit of the plaintiff, Deputy First Class Durham, against the defendant, Sheriff Jones, had its genesis in Durham's use of force on a suspectCpepper spray, two forearm blows to the ridge area under the suspect's nose, and two knee blows to the left side of the suspect's body—in the course of assisting a state trooper in the arrest of the suspect, who was fleeing from the trooper on a motorcycle. In a string of escalating requests after Durham had submitted a use-of-force report to his immediate supervisors, detailing the use of force, other supervisors from the Sheriff's Department demanded that he file another use-of-force report, suggested that he go to the hospital to document medical attention as a result of the incident,
and ordered him to charge the suspect with assault and resisting arrest or face assault charges himself. Durham, who had about 20 years' experience in law enforcement, did not incorporate the changes in follow-up reports or file charges against the suspect, but he did document these exchanges with superiors in subsequent reports. After being advised in writing that two specially trained criminal investigators would help him correct the "deficiencies" in his report, Durham contacted his union attorney.

     Two days later, Durham was subjected to a two-hour interrogation by the criminal investigators. He was refused permission to contact his attorney and was required to sign a document containing Miranda warnings. The investigators threatened him with both internal and criminal charges of assaulting the suspect if he did not revise his original report and delete the reports describing the requests of superiors to change the original. In spite of his misgivings about swearing a false oath, Durham ultimately made the changes under the investigators' supervision after they took his gun, ID, and badge. The items were subsequently returned to him. Durham suspected that the investigators wanted to create a better record in case the arrestee filed an excessive force complaint.

     Following the interrogation, Durham filed an internal grievance and requested an outside investigation into the matter. On that same day, Sheriff Jones demoted Durham from Deputy First Class to Deputy and suspended him with pay. After learning that the grievance would be
investigated by the very officials against whom the grievance had been made, Durham prepared a cover letter to a set of documents, which included a memorandum summarizing the events arising from his encounter with the suspect, addressed to his immediate supervisor, his original police report, the deleted follow-up reports, the false police report he created during his interrogation, the signed Miranda form, a copy of the grievance he had filed, and his suspension paperwork. He sent this packet of materials to the County State's Attorney, the Governor, the Police Academy where he had been trained, the state Police Training Commission, and the State Police, as well as to a number of media outlets, such as the local newspaper and two local television stations. He later sent the materials to additional political officials and news outlets until Sheriff Jones ordered him to stop.

     Following Durham's transmission of information, which Jones agreed did not reveal confidential interrogation methods, special police tactics, or the identity of confidential informants, Durham was brought up on departmental charges and was acquitted of all of the charges except those related to disseminating information without authorization. The hearing tribunal recommended 10 days' suspension, but Sheriff Jones notified Durham that he was considering an increase in the sanction. When Durham appeared for the penalty hearing, he was given a notice of termination.

     Durham sued Jones under 42 U.S.C. § 1983, alleging that he had been terminated for exercising his free speech rights under the First Amendment. The district court denied Sheriff Jones's motion to dismiss on the ground of qualified immunity, and the case went to trial, where the jury also rejected that affirmative defense.

     Qualified immunity shields governmental officials who have committed constitutional violations in their individual capacities but who, in light of clearly established law, could  easonably have believed that they were acting lawfully. To prevail on that defense—and avoid suit—a public official must show either that there was no constitutional violation or that the right violated was not clearly established at the time of the violation. Jones showed neither. In determining whether Durham's free speech rights had been violated when Jones terminated him, the court employed the test developed by the U.S. Supreme Court in Connick v. Myers, 461 U.S. 138, 142 (1983), and Pickering v. Board of Education, 391 U.S. 563, 568 (1968): (1) Was the employee speaking out as a citizen on a matter of public concern or as an employee concerned with a personal interest? (2) If the employee spoke out on a matter of public concern, was the employee's interest in speaking outweighed by the Government's interest in managing the workplace? (3) If the first two criteria are resolved in favor of the employee, was his or her speech a substantial factor in the decision to terminate him or her?

     In this case, Sheriff Jones admitted that Durham's speech was a substantial factor in his decision to discharge Durham, satisfying the third factor. The Fourth Circuit found that, notwithstanding that the information Durham communicated to the public was relevant to his
internal grievance and disciplinary proceedings, his rationale for disseminating the documents was to alert the public to serious and pervasive law enforcement misconduct in the Sheriff's Office, which was clearly a matter of public concern, as demonstrated by the interest in the story shown by the media. Thus, the first factor was satisfied. The second factor was satisfied because Sheriff Jones presented no evidence showing that Durham's actions had created any disruption in the Sheriff's Office.

     It was established that Durham's First Amendment rights had been violated, so in order to be granted qualified immunity, Jones was required to show that a reasonable officer would not have known that Durham's right not to be fired for speaking out in the manner that he did was not clearly established at the time of his termination from employment. The Fourth Circuit rejected Jones's argument that the lack of a bright-line rule to address Durham's situation meant that the right was not clearly established. The court observed that it had been clear in prior opinions in holding that public employees who speak out about misconduct warrant protection. Moreover, the circumstances of Durham's termination, which included coercion to lie under oath and threats against him, took the situation out of the realm of the ordinary workplace dispute. Accordingly, the right was clearly established, and the judgment of the district court was affirmed.

BANKRUPTCY: Definition of "Defalcation" Under 11 U.S.C. § 523(a)(4)

Anne Hemenway, Senior Attorney, National Legal Research Group

The Lawletter Vol 39 No 1

     Section 523(a)(4) of the U.S. Bankruptcy Code states that any debt arising from an individual debtor's "fraud or defalcation while acting in a fiduciary capacity" is nondischargeable. 11 U.S.C. § 523(a)(4). Recently, in Bullock v. BankChampaign, N.A., 133 S. Ct. 1754 (2013), the Supreme Court attempted to settle the differences in several different federal circuits as to how federal courts define "defalcation" within the context of the Bankruptcy Code's discharge exceptions. The Court was also intent on establishing some consistency between the terms "defalcation," "embezzlement," "larceny," and "fraud."

     Specifically, the Court held that "defalcation" incorporates and requires a culpable state of mind such that the conduct at issue involves either knowledge of, or reckless disregard for, the wrongful nature of the fiduciary behavior. The Court went on to explain that if the conduct at issue is not immoral or does not otherwise involve bad faith, the term requires an intent to engage in conduct that the fiduciary knows is improper or in reckless conduct "of the kind that the criminal law often treats as the equivalent." Id. at 1759.

     Applying the Supreme Court's definition of "defalcation," the court in Adas v. Rutkowski, No. 13 C 2517, 2013 WL 6865417 (N.D. Ill. filed Dec. 30, 2013), held:

      This evidence reflects a conscious effort to obfuscate his actions and demonstrates a conscious disregard or willful blindness to a substantial and unjustifiable risk that his conduct would violate his fiduciary duty to Rutkowski. Indeed, the bankruptcy court correctly found that Adas's conduct was "willful and reckless." This Court therefore finds no reason to upset the bankruptcy court's decision that Adas's actions constituted defalcation, even in light of the new standard set forth by the Supreme Court in Bullock.

Id. at *9; see also Catrambone v. Adams, 498 B.R. 839, 850 (N.D. Ill. 2013) (defalcation is no
longer distinguishable from fraud, in the sense that both require a showing of wrongful intent).

PENSIONS: ERISA—State Law Waivers

The Lawletter Vol 38 No 12

Jim Witt, Senior Attorney, National Legal Research Group

     Over the past decade, a troublesome issue under the Employee Retirement Income Security Act of 1974 ("ERISA") has been resolved in stages. That issue arises when there is a conflict between the identity of the designated beneficiary under an ERISA plan and the named beneficiary's apparent inability under state law to accept the benefits (for instance, due to the beneficiary's waiver of such rights). In 2001, the U.S. Supreme Court in Egelhoff v. Egelhoff, 532 U.S. 141 (2001), held that where the plan participant had neglected to remove his ex-wife as beneficiary under an ERISA-covered insurance plan following the couple's divorce, the designation prevailed over a Washington state law providing that upon a couple's divorce, there is an automatic revocation of the beneficiary designation made by one spouse in favor of the other under a nonprobate asset such as an insurance policy. The Court's ruling also prevented the application of state law with respect to questions of survivorship in the case of simultaneous deaths and with respect to antilapse provisions, slayer's statutes, and the spousal elective share. The basis for the Court's decision was the command of ERISA that the plan administrator's payment of benefits is to be "in accordance with the documents and instruments governing the plan." 29 U.S.C. § 1104(a)(1)(D). The Court noted that allowing the application of state law as to the designation of beneficiaries would result in an undue burden on plan administrators because it would force them to become familiar with the variations among state laws applicable to these different issues.

     In Kennedy v. Plan Administrator for DuPont Savings & Investment Plan, 555 U.S. 285 (2009), although the waiver executed by the named beneficiary/ex-spouse under the decedent-spouse's ERISA-covered savings and investment plan was classified as a "federal common law" waiver, the Supreme Court held that an ERISA plan administrator was still obligated to distribute the benefits in accordance with the beneficiary designation made under the plan. However, the Kennedy Court explicitly left open the question of whether once the benefits were distributed by the administrator, the decedent's estate could enforce the waiver against the plan beneficiary. As the Kennedy Court stated:

Nor do we express any view as to whether the Estate could have brought an action in state or federal court against [the ex-spouse designated beneficiary] to obtain the benefits after they were distributed.

Id. at 300.

     This very question was decided by the U.S. Court of Appeals for the Fourth Circuit in the case of Andochick v. Byrd, 709 F.3d 296 (4th Cir.), cert. denied, 134 S. Ct. 235 (2013), in which Scott Andochick and Erika Byrd were a married couple. Erika worked as an attorney for a limited liability partnership and participated in a 401(k) plan and a life insurance plan, both sponsored by her employer and therefore subject to ERISA. As part of the terms of the couple's marital settlement agreement and divorce, Andochick waived his right to any benefits under the plans. Erika died without changing the beneficiary designations on the plans, and Andochick took distribution of the benefits. Erika's estate obtained a state court order requiring Andochick to turn over the benefits to the estate. Andochick brought a declaratory judgment action under ERISA on the basis that ERISA's preemption of state law prohibited the state court from ordering Andochick to return the benefits. The U.S. District Court for the Eastern District of Virginia granted the estate administrators' motion to dismiss. Andochick v. Byrd, Civ. Act. No. 1:11-cv-739, 2012 WL 1656311 (E.D. Va. May 9, 2012).

     In affirming the decision, the Fourth Circuit stated:

In Kennedy, the Court emphasized three important ERISA objectives:

"[1] simple administration, [2] avoid[ing] double liability [for plan administrators], and [3] ensur[ing] that beneficiaries get what's coming quickly, without the folderol essential under less‑certain rules." Id. at 301, 129 S.Ct. 865 (some alterations in original) (citation omitted).

     Allowing post‑distribution suits to enforce state‑law waivers does nothing to interfere with any of these objectives. For in situations like that at issue here, Kennedy merely dictates that the plan administrator distribute plan benefits to the named beneficiary. This ensures simple administration regardless of whether post‑distribution suits are permitted, because the plan administrator would have no role in any post‑distribution proceedings. For the same reason, post‑distribution suits do not expose the plan administrator to double liability— only the named beneficiary has any claim against the plan administrator.

709 F.3d at 299.

     The court also addressed the concern that a postdistribution suit would interfere with achieving the goal of ensuring the expeditious distribution of funds by plan administrators to the proper recipients. Citing the Third Circuit case, Estate of Kensinger v. URL Pharma, Inc., 674 F.3d 131, 136 (3d Cir. 2012), the court noted that there is no rule

["]providing continued shelter from contractual liability to beneficiaries who have already received plan proceeds." Estate of Kensinger v. URL Pharma, Inc., 674 F.3d 131, 136 (3d Cir.2012). Permitting a post‑distribution suit against a plan beneficiary based on his pre‑distribution waiver does not prevent the beneficiary from "get[ting] what's coming quickly." Rather, as the district court noted, it merely prevents him from keeping what he "quickly" received. Thus, we conclude that permitting post‑distribution suits accords with the ERISA objectives discussed in Kennedy.

709 F.3d at 299-300 (alterations in original) (emphasis in original).

     Thus, in a roundabout way, the Fourth Circuit in Andochick effectively nullified ERISA's preemption of state law in the sense that the court recognized the validity of a predistribution state law waiver of ERISA plan benefits by holding that the waiver can be enforced once distribution is made.

FAMILY LAW: Attorney's Fees—Delaying the Case

The Lawletter Vol 38 No 12

Brett Turner, Senior Attorney, National Legal Research Group

     An ordinary New York divorce case was proceeding in a normal manner until the wife received a statement from the husband's group health plan. The statement showed that the husband had been given prescriptions for extremely large amounts of pain-killing narcotics. In all likelihood, he was either addicted to the medications or reselling them for a profit.

     Based upon the statement, the wife filed a motion to suspend visitation. This motion was initially granted, but the court then allowed supervised visitation. The visitation went well, and the husband filed a motion for unsupervised visitation, alleging that he was attempting to eliminate all use of narcotics. This attempt ultimately failed—the husband had permanent injuries that required moderate use of narcotics for pain control—but the husband's use of narcotics was greatly reduced. Eventually, the court's final order awarded unsupervised visitation, subject to certain requirements.

     The wife then moved for a substantial award of counsel fees. Attorney's fees awards are rare in American law, but there is a substantial exception for domestic relations cases, in which the court has broad discretion to make attorney's fees awards, after considering the means of the parties and the manner in which the case was litigated. The wife's motion specifically relied on the husband's improper use of narcotics, which had added numerous issues to the case and greatly increased the cost of resolving it. She also argued that the husband had repeatedly failed to comply with discovery requests.

     The court granted the wife's motion. N.M. v. R.G., No. 50043/2011, 2014 WL 43885 (N.Y. Sup. Ct. Jan. 2, 2014). "Husband's failure to acknowledge and timely address his abuse, or misuse, of prescription drugs resulted in the necessity of a motion to suspend his visitation, the necessity of a court appointed [visitation] supervisor [name omitted], and a protracted trial including medical experts that would not have otherwise been necessary." Id. at *11. "Husband's application to reopen the record, his attorney's motion to withdraw as counsel based upon Husband's failure to pay counsel fees, and Husband's repeated failure to provide financial discovery, resulted in excessive delay." Id. The amount of the award was 50% of the wife's total attorney's fees.

     N.M. is a timely reminder that domestic relations courts do make substantial fees awards against parties who needlessly delay litigation. It is particularly significant to note that the wife lost the most substantial issue on the merits: Her attempt to limit the husband's visitation was not successful. But the entire issue existed only because of the husband's misconduct, and parties who fail to comply with discovery rarely get much sympathy from the court. When one party's misconduct greatly increases the expense of trying a case, a fees award is possible even if the party seeking the award did not fully prevail on the merits.

CONTRACTS: Construction Contracts—Mechanic's Liens—Constitutionality

The Lawletter Vol 38 No 12

Tim Snider, Senior Attorney, National Legal Research Group

     Issues involving mechanic's liens are infrequently litigated in federal court, and rarely are the issues resolved on constitutional grounds. Yet that happened recently in a case decided by the Fifth Circuit. The case involved Mississippi's "Stop Notice" statute, Miss. Code Ann. § 85-7-181. In Noatex Corp. v. King Construction of Houston, L.L.C., 864 F. Supp. 2d 478 (N.D. Miss. 2012), aff'd, 732 F.3d 479 (5th Cir. 2013), a payment dispute arose between the owner of the project and the general contractor, on the one hand, and a materials and labor subcontractor, on the other hand, with respect to a construction project in Mississippi. The subcontractor claimed that it was owed about $260,000 by the contractor and had not been paid for the project. Pursuant to the Stop Notice statute, the subcontractor provided written notice to the owner that the contractor owed it $260,000 and stated its intention to file a "Laborer's and Materialman's Lien and Stop Notice" in Mississippi chancery court.

     The effect of this notice was that funds in the amount of $260,410.15 were "bound in the hands" of the owner. See Miss. Code Ann. § 85-7-181 ("[T]he amount that may be due . . . shall be bound in the hands of such owner for the payment in full[.]"). Further, under a related section of the Mississippi Code, id. § 85-7-197, the subcontractor's filing of the Stop Notice in the lis pendens record of the chancery court had the effect of establishing its lien priority with respect to the property that was the subject of the dispute. The owner later deposited the $260,410.15 in the registry of the chancery court.

     Stripped of some procedural complexity, the contractor filed a declaratory judgment action in federal district court. The district court held that section 85-7-181 was facially unconstitutional because it deprived contractors of property without due process. The court concluded that the Stop Notice statute deprived the contractor of a significant property interest—namely, the right to receive payment and to be free from any interference with that right. The court's principal objection to the Stop Notice statute was its absence of procedural safeguards. The statute does not provide for predeprivation notice or a hearing of any kind. It requires no posting of a bond on the part of the subcontractor prior to attachment, and it does not require a showing of exigent circumstances for attachment. It is not narrowly drawn to those circumstances where it should be applied, nor does it require any affidavit or attestation setting out the facts of the dispute and the legal rationale for the attachment. Because of these procedural shortcomings, the district court concluded, and the Fifth Circuit agreed, that the statute was facially unconstitutional, meaning that there are no circumstances that would render the operation of the statute constitutional.

     Striking down statutes like Mississippi's Stop Notice statute can have profound implications for the construction industry. Contractors (and subcontractors) typically are cash-flow businesses, meaning that depriving them of contract revenues for any significant period of time can place their business at risk. Before interrupting their cash flow through legal mechanisms like Mississippi's Stop Notice statute, the Noatex court would require, at a minimum, procedural safeguards that would provide the affected contractor with an opportunity at the outset to oppose the imposition of the lien and consequent sequestration of the contract proceeds. Comparable statutes in other states might be vulnerable to the same kind of constitutional challenge. See Anne M. Payne, Annotation, Construction and Effect of Statutes Requiring Construction Fundholder to Withhold Payments upon "Stop Notice"s from Subcontractor, Materialman, or Other Person Entitled to Funds, 4 A.L.R.5th 772.

CIVIL RIGHTS: Disability Discrimination in Public Employment: Circuits Split on Applicability of Title II

The Lawletter Vol 38 No 12

Dora Vivaz, Senior Attorney, National Legal Research Group

     Because there are a number of federal provisions prohibiting discrimination on the basis of disability, the issue of their respective scopes and how they interplay in various contexts continues to find its way into the courts. The Americans with Disabilities Act ("ADA") itself prohibits discrimination against persons with disabilities in three major areas of public life: (1) employment, public and private, which is covered by Title I; (2) public services, programs, and activities, which are covered by Title II; and (3) public accommodations, which are covered by Title III.

     The Seventh Circuit recently addressed the question of whether Title II applies to disability discrimination in public employment, supplementing the remedies provided by Title I, or whether Title I provides the exclusive remedy. Brumfield v. City of Chicago, 735 F.3d 619 (7th Cir. 2013). It noted that there is a split in the circuits on the issue, but ultimately concluded that the reasoning of the courts declining to apply Title II to public employment was more persuasive.

     The court began by stating that the Supreme Court has noted the issue but has not addressed it. It then reviewed the law from the circuits, noting that two of the three circuits that have directly addressed the issue have held that Title II unambiguously does not apply to employment-related claims and that several other circuits appear to lean that way, based on their decisions on related matters. The court also pointed out that several circuits have simply implicitly assumed that Title II does apply to employment-related claims, without analysis.

     The court acknowledged that the Attorney General has promulgated a regulation stating that Title II does apply to public employment and that, generally, an agency's interpretation of a statute is entitled to deference. The court, however, went on to note that deference applies only where the statute itself is either silent on the matter or ambiguous. After engaging in an analysis of the statute, the court concluded that Title II unambiguously does not apply to employment decisions by state and local governments.

     The court first looked at the actual language of Title II, which explicitly applies only to services, programs, or activities of a public entity, and concluded that these terms encompass only "outputs," or delivery to eligible recipients. It concluded that, by contrast, employment involves only internal operations. The court also compared Title II to Title I and concluded that the latter "specifically, comprehensively, and exclusively" addresses disability discrimination in employment, defining qualified individual by reference to employment.

     Perhaps the Supreme Court will settle the issue in the near future. In the meantime, the weight of authority seems to indicate that employment-related claims for disability discrimination under the ADA should be brought under Title I and that since Title I requires exhaustion of administrative remedies, care should be taken to ensure that such remedies are timely pursued.

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