March 26, 2013

Brad Pettit, Senior Attorney, National Legal Research Group

The Uniform Trust Code ("U.T.C.") provides that a "court may reform the terms of a trust, even if unambiguous, to conform the terms to the settlor's intention if it is proved by clear and convincing evidence that both the settlor's intent and the terms of the trust were affected by a mistake of fact or law, whether in expression or inducement."  U.T.C. § 415 (Thomson Reuters, Westlaw current through 2011 annual meetings of the Nat'l Conf. of Comm'r on Unif. State Laws & A.L.I.) (emphasis added).  More specifically, the U.T.C. states that "[t]o achieve the settlor's tax objectives, [a] court may modify the terms of a trust in a manner that is not contrary to the settlor's probable intention[, and a] court may provide that the modification has retroactive effect."  Id. § 416 (emphasis added).  The comment to section 416 seeks to explain the subtle distinctions between a court's discretionary power (1) under section 415 to approve the reformation of an irrevocable trust to conform to the settlor's intention by correcting a mistake of fact or law, and (2) under section 416 to modify an irrevocable trust in order to achieve the settlor's tax objectives:

"Modification" under this section is to be distinguished from the "reformation" authorized by Section 415. Reformation under Section 415 is available when the terms of a trust fail to reflect the donor's original, particularized intention. The mistaken terms are then reformed to conform to this specific intent. The modification authorized here allows the terms of the trust to be changed to meet the settlor's tax‑saving objective as long as the resulting terms, particularly the dispositive provisions, are not inconsistent with the settlor's probable intent. The modification allowed by this subsection is similar in concept to the cy pres doctrine for charitable trusts (see Section 413), and the deviation doctrine for unanticipated circumstances (see Section 412).

Id. § 416 cmt.

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.

California

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.

North Carolina

March 13, 2013

Brett Turner, Senior Attorney, National Legal Research Group

A growing number of states require, by statute or case law, that the court set the date for valuing marital property in advance of the actual hearing.  In Virginia, for example, all marital property must be valued on the date of the evidentiary hearing.  But "[u]pon motion of either party made no less than 21 days before the evidentiary hearing the court may, for good cause shown, in order to attain the ends of justice, order that a different valuation date be used."  Va. Code Ann. § 20-107.3.  In New York, "[a]s soon as practicable after a matrimonial action has been commenced, the court shall set the date or dates the parties shall use for the valuation of each asset."  N.Y. Dom. Rel. Law § 236(B)(4)(b).  Setting the date of valuation in advance allows all of the experts to value property as of the same date and therefore removes one important source of variance in parties' valuations.

But what happens if there is a material change in circumstances after the court has entered an interlocutory order setting the date of valuation?  In Caveney v. Caveney, 81 Mass. App. Ct. 102, 960 N.E.2d 331 (2012), a discovery master initially set the date of valuation as June 30, 2008.  In late 2008, of course, the national economy entered a sharp and very severe recession.  The recession caused a significant decrease in the value of many marital assets.  The wife therefore filed a motion, supported by an affidavit from her financial expert, asking the court to value the assets as of December 31, 2008.

The trial court granted the motion, and the Massachusetts Appeals Court affirmed. "Based on the changes in the economic climate, the judge indicated that it was reasonable and proper for the wife to utilize a valuation date of December 31, 2008."  Id. at 107, 960 N.E.2d at 336. 

The discovery master's order setting the date of valuation in Caveney did expressly allow either party to modify the order by filing a motion.  But the result would probably not have been materially different if that express modification provision had not been present.  Interlocutory orders granted by a trial court are generally not final and are therefore subject to modification in the discretion of the court until a final order has been entered in the case.  For example, in Virginia, the trial court has full discretion to modify any order it makes until 21 days after entry of a final order resolving all contested issues in the case.  Va. Sup. Ct. R. 1:1.  In states with Rules of Civil Procedure based upon the federal model, "any order or other decision, however designated, that adjudicates fewer than all the claims or the rights and liabilities of fewer than all the parties . . . may be revised at any time before the entry of a judgment adjudicating all the claims and all the parties' rights and liabilities."  Fed. R. Civ. P. 54(b).  Since a pretrial order setting the date of valuation will never resolve all contested issues in the case, the trial court has discretion to modify such an order after it has been made.

An order setting the date of valuation should not, of course, be changed lightly.  The purpose of such an order is to manage the case in an orderly fashion by ensuring that all expert valuations use the same date.  If the order can easily be modified, many of its advantages are lost. 

Jim Witt, Senior Attorney, National Legal Research Group

With the proliferation of will substitutes (vehicles such as revocable trusts, IRAs, and pensions, used to pass assets to beneficiaries at the owner's death but outside the will), a problem can arise with possible duplication between the will substitute and the will. Such a problem was litigated in the Court of Appeals of South Carolina case, Estate of Gill ex rel. Grant v. Clemson University Foundation, 725 S.E.2d 516 (S.C. Ct. App. 2012).

In Estate of Gill, the testatrix bequeathed $100,000 to Clemson University to establish the "Scholarship." The income earned by the fund (but none of the principal) was to be used to provide scholarships for "academically deserving football players." Almost one year after executing the will, the testatrix established an IRA with Morgan Stanley. She specifically designated the Scholarship as the beneficiary of $100,000 in the IRA. The Estate contended that her intent had been to provide a funding mechanism for the Scholarship under the will, not for Clemson to receive two separate $100,000 gifts. Clemson contended that it was entitled to both the $100,000 from the IRA and the $100,000 bequest under the will.

The Estate brought suit for a declaratory judgment, and a special referee found that because the will was unambiguous as to the $100,000 bequest to establish the Scholarship, the bequest was not ambiguous and extrinsic evidence could not be considered. The referee therefore ruled that Clemson was entitled to both the $100,000 Scholarship bequest and $100,000 from the IRA as a nontestamentary asset passing outside the will.

Tim Snider, Senior Attorney, National Legal Research Group

It has been established that an excessive award of punitive damages may violate due process. State Farm Mut. Auto. Ins. Co. v. Campbell, 538 U.S. 408, 417 (2003). To aid the lower courts in determining whether an award of punitive damages may be so excessive as to violate due process, the Supreme Court has announced punitive damages "guideposts." The Court, however, has never held that the punitive damages guideposts are applicable in the context of statutory damages. Among the statutes that authorize the recovery of statutory damages is the Copyright Act, 17 U.S.C. § 504(c). The recovery of statutory damages is authorized in cases of infringement, because proof of actual damages can be very difficult.

An illustrative case is Capitol Records, Inc. v. Thomas-Rasset, 692 F.3d 899 (8th Cir. 2012). There, the defendant used a computer file-sharing program to download and share copyrighted musical performances without the consent of the copyright owners. Using a forensic service, the owners located and identified the defendant as the person who had initiated the unauthorized copying and file-sharing of the recordings. At trial, the plaintiffs were awarded substantial statutory damages in an amount that was well within the limits of damages authorized by the statute. A prevailing copyright-infringement plaintiff can elect to recover either actual damages or statutory damages. In Capitol Records, the plaintiff elected to recover statutory damages. The defendant argued that the district court should apply a standard of due process to the award of statutory damages analogous to awards of punitive damages.

The Lawletter Vol 37 No 12

Dora Vivaz, Senior Attorney, National Legal Research Group

Initially, under the civil rights laws the Equal Employment Opportunity Commission ("EEOC") was not itself empowered to bring suit.  In 1972, the law was amended to provide for suits brought directly by the EEOC, but only after an investigation; a determination of reasonable cause; and an attempt to resolve the matter by informal methods of conference, conciliation, and persuasion.  42 U.S.C. § 2000e(5)(b).  Since that time, the courts have been in agreement that a conciliation attempt is at least a condition precedent to suit by the EEOC.  See, e.g., EEOC v. Radiator Specialty Co., 610 F.2d 178, 183 (4th Cir. 1979).  However, as the court noted in a recent case, the circuits appear to be split as to the standard that should govern the court's inquiry into whether the conciliation obligation has been satisfied.  EEOC v. St. Alexius Med. Ctr., No. 12 C 7646, 2012 WL 6590625, at *1-3 (N.D. Ill. Dec. 18, 2012).

In an early decision, the Tenth Circuit noted that the statutory language is mandatory and concluded that it was inconceivable that anything less than good-faith efforts is required.  EEOC v. Zia Co., 582 F.2d 527, 532-33 (10th Cir. 1978).  By the same token, it found that the court need not examine the details of offers and counteroffers between the parties. Although the court quoted language from the Conference Report on the law, which indicated that it was contemplated that the EEOC would "continue to make every effort to conciliate" and that it would file suit only "if conciliation proves to be impossible," id. at 533 (quoting 118 Cong. Rec. H1861 (Mar. 8, 1972)), the standard the court seemed to impose was simply a showing of "some effort" to conciliate and of "notice of the breakdown" of the effort.  Id. at 532-33.  The Sixth Circuit put forth a similar standard, adding that the EEOC is under no duty to pursue further conciliation if an employer rejects its offer.  EEOC v. Keco Indus., 748 F.2d 1097, 1101-02 (6th Cir. 1984).

Both the Eleventh and Fifth Circuits have imposed a somewhat more specific and more stringent standard, requiring the EEOC to (1) outline for the employer the reasonable cause for its belief that the law has been violated; (2) offer the employer an opportunity for voluntary compliance; and (3) respond to the employer in a reasonable and flexible manner.  EEOC v. Asplundh Tree Expert Co., 340 F.3d 1256, 1259 (11th Cir. 2003); EEOC v. Klingler Elec. Corp., 636 F.2d 104, 107 (5th Cir. 1981).  These courts have found that the underlying question is the reasonableness and responsiveness of the EEOC, considering all the circumstances.  The Fifth Circuit, in contrast to the Tenth and Sixth Circuits, specifically concluded that the court is required to make a thorough inquiry into the facts of the conciliation efforts in order to properly evaluate whether the EEOC has satisfied its duty.

February 5, 2013

Jeremy Taylor, Senior Attorney, National Legal Research Group

The U.S. District Court for the Northern District of Texas recently decided numerous choice-of-law issues in a products liability action brought by the family of a deceased helicopter pilot.  See Sulak v. Am. Eurocopter Corp., Act. No. 4:09-CV-651-Y, 2012 WL 4740176 (N.D. Tex. Oct. 3, 2012).  The decedent was a resident of Hawaii and was killed in Hawaii while piloting a helicopter manufactured and distributed by the defendants, who were located in France.  The decedent's family filed their action in Hawaii state court, and the defendants removed it to federal court in Hawaii.  The Hawaii federal court then transferred the action to the federal district court in Texas based on one defendant's insufficient contacts with Hawaii.

In light of the fact that the action ended up in federal court in Texas and that the crash had occurred in Hawaii, the court was faced with numerous choice-of-law issues involving both procedural and substantive questions.  Noting that it had jurisdiction over the lawsuit based upon federal diversity jurisdiction, the court stated that it was required to apply Texas choice-of-law rules to determine whether Texas or Hawaii law governed the plaintiffs' action.  Texas applies the most-significant-relationship test set forth in the Restatement (Second) of Conflict of Laws.  Under that analysis, it is not necessary that a single state's law control all substantive issues.  Each issue is, therefore, considered separately, and the state law that has the most significant relationship to the issue controls.

The court observed that under the Texas most-significant-relationship analysis, the law of the place of the injury governs questions of substantive law unless the policy considerations of the Restatement's choice-of-law principles show that another forum has a more significant relationship with such an issue.  The court contrasted this rule with the principle that the applicable procedural rules are those of the forum.  The court noted the general rule that if a Federal Rule of Civil Procedure or Evidence governs a disputed point, the Federal Rule is to be followed, even in diversity cases.  The court concluded that the Federal Rule of Evidence restricting the admissibility of subsequent remedial measures should govern in strict products liability cases.  The court also held that it would apply the Federal Rule of Civil Procedure governing the impleading of a third-party defendant, rather than Hawaii law governing the liability of third-party defendants, when the issue was not the substantive question of whether a potential third-party defendant was liable, but the procedural question of whether such a defendant could be impleaded.

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).