The Lawletter Vol 37 No 1

Suzanne Bailey, Senior Attorney, National Legal Research Group

"It ain't over 'til it's over."—Yogi Berra 

The U.S. Supreme Court recently considered whether a federal appellate court has the authority to address sua sponte the timeliness of a state prisoner's federal habeas petition.  Relying on prior precedent holding that a federal district court may consider a statute of limitations, Day v. McDonough, 547 U.S. 198, 202 (2006), or exhaustion, Granberry v. Greer, 481 U.S. 129, 134 (1987), defenses not raised by the State in answering the habeas petition at issue in Wood v. Milyard, 132 S. Ct. 1826 (2012), the Court held in an opinion written by Justice Ginsburg that an appellate court has the authority to consider, on its own motion, a forfeited timeliness defense.  However, the Court concluded that the U.S. Court of Appeals for the Tenth Circuit had abused its discretion in denying the petition on the ground of timeliness because the State did not merely forfeit the defense by inadvertent omission, but it knowingly waived the defense by affirmatively declining to assert the statute of limitations defense.  

 Under the Antiterrorism and Effective Death Penalty Act of 1996 ("AEDPA"), Pub. L. No. 104-132, 110 Stat. 1214 (Apr. 24, 1996), which applied to the petition in Milyard, a state prisoner has one year to file a federal petition for habeas corpus relief, starting from "the date on which the judgment became final by the conclusion of direct review or the expiration of the time for seeking such review."  28 U.S.C. § 2244(d)(1)(A).  For a prisoner whose judgment became final before the AEDPA was enacted, the one‑year limitations period runs from the AEDPA's effective date, that is, April 24, 1996.  The one‑year clock is stopped during the time a properly filed application for state postconviction relief is pending.  Id. § 2244(d)(2). 

In Milyard, the state judgment became final on direct review in early 1990.  Thus, the time for filing a federal petition began to run on April 24, 1996 and would expire on April 24, 1997 unless a properly filed application for state postconviction relief was pending in Colorado state court during that period.  The prisoner maintained that he had had such an application pending on April 24, 1996, that is, a motion for postconviction relief that he had filed in 1995 and that remained pending until he filed a second petition in August 2004.  The prisoner argued that the second petition had further tolled the limitations period until February 5, 2007, exactly one year before he filed the federal petition at issue in Milyard. 

In its preanswer response to the federal petition for writ of habeas corpus, the State acknowledged that it was arguable that the 1995 petition had been abandoned before 1997 and therefore did not toll the AEDPA statute of limitations.  However, the State informed the federal district court that it would not challenge the petition on the ground of timeliness.  The State reasserted its position in its full answer and defended on the merits, and the district court issued an opinion denying the petition, in part on the merits and in part for failure to exhaust.  On appeal, the Tenth Circuit directed the parties to brief the timeliness issue and then ruled that the petition was time-barred without addressing the merits.

June 5, 2012

Jeremy Taylor, Senior Attorney, National Legal Research Group

The U.S. Court of Appeals for the First Circuit recently affirmed a $21.06 million judgment, including $16.5 million for pain and suffering, in favor of a plaintiff who suffered severe injuries resulting from her use of "sulindac," the defendant's generic anti-inflammatory drug.  See Bartlett v. Mut. Pharm. Co., No. 10-2277, 2012 WL 1522004 (1st Cir. 2012).  Sulindac is known to cause a hypersensitivity reaction called Stevens-Johnson Syndrome and a related disease called toxic epidermal necrolysis ("SJS/TEN").  In December 2004, the plaintiff's physician prescribed sulindac under the brand name Clinoril for pain in the plaintiff's shoulder, and the plaintiff's pharmacist dispensed generic sulindac.

According to the court, the consequences for the plaintiff were "disastrous."  The plaintiff developed SJS/TEN early in 2005.  The court noted that TEN is diagnosed when 30% or more of the outer layer of skin on a patient's total body surface area has deteriorated, been burned off, or turned into an open wound.  The plaintiff suffered TEN over 60% to 65% of her body.  She was hospitalized for 70 days, including over 50 days in the burn unit.  She suffered permanent injuries, including permanent near-blindness, esophageal burns, vaginal and lung injuries, and disfigurement.  The plaintiff was unable to have sexual relations or to read, drive, or work.  The plaintiff asserted multiple causes of action against the manufacturer in New Hampshire state court.  The defendant removed the case to the federal district court.  After removal, all claims but the plaintiff's defective-design cause of action were dismissed on summary judgment or voluntarily by the plaintiff.

Initially, the court of appeals noted that under the governing New Hampshire law, the plaintiff, who alleged that sulindac was defectively designed, was required to show that the drug was unreasonably dangerous due to its propensity to cause SJS/TEN.  However, she was not required to establish that there existed an alternative, safer design for the drug.  In reaching this conclusion, the court rejected the manufacturer's argument that a safer alternative is an essential element of a design-defect claim, over and above the existence of an unreasonably dangerous product.  Hence, the district court had correctly permitted the plaintiff to establish that the sulindac was in a defective condition because it was unreasonably dangerous due to its propensity to cause SJS/TEN.  Interestingly, on the eve of trial, the defendant abandoned a potential defense that the drug was unavoidably unsafe but was sold with an adequate warning.

The Lawletter Vol 36 No 12

Brett Turner, Senior Attorney, National Legal Research Group

Can a property division order be reopened for mistake when a marital asset turns out to be worth much less than the parties and the court believed at the time of divorce?

This issue recently came before the highest court of New York in a case which received significant media attention.  In Simkin v. Blank, the parties signed a separation agreement in which they divided their marital property.  Each spouse generally received ownership of property titled in his or her name.  Because more marital property was titled in the husband's name, he agreed to pay to the wife just over $6 million to equalize the division.  The separation agreement was incorporated into a divorce decree.

Unfortunately for the husband, one of the assets titled in his name alone was a $5.4 million investment account.  The account was with Bernard L. Madoff Investment Securities.  After the divorce, Madoff's entire operation was revealed as an enormous Ponzi scheme, Madoff was imprisoned for fraud, and the account became worthless.

Two years after the divorce, the husband filed a motion to reopen the decree and reform the agreement, arguing that $2.7 million of the payment he made to the wife represented her share of the Madoff account, which was actually worth zero at the time of divorce but was valued at $5.4 million due to mutual mistake.  The trial court dismissed the husband's motion.  The New York Appellate Division reversed, holding that the husband had pleaded a valid claim of mutual mistake.  Simkin v. Blank, 915 N.Y.S.2d 47 (App. Div. 2011).

On further appeal, the New York Court of Appeals reinstated the trial court's judgment dismissing the complaint.  The court relied first on the fact that the separation agreement did not even mention the Madoff account:

[H]usband's claim that the alleged mutual mistake undermined the foundation of the settlement agreement, a precondition to relief under our precedents, is belied by the terms of the agreement itself.  Unlike the settlement agreement in True that expressly incorporated a "50-50" division of a stated number of stock shares, the settlement agreement here, on its face, does not mention the Madoff account, much less evince an intent to divide the account in equal or other proportionate shares (see Centro, 17 N.Y.3d at 277, 929 N.Y.S.2d 3, 952 N.E.2d 995 [explaining that "courts should be extremely reluctant to interpret an agreement as impliedly stating something which the parties have neglected to specifically include" (internal quotation marks and citation omitted)]).  To the contrary, the agreement provides that the $6,250,000 payment to wife was "in satisfaction of [her] support and marital property rights," along with her release of various claims and inheritance rights.  Despite the fact that the agreement permitted husband to retain title to his "bank, brokerage and similar financial accounts" and enumerated two such accounts, his alleged $5.4 million Madoff investment account is neither identified nor valued.  Given the extensive and carefully negotiated nature of the settlement agreement, we do not believe that this presents one of those "exceptional situations" (Da Silva, 53 N.Y.2d at 552, 444 N.Y.S.2d 50, 428 N.E.2d 382 [internal quotation marks and citation omitted]) warranting reformation or rescission of a divorce settlement after all marital assets have been distributed.

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.