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.

May 22, 2012

Steve Friedman, Senior Attorney, National Legal Research Group

Although the economy is hopefully on the rebound, the deluge of foreclosures continues.  And as the foreclosures continue, so too do the various legal battles associated with them.  A recent case in the U.S. District Court for the District of Maryland addresses an interesting and somewhat "murky" area of civil procedure in the context of a foreclosure action.  Cohn v. Charles, Civ. No. PJM 11-2013, 2012 WL 273751, at *4 (D. Md. Jan. 30, 2012).

I.          Section 1441 Removal

"Removal" is defined as "the transfer of an action from state to federal court."  Black's Law Dictionary "removal" (9th ed. 2009).

Except as otherwise expressly provided by Act of Congress, any civil action brought in a State court of which the district courts of the United States have original jurisdiction, may be removed by the defendant or the defendants, to the district court of the United States for the district and division embracing the place where such action is pending.

28 U.S.C. § 1441(a).  Furthermore, "a claim arising under" federal law may be removed even if coupled with a related state law claim, provided that both the federal and state claims are asserted against the same defendant or defendants.  See id. § 1441(c)(1).

Based on the above-stated portions of the removal statute, it has long been well established that "[o]nly a defendant to an action—neither a counter‑defendant nor a third‑party defendant—may remove a case under § 1441(a)."  Cohn, 2012 WL 273751, at *1 (citing Shamrock Oil & Gas Corp. v. Sheets, 313 U.S. 100, 107-09 (1941); Palisades Collections LLC v. Shorts, 552 F.3d 327, 332 (4th Cir. 2008)).

In determining whether an action "arises under federal law" within the meaning of § 1441(c)(1), courts employ the so-called "well-pleaded complaint rule," whereby the court looks to "'the face of the plaintiff's properly pleaded complaint.'"  Id. at *2 (quoting Verizon Md., Inc. v. Global NAPS, Inc., 377 F.3d 355, 363 (4th Cir. 2004) (citing Caterpillar v. Williams, 482 U.S. 386, 392 (1987))).

Accordingly, "[t]o determine whether [a particular] action was properly removed, the Court must first identify which party 'brought' the case in state court," which in turn "will determine which party was the 'defendant' in that court, hence able to initiate removal, and what constituted the 'complaint' for the purposes of the well‑pleaded complaint rule."  Id.

II.         The Cohn Case

In Cohn, the trustees for a deed of trust (the "Trustees") initiated a foreclosure action in the Circuit Court for Prince George's County, Maryland, regarding a certain parcel of Maryland real estate owned by Yanel Charles ("Charles").  See 2012 WL 273751, at *1.  Thereafter, Charles timely filed a counterclaim against the Trustees as well as a third-party complaint against the successor mortgagee, Nationstar Mortgage, LLC ("Nationstar"), alleging violations of the Truth in Lending Act ("TILA"), 15 U.S.C. §§ 1601 et seq., and the Real Estate Settlement Procedures Act ("RESPA"), 12 U.S.C. §§ 2601 et seq.   In response, the Trustees and Nationstar timely removed the counterclaim and third-party complaint to federal district court pursuant to 28 U.S.C. § 1441(a).  Charles then moved to remand the matter back to state court.

A.         Removal Not Authorized

May 8, 2012

Fred Shackelford, Senior Attorney, National Legal Research Group

Courts in various jurisdictions have arrived at different conclusions when deciding whether umbrella insurance policies are statutorily required to provide uninsured ("UM") or underinsured ("UIM") motorist coverage. One article has summarized the case law as follows:

Although uninsured or underinsured motorist coverage is an almost universally statutorily required component of motor vehicle liability policies, the question whether "excess" or "umbrella" insurance policies are also required to provide such coverage varies jurisdictionally. Many courts addressing the issue have found that umbrella policies, which are designed to protect against an infrequent risk of catastrophic loss in the form of excess judgments, and for which proportionally low premiums are paid, do not fall within the scope of an uninsured motorist statute which was intended to apply only to primary policies . . . .  Conversely, some courts have found that their uninsured motorist statutory schemes do contemplate the inclusion of umbrella policies. Those cases which consider whether an excess or umbrella policy is statutorily required to provide uninsured motorist coverage, as well as cases which consider whether coverage is provided by the terms of a policy, and, if so, at what point such coverage begins, have been collected and analyzed in this annotation.

Lisa K. Gregory, Annotation, "Excess" or "Umbrella" Insurance Policy as Providing Coverage for Accidents with Uninsured or Underinsured Motorists, 2 A.L.R.5th 922 (1992 & Westlaw database updated weekly).

This issue was recently resolved in Colorado in the case of Apodaca v. Allstate Insurance Co., 255 P.3d 1099 (Colo. 2011). In Apodaca, the insureds were covered under automobile and umbrella policies, both of which were issued by Allstate. The automobile policy included UM/UIM coverage in the amount of $100,000 per person and $300,000 per occurrence, while the umbrella policy provided $1 million in excess liability coverage for occurrences arising out of, among other things, "occupancy of a land vehicle . . . by an insured for personal transportation."  Id. at 1100. The umbrella policy did not expressly provide UM/UIM coverage, and it specifically excluded coverage for "personal injury or bodily injury to an insured."  Id. at 1101.

A Colorado statute requires that UM/UIM coverage be offered and included, unless rejected in writing, in any "automobile liability or motor vehicle liability policy" delivered or issued in Colorado.  Colo. Rev. Stat. § 10-4-609(1)(a). The court framed the issue as whether an umbrella policy that includes supplemental liability coverage for automobiles or motor vehicles is within the scope of this statute.  The court noted that an umbrella policy is a distinct type of excess liability policy, which may also provide primary coverage for certain risks that an underlying policy may not cover.

The Lawletter Vol 36 No 11

Fred Shackelford, Senior Attorney, National Legal Research Group

What is the potential liability of a testing laboratory that incorrectly analyzes a DNA sample?  This was the issue before the Oklahoma Supreme Court in Berman v. Laboratory Corp. of America, 2011 OK 106, 268 P.3d 68.  In the Berman case, the plaintiff sought assistance from the Department of Human Services ("DHS") to determine the paternity of her child and to collect child support.  The agency arranged for the defendant laboratory (LabCorp) to conduct a DNA test. LabCorp tested the sample twice and both times incorrectly reported that a particular individual, Herbert White Jr., was not the child's father.

However, after a different laboratory performed a DNA test and found that White was in fact the father, the plaintiff sued LabCorp for having negligently tested the DNA sample.  She sought damages for the loss of past and future child support payments that White would have been required to pay if the paternity test results had been correctly reported.  After the court disposed of an immunity defense, it addressed an issue of first impression in Oklahoma: "[D]oes LabCorp owe Berman, as the parent seeking to prove the paternity of her child, a duty of care to conduct accurate DNA testing which was ordered by DHS for child support purposes?"  Id. ¶ 16.

The Lawletter Vol 36 No 11

Matt McDavitt, Senior Attorney, National Legal Research Group

While a person's entry upon the land of another without consent ordinarily constitutes tortious trespass, there are exceptions to the rule, including privileged entry based on necessity.  Factually, privileged entry might occur in a circumstance where a person's property or dependents (i.e., an animal or a child) enters or wanders onto the property of another and necessity dictates that for the parent or owner to retrieve his or her property or offspring, he or she must enter the lands of another.  This so-called "privileged entry" exception appears in the Restatement (Second) of Torts:

(1)        One is privileged to enter land in the possession of another, at a reasonable time and in a reasonable manner, for the purpose of removing a chattel to the immediate possession of which the actor is entitled, and which has come upon the land otherwise than with the actor's consent or by his tortious conduct or contributory negligence.

(2)        The actor is subject to liability for any harm done in the exercise of the privilege stated in Subsection (1) to any legally protected interest of the possessor in the land or connected with it, except where the chattel is on the land through the tortious conduct or contributory negligence of the possessor.