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Archive for the ‘Commercial Litigation/Directors & Officers’ Category

A Dishonorable Discharge – Debt Collection, Contempt, and Efforts to Loosen the Bankruptcy Discharge

Posted on: May 23rd, 2019

By: Matthew Weiss

On April 24, 2019, the United States Supreme Court held oral argument in Taggart v. Lorenzen (In re Taggart), 888 F.3d 438 (9th Cir. 2018), cert. granted, 139 S. Ct. 782 (2019), a case addressing the standard for contempt where a creditor attempts to collect against a debtor whose pre-petition bankruptcy debts have been discharged. At issue is whether a creditor who violates a bankruptcy discharge injunction can avoid contempt where it had a good faith belief that the discharge was inapplicable to it. While the facts in that case are narrow, the Supreme Court’s decision in Taggart could have far-reaching implications for creditors who attempt to collect on debts following a bankruptcy.

The case began when real estate developer Bradley Taggart transferred his 25% interest in Sherwood Park Business Center, LLC (SPBC) to his attorney John Berman. Terry Emmert and Keith Jehnke, who also owned 25% of SPBC, filed suit against Taggart and Berman in Oregon state court asserting that the transfer breached SPBC’s operating agreement because Taggart failed to provide the required notice to Emmert and Jehnke so that they could exercise their right of first refusal. The lawsuit sought attorneys’ fees as permitted under the operating agreement.

Taggart subsequently filed a chapter 7 bankruptcy petition, staying the state court action. Following Taggart’s discharge, the state court action proceeded during which time Taggart was deposed.  The state court ultimately entered a judgment against Taggart and Berman and unwound the transfer of Taggert’s interest. Emmert and Jehnke then filed an application for attorneys’ fees against both Berman and Taggart, specifically seeking fees from Taggart arising after the date of Taggart’s bankruptcy discharge. In response, Taggart moved for the bankruptcy court to reopen his case and then filed a motion seeking to hold Jehnke, Emmert, and SPBC (collectively “Taggart’s creditors”) in contempt.

The bankruptcy court held Taggert’s creditors in contempt after finding that they had knowingly violated the discharge injunction by seeking attorneys’ fees even though they had a subjective good faith belief that the injunction did not apply to them. On appeal, the Ninth Circuit reversed the decision of the bankruptcy court, noting that “the creditor’s good faith belief that the discharge injunction does not apply to the creditor’s claim,” because Taggert had “returned to the fray,” precluded a finding of contempt “even if the creditor’s belief is unreasonable.”  Therefore, the bankruptcy court abused its discretion when it found that Taggart’s creditors knowingly violated the discharge injunction. Taggert’s petition for writ of certiorari with the United States Supreme Court was granted in January, and oral argument was held last month.

Taggart is significant because, if the Supreme Court affirms the Ninth Circuit, creditors will have significantly more leeway to pursue debts following a bankruptcy discharge without fear of being held in contempt so long as they have a “good faith” belief that the injunction does not apply to them, even when their sincerely held belief is unreasonable. While watering down the protections of the Bankruptcy Code’s discharge injunction may provide relief to creditors, it will surely create headaches for discharged bankruptcy debtors who may see increased efforts at collection activity.

If you have any questions or would like more information, please contact Matthew Weiss at [email protected].

California Tax Board for the Win

Posted on: May 21st, 2019

By: Matthew Jones

The California Franchise Tax Board has been dealing with a lawsuit for approximately 28 years. However, the lawsuit has finally come to an end due to the United States Supreme Court’s recent ruling. The highest court in the United States issued a ruling that shields states from private lawsuits filed in other states, thereby implicating the “sovereign immunity” principle. In reaching its decision, the Supreme Court overturned a 40-year-old precedent to now “hold that states retain their sovereign immunity from private suits brought in the courts of other states.”

The lawsuit, Franchise Tax Board v. Hyatt, was filed by a resident of California who earned millions of dollars in royalties from a computer patent. He then sold his California home and moved to Nevada, where he claimed his primary residence. This is significant because Nevada had no state income tax. However, the California Franchise Tax Board claimed the plaintiff who sued owed more than $10 million in taxes to the state of California despite his residency in Nevada. After the audit was upheld, the individual filed the lawsuit in Nevada.

If you have any questions or would like more information, please contact Matthew Jones at [email protected].

Georgia Court of Appeals Provides Guideline for Drafting Enforceable Exculpatory Clauses in Georgia

Posted on: April 23rd, 2019

By: Bart Gary and Jake Carroll

Exculpatory clauses are terms in a contract that shift the risk of loss to the other party or a third-party, or attempt to limit one’s obligations under a contract. A typical exculpatory clause is a “limitation of liability” provision, which is commonly used in agreements for services—especially professional services, rendered by accountants, architect, engineers and consultants.

Attempts to limit one’s liability to agreed amounts are sometimes challenged in court on the ground that they violate “public policy,” but are nevertheless generally enforceable in Georgia, provided such clauses are “explicit, prominent, clear and unambiguous.”

While these requirements have been addressed in prior appellate decisions, in Warren Averett, LLC v. Landcastle Acquisition Corp.[1] the Georgia Court of Appeals discussed in detail the “prominence” requirement for limitation of liability clauses in a contract for accounting services. The Court observed that a number of factors are considered when evaluating the enforceability of an exculpatory clause or limitation of liability clause:

  • Font. The clause should not be in the same font size used throughout the contract. It should be “capitalized, italicized, or set in bold type for emphasis.”
  • Setoff. The clause should be set off in a separate section that specifically addressed liability or recoverable damages, with a bold, underlined, capitalized or italicized specific heading, such as “Limitation of Liability” or “DAMAGES.”
  • Location. The clause should be in a prominent place within the contract to emphasize the importance of the clause’s limitation on recoverable damages, such as being adjacent to another similarly significant provision or being next to the parties’ signature lines.[2]

These factors should be used as a guide for parties when drafting and negotiating contracts with exculpatory clauses. For example, in construction contracts, the parties should pay close attention to the font and location of indemnity and no-damage-for-delay clauses. In commercial and professional services contracts, common exculpatory clauses that merit close scrutiny address indemnity, limitation of lability, waivers of certain types of damages, and insurance terms.

Finally, while the opinion is helpful as concerns what is not prominent, it does not offer a clear statement of what is prominent. For example, does the font need to be bold, capitalized, and italicized, or will one choice work? In light of the Warrant Averett decision, it would seem that the more factors met, the less risk the clause is found unenforceable.

If you have questions regarding this decision, or any other contract drafting questions, please contact Bart Gary at [email protected] and Jake Carroll at [email protected]. Mr. Gary and Mr. Carroll practice construction and commercial law as members of Freeman Mathis & Gary’s Construction LawCommercial Litigation, and Tort and Catastrophic Loss practice groups as well as representing business and commercial entities in a wide range of disputes and corporate matters involving breach of contract, business torts, and products liability claims.

[1] Warren Averett, LLC v. Landcastle Acquisition Corp., 2019 Ga. App. LEXIS 178, Case no. A18A2117, March 13, 2019. (physical precedent only). Because one judge of the three-judge panel concurred in the judgment, the opinion is limited, physical precedent.
[2] 2019 Ga. App. LEXIS 178 at 9-10 (emphasis by the Court) (internal citations omitted).

Ninth Circuit: Creditors May Be Vicariously Liable for TCPA Violations Based on Common Law Ratification Principles

Posted on: April 16th, 2019

By: Nikki Sachdeva

In a recent opinion, the U.S. Court of Appeals for the Ninth Circuit reversed a district court’s grant of summary judgment in favor of a creditor, finding that common law principles of ratification may create vicarious liability under the Telephone Consumer Protection Act (TCPA). In Henderson v. United Student Aid Funds, 2019 U.S. App. LEXIS 8597 (9th Cir. Mar. 22, 2019), the Court heard an appeal by named plaintiff Henderson in a putative class action brought under the TCPA. After ceasing to make payments on her student loan, Henderson began receiving calls from several debt collection companies. Henderson alleged that the pattern of the calls, which included several prerecorded messages to a cellular telephone number she had not provided in connection with her loan application or consented to be called on, evidenced the use of a combination of skip-tracing and autodialing. Such combined use is prohibited by the TCPA.  47 U.S.C. § 227(b)(1)(A)(iii).

United Student Aid Funds (“USA Funds”), which owned Henderson’s loans, had hired a loan servicer, which in turn hired debt collectors to collect on the unpaid loans. USA Funds did not have contractual relationships with the debt collectors, nor did it have day-to-day interactions with them. However, USA Funds had access to the debt collectors’ performance reports and had previously reviewed the debt collectors’ call notes upon identification of an issue with improper calling practices. As to the loan servicer, USA Funds monitored its regulatory compliance and, while it did not have the ability to fire debt collectors, USA Funds had the ability to ask the loan servicer to replace debt collectors.

In 2017, the U.S. District Court for the Southern District of California granted summary judgment in favor of USA Funds. The district court rejected Henderson’s arguments that there was a triable issue of fact as to whether USA Funds could be liable under theories of classical agency or implied actual authority. Further, finding that there was no principal-agent relationship between USA Funds and the debt collectors, the district court held that USA Funds could not be vicariously liable under a ratification theory.

The Ninth Circuit, in a 2-1 decision, reversed the district court’s grant of summary judgment and remanded for further proceedings. The Court held that there was a material issue of fact as to whether USA Funds ratified the debt collectors’ calling practices. According to the Court’s opinion, federal common law principles of ratification may create vicarious liability under the TCPA even where the contractual agreements at issue state and/or suggest an independent contractor relationship rather than an agency relationship. First, the Court held that ratification may create an agency relationship where none existed before where the acts are “done by an actor… who is not an agent but pretends to be.” The Court noted that the debt collectors told borrowers they were calling on behalf of USA Funds and accepted payments on USA Funds’ behalf. Finding that there was a triable issue of fact, the Court continued: “a reasonable jury could conclude that USA Funds accepted the benefits—loan payments—of the collectors’ calls while knowing some of the calls may have violated the TCPA. If a jury concluded that USA Funds also had ‘knowledge of material facts,’ USA Funds’ acceptance of the benefits of the collector’s unlawful practices would constitute ratification.”

The Ninth Circuit’s decision in Henderson raises issues for creditors and other businesses who engage third parties to conduct borrower or consumer calls on their behalf. Businesses should be mindful that they may be exposed to vicarious liability under the TCPA based on improper conduct by third parties even where there is no contractual relationship with the entity making the allegedly violative telephone calls.

If you have any questions or would like more information, please contact Nikki Sachdeva at [email protected].

New Medical Devices and Performance Criteria

Posted on: February 12th, 2019

By: Koty Newman

The Food and Drug Administration (“FDA”) recently issued final guidance (the “Guidance”), providing a framework for its new Safety and Performance Based Pathway for its updated 510(k) process. Section 510(k) of the Food, Drug and Cosmetic Act requires medical device manufacturers to notify the FDA of their intent to market a medical device. Notification enables the FDA to determine if the product is equivalent to a device already on the market, which by extension, helps the FDA determine if the device is at least as safe and effective as the already marketed device.

The FDA’s Safety and Performance Based Pathway evidences the FDA’s recognition that it may be less burdensome for device manufacturers to show a new device’s substantial equivalence to a predicate device by demonstrating that the new device meets certain performance criteria, rather than directly testing the new device against a predicate device. Thus, “[i]nstead of reviewing data from direct comparison testing between the two devices, FDA could support a finding of substantial equivalence based on data showing the new device meets the level of performance of appropriate predicate device(s),” the Guidance states. In order to discern the requisite performance criteria, manufacturers should look to descriptions in FDA guidance, FDA-recognized consensus standards, and special controls.

The Guidance states that the “FDA believes that use of performance criteria is only appropriate when FDA has determined that (1) the new device has indications for use and technological characteristics that do not raise different questions of safety and effectiveness than the identified predicate, (2) the performance criteria align with the performance of one or more legally marketed devices of the same type as the new device, and (3) the new device meets all of the performance criteria.” Further, a manufacturer may use this program only if the manufacturer can rely entirely on performance criteria to demonstrate substantial equivalence. The FDA will still require that a manufacturer identify a predicate device in order for the FDA to determine the relevant intended use and technological characteristics decision points.

The FDA will maintain a list of device types that are appropriate for the Safety and Performance Based Pathway on its website, along with other information that will be helpful for manufacturers intending on navigating this particular Pathway, such as “guidances that identify the performance criteria and testing methods recommended for each device type.”

This policy represents an expansion of the long-applied approach by the FDA, giving device manufacturers an additional pathway to demonstrate substantial equivalence. For the manufacturers who cannot, or prefer not to, rely on this Safety and Performance Based Pathway, direct comparison with a predicate device will remain available to determine whether the new device is substantially equivalent to a predicate device.

The FDA is also seeking public comment on questions such as whether it should make public a list of devices or manufacturers who make products that rely on older predicates, such as predicates that have been on the market for ten-or-so years, and whether there are actions the FDA could pursue to promote the use of more current predicates. The public will have until April 22, 2019 to comment.

If you have any questions or would like more information, please contact Koty Newman at (678) 996-9122 or [email protected].