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Opinions – 1/17/13 – U.S. 4th Circuit Court of Appeals

Administrative Law

Regulatory action as “rule making”

BOTTOM LINE: The Department of Labor’s suspension of various regulations for temporary agricultural workers and reinstatement of prior regulations constituted “rule making” under Administrative Procedure Act, and by failing to provide meaningful opportunity for public comment, or to solicit or receive relevant comments regarding the regulations’ substance or merits, the department did not follow the procedures required by law; therefore, the action was arbitrary and capricious.

CASE: North Carolina Growers’ Association, Incorporated v. United Farm Workers, No. 11-2235 (filed Dec. 21, 2012) (Judges Wilkinson, KEENAN & Diaz). 30 pages.

COUNSEL: Naomi Tsu, Southern Poverty Law Center, Atlanta, GA, for Appellants. Robin Shea, Constangy, Brooks & Smith, LLC, Winston-Salem, NC, for Appellees.

FACTS: The U.S. Department of Labor suspended various regulations for temporary agricultural workers and reinstated other prior regulations. The Immigration Reform and Control Act amendments to the Immigration and Nationality Act, passed in 1986, permitted the temporary admission of foreign workers to engage in agricultural jobs in the United States (“H-2A program”). In 1987, the Department promulgated regulations governing the H-2A program to effectuate Congress’s intent that domestic agricultural workers (“U.S. workers”) be given preference over foreign agricultural workers (“H-2A workers”), and that the employment of H-2A workers would not adversely affect the wages or working conditions of U.S. workers (collectively, “the 1987 regulations”). The 1987 regulations required that participating employers pay H-2A workers and similarly-situated U.S. workers a wage rate calculated by a formula known as an “adverse effect wage rate” (“AEWR”). The 1987 regulations remained largely in effect until January 16, 2009.

In February 2008, the Department published a notice of proposed rule making, stating that the agency intended to make substantial changes to the H-2A program. A 60-day comment period was provided, during which the Department received 11,000 comments. A final rule was published in December 2008 and became effective on January 17, 2009 (collectively, “the 2008 regulations,” or the 2008 rule). The 2008 regulations changed the method by which AEWRs were calculated, as well as the classification of seasonal workers on Christmas tree farms, who had previously been defined as “agricultural” employees under the H-2A program, but as “on-agricultural,” “forestry” employees under the Fair Labor Standards Act (“FLSA”). This distinction in classification was material, because persons “employed in agriculture” do not qualify to receive “overtime” pay under FLSA.

In 2004, the 4th Circuit found that the Department’s position regarding the classification of H-2A workers on Christmas tree farms was invalid because it was adopted without rule making allowing notice and comment and without a formal adjudication. In accordance with this precedent, the 2008 regulations defined H-2A workers on Christmas tree farms as “agricultural” employees for purposes of both the H-2A program and the FLSA. In March 2009, the newly-appointed Secretary of Labor issued a “notice of proposed suspension” of the 2008 regulations (“the 2009 Notice”). In the 2009 Notice, the Department proposed to suspend the 2008 regulations, during a nine-month period, for further review and reconsideration, in light of issues that had arisen since the publication of the 2008 regulations. The 2009 Notice also stated that during the suspension period, the Department proposed to reinstate on an interim basis the 1987 regulations to avoid a regulatory vacuum in the H-2A program.

The Department allowed a 10-day period to receive comments on the proposed suspension, citing the need for expediency, and stated that the Department would consider only comments concerning the suspension action itself, and not regarding the merits of either set of regulations (“the content restriction”). During this 10-day period, 800 comments were received. On May 29, 2009, after two months of consideration, the Department published a “final rule; suspension of rule” that suspended the 2008 regulations, and reinstated the 1987 regulations, for a nine-month period effective June 29, 2009 (collectively, “the 2009 Suspension”).

In June 2009, the North Carolina Growers’ Association, Inc., and other growers’ associations, farmers, and related lobbying organizations (collectively, “the NCGA”), filed a complaint in the district court against the Department and other federal agencies (collectively, “the federal defendants”), seeking to enjoin the Department’s 2009 Suspension, arguing that such action violated the APA. The district court granted the NCGA’s summary judgment motion, and issued a preliminary injunction prohibiting implementation of the 2009 Suspension. As a result of the district court’s injunction, the 2008 regulations continued to govern administration of the H-2A program, and H-2A and U.S. agricultural workers were paid at lower wage rates for nine months based on the 2008 AEWRs and the 2008 regulations.

In September 2009, the Department issued another notice of proposed rule making in a second attempt to replace the 2008 regulations. After issuing notice and receiving comment, the Department published new regulations governing the H-2A program (“the 2010 regulations”). The 2010 regulations largely restored the H-2A program to the status quo before 2008, and reinstituted the wages and working conditions established under the 1987 regulations. The district court held that the NCGA’s claims against the federal defendants were moot, in light of the Department’s promulgation of the 2010 regulations.

In December 2009, the district court permitted the United Farm Workers, the Farm Labor Organizing Committee, AFL-CIO, and representative H-2A workers (collectively, “the Farm Workers”) to intervene as defendants in this case. The Farm Workers filed a purported class action counterclaim against the NCGA on behalf of H-2A workers and U.S. agricultural workers who had been paid at wage rates based on the lower AEWRs in effect during the preliminary injunction. The parties filed cross motions for summary judgment on the issue of whether the 2009 Suspension was promulgated in compliance with the APA. The district court granted the NCGA’s motion for summary judgment, denied the Farm Workers’ motion for partial summary judgment, and dismissed with prejudice the Farm Workers’ counterclaims.

The Farm Workers appealed to the 4th Circuit, which affirmed.

LAW: The 4th Circuit considered the question of whether the Department’s action constituted “rule making” under the Administrative Procedure Act, 5 U.S.C. §§553, and 701 through 706, and, if so, whether the Department satisfied the APA’s “notice and comment” requirements. The APA requires that agencies follow certain procedures before issuing a rule. §553. Under the APA, a “rule” is defined as the whole or a part of an agency statement of general or particular applicability and future effect designed to implement, interpret, or prescribe law or policy or describing the organization, procedure, or practice requirements of an agency and includes the approval or prescription for the future of rates, wages, corporate or financial structures or reorganizations thereof, prices, facilities, appliances, services or allowances therefor or of valuations, costs, or accounting, or practices bearing on any of the foregoing. §551(4). The APA provides a broad definition of the term “rule making,” which comprises the “agency process for formulating, amending, or repealing a rule.” §551(5).

Here, the parties did not dispute that the 1987 and 2008 regulations each constituted a “rule” under the APA, but they disputed whether the Department’s action qualified as “formulating” a rule, thereby constituting “rule making.”

Under the definition of “formulating,” it is immaterial whether the rule at issue was newly drafted or was drawn from another source. When the 2008 regulations took effect on January 17, 2009, they superseded the 1987 regulations for all purposes relevant to this appeal. As a result, the 1987 regulations ceased to have any legal effect, and their reinstatement would have put in place a set of regulations that were new and different “formulations” from the 2008 regulations. Moreover, the Department’s own conduct showed that the Department viewed the reinstatement of the 1987 regulations as “rule making” and made at least some attempt to comply with the APA notice-and-comment procedures. Such attempts by an agency to comply with APA notice-and-comment procedures have been held to support the conclusion that those procedures were applicable. Manufactured Housing Inst. v. EPA, 467 F.3d 391, 399 (4th Cir. 2006). Thus, by reinstating the superseded 1987 regulations (albeit temporarily), the Department engaged in the “formulating” and the “repealing” aspects of “rule making,” and was therefore required to comply with the APA’s notice and comment procedures.

However, the record clearly demonstrated that the Department did not satisfy its notice and comment obligations. The notice and comment provisions of the APA require, among other things, that the agency give interested persons an opportunity to participate in the rule making through submission of written data, views, or arguments, and that the agency shall explain its decision, after consideration of the relevant matter presented. §553(b), (c). Here, by the very terms of the 2009 Notice, the Department stated that it would not receive or consider comments that were not only “relevant and important,” but were integral to the proposed agency action and the conditions that such action sought to alleviate. As a result of the content restriction, the Department refused to receive comments on and to consider or explain “relevant and significant issues.”

Because the Department did not provide a meaningful opportunity for comment, and did not solicit or receive relevant comments regarding the substance or merits of either set of regulations, the Department’s reinstatement of the 1987 regulations was arbitrary and capricious in that the Department’s action did not follow procedures required by law. See §706(2).

Accordingly, the district court judgment invalidating the Department’s action was affirmed.

Constitutional Law

Possession of firearm by illegal alien

BOTTOM LINE: The Second Amendment’s protection of the right to keep and bear arms does not extend to illegal aliens, and a federal statute prohibiting possession of firearm by an alien “illegally or unlawfully in the United States” was therefore valid.

CASE: U.S. v. Carpio-Leon, No. 11-5063 (filed Dec. 14, 2012) (Judges Traxler, NIEMEYER & Motz). 17 pages.

COUNSEL: Douglas Truslow, Columbia, SC, for Appellant. Robert Daley, Office of the United States Attorney, Columbia, SC, for Appellee.

FACTS: On February 24, 2011, Immigration and Customs Enforcement agents executed a consensual search of the home of Nicolas Carpio-Leon, a citizen of Mexico. During the search, the agents discovered a number of firearms and ammunition. Carpio-Leon admitted that he had stored the firearms in his bedroom and that he was in the United States illegally.

Carpio-Leon was thereafter indicted in two counts charging him with: (1) possession of a firearm by an alien “illegally or unlawfully in the United States,” in violation of 18 U.S.C. §922(g)(5)(A); and (2) illegal entry into the United States, in violation of 8 U.S.C. §1325(a)(2).

He filed a motion to dismiss Count I on the ground that §922(g)(5) was constitutionally invalid. After the district court denied the motion, Carpio-Leon entered a conditional guilty plea to both counts of the indictment, reserving the right to appeal the issue of the constitutionality of §922(g)(5).

Carpi-Leon subsequently appealed to the 4th Circuit, which affirmed the judgment of the district court.

LAW: Carpio-Leon contended that possession of firearms typically used for self-defense in one’s home is a right protected by the Second Amendment, even when such possession is by an illegal alien. The issue of the constitutionality of 18 U.S.C. §922(g)(5) under the Second Amendment was one that had not yet been addressed by the 4th Circuit. The 5th, 8th, and 10th Circuits, however, had upheld the provision in the face of a Second Amendment challenge, finding that the protection of the Second Amendment does not extend to illegal aliens. See United States v. Portillo-Munoz, 643 F.3d 437, 442 (5th Cir. 2011), cert. denied, 132 S. Ct. 1969 (2012); United States v. Flores, 663 F.3d 1022, 1023 (8th Cir. 2011) (per curiam), cert. denied, No. 11-9452, 2012 WL 993946 (U.S. June 25, 2012).

Any Second Amendment analysis must begin with the Supreme Court’s seminal decision in District of Columbia v. Heller, which held that the Second Amendment providing that the Second Amendment providing that “the right of the people to keep and bear arms shall not be infringed” codified a preexisting right that allows individuals to keep and bear arms. District of Columbia v. Heller, 554 U.S. 570, 592, 595 (2008)); see also United States v. Carter, 669 F.3d 411, 414 (4th Cir. 2012). However, the Heller Court also cautioned that the right to bear arms has limits. Heller, 554 U.S. at 595. Thus, the Second Amendment does not guarantee the right to possess for every purpose, to possess every type of weapon, to possess at every place, or to possess by every person. See United States v. Chester, 628 F.3d 673, 676 (4th Cir. 2010).

To apply Heller, it is necessary to follow the two-step approach set forth in Chester, asking first whether the challenged law imposes a burden on conduct historically falling within the scope of the Second Amendment’s guarantee. This historical inquiry seeks to determine whether the conduct at issue was understood to be within the scope of the right at the time of ratification. If it was not, then the challenged law is valid. Chester, 628 F.3d at 680. If, however, the regulation is found to burden conduct that falls within the scope of the Second Amendment’s protections, the reviewing court moves to the second step of applying an appropriate form of means-end scrutiny. Id.

Employing this analytical structure in the present case, it was first necessary to determine whether the scope of the Second Amendment includes the protection of aliens who are illegally in this country. Heller concluded, through a distinct analysis, that the core right historically protected by the Second Amendment is the right of self-defense by “law-abiding, responsible citizens.” Carter, 669 F.3d at 416 (quoting Heller, 554 U.S. at 635). Indeed, most scholars of the Second Amendment agree that the right to bear arms was tied to the concept of a virtuous citizenry and that, accordingly, the government could disarm “unvirtuous citizens.” United States v. Yancey, 621 F.3d 681, 684-85 (7th Cir. 2010). Several early proposals for the Bill of Rights likewise demonstrate the understanding that the core protection of the Second Amendment belongs to law-abiding citizens.

Thus, based on the historical inquiry, illegal aliens do not belong to the class of law-abiding members of the political community to whom the protection of the Second Amendment is given, because illegal aliens, by definition, have not entered the United States lawfully. Therefore, there was no need to proceed to the second step of Chester, and Carpio-Leon’s constitutional challenge under the Second Amendment could not succeed.

Accordingly, the judgment of the district court was affirmed.

Constitutional Law

Standing to challenge handgun restrictions

BOTTOM LINE: Individual and organizational plaintiffs lacked standing to challenge state and federal restrictions on the sale and transfer of handguns because those statutes did not burden the individual plaintiffs directly or prevent them from acquiring handguns they desired, and did not impede the not-for-profit organizational plaintiff in carrying out its mission; therefore, none of plaintiffs suffered an injury in fact.

CASE: Lane v. Holder, No. 11-1847 (filed Dec. 31, 2012) (Judges Motz, DUNCAN & Floyd). RecordFax No. 12-1231-60, 12 pages.

COUNSEL: Alan Gura, Gura & Possessky, PLLC, Alexandria, VA, for Appellants. Anisha Dasgupta, United States Department of Justice, Washington; Earle Getchell, Office of the Attorney General, Richmond, VA, for Appellees.

FACTS: Plaintiffs Michelle Lane and Amanda and Matthew Welling, and organizational plaintiff, the Second Amendment Foundation (“SAF”), filed a pre-enforcement challenge to the constitutionality of a federal statute restricting interstate transfers of handguns, 18 U.S.C. §922(b)(3); a federal regulation implementing that statute, 27 C.F.R. §478.99; and a Virginia law prohibiting Virginia firearms dealers from selling handguns to non-residents of Virginia, Va. Code section 18.2-308.2:2. The federal statute at issue, 18 U.S.C. §922(b)(3), included a requirement that interstate transfers of firearms take place through federal firearms licensees (“FFLs”). Under the federal statute, a buyer could purchase a handgun from an out-of-state source, but it was required that that source be a FFL and that the buyer arrange for the handgun to be delivered to an in-state FFL, from whom the buyer could retrieve the gun. In contrast, FFLs could sell or deliver a rifle or shotgun to an out-of-state resident if the transferee met in person with the FFL in the state where he wished to buy the firearm and if the transfer complied with the laws of both the transferee’s and transferor’s states.

With 27 C.F.R. §478.99, the Bureau of Alcohol, Tobacco and Firearms issued implementing regulations that closely tracked the federal statute. The Virginia statute likewise permitted the sale or transfer of a rifle or shotgun to a non-resident of Virginia, but prohibited the direct sale or transfer of a handgun to a non-resident. Like the federal statute, the Virginia law required that to sell or transfer a handgun to a non-resident, the firearms dealer send the gun to a firearms dealer in the nonresident’s home state, from whom the buyer could retrieve the gun.

Lane and the Wellings were residents of Washington, D.C. who wished to acquire handguns from other states. Lane and the Wellings generally asserted that they would participate more frequently in the market for handguns but for the interstate handgun transfer ban. They claimed that the transactions they were required to undertake in order to acquire a handgun were burdensome and expensive. SAF, a non-profit membership organization whose purposes included promoting the exercise of the right to keep and bear arms, contended that the challenged laws caused it to expend resources in response.

The plaintiffs sought injunctive and declaratory relief against Eric Holder, Jr., in his official capacity as Attorney General of the United States, and W. Stephen Flaherty, in his official capacity as Superintendent of the Virginia State Police, to prevent enforcement of 18 U.S.C. §922(b)(3), 27 C.F.R. §478.99, and Va. Code section 18.2-308.2:2, to the extent that these laws prohibited the acquisition of handguns by out-of-state residents. The plaintiffs moved for a preliminary injunction. In a hearing on that motion, the district court dismissed the case for lack of standing.

The plaintiffs appealed to the 4th Circuit, which affirmed.

LAW: To have standing, a plaintiff must first be able to demonstrate that it has suffered an “injury in fact” that is concrete and particularized, actual or imminent, and not conjectural or hypothetical. Friends of the Earth, Inc. v. Laidlaw Envtl. Servs. (TOC), Inc., 528 U.S. 167, 180-81 (2000). To establish an injury in fact, plaintiffs must demonstrate that their claim rests upon “a distinct and palpable injury” to a legally protected interest. Warth v. Seldin, 422 U.S. 490, 501 (1975). This injury must affect the plaintiffs in a personal and individual way. Lujan v. Defenders of Wildlife, 504 U.S. 555, 560 n.1 (1992).

A plaintiff who alleges an injury based on restriction of distribution channels may be able to show standing if the defendant’s actions directly affect that plaintiff. For instance, a distributor of contraceptives was found to have standing to challenge a law barring all but licensed pharmacists from selling contraceptives. Carey v. Pop. Servs. Int’l, 431 U.S. 678, 682-83 (1977). However, the plaintiffs here were in a fundamentally different situation, as the laws they challenged did not apply to them but rather to the FFLs from whom they would buy handguns.

In certain circumstances, consumers burdened by regulation of the sellers they transact with may be able to establish that they have suffered an injury in fact, as the Supreme Court has made clear in the context of Commerce Clause litigation. See Gen. Motors Corp. v. Tracy, 519 U.S. 278, 286 (1997). Again, however, the plaintiffs in Tracy were burdened directly, as the government required them to pay a tax upon buying products from out-of-state sellers. See Ben Oehrleins & Sons & Daughter, Inc. v. Hennepin County, 115 F.3d 1372, 1381 (8th Cir. 1997). No such government-imposed assessment was levied against the plaintiffs here.

Critically, the plaintiffs in the present case were not prevented from obtaining the handguns they desired but at worst were burdened by additional costs and logistical hurdles. To obtain a handgun from another state, the plaintiffs had to pay a transfer fee and visit multiple FFLs, but the laws did not prevent them from exercising their Second Amendment right to bear arms. Because the challenged laws did not burden the plaintiffs directly and did not prevent them from acquiring the handguns they desired, the plaintiffs did not allege an injury in fact.

Like an individual, a organization seeking to establish standing must demonstrate an injury in fact. See Havens Realty Corp. v. Coleman, 455 U.S. 363, 378 (1982). An organization may suffer an injury in fact when a defendant’s actions impede its efforts to carry out its mission. See id. at 379. Here, however, the organizational plaintiff, SAF, merely asserted that it was injured because its resources were taxed by inquiries into the operation and consequences of interstate handgun transfer provisions. This “mere expense” to SAF did not constitute an injury in fact. Because the challenged laws were not alleged to have impeded SAF’s efforts to carry out its mission, SAF suffered no injury in fact.

Accordingly, the district court’s judgment dismissing the action was affirmed.

Consumer Protection

Debt cancellation agreements

BOTTOM LINE: Federal law governing debt cancellation agreements entered into by national banks does not pre-empt the Maryland Credit Grantor Closed End Provisions applicable to local lenders, even if the debt cancellation agreement is part of a credit contract originated by a local lender and assigned to a national bank

CASE: Decohen v. Capital One, N.A., No. 11-2161 (filed Dec. 26, 2012) (Judges Shedd, DAVIS & Wynn). RecordFax No. 12-1226-60, 21 pages.

COUNSEL: Benjamin Carney, Gordon & Wolf, CHTD, Towson, MD, for Appellant. Bryan Fratkin, McGuirewoods, LLP, Richmond, VA, for Appellee.

FACTS: In 2007, Philip Decohen bought a used Chrysler Pacifica and financed it with a loan from a Maryland car dealer, Nation Auto of Marlow Heights. The amount financed included a $600 charge for a “debt cancellation agreement.” Under the Maryland Credit Grantor Closed End Provisions (“CLEC”), Md. Code Ann., Com. Law §12-1001et seq., such an agreement requires that a lender cancel the remaining loan balance when a car is totaled and the insurance payout does not cover the entire outstanding balance. Here, however, that did not happen.

In 2010, Decohen suffered a total loss of the Pacifica. His insurance company paid a total of $12,839, but Decohen owed another $1,504 on the vehicle. Under the Maryland law, the holder of the note on the vehicle would have been compelled to cancel the remaining balance. Consequently, Decohen submitted a claim to the servicer of the debt cancellation agreement, Beacon Industries Worldwide, of Fort Lauderdale, Florida. Beacon calculated the unpaid net balance to be $12,908 to be more than the value of the car, and denied the claim.

Nation Auto had assigned Decohen’s loan to Capital One, N.A. As a result of the claim denial, Capital One demanded payment of the $1,504 remaining loan balance. Capital One asserted that it did not have to cancel the remaining loan balance because the National Bank Act (“NBA”) and federal regulations preempted Maryland’s CLEC law. Decohen filed a putative class action, asserting claims for breach of contract and violation of the CLEC.

The district court found that the NBA and federal regulations preempted the CLEC and granted Capital One’s motion to dismiss Decohen’s complaint for failure to state a claim for breach of contract.

Decohen appealed to the 4th Circuit, which reversed the judgment of the district court and remanded the case.

LAW: Decohen argued that the district court erred in finding that federal law preempted the CLEC.

With the NBA, enacted in 1864, Congress established the system of national banking still in place today. See Watters v. Wachovia Bank, N.A., 550 U.S. 1, 10 (2007). The Act vested in nationally chartered banks enumerated powers and “all such incidental powers as shall be necessary to carry on the business of banking.” 12 U.S.C. §24 (Seventh). To prevent inconsistent state regulation from impairing the national system, Congress provided: “No national bank shall be subject to any visitorial powers except as authorized by Federal law.” 12 U.S.C. §484(A).

Federal control shields national banking from unduly burdensome and duplicative state regulation. Watters, 550 U.S. at 11. Despite the broad scope of the NBA, however, national banks are subject to state laws of general application in their daily business to the extent such laws do not conflict with the letter or the general purposes of the NBA. Id. National banks are subject to state laws of general application in their daily business to the extent such laws do not conflict with the letter or the general purposes of the NBA. Id.

Congress has authorized the Office of the Comptroller of the Currency (“OCC”) to promulgate regulations implementing the NBA. See 12 U.S.C. §93a. Those regulations contain both an express preemption provision and a savings clause. The express preemption provision states that generally, state laws that obstruct, impair, or condition a national bank’s ability to fully exercise its federally authorized non-real estate lending powers are not applicable to national banks.

Following the OCC’s preemption provision is the savings clause, which provides that state laws on certain specified subjects, including the right to collect debts, are not inconsistent with the non-real estate lending powers of national banks and apply to national banks to the extent that they only incidentally affect the exercise of national banks’ non-real estate lending powers. 12 C.F.R. §7.4008(e). The OCC has also promulgated regulations concerning debt cancellation contracts (“DCCs”) entered into by national banks.

The CLEC provisions regarding DCCs are not expressly preempted by federal law when the agreements are part of credit contracts originated by a local lender and assigned to a national bank, because the OCC regulations explicitly concern DCCs entered into by national banks. See 12 C.F.R. §37.1(c). Thus, if Capital One had directly loaned Decohen the money to purchase his vehicle, and that loan included a DCC, it would be governed by federal regulations. However, Capital One did not loan Decohen the money to purchase his vehicle; Nation Auto did, and then assigned the loan to Capital One.

Furthermore, Congress has not occupied the field with regard to DCCs, as the OCC regulations leave room for state regulation of DCCs entered into by entities other than national banks (such as here, a car dealer) and of agreements assigned to national banks. Nor is the CLEC is not conflict preempted by federal banking regulations, because it is not physically impossible to comply with both laws. Finally, the state law does not stand as an obstacle to the objective of the federal law, because the CLEC actually furthers the purpose of the OCC regulation of DCCs, which is to ensure that national banks offer and implement contracts and agreements consistent with safe and sound banking practices. 12 C.F.R. §37.1(b).

As such, the district court erred in deeming Decohen’s CLEC claim against Capital One preempted by federal law and regulations. Accordingly, the judgment of the district court dismissing Decohen’s CLEC and breach of contract claims was vacated and the case remanded.

Corporate Law

Derivative claims from banking operations

BOTTOM LINE: Where a bankrupt corporation’s former directors and officers also served as directors and officers of the corporation’s wholly owned banking subsidiary, the bankruptcy trustee’s claims of negligence and breach of fiduciary duty flowing from banking operations were derivative in nature and could be brought only by the Federal Deposit Insurance Corp.

CASE: In re: Beach First National Bancshares, No. 11-2019 (filed Dec. 28, 2012) (Judges AGEE, Wynn & Floyd). 15 pages.

COUNSEL: David Parrish, Nexsen Pruet, Charleston, SC, for Appellant. Dennis Connolly, Alston & Bird, LLP, Atlanta, GA, for Appellees.

FACTS: Michelle Vieira, trustee in bankruptcy of Beach First National Bancshares, Inc., (the “Trustee” and “Bancshares,” respectively) filed this action against the former directors and officers of Bancshares (collectively, the “Directors). The Directors also all formerly served as the officers and directors of First National Bank Myrtle Beach, SC (the “Bank”), a wholly owned subsidiary of Bancshares. The Bank was Bancshares’ primary asset.

In 2008, the United States Office of the Comptroller of the Currency (“OCC”) began monitoring the Bank and found serious deficiencies with the management and operation. In 2010, after corrective actions failed to sustain the financial stability of the Bank, OCC closed the Bank and named the Federal Deposit Insurance Corporation (“FDIC”) as its receiver.

As a consequence of the Bank’s failure, Bancshares filed for bankruptcy under Chapter 7.

The Trustee then filed this adversary proceeding, asserting breach of fiduciary duty and negligence against the Directors in their capacity as the officers and directors of Bancshares. Specifically, the Trustee alleged that the Directors breached a number of duties to Bancshares, resulting in mismanagement and lack of oversight of the Bank and over Bancshares’ interest in a real estate holding entity. The district court determined that the Trustee pled against the Directors only claims derived from alleged defalcations in the Directors’ operation of the Bank, and found that the Trustee’s right to bring such derivative claims had been divested by statute in favor of the FDIC. Derivative claims of the nature asserted by the Trustee, the district court determined, could be brought only by the FDIC under the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (“FIRREA”). As such, the district court concluded that the Trustee lacked standing to bring the action, and it granted the Directors’ motion to dismiss the action.

The Trustee appealed to the 4th Circuit, which affirmed in large part the judgment of the district court, reversing only that portion of the judgment dismissing the Trustee’s claim regarding Bancshares’ interest in a real estate holding entity.

LAW: The Trustee argued that she did not plead derivative claims against the Directors, but instead asserted direct claims that did not fall within the purview of the FDIC.

A trustee in bankruptcy succeeds to all rights of the debtor, including the right to assert any causes of action belonging to the debtor. See Nat’l Am. Ins. Co. v. Ruppert Landscaping Co., 187 F.3d 439, 441 (4th Cir. 1999). Applying that foundational principle to the present case, the Trustee had the authority to assert any cause of action that Bancshares could have brought in its own right, including the right to assert derivative claims of Bancshares (as the Bank’s sole shareholder) against the Directors in their capacity as officers and directors of the Bank. This was so because under South Carolina law, when an officer or director of a corporation fails to fulfill a duty to the corporation, that corporation may bring a direct action against the officer or director. Babb v. Rothrock, 401 S.E.2d 418, 419-20 (S.C. 1991). When the corporation fails to bring a direct action, a shareholder may bring suit on behalf of the corporation in a derivative action. See Rice-Marko v. Wachovia Corp., 728 S.E.2d 61, 65 (S.C. 2012). In this case, that shareholder was Bancshares, acting by virtue of the bankruptcy proceeding through the Trustee.

Under FIRREA, however, the FDIC, when appointed receiver of a bank, succeeds to all rights, titles, powers, and privileges of the insured depository institution, and of any stockholder of such institution with respect to the institution and the assets of the institution. 12 U.S.C. §1821(d)(2)(A)(i). It is well settled under South Carolina law that causes of action for losses sustained because of the mismanagement and negligence of directors, officers, and employees of a bank belong to the bank itself, and not to the stockholders or creditors. FDIC v. American Bank Trust Shares, Inc., 412 F. Supp. 302, 306 (D.S.C. 1976), vacated on other grounds, 558 F.2d 711 (4th Cir. 1977). In the event of its liquidation, such causes of action are vested in its receiver. Id.; see also Bauer v. Sweeny, 964 F.2d 305, 308 (4th Cir. 1992).

The cited 4th Circuit cases, however, involved individual shareholders asserting clearly derivative claims against officers and directors of an operating bank entity, and did not include the additional element, present in this case, of dual-role fiduciaries at the holding company and subsidiary bank levels. The Eleventh Circuit considered similar issues in Lubin v. Skow (In re Integrity Bancshares, Inc.), 382 Fed. App’x 866 (11th Cir. 2010) (per curiam). In Lubin, as here, the trustee in bankruptcy of a bank holding company filed an adversary proceeding against the holding company’s officers and directors, alleging that they had caused the holding company to take on excess debt to fund its subsidiary bank, devaluing the holding company stock. Id. at 869. Most of the Lubin defendants had served as officers and directors of both the holding company and the subsidiary bank. Id. The 11th Circuit concluded that the FDIC succeeded to all derivative claims against the officers and directors of the subsidiary bank, observing, though, that the bankruptcy trustee could bring claims for direct harm to the holding company. Id. at 871.

In the present case, with one exception, the basis of liability the Trustee pled against the Directors flowed only from the duties the Directors might have violated in their operation and management of the Bank. The Trustee pled that the Directors allowed mismanagement of the Bank, but such conduct caused injury first to the Bank and then only indirectly to Bancshares as the Bank’s sole shareholder. Because the main thrust of the Trustee’s pleading focused on harm that was not distinct from the harm Bancshares suffered when its investment in the Bank soured, the Trustee lacked standing to pursue these derivative claims under FIRREA, as the right to pursue such claims belonged to the FDIC. See id.

The only independent claim alleged by the Trustee was the claim that the Directors caused Bancshares to improvidently subordinate Bancshares’ majority interest in an LLC that owned an office building in Myrtle Beach, South Carolina, causing the loss of Bancshares’ equity interest in the LLC. This particular act did support a direct claim against the Directors, and the district court erred in dismissing that claim.

Accordingly, the judgment of the district court was reversed and the case remanded with regard to the Trustee’s claims as to the Directors’ alleged improper subordination of Bancshares’ LLC interest. In all other respects, the judgment of the district court was affirmed.

Criminal Law

Driving under the influence

BOTTOM LINE: Coupled with abundant evidence of defendant’s intoxication, evidence that defendant had blood alcohol concentration of .09 approximately three hours after crashing her car was sufficient to prove a violation of the criminal statute that prohibits operating or being in actual physical control of a motor vehicle while operator’s the operator’s blood alcohol concentration is 0.08 grams or more.

CASE: U.S. v. Smith, No. 11-4336 (filed Dec. 17, 2012) (Judges Duncan, Agee & DIAZ). 18 pages.

COUNSEL: William Mitchell, Brennan, Sullivan & McKenna, LLP, Greenbelt, MD, for Appellant. Hollis Weisman, Office of the United States Attorney, Greenbelt, MD, for Appellee.

FACTS: At about 3:00 a.m. on October 31, 2009, Amber Howard was driving along the Baltimore-Washington Parkway when she saw a car drive over the highway median and flip over. Howard called 911 and then ran to check on the accident. As she approached the wrecked car, she heard a woman screaming for help. The woman, Kristen Smith, exited the wrecked vehicle through its rear passenger window and walked toward Howard. Howard heard her say, “I never drink. I never drink. I didn’t want to go out. I never drink. I only had one drink.” Smith’s passenger, Jabari Outz, was pronounced dead on the scene by emergency medical services.

While waiting for the police to arrive, a distressed and disoriented Smith repeatedly wandered onto the highway, and Howard pulled her out of the road several times. Howard also smelled liquor emanating from Smith. Police officers arrived at around 3:30 a.m. Smith was taken to the hospital, where she submitted to a routine blood test. A police officer dispatched to stay with Smith while she was treated in the emergency room saw her writhing in her bed and heard her make a number of unsolicited statements, including, “Don’t ever drink and drive,” and “Lock me up and throw away the key.” Some time later, another police officer arrived at the emergency room to oversee a second blood draw, which was conducted at 5:47 a.m.

The blood sample from this second draw, which showed a blood alcohol content of .09 grams per 100 milliliters, was furnished to Lucas Zarwell, the Deputy Chief Toxicologist at the Office of the Chief Medical Examiner in Washington, D.C. Smith was subsequently charged with homicide during the commission of an unlawful act not amounting to a felony, in violation of 18 U.S.C. §1112(a). The underlying unlawful act was an alleged violation of 36 C.F.R. §4.23(a)(2), which prohibits operating or being in actual physical control of a motor vehicle while the alcohol concentration in the operator’s blood or breath is 0.08 grams or more of alcohol per 100 milliliters of blood.

At Smith’s criminal trial, Zarwell testified as an expert witness on the results of the 5:47 a.m. blood sample and about typical alcohol absorption durations and elimination rates. At the close of the government’s case in chief, Smith moved for a judgment of acquittal under Fed. R. Crim. P. 29, arguing that the evidence produced by the government was insufficient to show her blood alcohol level exceeded .08 at the time of the accident, almost three hours before the blood test. The district court denied the motion, and the jury returned a verdict of guilty. Prior to sentencing, Smith renewed her motion for judgment of acquittal and moved for a new trial. The district court denied both motions.

Smith appealed to the 4th Circuit, which affirmed the judgment of the district court.

LAW: Smith challenged the sufficiency of the government’s evidence, arguing that the district court erred when it denied her motion for judgment of acquittal pursuant to Fed. R. Crim. P. 29. Smith conceded that the government presented evidence that she was under the influence of alcohol at the time of the accident, and that the government’s evidence established that her blood contained .09 grams of alcohol per 100 milliliters at 5:47 a.m., nearly three hours after the crash. Smith contended, however, that the government did not offer sufficient evidence upon which a rational finder of fact could have determined beyond a reasonable doubt that, at the time she was operating her vehicle, her blood alcohol concentration was .08 percent or more, as a 36 C.F.R. §4.23(a)(2) “per se” violation requires.

Unlike some comparable state statutes, §4.23(a)(2) sets no explicit time limit for the taking of a blood alcohol test that may be used at trial to show a defendant’s alcohol concentration. Section 4.23(a)(2) is also silent as to the regulation’s proof requirements. Unlike some state DUI laws, 36 C.F.R. §4.23(a)(2) does not make it unlawful to have a blood alcohol level above the legal limit within a specified time after operating a motor vehicle, nor does it contain a presumption regarding the person’s blood alcohol at the time he was operating or in physical control of a vehicle based on subsequently obtained breath or blood test results. Because there is no presumption based on the test results, the Government is required to prove that a defendant’s blood alcohol content was above the legal limit at the time of operating the vehicle and not merely at the time the breath or blood sample was taken. See United States v. French, No. 2:08-MJ-726-GWF, 2010 WL 1633456 (D. Nev. Apr. 10, 2010) (unpublished).

However, the government may, in some circumstances, establish a “per se” violation without direct evidence of the defendant’s blood alcohol content while actually driving and without introduction of relation-back evidence. Here, a rational finder of fact could have determined beyond a reasonable doubt that Smith violated the “per se” regulation.

Even if, as Smith asserted, her 5:47 a.m. blood alcohol result was, standing alone, insufficient to establish the violation, this evidence did not actually stand alone; the government presented myriad other evidence supporting the jury’s conclusion that Smith’s blood alcohol level was over the legal limit while she was driving. Most notably, Zarwell’s unrebutted testimony about typical alcohol absorption durations and elimination rates established that it was extremely unlikely that Smith could have registered a .09 percent blood alcohol content at 5:47 a.m. without having exceeded the .08 percent threshold at the time of the crash nearly three hours earlier.

There were also abundant other indicia of Smith’s guilt. The evidence showed that Smith was driving erratically and that she flipped her car over the highway’s median strip. Howard testified that Smith was behaving erratically and that she smelled strongly of liquor. Smith also made statements to two witnesses about her own drinking and driving. When coupled with the result of the 5:47 a.m. blood alcohol test and Zarwell’s testimony, this evidence could lead a rational juror to determine beyond a reasonable doubt that Smith had violated the regulation’s .08 threshold. Accordingly, Smith was not entitled to a judgment of acquittal, and the judgment of the district court was affirmed.

Criminal Law

Identity theft

BOTTOM LINE: Federal statutes prohibiting identity theft of a “person” or “individual” were fatally ambiguous regarding their application to the unauthorized use of means of corporate identification; therefore, the defendants’ convictions arising from the use of a company stamp to endorse checks were therefore vacated.

CASE: U.S. v. Hilton, No. 11-4273 (filed Dec. 13, 2012) (Judges Traxler, KEENAN & Harwell (sitting by designation)). 24 pages.

COUNSEL: Rudolph Ashton, McCotter, Ashton & Smith, PA, New Bern, NC; Daniel McIntyre, Charlotte, NC; Lawrence Hewitt, Guthrie Davis Henderson & Staton, Charlotte, NC, for Appellants. Michael Savage, Office of the United States Attorney, Charlotte, NC, for Appellee.

FACTS: Defendants, Jacqueline, Tamatha, and Jimmy Hilton, challenged their convictions on charges involving a scheme to defraud The Woodsmiths Company, a small North Carolina furniture manufacturer that was Tamatha Hilton’s employer. The primary issue before the appellate court was whether the statutes prohibiting identity theft and aggravated identity theft, 18 U.S.C. §§1028(a)(7) and 1028A, under which Jimmy Hilton and Jacqueline Hilton were convicted, encompassed the theft of the identity of a corporation.

The charges in this case arose from a two-year scheme in which the defendants defrauded Woodsmiths of about $655,000 by stealing and cashing numerous checks written to Woodsmiths by its customers. Tamatha Hilton was Woodsmiths’ office manager and bookkeeper, and was responsible for retrieving the mail from the company’s post office. Tamatha participated in the fraud by sending company invoices to customers, requesting that they mail either initial or final payment for their furniture orders to the company address. Tamatha’s husband, Jimmy Hilton, also participated in the scheme, as did Jimmy’s former wife, Jacqueline Hilton. The Hiltons used a stamp bearing the Woodsmiths name to endorse the checks.

The defendants were ultimately charged in a 43-count indictment on charges including identity theft, mail fraud, mail theft, money laundering, passing forged securities, and making a false statement to a financial institution. A jury acquitted Jacqueline of making a false statement to a financial institution but convicted the defendants on all remaining counts. 0

The defendants appealed to the 4th Circuit, which found that the statutes prohibiting identity theft and aggravated identity theft were fatally ambiguous, and it therefore vacated the defendants’ convictions on that charge. It affirmed the remaining convictions.

LAW: The first identity theft statute in question, 18 U.S.C. §1028(a)(7), prohibited the knowing transfer, possession, or use, without lawful authority, of a “means of identification of another person” with the intent to commit, or to aid or abet, or in connection with, any unlawful activity that constitutes a violation of federal law, or that constitutes a felony under any applicable state or local law. Id. The second identity theft statute, 18 U.S.C. §1028A, proscribed the same conduct in connection with certain enumerated felonies, including mail fraud, and provided for enhanced penalties.

Although the substantive prohibitions of both statutes applied to the identity of “persons,” the term “means of identification” found in both statutes is defined in §1028(d)(7) as “any name or number that may be used, alone or in conjunction with any other information, to identify a specific individual.”

Thus, it was necessary to determine whether the phrase “means of identification of another person,” as used in the identity theft statutes, encompassed the unauthorized use of the identification of corporations, when the term “means of identification” was defined by statute as referring to the identity of “specific individuals.” The identity theft statutes did not define the terms “person” or “individual.” However, the Dictionary Act, 1 U.S.C. §1, which defines terms used in the United States Code specifies that the word “person” includes corporations and companies, as well as individuals.

Accordingly, under the Dictionary Act, corporations generally are considered “persons” when a statute fails to indicate otherwise. However, the Dictionary Act does not define the word “individual.”

Moreover, the Dictionary Act treats the word “individual” as a subset of the term “person.” By making this distinction with regard to these two words, the Dictionary Act suggests that the two words are not synonymous. Thus, aware of the general definitions contained in the Dictionary Act, Congress drafted the identity theft statutes by using the term “person,” which includes corporations, but also by using the word “individual,” which may or may not include corporations. The context of the identity theft statutes did not indicate whether the term “individual” was to include corporations.

Although the effects of identity theft may be financially devastating to corporations, nothing in the text of the statutes indicated that Congress intended to protect corporate victims as well as natural persons. In light of the statutory ambiguity resulting from Congress’s use of both the term “individual” and the term “person” when referring to victims of identity theft, the rule of lenity applied. WEC Carolina Energy Solutions, 687 F.3d at 206. The rule of lenity first helps to ensure that a fair warning be given to the world in language that the common world will understand, of what the law intends to do if a certain line is passed. Yi v. Fed. Bureau of Prisons, 412 F.3d 526, 535 (4th Cir. 2005). Second, the rule acknowledges that Congress, rather than the judiciary, is the proper institution to define criminal conduct. Id.

Here, nothing in the text, structure, articulated purpose, or legislative history of the identity theft statutes compelled the conclusion that Congress intended to make the theft of a corporation’s identity a crime under §§1028(a)(7) or 1028A. Accordingly, there was a grievous ambiguity, and in the face of two plausibly valid interpretations, the rule of lenity controlled. Because the identity theft statutes were fatally ambiguous regarding whether they included as a criminal offense the unauthorized use of the means of identification of a corporation, Jimmy’s and Jacqueline’s convictions for identity theft and aggravated identity theft were vacated. The other convictions were affirmed.

Criminal Law


BOTTOM LINE: Defendant’s act of stealing a small sum of money from dry cleaning branch that relied on out-of-state suppliers had “minimal effect” on interstate commerce and therefore satisfied jurisdictional requirement of federal law prohibiting robbery or extortion that “in any way or degree obstructs, delays, or affects commerce or the movement of any article or commodity in commerce.”

CASE: U.S. v. Tillery, No. 11-4819 (filed Dec. 19, 2012) (Judges Wilkinson, GREGORY & Duncan). 10 pages.

COUNSEL: Charles Lewis, Richmond, VA, for Appellant. Jessica Brumberg, Office of the United States Attorney, Richmond, VA, for Appellee.

FACTS: Following his robbery of a branch of Swan Dry Cleaners in Petersburg, Virginia, in which he stole $40 – $100 from the cash register of the store, Carter Tillery was charged with a Hobbs Act robbery, in violation of 18 U.S.C. §1951(a), and using, carrying, and brandishing a firearm during a crime of violence, in violation of 18 U.S.C. §924(c)(1)(A)(ii).

The Hobbs Act prohibits robbery or extortion that “in any way or degree obstructs, delays, or affects commerce or the movement of any article or commodity in commerce.”

Following a jury trial, Tillery was convicted on both counts. He appealed to the 4th Circuit, which affirmed.

LAW: Tillery challenged the jurisdictional element of his Hobbs Act robbery conviction, arguing that because he stole only $40 – $100, the robbery in question did not have a “minimal effect” on interstate commerce.

The two elements of a Hobbs Act crime are: (1) robbery or extortion; and (2) interference with commerce. Stirone v. United States, 361 U.S. 212, 218 (1960). The Act’s jurisdictional predicate is satisfied where the instant offense has a “minimal effect” on interstate commerce. United States v. Williams, 342 F.3d 350, 354 (4th Cir. 2003).

A robbery has a “minimal effect” on interstate commerce when it depletes the assets of an “inherently economic enterprise.” See Williams, 342 F.3d at 355. When determining whether a robbery had a minimal effect on interstate commerce, it is necessary to look not at the impact of the immediate offense, but whether the relevant class of acts has such an impact. Williams, 342 F.2d at 355. The impact on commerce may be shown by proof of probabilities without evidence that any particular commercial movements were affected. United States v. Brantley, 777 F.2d 159, 162 (4th Cir. 1985).

Here, the government put on more than enough evidence to show Swan Dry Cleaners had an interstate commerce connection. The branch which Tillery robbed was part of a larger network of cleaners, and for the enterprise as a whole to operate, Swan Dry Cleaners had to purchase most of its supplies from out-of-state. Viewed in the aggregate, robbing a place of business, especially Swan Dry Cleaners, which necessarily relied on out-of-state suppliers to operate, has an interstate commerce connection. Therefore, when Tillery stole money from cash register of Swan Dry Cleaners, depleting an inherently economic enterprise of its assets, the Hobbs Act jurisdictional requirement was satisfied.

This finding was consistent with previous 4th Circuit holdings. In United States v. Singleton, the Court held that business that purchases a substantial portion of its inventory from out-of-state suppliers is engaged in interstate commerce for purposes of the Hobbs Act. United States v. Singleton, 178 F. App’x 259, 262 (4th Cir. 2006) (unpublished). There was also a much stronger nexus with interstate commerce in this instance than in some prior holdings in which it was found that the Hobbs Act’s jurisdictional requirement was satisfied. See, e.g., Williams, 342 F.3d at 355. By comparison, it would violate the principles of common sense to find that robbing a legitimate place of business would not have even a minimal effect on interstate commerce, especially when viewing such activities in the aggregate.

While Tillery raised a number of policy arguments as to why the Court should not find the robbery met the jurisdictional requirement, ultimately, policy does not trump precedent. Here, despite the small amount of money stolen, it has never been held that the depletion of assets theory has a dollar-amount minimum. Rather, it is necessary to look only at whether an inherently economic enterprise is depleted of its assets, not at the amount of assets depleted.

Accordingly, the judgment of the district court was affirmed.

Criminal Procedure

Extraterritorial jurisdiction

BOTTOM LINE: District court properly exercised extraterritorial jurisdiction against the defendant for theft of public money and acts affecting a personal financial interest, because even though the defendant was a foreign national employed by U.S. government and the acts in question occurred abroad, congressional intent to exercise overseas jurisdiction could be inferred from the nature of criminalized offenses.

CASE: U.S. v. Ayesh, No. 11-4266 (filed Dec. 18, 2012) (Judges Traxler, Davis & COGBURN (sitting by designation)). 12 pages.

COUNSEL: Alan Yamamoto, Alexandria, VA, for Appellant. Ellen Meltzer, United States Department of Justice, Washington, for Appellee.

FACTS: Osama Esam Saleem Ayesh, a resident of Amman, Jordan, was hired by the U.S. Department of State to work as the shipping and customs supervisor at the U.S. Embassy in Baghdad, Iraq. While there, Ayesh devised a scheme to divert United States funds intended for shipping and customs clearance vendors to his wife’s bank account in Jordan. He established a phony email account and submitted fraudulent invoices and wire transfers in the name of a legitimate vendor. He also obtained self-inking signature stamps for the legitimate vendor, and kept all such instrumentalities in his living quarters, which were located on the grounds of the U.S. Embassy in Baghdad.

After U.S. officials came to suspect Ayesh of wrongdoing, they arranged for him to come to the United States under the pretext of attending a training seminar. Upon his arrival at Dulles International Airport, Ayesh was arrested and questioned by the FBI. He eventually confessed.

A grand jury subsequently returned a three-count indictment against Ayesh, charging him in two counts with theft of public money, in violation of 18 U.S.C. §641, and in one count with committing acts affecting a personal financial interest, in contravention of 18 U.S.C. §208(a).

The district court denied Ayesh’s motions to dismiss. Following a jury trial, Ayesh was convicted on all counts. Ayesh appealed to the 4th Circuit, which affirmed.

LAW: Ayesh contended that the district court improperly exercised extraterritorial jurisdiction over him for violations of 18 U.S.C. §§208(a) and 641 occurring in Iraq.

Congress has the authority to apply its laws, including criminal statutes, beyond the territorial boundaries of the United States. United States v. Dawn, 129 F.3d 878, 882 (7th Cir. 1997). See also United States v. Bowman, 260 U.S. 94, 97-98 (1922). Whether Congress has exercised that authority is a matter of statutory construction and, for the most part, statutes enacted by Congress, including criminal statutes, apply only within the territorial jurisdiction of the United States. EEOC v. Arabian Am. Oil Co., 499 U.S. 244, 248 (1991).

Generally, if Congress intends for overseas crimes against private individuals or their property which affect the peace and good order of the community, to be punished in this country, it is natural for Congress to say so in the statute, and failure to do so will negative the purpose of Congress in this regard. Bowman, 260 U.S. at 98. However, this same rule of interpretation does not apply to criminal statutes that are not logically dependent on their locality for the government’s jurisdiction but are enacted because of the right of the government to defend itself against obstruction, or fraud wherever perpetrated, especially if committed by its own citizens or agents. Id. In such cases, congressional intent may be inferred from the nature of the offense. Id.

With regard to Ayesh’s offenses, congressional intent to exercise overseas jurisdiction can be inferred from the nature of the offenses criminalized by §§208(a) and 641. Otherwise, government employees, contractors, or agents like Ayesh, be they United States citizens or foreign nationals, would be at liberty to pilfer public money or engage in acts of self-dealing with impunity so long as they did so abroad. As such, the district court’s exercise of extraterritorial jurisdiction was consistent with Congress’s intent that §§208(a) and 641 be applied abroad.

Furthermore, extraterritorial application of these statutes comported with international law. See Murray v. The Schooner Charming Betsy, 6 U.S. (2 Cranch.) 64, 118 (1804). The district court’s exercise of jurisdiction was supported by the protective principle of international law, which permits a nation to assert subject matter criminal jurisdiction over a person whose conduct outside the nation’s territory threatens the national interest. United States v. Alomia-Riascos, 825 F.2d 769, 771 (4th Cir. 1987). Extraterritorial jurisdiction was also appropriate under the territorial principle, which permits jurisdiction over all acts which take effect within the sovereign even though the author is elsewhere. Rivard v. United States, 375 F.2d 882, 886 (5th Cir. 1967). Both statutes criminalize conduct that has effects within the United States and threatens the operation of this nation’s governmental functions.

Finally, the district court’s exercise of extraterritorial jurisdiction comported with due process. See United States v. Brehm, 691 F.3d 547, 552 (4th Cir. 2012). Ayesh’s employment with the Department of State at the United States Embassy in Baghdad was central to the commission of his alleged crimes. Moreover, Ayesh lived on the embassy compound, and he was provided with a copy of the Foreign Service National Handbook, which advised him that he was subject to the laws and regulations of the United States. Id. at 687, 693-94. 698. Thus, despite the fact that Ayesh was a foreign national and all of the acts occurred in Jordan and Iraq, the district court properly exercised extraterritorial jurisdiction over him, and it properly denied Ayesh’s motion to dismiss.

Accordingly, the judgment of the district court was affirmed.

Criminal Procedure

Frivolous appeals

BOTTOM LINE: The Prison Litigation Reform Act’s ban on proceeding in forma pauperis, which is triggered when a prisoner has had three cases dismissed as frivolous, malicious or for failure to state a claim, was likewise triggered by summary judgment rulings that the issuing judge expressly characterized as “strikes” under the PRLA.

CASE: Blakely v. Wards, No. 11-6945 (filed Dec. 14, 2012) (Judges Agee, WYNN & Floyd). 12 pages.

COUNSEL: Frederick Hall, Georgetown University Law Center, Washington, for Appellant. Daniel Settana, McKay, Cauthen, Seitana & Stubley, PA, Columbia, SC, for Appellees.

FACTS: With the Prisoner Litigation Reform Act (“PLRA”), 28 U.S.C. §1915(g), Congress sought to reduce the number of frivolous lawsuits flooding the federal courts. Congress did so in part by enacting 28 U.S.C. §1915(g), a “three-strikes” statute providing that if a prisoner has had three prior cases dismissed as frivolous, malicious, or for failure to state a claim for which relief may be granted, the prisoner generally may not proceed in forma pauperis but rather must pay up-front all filing fees for his subsequent suits.

James Blakely, a prisoner in a South Carolina correctional institution, had pursued over 40 cases in federal district court, ten appeals, and numerous suits in state court. In 2010, Blakely filed suit against a number of South Carolina officials and correctional institution employees, alleging various constitutional rights violations. The defendants removed the case from state court to federal district court and then moved for summary judgment. A magistrate judge issued a Report and Recommendation finding that Blakely’s claims were meritless. The district court agreed, granted summary judgment in the defendants’ favor, and dismissed the case. Blakely appealed to the 4th Circuit.

To avoid having to pay the necessary appellate filing fees up front, Blakely sought to proceed in forma pauperis (“IFP”). The 4th Circuit initially denied Blakely’s application to proceed IFP. After Blakely moved for reconsideration, the Court assigned Blakely counsel and directed the parties to brief whether certain previously-dismissed suits that had been terminated at summary judgment constituted “strikes” under the PLRA, such that Blakely was barred from proceeding IFP in his appeal. The Court found that because Blakely had had more than three adverse summary judgment rulings in which the court expressly found the action was frivolous, malicious, or failed to state a claim, he was barred from proceeding IFP, and it therefore denied his motion for reconsideration.

LAW: The critical section of the PLRA at issue in Tolbert and this case states: “In no event shall a prisoner bring a civil action or appeal a judgment in a civil action or proceeding under this section if the prisoner has, on 3 or more prior occasions, while incarcerated or detained in any facility, brought an action or appeal in a court of the United States that was dismissed on the grounds that it is frivolous, malicious, or fails to state a claim upon which relief may be granted, unless the prisoner is under imminent danger of serious physical injury.” 28 U.S.C. §1915(g). In other words, if a prisoner has had three prior cases dismissed as frivolous, malicious, or failing to state a claim for which relief may be granted, the prisoner generally must pay up-front all filing fees for his subsequent suits.

Blakely contended that summary judgment rulings of his previously-filed cases could not, as a matter of law, constitute strikes under 28 U.S.C. §1915(g). Specifically, Blakely asserted that Tolbert v. Stevenson, 635 F.3d 646 (4th Cir. 2011), established a bright-line rule that a case dismissed on summary judgment is not a strike under §1915(g).

In fact, however, Tolbert considered whether the three-strikes provision applied only to actions dismissed in their entirety as frivolous, malicious, or failing to state a claim, or whether it also applied to actions in which some, but not all, of the claims were dismissed on those grounds. Tolbert, 635 F.3d at 647. The Court held that §1915(g) requires that a prisoner’s entire action or appeal be dismissed on enumerated grounds in order to count as a strike. Id. at 651. Because Blakely did not contend that his cases were dismissed only in part on the enumerated grounds, Tolbert was not directly on point. Moreover, in Tolbert, the Court did not address the question of whether a dismissal on summary judgment expressly stating that the underlying suit “is frivolous, malicious, or fails to state a claim” can constitute a strike under §1915(g).

In the present case, among the previously-dismissed suits the Court directed Blakely to address in this proceeding were four summary judgment orders that contained language characterizing the summary judgment dismissals as strikes because they qualified as a dismissal on the grounds that they were frivolous, malicious, or failed to state a claim upon which relief may be granted. It would improperly subvert the PLRA’s very purpose to restrict the dismissals that can count as strikes when cases dismissed on summary judgment may also be dismissed for frivolousness, maliciousness, and failure to state a claim . See De Osorio v. INS, 10 F.3d 1034, 1043 (4th Cir. 1993). Therefore, if a summary judgment order states on its face that the district court considered the statutory criteria for a strike to have been met, then the summary judgment dismissal should count as a strike.

Because, here, at least four summary judgment orders stated that Blakely’s suits were frivolous, malicious, or failed to state a claim for which relief could be granted, those orders counted as strikes and barred Blakely from proceeding IFP on appeal. Accordingly, Blakely’s motion for reconsideration was denied.

Criminal Procedure

Proffer agreements

BOTTOM LINE: A pre-indictment proffer agreement that barred the government from using the proffered statements against the defendant, so long as he did not breach the agreement, remained in effect after his indictment for mail fraud; therefore, once he breached the agreement, the proffered statements were properly admitted at his trial.

CASE: U.S. v. Gillion, No. 11-4942 (filed Dec. 28, 2012) (Judges Gregory, DUNCAN & Wilson (sitting by designation)). 19 pages.

COUNSEL: Eric Ruschky, Columbia, SC, for Appellant. Winston Holliday, Office of the United States Attorney, Columbia, SC, for Appellee.

FACTS: This appeal arose from Gary Gillion’s convictions for mail fraud and conspiring to commit mail fraud. In 2000, Gillion became southeastern regional manager of CitiCapital Trailer Rental, a trailer leasing company owned by CitiGroup. Prior to becoming a regional manager at CitiCapital, Gillion worked with a number of trailer leasing companies. He maintained a business relationship and friendship with John DalCanton, a trailer leasing executive. DalCanton was serving as CitiCapital’s vice president in its Dallas, Texas headquarters when the events leading to Gillion’s convictions transpired.

In December 2003, DalCanton told Gillion that CitiGroup was considering selling CitiCapital. Concerned that the sale would mean Gillion and DalCanton would lose their jobs, Gillion told DalCanton he had created a side company, Capital City Trailer to “make some money” in case CitiCapital laid them off. Records revealed that Gillion opened a business checking account in Capital City’s name on November 15, 2003.

DalCanton, who later pleaded guilty to conspiring to commit mail fraud and testified against Gillion at trial, described the ways he and Gillion used Capital City to defraud CitiCapital and purloin profits beginning in late 2003. One of their schemes involved Baker Transportation, a South Carolina trucking company that had been a CitiCapital customer for several years. On October 28, 2003, Gillion, acting as president of Capital City, signed a lease-to-own agreement with Baker. The agreement named eight 48-foot trailers by serial number. As of that time, however, neither Gillion nor Capital City owned the eight trailers named in the Baker lease. Gillion subsequently used a forged document of sale to approve a sale of the eight named trailers from CitiCapital to Capital City, at a $1,241 loss for CitiCapital. Over the course of the three-year lease, Capital City, Gillion, and DalCanton received over $27,000 in profits from the deal.

On March 23, 2010, before his eventual indictment, Gillion signed a proffer agreement with the government (the “Agreement”), pursuant to which he agreed to provide information about his actions while employed as a CitiCapital regional manager. He also agreed to submit to polygraph examinations if requested. Absent breach, the Agreement barred the government from using Gillion’s proffered statements against him. Pursuant to the Agreement, Gillion met with Special Agent Chris McClure on March 23, 2010, for an interview, during which made a number of admissions regarding Capital City and the fraud scheme he had perpetrated.

In 2011, Gillion was indicted for one count of conspiracy to commit mail fraud, in violation of 18 U.S.C. §371, and seven counts of substantive mail fraud, in violation of 18 U.S.C. §1341. Before trial, the government requested that Gillion submit to a polygraph examination to test the truth of his original proffer interview. Gillion moved to suppress the statements he made during the pre-indictment proffer session, arguing that the Agreement had no effect post-indictment. The district court found the Agreement was still in effect, and held that Gillion could either sit for the polygraph examination or be found in breach. Gillion sat for the polygraph examination on June 6, 2011, but left the session midway, disputing the scope of the questions. As a result, the district court found Gillion in breach and allowed Agent McClure to testify to Gillion’s proffered statements at trial.

At the conclusion of the trial, the jury found Gillion guilty of four counts of substantive mail fraud and one count of conspiring to commit mail fraud, in violation. Gillion moved for judgment of acquittal pursuant to Federal Rule of Criminal Procedure 29(c), challenging the sufficiency of the evidence underlying his convictions. The district court denied the motion.

Gillion appealed to the 4th Circuit, which affirmed.

LAW: Gillion argued that the district court erred in admitting the statements he made during his proffer session.
A proffer agreement defines the obligations of the parties and is intended to protect the defendant against the use of his statements, particularly in those situations in which the defendant has revealed incriminating information and the proffer session does not mature into a plea agreement. United States v. Lopez, 219 F.3d 343, 345 n. 1 (4th Cir. 2000). A proffer agreement operates like a contract and is interpreted based on its language. Id. at 346-47.

Here, nothing in the Agreement suggested a temporal limitation; rather, it required Gillion to be “fully truthful and forthright at any stage. The language of the Agreement clearly contemplated the possibility of a breach and trial in its provisions regarding the consequences of breach, making clear that it would not lapse post-indictment. Therefore, the district court correctly rejected Gillion’s argument that either the terms of the contract, or constitutional law or criminal law, generally requires that the polygraph must be taken pre-indictment.

Moreover, even if the district court erred in requiring Gillion to adhere to the Agreement, admission of the proffered statements was harmless. For one, the statements admitted at trial from Gillion’s proffer session involved facts proven by the government in other ways. In particular, DalCanton testified as to all the information McClure provided, including the methods he and Gillion used to defraud CitiCapital while employed there. DalCanton’s testimony was extensively corroborated by accompanying exhibits. In addition, even Gillion’s defense did not deny his involvement in the Capital City scheme. Given the testimony from DalCanton and others, as well as the numerous documents evidencing the fraud, even if the district court erred in admitting Gillion’s proffered statements, their admission was harmless and, hence, was not grounds for reversing Gillion’s conviction.

Accordingly, the judgment of the district court was affirmed.

Criminal Procedure

Search & seizure

BOTTOM LINE: Where the police had a reasonable, articulable suspicion sufficient to stop defendant’s car based on credible information from a confidential informant, and established that the defendant was the person with whom the confidential informant had arranged a drug deal, the police had probable cause to search defendant’s vehicle, and the evidence found and seized during that search was admissible.

CASE: U.S. v. Lawing, No. 11-4896 (filed Dec. 31, 2012) (Judges AGEE, Wynn & Floyd). RecordFax , 19 pages.

COUNSEL: John Coalter, McKinney Perry & Coalter, Greensboro, NC, for Appellant. Michael Joseph, Office of the United States Attorney, Greensboro, NC, for Appellee.

FACTS: On May 3, 2010, a confidential informant (“CI”) met with a detective with the Rowan County, North Carolina Sheriff’s Office and told him that he had previously purchased crack cocaine from an individual the CI identified as “Drew.” The CI described Drew as a black male with short hair in his late twenties or early thirties. In the presence of police officers, the CI telephoned Drew and ordered a quantity of crack cocaine, which Drew agreed to shortly bring to the CI’s residence. The officers recorded the call.

The CI informed the detectives that Drew would deliver the crack cocaine to the CI’s residence in about 20 minutes and that he would be driving a grey four-door Lexus automobile. The CI also told the detectives the route that Drew would use to travel to his residence. Police officers waited with the CI at his residence for Drew to arrive and positioned a team of officers along Drew’s expected route of travel. About 20 minutes later, they observed a four-door grey Lexus, driven by a black male matching the CI’s description of Drew, proceeding along the expected route. They effected a traffic stop of the vehicle.

The officers determined that the registration of the vehicle had expired and that the car was registered to Lawing, not to a person named Drew. When they checked the driver’s license of the driver, it bore Lawing’s name. The officers sought to verify whether Lawing was indeed Drew, given that all the other predictive information from the CI had now been verified by the events leading to the stop of the Lexus. They called the telephone number the CI had used to call Drew, and Lawing’s cell phone rang within five seconds. They then repeated the exercise, and Lawing’s cell phone again rang immediately. Concluding that “Drew” was in fact Lawing, the officers frisked and detained Lawing. They then searched his vehicle and found a sawed-off shotgun, shotgun shells, and a small amount of cocaine.

Lawing was arrested and charged with possession of a firearm by a convicted felon in violation of 18 U.S.C. §§922(g)(1) and 924(a)(2) (Count I); possession of ammunition by a convicted felon, also in violation of 18 U.S.C. §§922(g)(1) and 924(a)(2) (Count II); and possession of an unregistered shotgun modified having an overall length of less than 26 inches, in violation of 26 U.S.C. §§5841, 5861(d), and 5871 (Count III). Lawing filed a motion to suppress all evidence seized during the stop and search of his vehicle. The court denied the motion. At the conclusion of the government’s case, Lawing moved to dismiss all charges, contending that the evidence was insufficient to prove his guilt. The district court denied the motion. The jury ultimately found Lawing guilty of Count II (possession of ammunition by a convicted felon), but acquitted him of Counts I and III.

Lawing appealed to the 4th Circuit, which affirmed.

LAW: Law enforcement may stop and briefly detain a person for investigative purposes if the officer has a reasonable suspicion supported by articulable facts that criminal activity may be afoot, even if the officer lacks probable cause. United States v. Christmas, 222 F.3d 141, 143 (4th Cir. 2000). Reasonable suspicion is simply a particularized and objective basis for suspecting the person stopped of criminal activity. Ornelas v. United States, 517 U.S. 690, 696 (1996). It is a less demanding standard than probable cause. Illinois v. Wardlow, 528 U.S. 119, 123 (2000).

Here, the police had reasonable suspicion, supported by articulable facts, to believe that criminal activity was afoot when they conducted the stop of Lawing’s vehicle. The CI had relayed information to the police in a face-to-face setting, thereby affording them the clear ability to judge his credibility. See United States v. Perkins, 363 F.3d 317, 323 (4th Cir. 2004). The totality of the circumstances afforded the police reasonable suspicion to stop Lawing’s car in that the CI had provided substantial and verifiable details that established the necessary indicia of reliability: Lawing drove the car that the CI said he would drive; Lawing took the route that the CI said he would take; and Lawing appeared at the time the CI said he would arrive, in a place close to the intended delivery address. This course of events allowed law enforcement to corroborate the CI’s account of the time and circumstances of the intended cocaine delivery. Thus, the stop of Lawing’s vehicle was clearly appropriate.

Further, the police had the requisite probable cause to search Lawing’s vehicle. While police typically must obtain a warrant to carry out a search, an exception to the warrant requirement has long been recognized where probable cause is established to believe that a vehicle contains contraband or evidence of a crime. See Carroll v. United States, 267 U.S. 132, 153 (1925). In the present case, even prior to the ringing of Lawing’s cell phone, the predictive information provided by the CI had been almost entirely born out by the facts as observed by police; all that remained was for the officers to verify that the individual driving the Lexus was the same person from whom the CI had offered to purchase cocaine base, thus tipping the scales from reasonable suspicion to probable cause.

When police called the number provided by the CI and twice observed Lawing’s cell phone ringing, they verified that Lawing was the target of their investigation, and established a substantial likelihood that Lawing was trafficking in contraband – that is, they now possessed probable cause. The facts and circumstances in this case were thus sufficient to warrant a man of reasonable prudence to believe that contraband or evidence of a crime would be found in Lawing’s vehicle. Because the stop and search of Lawing’s car and the seizure of Lawing’s cell phone did not violate Lawing’s Fourth Amendment rights, the district court did not err in denying his motion to suppress.

Accordingly, the judgment of the district court was affirmed.


Marital communications privilege

BOTTOM LINE: Emails sent by defendant to his wife using work email account, which defendant knew his employer could inspect at will and which defendant took no steps to protect, were not “confidential” and therefore did not fall within the marital communications privilege.

CASE: U.S. v. Hamilton, No. 11-4847 (filed Dec. 13, 2012) (Judges MOTZ, Floyd & Eagles (sitting by designation)). 11 pages.

COUNSEL: Charles Lustig, Shuttleworth, Ruloff, Swain, Haddad & Morecock, PC, Virginia Beach, VA, for Appellant. Richard Cooke, Office of the United States Attorney, Richmond, VA, for Appellee.

FACTS: Phillip Hamilton served as a member of the Virginia House of Delegates from 1988 to 2009. He eventually became Vice Chairman of the Appropriations Committee, which was responsible for the state budget. While serving as a legislator, he also worked as an administrator and then as a part-time consultant for the Newport News public schools system. While a state legislator, Hamilton met with officials from Old Dominion University to discuss state funding for the university, as well as his own potential employment at Old Dominion.

A government investigation led to charges that, while a state legislator, Hamilton secured state funding for Old Dominion, a public university, in exchange for employment by the university. The evidence produced by the government at Hamilton’s trial included email exchanges between Hamilton and his wife discussing their dire financial situation, Hamilton’s dealings with Old Dominion, and their hope that Hamilton be given a position at the university. Hamilton’s emails to his wife were sent using a work email account on an office computer. Hamilton was on notice of his employer’s policy permitting inspection of emails stored on the system at the employer’s discretion.

Hamilton was ultimately convicted of federal program bribery and extortion under color of official right. Hamilton appealed to the 4th Circuit, which affirmed the convictions.

LAW: Hamilton argued that the district court erred in admitting into evidence the email exchanges between him and his wife, as these emails fell within the marital communications privilege.

Communications between spouses, privately made, are generally assumed to have been intended to be confidential, and hence are privileged. Wolfle v. United States, 291 U.S. 7, 14 (1934). To be covered by the privilege, however, a communication between spouses must be confidential. Id. “Voluntary disclosure” of a communication waives the privilege. Id. at 14-15.

Wolfle, the leading marital communications privilege case to have reached the Supreme Court, was instructive with regard to Hamilton’s privilege claim. In Wolfle, the Court held that a defendant’s communication with his wife did not come within the privilege because of his voluntary disclosure of the communication to a third person, his stenographer. Wolfle, 291 U.S. at 14. The Court explained that, normally a husband and wife may conveniently communicate without stenographic aid, and “the privilege of holding their confidences immune from proof in court may be reasonably enjoyed and preserved without embracing within it the testimony of third persons to whom such communications have been voluntarily revealed.” Id. at 16-17. The Court further noted that because the privilege suppresses relevant testimony, it should be allowed only when it is plain that marital confidence cannot otherwise reasonably be preserved. Id. at 17.

In Hamilton’s case, email has become the modern “stenographer.” Like the communications to the stenographer in Wolfle’s time, emails today, in common experience, are confidential. See id. at 15. However, just as spouses can “conveniently communicate without” use of a stenographer, they can also “conveniently communicate without” using a work email account on an office computer. See Wolfle, 291 U.S. at 16. Therefore, as in Wolfle, it was hardly plain that marital confidence could “reasonably be preserved” without according the privilege to the spousal communications at issue here. See id. at 17.

Hamilton contended that he did not waive the privilege because he had no reason to believe, at the time he sent and received the emails, that they were not privileged, and he could not waive his privilege retroactively. However, the district court found that Hamilton did not take any steps to protect the emails in question, even after he was on notice of his employer’s policy permitting inspection of emails stored on the system at the employer’s discretion. In similar circumstances, it has been held that a defendant did not have an “objectively reasonable” belief in the privacy of files on an office computer after his employer’s policy put him “on notice” that it would be overseeing his internet use. United States v. Simons, 206 F.3d 392, 398 (4th Cir. 2000).

As such, the district court did not abuse its discretion in concluding that the emails were not subject to the marital communications privilege. Rather, that conclusion accorded with the admonition in Wolfle against freely extending the privilege to communications outside of which marital confidences can “otherwise reasonably be preserved,” and with the principle that one who is on notice that the allegedly privileged material is subject to search may waive the privilege when he makes no efforts to protect it. See Wolfle, 291 U.S. at 17.

Accordingly, the judgment of the district court was affirmed.

Labor & Employment

Representation election

BOTTOM LINE: Representation election certifying the union as the exclusive bargaining representative of certain nursing facility employees was not undermined by allegedly racially inflammatory remarks made by an NAACP leader regarding an incident at the facility, because the speaker had no involvement during the “critical period” between filing of the representation petition and the representation election, and thus was not the union’s actual or apparent agent.

CASE: Ashland Facility Operations, LLC v. National Labor Relations Board, Nos. 11-2004, 11-2132 (filed Dec. 14, 2012) (Judges King, Gregory & WYNN). 18 pages.

COUNSEL: James Naughton, Hunton & Williams, LLP, Norfolk, VA, for Ashland Facility Operations. Fred Jacob, National Labor Relations Board, Washington, for the National Labor Relations Board. John Durkalski, Butsavage & Associates, PC, Washington, for United Food and Commercial Workers International Union, Local 400.

FACTS: Ashland Facility Operations, LLC operated a 190-bed skilled nursing facility north of Richmond, Virginia. On a Saturday evening in February 2010, an African-American certified nursing assistant (“CNA”) alleged that money had been stolen from her purse. Six members of the nursing crew, five of whom were African-American and one of whom was Caucasian, were compelled to empty their purses so that their supervisors could check for the missing money. Charles Nelson, Ashland Facility’s then-executive director, subsequently apologized to the six CNAs, and the supervisors who had initiated the search were suspended and later terminated.

In April 2010, King Salim Khalfani, executive director of the Virginia State Conference NAACP, sent a letter to Nelson alleging discriminatory treatment of Ashland Facility’s African-American employees and referencing the February incident. On May 10, 2010, Khalfani held a press conference, during which he decried the treatment of the six CNAs subjected to the search. At the press conference, some of the nurses claimed that they had been targeted because of their skin color. On the same day as the press conference, Khalfani emailed three of the CNAs to set up a meeting with representatives of the Union. After June 2010, Khalfani did not provide any assistance to the Union in its efforts to organize Ashland Facility’s employees.

On September 21, 2010, the United Food and Commercial Workers International Union, Local 400 (the “Union”) filed a petition to represent a bargaining unit of all regular full-time and part-time CNAs, restorative aides, activity aides, and maintenance employees. This filing marked the beginning of the so-called “critical period,” the time between the filing of a representation petition and the representation election. The election was scheduled for November 3, 2010. The election resulted in a majority vote in favor of the Union as representative of the group.

Ashland Facility filed objections to the election, alleging that the Union’s campaign was based on unlawful appeals to racial prejudice. An administrative law judge (“ALJ”) overruled the objections and certified the Union as the exclusive bargaining representative of the named bargaining unit. The National Labor Relations Board affirmed the ALJ’s recommendation.

In June 2011, the Union sent a letter to Ashland Facility requesting that it bargain collectively with the Union about the terms and conditions of employment of Ashland Facility’s workers. Ashland Facility refused to bargain, stating that it believed that the November 2010 election was invalid. The Union filed a charge against Ashland Facility, asking the Labor Board to compel Ashland Facility to negotiate. The Labor Board eventually granted the Union’s motion for summary judgment and ordered Ashland Facility to bargain with the Union.

Ashland Facility appealed to the 4th Circuit, which held that the Union was properly certified, and therefore denied Ashland Facility’s petition for review and enforced the Labor Board’s order.

LAW: Conduct by a union or its agents can be a basis for setting aside an election when threats, acts of coercion, or other improprieties occurred and materially affected the election results. NLRB v. Ky. Tenn. Clay Co., 295 F.3d 436, 442 (4th Cir. 2002). Here, Ashland Facility contended that allegedly racially inflammatory remarks by Khalfani undermined the validity of the election certifying the Union as the exclusive bargaining representative of certain Ashland Facility employees. Specifically, Ashland Facility asserted that the Virginia NAACP was an apparent agent of the Union when Khalfani made the allegedly inflammatory statements, and thus the Labor Board should have scrutinized the election results more closely.

A putative agent has apparent authority when a third party reasonably believes the actor has authority to act on behalf of the principal and that belief is traceable to the principal’s manifestations. Restatement (Third) of Agency §2.03 (2006). In the context of labor representation elections, the final inquiry into agency is always whether the amount of association between the Union and a third party is significant enough to justify charging the Union with the conduct. PPG Industs., Inc. v. NLRB, 671 F.2d 817, 822 n.8 (4th Cir. 1982). Here, in its contention that the Virginia NAACP was an apparent agent of the Union, Ashland Facility relied on Kentucky Tennessee Clay Company, in which two employees were found to be apparent agents of a union when professional union organizers had delegated a number of organizing tasks to the unpaid employee organizers. Ky. Tenn. Clay Co., 295 F.3d at 444.

However, Kentucky Clay Company was sharply distinguishable from the present case. For one, whereas the apparent agents in Kentucky Tennessee Clay Company were actively involved in the organizing campaign throughout the precertification campaign and critical period, in this case, Khalfani had no involvement in the campaign after June 2010, more than two months before the start of the critical period. In the Kentucky Tennessee Clay Company organizing campaign, the one union official was only minimally involved, whereas here, the Union had three employees who were actively involved in the organizing campaign, ran all organizing meetings, and called employees to discuss the Union.

Thus, there was ample factual basis to support the Labor Board’s finding that the Virginia NAACP was not the Union’s agent.

Moreover, the Labor Board correctly found that even if the Virginia NAACP had been an agent of the Union, Khalfani’s pre-petition statements did not provide a basis for setting aside the election, because in general, appeals to racial prejudice will not be a basis for overturning an election so long as they are made in the context of an effort to raise workplace grievances or other issues of legitimate concern to employees. Case Farms of N.C., Inc. v. NLRB, 128 F.3d 841, 846 (4th Cir. 1997).

Accordingly, Ashland Facility’s petition was denied, and the decision of the Labor Board was enforced.


Federal Tort Claims Act

BOTTOM LINE: Federal statute providing that the Secretary of Veterans Affairs shall decide “all questions” of law and fact affecting veterans’ benefits, and that such a decision shall be “final and conclusive,” did not bar the court from making independent findings of fact in a wrongful death/wrongful consortium action brought pursuant to Federal Tort Claims Act, because plaintiff’s claim would not affect the validity of her VA benefits award.

CASE: Butler v. U.S., No. 11-2408 (filed Dec. 19, 2012) (Judges Niemeyer, Shedd & AGEE). 12 pages.

COUNSEL: Lewis Everett, Everett & Everett, Durham, NC, for Appellant. Jason Cheek, United States Department of Justice, Washington, for Appellee.

FACTS: This case involved plaintiff Kay Butler’s action for wrongful death and loss of consortium, brought pursuant to the Federal Tort Claims Act (“FTCA”), 28 U.S.C. §1346. Mrs. Butler’s husband, Truman, was a veteran of the armed forces. Mr. Butler was treated at the Veterans Administration Medical Center in Durham, North Carolina (“Durham VA”) for evaluation of a thoracic aortic aneurysm and eventually underwent surgery for the problem. After the operation, Mr. Butler was discovered to be paralyzed from the chest down, and he eventually died from complications arising from the surgery.

In April 2005, Mrs. Butler filed a claim for dependency and indemnity compensation benefits with the Department of Veterans Affairs (“VA”), pursuant to 38 U.S.C. §1151, which provides for disability payments from the VA if claimants can show that disability or death was caused by hospital care, medical or surgical treatment, or examination furnished to the veteran in a VA facility and the proximate cause of the disability or death was carelessness, negligence, lack of proper skill, error in judgment, or similar instance of fault on the part of the VA in furnishing the hospital care, medical or surgical treatment, or examination, or an event not reasonably foreseeable. The VA issued a Rating Decision on April 9, 2008. Based on the evidence presented, the VA resolved all reasonable doubts in Mrs. Butler’s favor and concluded that she was entitled to an award of benefits under §1151.

Mrs. Butler then filed a complaint under the FTCA in the district court, alleging claims for wrongful death and loss of consortium against the United States. Mrs. Butler moved for judgment on the pleadings, arguing that under 38 U.S.C. §511, the district court was bound by decisions of law and fact made by the VA during the benefits claim adjudication and consequently did not have the authority or jurisdiction to review or overrule those decisions. The district granted the Government’s motion for summary judgment, dismissing the case.

Mrs. Butler appealed to the 4th Circuit, which affirmed.

LAW: The Secretary of Veterans Affairs shall decide “all questions” of law and fact necessary to a decision by the Secretary under a law that affects the provision of benefits by the Secretary to veterans or the dependents or survivors of veterans, and that the Secretary’s decision as to any such question shall be final and conclusive and may not be reviewed by any other official or by any court. 38 U.S.C. §511(a). Mrs. Butler contended that this statutory language should be construed as a bar to any court which might consider the same facts in any proceeding from reaching a conclusion contrary to the Rating Decision.

However, although §511 provides that the decision of the VA as to “any such question” is final and conclusive, the “question” referred to is limited to those “necessary to a decision by the Secretary under a law that affects the provision of benefits by the Secretary to veterans or the dependents or survivors of veterans.” Id. (emphasis added). Mrs. Butler’s reading ignored the plain language of the statute and the clear weight of judicial precedent. In a case with a fact pattern virtually identical to that of the case at bar, the Ninth Circuit rejected the view posited by Mrs. Butler, holding that a prior award of disability benefits by the VA did not bar litigation of liability issues in a subsequent FTCA negligence action. Littlejohn v. United States, 321 F.3d 915, 919-24 (9th Cir.), cert. denied, 540 U.S. 985 (2003). The Littlejohn plaintiff contended that FTCA liability was established by the VA’s Rating Decisions under traditional claim preclusion principles. Id. at 919. The Ninth Circuit disagreed, holding that the plaintiff’s claim preclusion argument failed because the VA could not assert its FTCA causation defense in the agency disability benefit proceedings, and because claim preclusion is incompatible with the statutory purposes underlying the veterans’ disability and FTCA statutory schemes. Id.

The Ninth Circuit’s reasoning was sound, and applied here. Thus, the “questions” of law and fact to be given conclusive effect under §511(a), and to be subject to no further review by a court, were only those which would affect the provision of the benefits awarded by the VA. See Littlejohn, 321 F.3d at 921. Although §511(a) provides that the decision of the VA as to “any such question” is final and conclusive, the “question” referred to is limited only to those “necessary to a decision by the Secretary under a law that affects the provision of benefits by the Secretary to veterans or the dependents or survivors of veterans.” §511(a). As Mrs. Butler herself conceded, an adverse decision in her FTCA action would have no impact on the validity of the benefits she received in the award from the VA. This concession correctly recognized that the terms of §511 did not provide the preclusive effect that she asserted.

Because adjudication of Mrs. Butler’s FTCA claim would not affect the validity of her VA benefits award, the district court did not err in holding that §511 did not preclude the court from making independent findings of fact and conclusions of law in Mrs. Butler’s FTCA proceeding. As such, the district court did not err in denying Mrs. Butler’s motion for judgment on the pleadings.

The judgment of the district court was accordingly affirmed.