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Opinions – 6/13/13: 4th U.S. Circuit Court of Appeals

Civil Procedure

Standing 

BOTTOM LINE: By electing to conduct their restaurant business through a limited liability company and thereby receive protection of their personal assets from liability, restaurant principals gave up their standing to claim damages to the LLC, even if they also suffered personal damages as a result.

CASE: Painter’s Mille Grille, LLC v. Brown, No. 12-1357 (decided May 24, 2013) (Judges NIEMEYER, Duncan & Floyd). RecordFax No. 13-0524-62, 20 pages.

COUNSEL: Richard Winelander, Baltimore, MD, for Appellants. Ramona Cotca, Thompson O’Donnell LLP, Washington; John Vander-Woude, Eccleston & Wolf PC, Hanover, MD, for Appellees.

FACTS: Painter’s Mill Grille, LLC, owned and operated a restaurant known as Cibo’s Bar and Grill in Owings Mills, Maryland. Painter’s Mill leased the premises from 100 Painters Mill. The long-term lease, which commenced in 2002, provided that Painter’s Mill Grille could not assign its leasehold rights without 100 Painters Mill’s consent. The parties’ landlord-tenant relationship soon grew rocky. Painter’s Mill Grille repeatedly failed to pay rent as due, leading 100 Painters Mill to obtain multiple judgments against it for unpaid rent. In October 2008, Painter’s Mill Grille entered into an Asset Purchase Agreement with Earnest and Betty Hines, who agreed to purchase Painter’s Mill Grille’s interest in the restaurant, but the deal fell through in 20 2009.

Painter’s Mill Grille and its principals, Alessandro Vitale, Sergio Vitale, and Rinaldo Vitale, filed suit in the district court against 100 Painters Mill, as well as 100 Painters Mill’s parent company, David S. Brown Enterprises, Ltd., and three employees of both companies, seeking damages for what they alleged was the defendants’ racially motivated interference with the restaurant’s business and with the contract between Painter’s Mill Grille and the Hineses’ company. The complaint alleged that as the result of the defendants’ “constant harassment,” Painter’s Mill Grille decided to sell its business and, pursuant to that decision, entered into the Asset Purchase Agreement with the Hineses. The plaintiffs also alleged that the defendants unreasonably withheld consent from Painter’s Mill Grille to assign its lease interest to the Hineses’ company. The plaintiffs claimed that the derogatory comments and withheld consent, as intended, caused the Hineses’ company to breach its contract with Painter’s Mill Grille.

Based on these allegations, the plaintiffs asserted that the defendants, out of racial animus, interfered with Painter’s Mill Grille’s business and its opportunity to sell the restaurant, including its leasehold interest, in violation of 42 U.S.C. §§1981, 1982, and 1985(3) and state tort principles. The defendants filed a motion to dismiss the complaint. The district court granted the motion, finding, in part, that Painter’s Mill Grille’s principals did not have standing to be plaintiffs.

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

LAW: Painter’s Mill Grille’s principals, Alessandro, Sergio, and Rinaldo Vitale, contended that the district court erred in dismissing them as plaintiffs and holding that Painter’s Mill Grille was the only proper plaintiff. However, the Vitales failed to account for the fact that they elected to conduct their business through a limited liability company (“LLC”) and that, just as they received protection of their personal assets from liability in doing so, they also assumed a role as agents for the company. At bottom, they gave up standing to claim damages to the LLC, even if they also suffered personal damages as a consequence. The Supreme Court’s decision in Domino’s Pizza, Inc. v. McDonald, 546 U.S. 470 (2006), foreclosed just such claims.

In Domino’s Pizza, John McDonald, the president and sole shareholder of a corporation that had contracted with Domino’s Pizza, contended that Domino’s Pizza had breached its contract with his McDonald’s corporation because of its racial animus toward McDonald, in violation of 42 U.S.C. §1981, and that this breach injured him personally. While the 9th Circuit recognized McDonald’s claim on the ground that McDonald’s injuries were distinct from that of the corporation, the Supreme Court rejected that proposition, stating that, as a fundamental principle of corporation and agency law, the shareholder and contracting officer of a corporation has no rights and is exposed to no liability under the corporation’s contracts. Id. at 477. The Court further stated that a plaintiff cannot state a claim under §1981 unless he has rights under the existing (or proposed) contract that he wishes to make and enforce. Id. Given that the Vitales had no personal rights under any of the contracts with 100 Painter’s Mill, they could not bring §1981 claims with respect to them, even though they might have personally suffered injury as a consequence.

Accordingly, the judgment of the district court was affirmed.

Civil Procedure

Stay 

BOTTOM LINE: Because plaintiffs had every opportunity to procure a federal forum by removing defendants’ first-filed state suit rather than by bringing a separate federal action in a separate federal district, federal district court did not err in granting defendants’ motion to stay plaintiffs’ suit pending resolution of defendants’ earlier-filed state suit.

CASE: VRCompliance v. Homeaway, Inc., No. 12-1143 (decided May 24, 2013) (Judges WILKINSON, Shedd & Duncan). RecordFax No. 13-0524-63, 10 pages.

COUNSEL: M. Keith Blankenship, Eye Street Solutions, LLC, Leesburg, VA, for Appellants. Adam Kessel, Fish & Richardson, PC, Boston, MA, for Appellees.

 

FACTS: Homeaway, Inc. owned and operated a number of websites that facilitated the rental of home residences by travelers on vacation. Many localities, finding that these vacation rentals deprived them of significant tax revenue, turned to companies like Eye Street Solutions LLC, which had developed computer software designed to identify homeowners who neglected to pay taxes when they rented out their homes. Eye Street claimed the software as a trade secret. Eye Street licensed its software to VRCompliance LLC, which, in turn, used the software to conduct tax-compliance investigations on behalf of localities, including those belonging to the Colorado Association of Ski Towns (“CAST”).

Believing that Eye Street’s software was impermissibly accessing its websites, HomeAway contacted CAST and Eye Street, demanding that CAST’s members cease using the software. On October 3, 2011, after Cast and Eye Street had failed to comply with these demands, HomeAway filed suit against Eye Street, VRCompliance, and CAST in the district court of Travis County, Texas. Its complaint asserted the Texas state-law claims including breach of contract, misappropriation of trade secrets, violations of the Texas Theft Liability Act, Tex. Civ. Prac. & Remd. Code Ann. §§134.001-.005, conversion, and constructive trust. The defendants asserted various state-law counterclaims, including tortious interference with existing and prospective contractual relations and defamation.

Eye Street did not attempt to remove HomeAway’s Texas suit to federal district court. Instead, in October 2011, it filed its own action against HomeAway and its subsidiaries in the U.S. District Court for the Eastern District of Virginia. Eye Street’s complaint sought certain declaratory judgments, including a declaratory judgment that it was not committing the various violations asserted in HomeAway’s Texas complaint. After HomeAway moved to dismiss Eye Street’s action for improper venue or, alternatively, to transfer venue to the U.S. District Court for the Western District of Texas, the district court stayed the action pending the resolution of HomeAway’s Texas lawsuit.

Eye Street appealed to the 4th Circuit, which affirmed.

LAW: The district court based its ruling on the decision in United Capitol Insurance Co. v. Kapiloff, which identified factors for district courts to consider in deciding whether to stay declaratory actions in deference to parallel state proceedings. United Capitol Insurance Co. v. Kapiloff, 155 F.3d 488, 493-94 (4th Cir. 1998). The district court found that Texas had a strong interest in deciding the issues of the case in its courts, as all of Eye Street’s claims related to the single general question of whether the defendants violated the terms and conditions of use for HomeAway’s websites. The district court also concluded that the Texas State Court would likely resolve the issues more efficiently than the federal district court. In addition, because the Texas and Virginia Suits involved overlapping issues of fact and law, the district court concluded that permitting the action to go forward would result in unnecessary entanglement between the federal and state court systems. See Nautilus Ins. Co. v. Winchester Homes, Inc., 15 F.3d 371, 379, 377 (4th Cir. 1994).

However, another consideration loomed above these considerations, justifying the stay. Crucially, Eye Street insisted on proceeding with its federal action, rather than seeking to remove HomeAway’s action to the appropriate federal district court in Texas, even after HomeAway indicated that it would not oppose removal. Eye Street thus desired not a federal forum per se, but one that would approach the dispute on its terms and potentially preempt HomeAway’s alternative framing of the issues in the Texas suit. This conduct was precisely the kind of “procedural fencing” that federal case law aims to forestall. Kapiloff, 155 F.3d at 494.

Congress designed the federal removal statute, 28 U.S.C. §1446, as the primary avenue for obtaining federal court review of claims already pending in a state court. Under the statute, a defendant in an action pending in state court may seek to remove the action only to the federal district court for the district and division within which such action is pending. Id. §1446(a). However, if the defendant could gain a federal forum in any federal district court with personal jurisdiction over the state court plaintiffs simply by filing a federal action recasting the claims against it as declaratory claims, then the removal statute’s comprehensive jurisdictional scheme would be supplanted with a regime of forum shopping.

District courts enjoy discretion to consider a litigant’s deliberate decision to forego removal as a reason to stay its federal declaratory action. See Chase Brexton Health Servs., Inc. v. Maryland, 411 F.3d 457, 464 (4th Cir. 2005). District courts likewise have broad discretion to to stay declaratory actions in deference to parallel state proceedings. Wilton v. Seven Falls Co., 515 U.S. 277, 286, 289 (1995). Given the circumstances of the present case, the district court did not abuse its discretion in staying Eye Street’s action.

Accordingly, the judgment of the district court was affirmed.

Criminal Procedure

Habeas corpus 

BOTTOM LINE: Although Commonwealth of Virginia failed to comply with district court order calling for immediate unconditional release of successful habeas corpus petitioner or petitioner’s retrial within 120 days, district court abused its discretion in barring re-prosecution of petitioner, because constitutional claims for which petitioner was awarded habeas corpus relief were readily capable of being remedied in a new trial.

CASE: Wolfe v. Clarke, No. 12-7 (decided May 28, 2013) (Judges KING, Duncan & Thacker). RecordFax No. 13-0528-60, 41 pages.

COUNSEL: Matthew Dullaghan, Office of the Attorney General of Virginia, Richmond, VA, for Appellant. Ashley Parrish, King & Spalding, LLP, Washington, for Appellee.

FACTS: In 2002, Justin Wolfe was convicted by a state court of capital murder and other crimes relating to the death of Danny Petrole. Wolfe’s convictions were subsequently vacated by a Virginia federal district court, and the case was remanded for further proceedings. The district court’s decision was affirmed on appeal, leaving in place the district court’s remedial edict that Wolfe be retried or released.

The Commonwealth of Virginia subsequently filed an action in the 4th Circuit, seeking relief from the district court’s “Order Enforcing Judgment.” The district court entered the challenged order upon ascertaining that the Commonwealth had not complied with the operative retry-or-release directive. As a consequence, the Commonwealth was instructed to release Wolfe unconditionally, free of all criminal proceedings within ten days of the entry of the order. The district court further proscribed the Commonwealth from re-prosecuting Wolfe on the charges originally tried in state court or any other charges stemming from Petrole’s death which required the testimony of the prosecution’s key witness, Owen Barber, in any form. In support of this remedy, the court concluded that the Commonwealth’s prosecutors had, on remand, improperly conducted themselves with respect to Barber.

On January 3, 2013, the 4th Circuit stayed, pending resolution of this appeal, the district court’s order. The Court held that the district court accurately determined that the Commonwealth neglected to timely observe the retry-or-release directive and was correct to order Wolfe’s immediate release. However, finding that the district court had fashioned an overbroad remedy, the appellate court vacated the Order Enforcing Judgment and remanded for the district court to enter a substitute order directing that Wolfe simply be released from the custody imposed as the result of his 2002 convictions.

LAW: The first issue before the Court was whether the Commonwealth complied with the Relief Order. By its Relief Order, the district court did not direct Wolfe’s immediate release, but instead accorded the Commonwealth the options of retrying Wolfe within 120 days or unconditionally releasing him. Under this meaning of the word “unconditional,” it was self-evident that releasing Wolfe from the custody of the Virginia Department of Corrections to Prince William County for the purposes of retrial did not constitute releasing him “unconditionally from custody.”

The Commonwealth’s other option for compliance with the Relief Order was to provide Wolfe with a new trial within 120 days of the date of the Order. The stay entered on November 22, 2011 pending the Commonwealth’s appeal of the Court’s Amended Judgment paused or halted the 120-day deadline imposed by the Court to provide Wolfe a new trial. When that stay was lifted on September 7, 2012, the deadline clock resumed where it had left off, leaving 36 days remaining. On Saturday, October 13, 2012, the 120 days given to the Commonwealth to provide Wolfe with a new trial expired. Because the deadline fell on a weekend, the deadline for retrial moved to Monday, October 15, 2012. Moreover, the Order Enforcing Judgment specified that the retrial had to be completed, and not merely commenced, within the prescribed period.

While completing a retrial of a complex death penalty case within 36 days might arguably have been a practical impossibility justifying an extension of the retrial period, the Commonwealth did not return to court seeking either a clarification or an extension. Given that the Commonwealth failed to either retry or release Wolfe within 120 days, it did not comply with the Order. As such, it was necessary to determine the appropriate remedy for that transgression.

The award of an unconditional writ does not, in and of itself, preclude the authorities from rearresting and retrying a successful habeas petitioner. The district court, however, identified an exception to the general rule, namely, that in extraordinary circumstances, a habeas court may forbid reprosecution. Satterlee v. Wolfenbarger, 453 F.3d 362, 370 (6th Cir. 2006). In detecting the presence of extraordinary circumstances here, the district court pointed to the conduct of the prosecutors, which demonstrated a continuing pattern of violating Wolfe’s right to use certain evidence. The court found that the prosecutors had incurably frustrated the entire purpose of habeas corpus and had permanently crystalized” the constitutional violations by scaring Barber into invoking his Fifth Amendment right to avoid self-incrimination.

However, the district court’s conclusion concerning the availability of Barber’s testimony at a retrial was speculative. Barber could decide on his own to testify, or, under a proper grant of immunity, his testimony could well be compelled. See Kastigar v. United States, 406 U.S. 441 (1972). Alternatively, the state trial court could determine that a waiver of Barber’s Fifth Amendment privilege had already been made; it could authorize the evidentiary use of Barber’s prior statements in one form or another; or it could craft any number of other remedies. This task of conducting Wolfe’s retrial was for the state trial court.

In sum, the constitutional claims for which Wolfe was awarded habeas corpus relief were readily capable of being remedied in a new trial. Given the absence of extraordinary circumstances, the proper disposition here was the release of Wolfe, subject to rearrest and retrial. For these reasons, the district court’s Order Enforcing Judgment was vacated and remanded with instructions that the court enter a substitute order directing that Wolfe be released from the custody imposed as the result of his 2002 convictions, and, further, that those convictions be expunged and their legal effects nullified consistently this opinion. The order was to be without prejudice to a retrial of the original charges against Wolfe, and it should not preclude the conduct of such other and further proceedings in the state or federal courts as may be appropriate.

Family Law

Custody 

BOTTOM LINE: Where mother had sole custody of her Swiss-born son and had a legitimate reason for traveling with him from Switzerland to United States, and where Swiss law gave her unilateral right to remove the child while he was in her sole custody, mother did not abuse her rights under Swiss law or breach any parental authority rights that father held at the time of removal.

CASE: White v. White, No. 12-1835 (decided May 24, 2013) (Judges Niemeyer, MOTZ & Keenan). RecordFax No. 13-0524-64, 13 pages.

COUNSEL: Stephen Cullen, Miles & Stockbridge, PC, Washington, for Appellant. Michael Johnson, Arnold & Porter, LLP, Washington, for Appellee.

FACTS: In May 2009, Soubadeh White and her husband, Malcolm, had a son in Switzerland. In June 2010, the Whites separated, and Malcolm initiated legal proceedings in Switzerland pertaining to the separation, including rights to the couple’s child. In October 2010, the Swiss Court of First Instance of Geneva authorized the parties’ legal separation and granted custody of the child to Soubadeh. The court also granted Malcolm visitation rights.

In April 2011, Soudabeh White left Switzerland for the United States with her minor son. Malcolm did not learn of their departure until three days later. Soubadeh subsequently claimed that she came to the United States to visit her sister and to seek medical care for her son. Doctors in Switzerland had diagnosed the child with autism; in the United States, doctors later diagnosed him with a feeding disorder for which he received treatment. Since coming to the United States, the child remained in the country continuously.

At the time of the departure of Soubadeh and the child to the United States, court-appointed psychologists in Switzerland were conducting an analysis of the parties and the child to assess custody arrangements. In July 2011, the psychologists issued their preliminary report. In it, they suggested that Soubadeh suffered from psychological problems which affected her ability to properly care for her son and that the court should transfer custody of the child to Malcolm if her condition did not improve within six months.

In September 2011, the Court of First Instance of Geneva issued an emergency ruling prohibiting Soubadeh from leaving Switzerland with the child. However, in December 2011, the same court found that it did not have jurisdiction because Switzerland was no longer the usual place of residence of Soubadeh and the child. In February 2012, the Swiss tutelary court in Geneva also found that it lacked jurisdiction but noted that Soubadeh had sole custody of the child and could therefore remove the child from Switzerland without authorization.

On April 6, 2012, upon finding that Soubadeh and the child were residing in Alexandria, Virginia, Malcolm brought in the federal district court a petition for return under the Hague Convention on the Civil Aspects of International Child Abduction, Oct. 25, 1980, T.I.A.S. No. 11,670, 1343 U.N.T.S. 89, and the International Child Abduction Remedies Act, 42 U.S.C. §11601et seq. (2006). The petition alleged one count of wrongful removal. The district court denied the petition for return.

Malcolm appealed to the 4th Circuit, which affirmed.

LAW: The Hague Convention provides that where a child has been wrongfully removed or retained, the authority concerned shall order the return of the child forthwith. Hague Convention art. 12. The removal or retention of a child is to be considered wrongful where it is in breach of rights of custody attributed to a person either jointly or alone, under the law of the State in which the child was habitually resident immediately before the removal. Id. art. 3(a). Because it was undisputed in this case that Switzerland was the child’s habitual residence before his removal, Swiss law determined whether there was a breach of rights. See id.

Malcolm first maintained that Soubadeh’s removal of the child to the United States inhibited parental authority rights he retained under Swiss law and that such rights constitute rights of custody protected under the Convention. However, the October 2010 separation order explicitly awarded custody of the child to Soudabeh, reserving to Malcolm only the right to visit the child – i.e., a “right of access.” Hague Convention art. 5(b). Under the Convention, breach of a right of access alone does not provide cause for return of a child. See id. arts. 3, 12; Jenkins v. Jenkins, 569 F.3d 549, 555 n.3 (6th Cir. 2009). Thus, the district court did not err in holding that Malcolm had not demonstrated that the removal of their child by Soubadeh breached any parental authority rights he retained at the time of removal.

Malcolm next maintained that Soubadeh’s removal of the child was intended to compromise his relationship with the child and that it threatened the child’s well-being, constituting an abuse of rights under Swiss law. However, under Swiss law, typical relocation and integration difficulties do not normally constitute a “serious threat.” See Tribunal fédéral 136 ATF III 353 ¶3.3. The district court found credible Soubadeh’s testimony that she brought her son to the United States to see her sister and to seek medical treatment, and the record clearly indicated that, soon after her arrival in the United States, Soubadeh sought medical treatment for the child and received a diagnosis different from the autism diagnosis with which she had been dissatisfied in Switzerland. Malcolm offered no evidence to support his assertion that Soubadeh left the country in order to evade her psychological evaluation and its consequences, or that the removal otherwise threatened the child’s wellbeing.

Finally, Malcolm relied on the Swiss Court of First Instance’s March 2013 order purporting to transfer custody of the child from Soubadeh to Malcolm two years after the child’s removal to the United States. However, under the Convention, a removal’s wrongfulness depends on rights of custody at the time of removal. The Swiss Court of First Instance’s March 2013 order did not purport to reject the authenticity of, or retroactively alter, the previously governing October 2010 order granting Soubadeh sole custody of the child. The October 2010 order, which was in effect at the time of the child’s removal, therefore controlled this case.

Because the district court did not clearly err in finding that Soubadeh had legitimate reasons for coming to the United States, Malcolm’s contention that Soubadeh abused her custody rights under Swiss law by removing the child from Switzerland was without merit.

Accordingly, the judgment of the district court was affirmed.