In Their Opinion : Seventh Circuit Court of Appeals Commentary : Lawyer & Attorney Michael E. Rigney : Kelley Drye & Warren Law Firm

SEC v. ENTERPRISE TRUST CO. (March 18, 2009)

Although only in existence for two years, Enterprise Trust managed more than $100 million in hundreds of accounts. Some of the accounts were custodial only, and others authorized Enterprise to choose securities. Enterprise did not honor its customers instructions and traded very aggressively in both the noncustodial and custodial accounts. It lost more than half of the money in its care before the SEC stepped in. The lower court appointed a receiver to propose a distribution plan for Enterprise’s assets. The receiver proposed a plan under which holders of custodial accounts recovered approximately 60% of their investment while holders of noncustodial accounts recovered between 25 and 50% of their investment. The receiver also proposed the use of illiquid assets to repay the noncustodial accounts, further compromising their value. The district court approved the plan. Several owners of noncustodial accounts, who were not parties to the case, appeal.

In their opinion, Chief Judge Easterbrook and Judges Flaum and Manion affirmed. The Court first addressed the difficult question of appellate jurisdiction. In 1994, the Court held, in SEC v. Wozniak, that investors who were affected by a plan of distribution could not appeal without becoming formal parties through intervention. The Court believed that Supreme Court precedent supported the proposition that only a party could appeal. In 2002, however, the Supreme Court held, in Devlin v. Scardelletti, that nonparty class members could appeal. Devlin called into question the Court’s understanding of the Supreme Court’s holdings. After a review of applicable precedent, the Court concluded that a nonparty whose rights are decided and who cannot litigate the issue in some other forum does have the right to appeal. Thus, the Court overruled Wozniak. The Court found the resolution of the merits much easier. Applying an abuse of discretion standard, the Court found that the reasons the plan favored the custodial account holders over the noncustodial account holders – that the custodial account holders did not authorize Enterprise to take any action with their assets, they were unaware that Enterprise had used their assets, and they would not have benefited had Enterprise’s strategy succeeded -- made sense. In fact, the Court opined that the custodial account holders had the stronger objection -- that the noncustodial account holders received anything before the custodial account holders were fully repaid. Having found no abuse of discretion, the Court affirmed.

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IN RE: GOLDBLATT'S BARGAIN STORES (March 18, 2009)

Before its bankruptcy, Goldblatt's operated six stores in the Chicago area. In January 2003, Great American Group agreed to buy the inventory at two of the stores at a deep discount. Shortly thereafter, Great American agreed to do the same with the inventory at the other four stores. Both sales were contingent on the independent appraisal of the inventories. Both sales were approved by LaSalle Bank, Goldblatt's principal creditor. Before the sales, Great American learned that inventory purchased for $450,000 had been moved from the four stores to the two stores. Great American did not advise the Bank of that fact. The independent appraisal of the first sale confirmed that the inventory was worth at least as much as it had been represented. The appraisal of the inventory from the four other stores, however, indicated that the inventory was worth at least $2 million less than Goldblatt's had estimated. The results of the second appraisal entitled Great American to a refund of approximately $1 million from Goldblatt's. LaSalle Bank, although required by contract to pay, refused to do so. The bankruptcy court, after a trial, concluded that Great American was legally obligated to disclose the movement of the inventory to LaSalle. The court concluded, however, that LaSalle would not have acted any differently had it known and that LaSalle had not shown that it incurred any loss from the movement. On appeal, the district court reversed. The district court agreed that Great American owed a duty of disclosure to LaSalle. However, it held that the fraud excused LaSalle Bank from any obligation to perform. Great American appeals.

In their opinion, Chief Judge Easterbrook and Judges Sykes and Tinder reversed. The Court agreed that a victim of fraud is typically entitled to rescission. Here, however, LaSalle does not seek rescission. It simply wants to be excused from having to pay the deficiency based on the overestimation of the second inventory. Before LaSalle is entitled to a remedy, it must establish reliance and injury. The Court agreed with the bankruptcy judge that LaSalle had not proven neither reliance nor loss.

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CAROLINA CASUALTY v. ESTATE OF KARPOV (March 17, 2009)

Stanislaw Gill was driving his tractor-trailer on the Indiana Toll Road when he rear-ended a stopped car. More collisions followed. Eventually, four persons died and many others were injured. Carolina Casualty insured Gill and his employer. The policy provided a limit of $1 million of coverage for any one accident. Carolina Casualty filed an interpleader action, naming Gill, his employer, and everyone who had filed a claim arising out of the accident. Carolina Casualty deposited $1 million with court and sought a declaration that $1 million was the limit of its liability. The court granted summary judgment to Carolina Casualty. Margarita Karpov appeals individually and as administratrix of the estate of Dimitry Karpov.

In their opinion, Judges Cudahy, Manion and Williams affirmed. The sole issue on appeal was whether the Motor Carrier Act (“MCA”) and the endorsement issued by Carolina Casualty verifying compliance with the MCA establish coverage limits of $750,000 per person. The Court agreed that the MCA, in § 31139(b), establishes a $750,000 minimum level of financial responsibility. Appellants cite § 13906 for the proposition that the $750,000 level was a per-person, rather than a per-accident, threshold. Section 13906 provides: “The security must be sufficient to pay not more than the amount of the security, for each final judgment against the registrant for bodily injury to, or death of, an individual resulting from the negligent operation, maintenance, or use of motor vehicles, . . . .” Appellants rely on the “for each final judgment” language to argue that the limit was per person. The Court found little authority on the subject. Two district courts have relied on the “not more than” language to hold that § 13906 creates a limit of coverage from a single accident. One of the decisions was affirmed, albeit in an unpublished opinion. The Court agreed with the rationale of the district courts and held that the MCA did not create a per-person limit. The Court also rejected appellants’ argument that the policy endorsement itself created a per-person limit, on several grounds: a) the endorsement merely verifies compliance with the MCA, which does not adopt a per-person limit, b) the endorsement specifically refers to the per-accident limits in the policy itself, and c) the language of the endorsement is provided in a government regulation and states the limits “for each accident.” Finally, the Court found nothing in legislative history or public policy that supported a different conclusion.

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CRACCO v. VITRAN EXPRESS, INC. (March 17, 2009)

Kevin Cracco was a truck terminal manager at Vitran Express. In late 2006, he was hospitalized with a serious health condition and went on FMLA leave. Cracco's duties were performed by other employees during his absence. The replacement employees discovered a host of problem’s during Cracco’s absence: damaged freight, safety lapses and general disorganization. Vitran's further investigation also discovered falsified freight records. The company terminated Cracco's employment upon his return from leave. Cracco filed suit, alleging that the company violated his FMLA rights. The district court entered a default order when Vitran failed to respond. The court later vacated the default and granted summary judgment to Vitran. Cracco appeals.

In their opinion, Judges Ripple, Manion and Sykes affirmed. The Court first affirmed the district court's order vacating the default. It found Vitran’s statement in its motion that Cracco was fired for cause sufficient to meet the liberal meritorious defense requirement of Rule 55. The Court also rejected Cracco's argument that the district court improperly deemed admitted a paragraph of Vitran’s Rule 56.1 statement of material facts. The paragraph contained multiple statements relating to the problems discovered at the terminal during Cracco’s leave. The Court conceded that the lower court could have required Vitran to unbundle the allegations. It concluded that the court did not abuse its discretion in requiring Cracco to respond to the paragraph, however. The Court then addressed the summary judgment ruling. With respect to the direct method of proof, Cracco attempted to establish a causal connection between his protected activities and his termination. He relied on the fact that he was terminated immediately upon his return from leave. The Court rejected the argument, concluding that the discovery of the performance problems during his leave negated any inference of causal connection. The Court concluded that Cracco was unable to establish two prongs of the indirect method of proof test: a) that he met his employer’s expectations and b) that he was treated less favorably than a similarly situated employee. Finally, because Cracco presented no evidence that he would have retained his job had he not taken FMLA leave, his interference claim failed as well.

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HARP v. CHARTER COMMUNICATIONS, INC. (March 16, 2009)

Mary Harp was a supervisor in the audit department at Charter Communications, Inc. ("Charter"). She was responsible for ensuring that Charter’s outside contractors performed the services for which they were retained. In early 2004, she concluded that one of Charter’s outside contractors sought payment for services it did not perform. Harp was unhappy with the way Charter treated the situation. She complained to the company that her direct supervisor violated the company's ethics code by authorizing full payment to the contractor. Shortly thereafter, the entire audit department was eliminated as part of a reduction in force. Harp brought an action against Charter under the Sarbanes-Oxley Act, alleging that her termination was in retaliation for her whistle-blowing. The district court granted summary judgment to Charter. Harp appeals.

In their opinion, Judges Ripple and Rovner affirmed (Tinder dissenting). In order to prevail, the Court noted that Harp had to prove a) that she engaged in protected activity, b) that Charter knew she was engaged in protected activity, c) that she suffered an unfavorable personnel action, and d) that the protected activity was a contributing factor in the personnel action. In order to meet the “protected activity” element, Harp must have actually believed that her supervisor’s conduct was unlawful and her belief must have been reasonable. The Court concluded that Harp's allegation that her supervisor authorized full payment to a contractor for services not performed had no subjective or objective basis for belief. The Court noted that Harp relied on conversations with a coworker in coming to her conclusion and that her own conduct was inconsistent with the belief. Thus, Harp was unable to establish even the first element of the test. The Court added that her claim would fail even if she met that element. The fact that the entire department was eliminated as part of a reduction in force would prevent her from establishing that her complaint was a contributing factor in her termination.

Judge Tinder dissented. Judge Tinder agreed with the legal test laid out in the majority opinion but disagreed with the majority's analysis and application of the facts to the law. He believed that Harp had a subjective belief that the company was a victim of fraud at the time she submitted her complaint and that her complaint could be reconciled with her deposition testimony. He also thought the circumstances behind the reduction in force were questionable enough to allow Harp to proceed with her complaint. For example, Charter argued that the reduction in force was necessary to save $800,000 a month -- yet the salaries of the entire department amounted to less than $200,000 per month. Also, Harp's severance form indicated that she would not be eligible for rehire -- a fact Judge Tinder thought atypical of a reduction in force. Finally, Charter began rehiring for the audit department within two months of the reduction. Judge Tinder thought that Harp had presented enough evidence to allow her claim to go to the jury.

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CAPITOL INDEMNITY CORP. v. ELSTON SELF SERVICE WHOLESALE GROCERS, INC. (March 12, 2009)

Elston Self-Service Wholesale Grocers, Inc. ("Elston") is a wholesale cigarette distributor. Lorillard Tobacco Co. ("Lorillard") filed a complaint against Elston, alleging that it sold counterfeit cigarettes bearing a Lorillard trademark. Elston was insured by Capitol Indemnity Corp. When Elston claimed coverage, Capitol Indemnity disclaimed any duty to indemnify or defend. Capitol Indemnity sought a declaratory judgment that it had no such duty. The district court ruled that Capitol Indemnity had an obligation to defend Elston in the Lorillard litigation. Capitol Indemnity appeals.

In their opinion, Chief Judge Easterbrook and Judges Flaum and Manion affirmed. The Court addressed the policy provisions. At issue was an exclusion to the policy's coverage of "advertising injury." The policy excluded from coverage any injury arising out of the publication of “material” whose first publication took place before the policy period. Capitol Indemnity argued that Elston's years of lawful sales of Lorillard cigarettes before the beginning of the policy term constituted a prior publication. The counterfeit packaging was nearly identical to the Lorillard packaging. The Court rejected Capitol Indemnity’s position. It interpreted the term "material" in the policy exclusion to refer to the same wrongful material alleged in the complaint. Because there was no allegation of counterfeit sales prior to the policy term, there was no prior publication. Under Illinois law, Capitol Indemnity is required to defend Elston if the underlying complaint potentially falls within the scope of coverage. Having found that the prior publication exclusion does not apply, the Court affirmed the district court’s finding of a duty to defend.

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MALONE v. RELIASTAR LIFE INSURANCE CO. (March 12, 2009)

Gordon Beeler disappeared in January of 1998, leaving behind a wife of 30 years, four children, a business partner and $2.6 million in life insurance policies. A trust was the beneficiary of the policies. The insurance companies denied benefits in 2003, and again in 2005, citing evidence that Beeler may have been alive. The beneficiaries brought suit against the insurance companies, seeking death benefits and punitive damages. The district court granted summary judgment to the insurance companies on the punitive damages claim. The breach of contract claim was tried to a jury. The trustee presented evidence that Beeler had been missing since the date of his disappearance, that the family had conducted numerous investigations into his disappearance, and that he had not been in communication with his family or friends since the day of his disappearance. The insurance companies presented evidence of a troubled family situation, a strained marriage, and witnesses who claimed to have seen Beeler after the date of his disappearance. The jury returned a verdict in favor of the defendants. The district court denied the trustee’s Motion for a New Trial. The trustee appeals.

In their opinion, Judges Kanne, Williams and Sykes affirmed in part, vacated in part and remanded for a new trial. On the punitive damages issue, the Court concluded that there was a good-faith dispute over coverage. Under Indiana law, a good-faith coverage dispute precludes punitive damages. The Court affirmed the district court. With respect to the death benefits claims, however, the Court found that the district court had erred. In Indiana, a claimant may prove an insured’s death in two different ways. It can present evidence, direct or circumstantial, that the insured is, in fact, dead. Alternatively, it can seek a common law presumption of death by showing that the individual has been "inexplicably absent" for seven years, that the individual has not communicated with close family and friends and that the individual cannot be found despite diligent search. That presumption can be rebutted by proof of facts inconsistent with the presumption. The Court found two errors in the district court's approach to the trial. First, the district court erred in instructing the jury that "inexplicably absent" meant that Beeler’s absence was "unexplained by circumstances other than those suggesting death." The Court concluded that the presumption arises when the plaintiff proves a seven-year absence, a lack of communication, and an inability after diligent search to find the person. Any evidence offered to explain the disappearance is relevant only to rebutting the presumption. Second, the Court found error in the special verdict form. The jury was asked three questions: whether the plaintiff raised the presumption of death, whether the defendants rebutted the presumption of death, and whether plaintiff proved that Beeler was, in fact, dead. The special verdict form instructed the jury to conclude its deliberations if it answered no to the first question. The jury did answer no to the first question, it did conclude its deliberations, and it never considered whether plaintiff proved that Beeler was, in fact, that. The Court conceded that either of the two errors, standing alone, might not have required a reversal. Considered together, however, they amounted to reversible error.

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CLEAR CHANNEL OUTDOOR, INC. v. INTERNATIONAL UNIONS OF PAINTERS AND ALLIED TRADES (March 12, 2009)

Clear Channel Outdoor ("CCO ") owns and maintains hundreds of billboards in and around Milwaukee. Patrick Rogney was a CCO crew chief. In April of 2003, Rogney was working with a crew on a billboard in Milwaukee. They were on a platform about 18 feet off the ground. At some point, he disconnected his safety harness from the cable. A company official, conducting a field inspection, observed Rogney at work without the connected harness. After observing for about eight minutes, he notified the operations manager by phone. CCO suspended Rogney that afternoon, and later discharged him. The union filed a grievance, alleging that the termination was without good cause. Pursuant to the collective bargaining agreement, the parties submitted the matter to an arbitrator. After an evidentiary hearing, the arbitrator determined that Rogney's discharge was without just cause and that an appropriate penalty was a six-month suspension without pay. The arbitrator interpreted "just cause" to require CCO to not only consider whether an offense allowing termination was committed but also to consider whether termination was warranted under the circumstances. CCO brought an action to vacate the arbitrator's award. The district court confirmed the arbitrator's decision. CCO appeals.

In their opinion, Judges Rovner, Wood and Williams affirmed. The Court emphasized its limited role in reviewing a labor arbitrator's decision -- only to determine whether the arbitrator exceeded the powers delegated to him. Here, the Court looked to whether the arbitrator's decision had a plausible foundation in the terms of the collective bargaining agreement. The Court noted that it did not necessarily agree with the arbitrator's construction of the contract. In fact, the collective bargaining agreement gave CCO discretion to fire an employee for a violation of the very safety rule that Rogney violated. Nevertheless, the Court concluded that the arbitrator "without question" interpreted the agreement. Since his decision drew its essence from the agreement, the Court let it stand and affirmed the district court.

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CLANCY v. OFFICE OF FOREIGN ASSETS CONTROL (March 11, 2009)

Ryan Clancy, an American citizen, traveled to Iraq in January 2003. Clancy's purpose was to protest the United States’ involvement in Iraq by acting as a “human shield.” Upon his return to the United States, Clancy admitted to a customs official the reason for his trip. The Office of Foreign Assets Control ("OFAC") issued a Pre-penalty Notice ("PPN"), charging Clancy with providing services to Iraq by shielding facilities from possible military action. OFAC relied on regulations, promulgated post-September 11, restricting trade and transactions with Iraq. OFAC advised Clancy that he could be assessed a penalty of up to $250,000. It offered him the opportunity to make a written response. Clancy submitted a response in which he challenged the validity of the regulations. He did not dispute the factual basis of the charges. OFAC assessed a final civil penalty of $8,000. Clancy filed suit. The district court granted summary judgment against Clancy on all of his claims. Clancy appeals.

In their opinion, Judges Bauer, Kanne and Williams affirmed. The Court first addressed Clancy's procedural due process argument. The relevant inquiry, it said, is whether the procedures afforded presented an unreasonable risk of an erroneous deprivation of a protected interest. The Court concluded that the procedures afforded to Clancy -- the pre-penalty notice, a statement of the underlying facts, an opportunity to respond -- were constitutionally sufficient. The Court then addressed Clancy's challenge to the validity of the regulations. It rejected each of Clancy's arguments. It concluded: a) that the regulations were a proper exercise of OFAC's authority, b) that the travel restrictions were justified by national foreign-policy considerations, c) that Clancy's travel was not "inherently expressive" so as to invoke rights under the First Amendment, and d) that Clancy's actions in Iraq attempted to confer a benefit on the country and therefore met the definition of "services" as that term is used in the regulation.

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