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

BERGQUIST v. MANN BRACKEN, LLP (January 26, 2010)

Sandra Bergquist owed money to the bank that issued her a credit card. The bank retained the law firm of Mann Bracken to collect the debt. The firm arbitrated the dispute before the National Arbitration Forum, as provided in the credit card agreement. The bank prevailed at the arbitration and a state court entered judgment enforcing the arbitration award. Bergquist was suspicious of the connection between Mann Bracken and the National Arbitration Forum. She asked the state court to set aside its judgment enforcing the award. It did so and dismissed the case with prejudice. She also filed a class-action on behalf of all persons who were pursued by Mann Bracken and had their claims arbitrated before the National Arbitration Forum. The defendants removed the case to federal court pursuant to the Class Action Fairness Act (CAFA). The district court remanded, concluding that the Rooker-Feldman doctrine precluded federal jurisdiction of the claim. Defendants appeal.

In their opinion, Chief Judge Easterbrook and Judges Bauer and Rovner vacated and remanded. The Court first rejected the argument that CAFA trumps Rooker-Feldman. Although CAFA expands federal jurisdiction with respect to class actions, it does not change the Rooker-Feldman limitation on collateral attacks of state court decisions. The Court concluded, however, that the Rooker-Feldman doctrine had no application in the case. First, although the district court recognized the inapplicability of the doctrine to Bergquist's individual claim (because the state case had been dismissed with prejudice), it nevertheless remanded because Bergquist sought relief on behalf of others who had lost in state court. The Court found this to be error. The district court was not allowed to remand the entire case because some portion of it did not belong in federal court. A federal court must exercise the jurisdiction that does exist. Second, it was not apparent to the Court that any claim need be remanded. The Court identified three possible subclasses: those who won in state court, those who lost in state court, and those who neither won nor lost. The class can be defined to eliminate those who lost in state court, the only persons in the class with a Rooker-Feldman problem. The Court remanded for a determination of whether the jurisdictional requirements were met under that revised class definition.

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AVILA v. PAPPAS (January 4, 2010)

Maria Avila was already in trouble. Her employer, the Cook County Treasurer's Office, was about to conduct a disciplinary hearing. Avila made it worse when she told one of her coworkers that she might "go postal." Her coworker advised her superiors. They not only added a disciplinary count for the implied threat and fired her but alerted the authorities. Avila was criminally prosecuted. The prosecutor charged a felony, taking the position that one of the targets of Avila's threat was a public official. Avila was acquitted, the court holding that he was not a public official. Avila filed suit against her superiors pursuant to §1983, alleging both constitutional violations and state law malicious prosecution. Although the court dismissed the federal counts, it retained the state law claim under supplemental jurisdiction and resolved it on the merits in favor of the defendants. Avila appeals the judgment on the state law claim.

In their opinion, Chief Judge Easterbrook and Judges Wood and Tinder vacated and remanded with instructions to dismiss for want of jurisdiction. The Court first addressed its jurisdiction. Although Avila asserted four federal law theories, the Court emphasized that a federal claim must have substance to create a basis for federal jurisdiction. The Court concluded that the federal claims -- substantive due process, conspiracy, failure to train, and equal protection -- were frivolous. The Court principally relied on the Supreme Court's decision in Albright and the Court's own decision in Newsome, holding that malicious prosecution does not violate the Constitution if state law recognizes it as a tort (which Illinois does).

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SHERWOOD v. MARQUETTE TRANSPORTATION CO. (November 23, 2009)

Bluegrass Marine employs Michael Sherwood as a deckhand on one of its Mississippi River vessels. Sherwood alleged that he was injured during his employment. He brought suit under the Jones Act. Bluegrass sought a stay in favor of arbitration, invoking a clause in Sherwood's employment contract that required all disputes to be arbitrated under the Illinois Uniform Arbitration Act. The court denied the stay, concluding that the Federal Arbitration Act (which does not apply to seamen) preempted the Illinois Act. Bluegrass appealed.

In their opinion, Chief Judge Easterbrook and Judges Evans and Williams dismissed for want of jurisdiction. The Court noted that Bluegrass relied on § 16 of the FAA, which authorizes interlocutory review of a refusal to stay an action under § 3 of the FAA. The Court concluded that § 16 could not provide a basis for jurisdiction since the FAA does not apply to seamen and because Bluegrass never sought or was denied a stay under § 3 of the Act. The Court also rejected Bluegrass' reliance on both the collateral order doctrine and § 1292 (as the denial of an injunction) as bases for an appeal. Although the Court denied the appeal, it did express its doubt regarding the correctness of the district court's preemption conclusion.

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HOOSIER ENERGY RURAL ELECTRIC COOPERATIVE v. JOHN HANCOCK LIFE INSURANCE COMPANY (September 17, 2009)

Hoosier Energy Rural Electric Cooperative and John Hancock Life Insurance Company entered into a lease-leaseback of a Power Plant in order to take advantage of excess depreciation deductions held by Hoosier. Because the transaction exposed John Hancock to substantial financial risks, Hoosier arranged with Ambac Assurance Corporation to pay to Hancock $120 million upon the occurrence of certain events. One of those events was a reduction in Ambac’s credit rating. If that occurred, Hoosier had 60 days to replace the surety. It did occur. Even with an extension, Hoosier did not replace the surety. John Hancock demanded performance. Ambac was ready and able to perform but Hoosier filed suit and obtained a temporary restraining order and a preliminary injunction. Ambac’s performance would require Hoosier to cover the payment, which would drive Hoosier into bankruptcy. John Hancock appeals.

In their opinion, Chief Judge Easterbrook and Judges Kanne and Wood affirmed. The Court began with the requirements for equitable relief: irreparable injury, a plausible claim on the merits and the balance of equities. The Court accepted the district court’s finding of irreparable injury and proceeded to address the merits. The district court had found merit in two Hoosier arguments: that the transaction was illegal and must be unwound and that Hoosier is at least temporarily excused under the doctrine of "temporary commercial impracticability." The Court disagreed with respect to the first prong. Whether or not the IRS allows the parties to take advantage of the intended tax consequences, the Court believed that the parties were still bound by their contractual obligations. With respect to the second prong, the Court noted that New York courts do not recognize "temporary commercial impracticability." Although they do recognize the defense of impossibility, they take a dim view of it and do not excuse performance when the "impossibility" is the result of financial hardship. If, as Hancock claims, Hoosier had the option to replace the surety, the Court did not believe that an impossibility defense would stand. If, however, as Hoosier claims, it had a duty to replace the surety, an impossibility defense might prevail. The Court found enough uncertainty in the contract and the facts surrounding Hoosier's ability or inability to replace the surety that it concluded that the district court was correct with respect to Hoosier's prospect of prevailing. Finally, the Court required the district court to re-examine the amount of the injunction bonds to protect John Hancock and urged the district court to allow Hancock to realize its surety if Hoosier is not able to replace the surety within a few months.

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NEW ALBANY DVD v. CITY OF NEW ALBANY (September 10, 2009)

New Albany DVD set out to operate an adult entertainment business in New Albany, Indiana. It purchased property, obtained licenses and renovated a building. Although the land was properly zoned, the City refused to conduct a final inspection, a requirement for occupancy. Instead, it imposed a moratorium on new adult businesses. During the moratorium, it changed the zoning rules to prohibit the operation of an adult business on the property selected by New Albany DVD. The new rules prohibit the operation of an adult business within 1000 feet of a church or any property zoned residential. The site is within 200 feet of both. New Albany DVD brought suit under § 1983, alleging a violation of the First Amendment. The district court held that the ordinance was likely unconstitutional and issued an injunction allowing New Albany DVD to open. The City appeals.

In their opinion, Chief Judge Easterbrook and Judges Ripple and Rovner remanded. The Court first disagreed with the lower court's rationale -- that the regulation was not narrowly tailored for its purpose -- for issuing the injunction. Although Alameda Books and other cases require narrow tailoring of regulations of adult businesses, the Court concluded that the dispersal regulation at issue had often been used and sustained after challenge. The Court went on, however, to agree with the court’s result under a different rationale. It noted that the studies relied on by the City focused on live-entertainment businesses. New Albany DVD offers take-home materials only. The City’s attempts to overcome this hurdle by offering anecdotal evidence of increased litter and theft was rejected as well. The Court agreed that the City might be able to use those justifications, but concluded that sufficient evidence did not exist in the record. Finally, the Court referred, as it did in its earlier Annex Books opinion (see post), to Justice Kennedy’s opinion in Alameda Books as a guide to the evidence required under the intermediate scrutiny standard.

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GOTHAM HOLDINGS v. HEALTH GRADES (September 3, 2009)

Gotham Holdings and Health Grades are parties to litigation pending in New York. In that proceeding, Health Grades maintained that an award in its earlier arbitration with Hewitt Associates supported its litigation position. Although it tendered the award and related documents in the litigation, Gotham asked for more. Health Grades refused. Gotham subpoenaed the documents directly from Hewitt in Illinois. The court ordered Hewitt to turn over the documents, which it is willing to do. Health Grades appeals.

In their opinion, Chief Judge Easterbrook and Judges Williams and Sykes affirmed. The Court noted that Health Grade's refusal was based on a confidentiality provision in the arbitration. The first ground on which it affirmed was a specific section of the confidentiality agreement that allowed documents to be produced in response to a subpoena. Additionally, even if the agreement did not so provide, the Court held that the parties to the arbitration could only bind themselves. They cannot, by agreement, limit a third party's access to the documents.

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ANNEX BOOKS, INC. v. CITY OF INDIANAPOLIS (September 3, 2009)

The City of Indianapolis regulates “adult entertainment businesses”. The regulations include a license requirement, store lighting requirements, Sunday closings and restricted weekday hours. Prior to 2003, any retail establishment that received 50% of its revenue or devoted 50% of its space to adult materials was considered such a business. In 2003, Indianapolis reduced the 50% threshold to 25%. Four businesses that fell within that new definition brought suit, challenging both the licensing procedures and the definition. The district court rejected the challenges to both. The businesses appeal.

In their opinion, Chief Judge Easterbrook and Judges Flaum and Rovner affirmed in part and reversed in part. The Court adopted the district court's opinion with respect to the licensing challenge. It went on to address the challenge to the definition. The Court noted that Indianapolis conceded that the law is subject to "intermediate" scrutiny in that the plaintiffs are booksellers. Indianapolis relies on the reduction of crime and other negative effects of adult businesses. The Court identified a problem, however. Indianapolis relied on studies accepted by the Supreme Court and on a study it conducted years earlier that associated higher crime with adult businesses. But the studies all dealt with the effect of regulations dispersing adult businesses. The Indianapolis ordinance does not deal with dispersal -- it deals with store hours and store conditions. The studies also dealt with businesses that offered live entertainment, unlike three of the four plaintiffs in the case. The Court concluded that an evidentiary hearing was required. At the hearing, the City must present relevant evidence supporting its restrictions on adult businesses that satisfies the intermediate standard of the Supreme Court's decision in Alameda Books. The Court referred to Justice Kennedy's opinion, reflecting the holding of Alameda Books, as instructive. In order to meet the constitutional challenge, said Justice Kennedy, an ordinance must suppress the secondary effects of the regulated business yet leave the availability and amount of speech "substantially intact."

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FAIRLEY v. ANDREWS (August 20, 2009

Fairley and Gackowski were employed as guards at the Cook County Jail. Both complained about their fellow guards' mistreatment of prisoners. After one particularly brutal incident, the affected prisoners filed suit. Fairley and Gackowski infuriated some of the other guards by their willingness to testify truthfully about their knowledge of the incident. They were both harassed and taunted, verbally and physically. Ultimately, they both quit. Fairley testified in a deposition a few weeks before he quit. Gackowski gave a deposition after he quit. Both testified at the trial, which resulted in a defense verdict. Fairley and Gackowski brought an action under § 1983, alleging that the defendants violated their free speech rights by assaulting them as a result of their willingness to report the abuse of prisoners and to testify truthfully. Shortly before trial, the district court ordered the exclusion of all evidence of events that occurred prior to the plaintiffs’ depositions. The judge reasoned that anything that occurred prior to their speech could not be considered as retaliation or punishment for that speech. Without that evidence, the guards accepted a dismissal. Fairley and Gackowski appeal.

In their opinion, Chief Judge Easterbrook and Judges Posner and Wood affirmed in part and reversed in part. The Court first clarified its jurisdiction, given the guards' acceptance of a dismissal after the court’s evidentiary ruling. The Court concluded that a party can decide that further pursuit of its case in the trial court is hopeless and accept a judgment against it in order to appeal. On the merits, the Court addressed both of plaintiffs' theories: that the defendants punished them for reporting defendants’ misconduct and that defendants taunted them to prevent their future testimony. On the first theory, the Court concluded that their claim was barred by Garcetti. Garcetti provides that the First Amendment does not protect speech that is part of one's job. Here, one guard’s report about another guard's conduct is part of the job. But Garcetti applies as against an employer - here, the defendants are coworkers. The Court concluded that it did not have to reach the coworker issue. The guards' Monell argument that the jail had a policy against reporting any guard misconduct linked the employer's liability and the coworker's liability. On the second theory of liability, however, the Court concluded that Garcetti did not control. The speech at issue in the second theory was the guards' testimony in the prisoners' trial. That speech is not part of the job. The Court concluded that Fairley and Gackowski could recover against a defendant who made threats that were designed to discourage their trial testimony.

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INDIANA PROTECTION AND ADVOCACY SERVICES v. INDIANA FAMILY AND SOCIAL SERVICES ADMINISTRATION (July 28, 2009)

The State of Indiana receives federal funds under programs designed to assist those with disabilities and mental illnesses. In return, it must have a system to protect and advocate for their rights. The Indiana Protection and Advocacy Services ("Services") is the system the state created for that purpose. As such, it is entitled to investigate incidents of abuse and neglect and to see patient records, unless the patient has a legal guardian in charge of his or her interests. When a mentally disabled patient died at a state hospital, Services investigated. The hospital refused to turn over the patient's medical records. Services filed suit in federal court, naming the hospital and the state agency in charge of its operation, Indiana Family and Social Services Administration. The district court found that the hospital was required to turn over the records. The defendants appeal.

In their opinion, Chief Judge Easterbrook and Judges Sykes and Kendall vacated and remanded. The Court never reached the merits. It noted that neither statute in question created an express right of action for a state system such as Services. If there is a private right of action to enforce the provisions of the statutes, it comes from § 1983. The Court added, however, that Services is a state actor. It is therefore not a "person" under § 1983 and cannot sue a state agency. The Court remanded with instructions to dismiss for lack of jurisdiction.

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FRY v. EXELON CORPORATION CASH BALANCE PENSION PLAN (July 2, 2009)
 

Exelon Corporation created a defined-benefit pension plan in 2002. In order to be able to distribute the balance of employee's account as if the Plan were a defined-contribution plan, Exelon defined "normal retirement age" to be five years after commencement of employment. Exelon was thus able to avoid what it considered to be a problem with ERISA's treatment of defined-benefit plans (Congress fixed the problem in ERISA in 2006). Thomas Fry retired from Exelon in 2003 at age 55. Fry sued the Plan when it turned over only his account balance rather than his balance plus investment credits through age 65. The lower court held that the Plan satisfied ERISA. Fry appeals.

In their opinion, Chief Judge Easterbrook and Judges Evans and Sykes affirmed. The Court examined the statute. ERISA defines "normal retirement age" as either a) when an employee attains normal retirement age under the plan, or b) the later of i) age 65 or ii) the employee’s fifth anniversary in the Plan. The Court agreed with Exelon that its approach was allowable under the first prong of the definition. It concluded that ERISA did not require a retirement age to be actuarially accurate. Under the statute, an age is a "normal retirement age" if the plan says it is.

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UNITED STATES v. ROLLS-ROYCE CORPORATION (June 30, 2009)

Curtis Lusby was an engineer at Rolls-Royce Corp. He became suspicious that the company was falsely certifying that one of its aircraft engines met government specifications so he informed his superiors. He claims that the company fired him for doing so. He brought suit under the False Claims Act, alleging that the company punished him for preparing to bring an action under the statute. The parties jointly dismissed the suit in 2003. However, two months earlier, Lusby had filed a qui tam action under seal. The court dismissed the action for failure to plead fraud with particularity and because of the claim preclusion effect of the earlier lawsuit. Lusby appeals.

In their opinion, Chief Judge Easterbrook and Judges Posner and Wood affirmed in part and reversed in part. The Court first addressed claim preclusion. It noted its 2007 decision in Cole. In Cole, the Court held that a person who did not prevail on a Title VII claim cannot later bring both a personal and qui tam claim under the False Claims Act. Here, however, Lusby disputes one of the elements of claim preclusion -- that the cases involve the same parties (Cole conceded the issue). The Court noted that the United States is not an actual party to a qui tam suit unless it intervenes. It is, however, the real party in interest. In addition, the Court identified several procedural requirements for qui tam litigation that would make it very difficult to bring a personal claim in the same suit. The Court concluded that the resolution of an employee's personal suit does not preclude a later qui tam suit. With respect to the particularity issue, the Court stated that the complaint contained quite specific allegations of fraud. It rejected Rolls-Royce's argument that a specific allegation of the details of the invoices was required. The Court did affirmed the lower court with respect to Lusby's allegations that Rolls-Royce committed fraud during the earlier settlement negotiations.

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KROLNIK v. THE PRUDENTIAL INSURANCE COMPANY (June 29, 2009)

Although Paul Krolnik ceased working because of a hernia and back pain, he failed to return to work because, at least in part, of his depression. Prudential paid him long-term disability benefits for two years. It stopped the benefit stream after two years because the policy at issue caps the benefit at two years if the inability to work is caused, even in part, by a mental illness (including depression). Krolnik brought an ERISA suit against Prudential. The court below barred all discovery on medical issues, struck Krolnik's medical affidavits and granted summary judgment to Prudential.

In their opinion, Chief Judge Easterbrook and Judges Kanne and Williams affirmed in part and vacated and remanded in part. The parties agreed that the benefit plan at issue did not confirm operational discretion on its administrator. The Court stated that the court below therefore was required to make an independent decision on Krolnik’s benefit entitlement. Here, instead, the judge simply looked at the administrative record and disallowed any new evidence. The court erred in barring discovery, refusing to take new evidence, declining to resolve disputed facts and simply relying on the administrative record. As an aside, the Court criticized the use of the phrase "de novo review" in these circumstances since the court is not reviewing anything but reaching an independent decision. The Court affirmed the district court with respect to a subrogation issue and otherwise vacated and remanded.

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FREEDOM MORTGAGE CORPORATION v. BURNHAM MORTGAGE, INC. (June 23, 2009)

Freedom Mortgage Corp. loaned money to property purchasers arranged by broker Burnham Mortgage, Inc. After the purchasers defaulted, Freedom purchased the properties with credit bids at auction, was awarded default judgments for the difference between the purchase prices and the outstanding debts, and later resold the properties for less than their purchase price. Freedom claims (in its complaint, taken as true) that Burnham conducted a scam whereby it arranged to over-appraise properties, sponsor sham sales, and have Freedom lend money on its inflated understanding of the properties’ purchase prices. Title insurers indemnified Freedom for damages caused by a failure to close according to Freedom's specifications. Freedom sued Burnham and the insurers for fraud and under RICO. The court first ruled that, under Illinois law, Freedom was not able to recover from a third party any damages on the theory that the property was worth less than it had been purchased for at the foreclosure sale. The court later ruled that Freedom's claim was barred by claim preclusion and by the Rooker-Feldman doctrine. Freedom appeals.

In their opinion, Chief Judge Easterbrook and Judges Bauer and Evans reversed and remanded. The Court quickly disposed of the Rooker-Feldman argument. Rooker-Feldman comes into play when a party complains about a state court judgment in federal court. Here, Freedom is the prevailing state court party in the foreclosure action, and is complaining about injuries from conduct that predated the state court proceedings. Rooker-Feldman does not apply. With respect to claim preclusion, the Court noted that Illinois does not require all claims to be made in a single action - only if they relate to the same transaction. Since Illinois treats claims on a guarantee, for example, as a separate transaction, the Court concluded that it would allow a separate claim against a third party for fraud. As for issue preclusion, the Court agreed that Freedom is stuck with its credit bid purchase prices as the value of the properties. That does not eliminate damages, however -- it only limits them.

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WISCONSIN VALLEY IMPROVEMENT COMPANY v. UNITED STATES OF AMERICA (June 22, 2009)

Wisconsin Valley Improvement Company (“WVIC”) operates dams on the Wisconsin River, some of which are licensed by the Federal Energy Regulatory Commission. Years ago, during a license renewal process, the U. S. Forest Service asked the Commission to impose conditions on the WVIC license that would curtail certain flooding on federal land. WVIC claimed that it had prescriptive easements over the federal lands that made the requested conditions inappropriate. In a brief filed with the Commission in February of 1996, the Forest Service explicitly did not concede the easement claim but argued that it had a right to the conditions regardless of the existence of a valid easement. The matter was resolved on the grounds that the existence of an easement was irrelevant. Thus, the issue of the easement’s existence was not resolved. In June of 2008, WVIC filed suit under the Quiet Title Act to establish their flowage easement. The district court concluded that the suit was not filed within the twelve-year statute of limitations of the Quiet Title Act because the claim accrued no later than the filing of the February 1996 brief. It dismissed for lack of subject matter jurisdiction. WVIC appeals.

In their opinion, Chief Judge Easterbrook and Judges Sykes and Van Bokkelen affirmed, as modified. The Court noted that a claim accrues, for purposes of the Quiet Title Act, when a person knows or reasonably should know that the United States maintains an adverse claim to property. Although the Court recognized that there was no evidence that the Forest Service ever flatly forbade the flooding of its lands, it agreed that its refusal to concede the issue in the Commission briefing was enough to lead a reasonable person to conclude there was a potential dispute. That knowledge is enough to trigger the period of limitations. The Court did take issue with the district court's characterization of the issue as jurisdictional. Subject matter jurisdiction is granted by federal law -- statutes of limitations do not detract from a federal court’s authority to decide the issues. The Court affirmed the judgment as modified to a dismissal with prejudice.

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NATIONAL RIFLE ASSOCIATION OF AMERICA v. CITY OF CHICAGO (June 2, 2009)
 

The City of Chicago and the Village of Oak Park, Illinois both ban the possession of most handguns. The Supreme Court decided District of Columbia v. Heller in 2008, holding that the Second Amendment prohibited the District of Columbia from banning the possession of handguns for self protection. The National Rifle Association then sued the municipalities. The district court dismissed the suits against Chicago and Oak Park because Heller dealt with the authority of the District of Columbia. In other, older cases the Supreme Court has refused to apply the Second Amendment to the states. The NRA appeals.

In their opinion, Chief Judge Easterbrook and Judges Bauer and Posner affirmed. The Court conceded that the Supreme Court, in Cruikshank, Presser and Miller, was presented with arguments based on the privileges and immunities clause. The NRA argues that the Second Amendment should be applied to the states under the "selective incorporation" approach that was not argued in those cases. The Court rejected that argument, stating that it is bound to follow the Supreme Court precedent if it has "direct application" to the case, even if a different argument is presented and even if the original reasoning has been brought into question over time. The Second Amendment precedent does have direct application as is evident from the Supreme Court's footnote 23 in Heller itself. There, the Supreme Court specifically commented that the continuing vitality of that precedent was not before it. The Court concluded that it is up to the Supreme Court to revisit the issue, even if the current legal theory is not the one addressed by the precedent. The Court added its own view that it is not convinced, as some others are, that the Supreme Court will change its approach to the Second Amendment when afforded the opportunity.

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UNITED AIRLINES, INC. v. REGIONAL AIRPORTS IMPROVEMENT CORPORATION (May 5, 2009)

When United Airlines reorganized in bankruptcy, several issues remained unresolved. One of those issues involved $60 million of secured loans to United for terminal improvements at Los Angeles International Airport. United is under an obligation to pay to the lenders the full value of the secured asset, up to the $60 million. The bankruptcy court used a discounted-cash-flow analysis to value the asset, mainly because there was little evidence in the record on the market value of improved airport terminal space. The court's analysis resulted in a value of approximately $35 million. The lenders appeal.

In their opinion, Chief Judge Easterbrook and Judges Bauer and Manion reversed and remanded. The Court addressed two aspects of the court's analysis -- the appropriate annual rental rate and the appropriate discount rate. With respect to the rental rate, the Court rejected the court's use of a $17 per square foot rental rate. The Court noted that the evidence of the $17 rate represented unimproved airport terminal space. The security for the $60 million loan, however, is improved airport terminal space. There is evidence in the record that improved space at Los Angeles International Airport is rented for as much as $63 a foot. The Court recognized that the United space may not be worth as much as $63 because of several factors that distinguish it from the actual space rented. The Court noted that any rental revenue in excess of $30 would result in a full repayment of the $60 million loan. The Court concluded that the space could be leased for at least $30 a foot. With respect to the discount rate, the Court also took issue with the bankruptcy court’s approach. The court simply averaged the rate suggested by the lenders and the rate suggested by United. Relying on the fact that Los Angeles International Airport is currently operating at full capacity and can itself raise money at 8%, the Court concluded that the discount rate should not exceed 8%. The reduced discount rate also reduced the rental amount at which the lenders would fully recover the amount of their loans to $23 a foot. The Court concluded that the lenders were entitled to that full recovery.

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WESTFIELD INSURANCE COMPANY V. SHEEHAN CONSTRUCTION COMPANY (APRIL 29, 2009)

Several home owners in the same subdivision began to notice water damage in their new homes. Litigation ensued against the general contractor, Sheehan Construction Co. Although the problem was traced to one of Sheehan's subcontractors, Sheehan settled the litigation for nearly $3 million. Sheehan is ensured by Westfield Insurance Co. under a general liability policy. Sheehan brought an action against Westfield for indemnity. The district court granted judgment to Westfield. Sheehan appeals.

In their opinion, Chief Judge Easterbrook and Judges Wood and Williams affirmed. Westfield's policy excluded damage to "your work” if it was included in the "products-completed operations hazard." "Your work" is defined in the policy to include work performed by Sheehan or on its behalf. Although the Court recognized that the standard form policy was changed in 1986 to exclude a subcontractor’s work from the "your work" exclusion, it noted that Sheehan's policy did not contain the newer language. With respect to the "products-completed operations hazard" requirement, the Court also looked to the policy definition and concluded that the term was designed so that it covered accidents that occurred during construction but did not cover poor workmanship in a completed house. The Court concluded that the "your work" exclusion directly addressed the homeowners’ harm at issue and resulted in non-coverage.

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SWANSON v. BANK OF AMERICA (April 24, 2009)

The Court denied rehearing in a case originally decided on March 19 and reported here. The Ninth Circuit released an opinion at odds with the Court's on March 16 (and therefore not considered or discussed in the March 19 opinion), Nevertheless, the Court stuck with its analysis and remarked that the Ninth Circuit panel was at odds with an earlier, nonprecedential opinion of the same court.

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IN RE: KUEHN (April 16, 2009)

Stephanie Kuehn completed all the coursework necessary for a master's degree at Cardinal Stritch University. She did not, however complete her obligation with respect to tuition. When the university awarded her a degree, she still owed $6,000 in tuition. When she requested a transcript in order to qualify for a salary increase, the university refused. Kuehn filed for bankruptcy. The university continued to refuse to provide her a transcript, both while the bankruptcy case was pending and even after the discharge order. The bankruptcy court ordered the university to provide a transcript and pay damages and attorneys fees. The district court affirmed. The university appeals.

In their opinion, Chief Judge Easterbrook and Judges Ripple and Wood affirmed. The Court recited the Bankruptcy Code provisions that prohibit a creditor from taking "any act to collect" a claim during the bankruptcy proceeding or after a claim has been discharged. The Court determined that whether the university was acting to collect a debt depended on whether Kuehn had a right, or property interest, in obtaining a transcript. Since the Wisconsin Supreme Court has never addressed the issue, The Court was forced to predict what the court would do. The Court concluded that the Wisconsin Supreme Court would hold that students are joint owners of the data reflecting their grades. Relying on the Wisconsin Supreme Court’s reasoning in Hirsch as well as established university custom, the Court concluded that a right in one’s grades would be meaningless without a right to a transcript. The university’s refusal to provide the transcript was therefore an act to collect a debt and violated the automatic stay and the discharge injunction.  

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UNITED STATES OF AMERICA v. FLETCHER (April 10 , 2009)

Cap Gemini purchased a consulting business from Ernst & Young in 2000. The Ernst & Young partners received shares in the new business in exchange for their partnership shares. The partners preferred to treat the receipt of shares as income in 2000. The company wanted to put some restrictions on the shares to ensure that the partners would remain with the new organization. They all agreed on a methodology that they thought would serve both purposes. The shares were all transferred and fully taxable in 2000 but were restricted for almost five years. One of the partners, Cynthia Fletcher, received shares with a market value of approximately $2.5 million. She reported this as ordinary income in 2000. Fletcher left the organization and collected the shares remaining in her account. Because the market price of the stock plummeted after the acquisition, it turns out that the partners would have been better off not taking the income in the first year. Fletcher filed an amended tax return for 2000 and took the position that her only income in 2000 was the $650,000 that was actually distributed from her account. Although the Internal Revenue Service processed the refund, the United States filed suit to recover. The district court granted summary judgment to the United States and ordered Fletcher to refund the refund. Fletcher appeals.

In their opinion, Chief Judge Easterbrook and Judges Ripple and Tinder affirmed. The Court first made it clear that Fletcher was not attempting to change the form of the transaction. Instead, she argued that the actual terms of the original transaction had tax consequences that are different than originally reported. The Court disagreed with the substance of her argument, however. Although the stock was restricted, the partners bore the economic risk and were the beneficial owners as of 2000. Even though the partners did not have cash in hand, the economic value of the stock was within their control. Therefore, the income was constructively received in the year 2000 and properly reported as such originally.

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CITY OF JOLIET, ILLINOIS v. NEW WEST, L.P. (April 9, 2009)

The City of Joliet filed eminent domain proceedings to acquire the Evergreen Terrace Apartments. New West, the owner of the apartment complex, filed an action under 42 U.S.C. § 1983. New West sought an injunction and damages, alleging that federal law preempted Joliet's attempts to condemn the property. The district court originally put the condemnation on hold and dismissed the § 1983 action. On the first appeal, the Court reversed and directed the district court to resolve the condemnation proceedings. On remand, HUD intervened and contended that the condemnation was precluded by two different federal statutes. The district court rejected HUD’s argument and certified the case for interlocutory appeal. New West and HUD appeal.

In their opinion, Chief Judge Easterbrook and Judges Williams and Sykes affirmed. The court reviewed the three federal statutes in play. Section 8 of the Housing Act of 1937 provides federal rent subsidies. Section 221 of the National Housing Act creates a federal government mortgage insurance program. Finally, the Multifamily Assisted Housing Reform and Affordability Act of 1997 provides a mechanism for HUD to renegotiate mortgages under section 221. Owners who renegotiate under the 1997 Act must promise to maintain availability for low income tenants for 30 years. Evergreen Terrace participated in all three programs. The Court held in the first appeal that Section 8 does not preempt any eminent domain proceeding. HUD argues that a condemnation would interfere with the purposes of Section 221 and the 1997 Act, both of which are designed to preserve low income housing stock. The Court noted that the Supreme Court recently warned against using preemption inferred from a clash of goals and objectives. Only if an agency has issued a preemptive regulation with the force of law should that power be used expansively. The Court noted that no such HUD regulation exists with respect to eminent domain powers. In fact, the Court did not even agree that the clash of goals even existed. All three federal statutes are voluntary. Even when used, private owners can withdraw from the programs at any time. Without such a regulation, the Court concluded that the eminent domain should go forward.

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SANDOVAL v. CITY OF CHICAGO (March 30, 2009)

Juan Sandoval and Sidney Pennix were Chicago police officers. They were also in the military reserve and on active duty in El Salvador and Iraq, respectively. When Chicago scheduled the examination for candidates for sergeant, Sandoval and Pennix requested an opportunity sit for the test. Chicago accommodated their requests by offering them the opportunity to take the test in, respectively, San Salvador and Frankfurt. They both took the test, passed and were placed on the eligibility list. They then filed suit pursuant to the Uniformed Services Employment and Reemployment Rights Act (“USERRA”). They both allege that they should have been offered locations closer to where they were stationed and also seek compensation for the transportation cost to the testing locations. The district court granted summary judgment to the City of Chicago. Sandoval and Pennix appeal.

In their opinion, Chief Judge Easterbrook and Judges Kanne and Evans affirmed. The Court focused on the language of USERRA. It provides that a person serving in the military may not be denied a benefit of employment because of that service. In other words, said the Court, the Act requires an employer to treat persons on active duty the same as other employees. Here, Sandoval and Pennix seek an accommodation - not equal treatment. Chicago treated Sandoval and Pennix the same as it would have treated any other employee who was on leave for a non-military reason. The City did not violate USERRA.

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HEITMANN v. CITY OF CHICAGO (March 25, 2009)

The City of Chicago and the police officers' union have agreed to a procedure for police officers to take compensatory time off in lieu of overtime pay. Under the Fair Labor Standards Act, a public employee who has accrued compensatory time off and has requested to use it is permitted to "use such time within a reasonable period after making the request if the use of the compensatory time does not unduly disrupt the operations of the public agency." Several officers with accumulated compensatory time off brought a suit against the City. They contend that they should be allowed to take a particular days of their own choosing unless their absence at that time would result in a shortage of available officers. Conversely, the City contends that it is the department's choice. In their view, an officer may submit a generic request for compensatory time off. The City then decides what days, if any, to allow. The magistrate judge below concluded that the City had no set procedure. The lack of procedure failed to ensure the rights of the officers. He issued a detailed injunction specifying the process the City must use in response to future applications. The City appeals.

In their opinion, Chief Judge Easterbrook and Judges Rovner and Williams vacated the injunction and remanded. As an initial matter, the Court noted that the Fair Labor Standards Act only allows injunctions in suits by the Secretary of Labor and only when the remedy at law is inadequate. Here, any failure of the City to honor the officers' time off rights is compensable by money. The unavailability of an injunction, however, does not mean that the officers are not entitled to a remedy. The Court concluded that the statutory language was not clear and included such open-ended words as "reasonable" and "undue." But the Court looked to an agency regulation that does address the issue. The agency's approach is not unreasonable and is thus entitled to deference under Chevron. The regulation defines "reasonable period" and "unduly disrupt" - and it does so in the same way that the officers do. The Court vacated the injunction and remanded for an award of non-injunctive relief to be determined by the magistrate judge.

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CONTILLI v. LOCAL 705 INTERNATIONAL BROTHERHOOD OF TEAMSTERS PENSION FUND (March 23, 2009)

Vito Contilli reached retirement age in 1995 but continued to work for two years. He retired in October of 1997 and applied for his retirement benefits in January of 1998. Applying their rule that a retiree had to apply for benefits, the union Pension Fund began paying his monthly pension payments in February. The Fund neither paid Contilli for the interim months nor increased his monthly benefit to take those months into account. Contilli brought an action, claiming that the approach violated ERISA’s non-forfeiture rule. The district court found in favor of the Fund. Contilli appeals.

In their opinion, Chief Judge Easterbrook and Judges Ripple and Rovner vacated and remanded. The Court agreed that the retiree application requirement was not a problem – nor was a deferral of retirement without any benefit payment while the retiree is still working. Section 1053(a) requires, however, that any delay in benefits once a retirement is effective must be made up with payments for the missing months or with an actuarial adjustment to payments in future months.

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SWANSON v. BANK OF AMERICA (March 19, 2009)

Bank of America issued a credit card to Laura Swanson. Pursuant to the credit agreement, Bank of America could increase the interest rate if her balance exceeded her credit limit twice in any 12-month period. The higher interest rate was to take effect at the beginning of the billing cycle to which it applied. Swanson exceeded her credit limit at the close of the August 2007 and November 2007 cycles. Bank of America applied the higher interest rate effective at the beginning of the November cycle. Swanson brought suit, alleging that a Truth in Lending Act regulation precludes the imposition of a higher interest rate in that circumstance. The district court granted judgment to the bank. Swanson appeals.

In their opinion, Chief Judge Easterbrook and Judges Kanne and Evans affirmed. The Court first analyzed the regulation at issue. Although both the bank and Swanson argued that the regulations supported its position, the Court concluded that the regulation did not squarely address the issue at hand. It therefore consulted the commentary. The bank relies on the comment that states that no notice of the change is required if the specific change is set forth in the initial agreement. The comment gives as examples an increased rate after a lower introductory rate and an increased rate when a customer fails to keep a promised minimum account balance. Swanson, on the other hand, relies on the comment that notice must be given if the contract allows the creditor to increase the rate at its discretion. The Court noted that one appellate court and at least six trial courts had considered the issue and had all agreed with the bank's position. Finding these decisions "sensible," the Court also agreed with the bank. It pointed out that the contract between the bank and Swanson allowed the practice. An ambiguous regulation with an ambiguous commentary was not enough to override the specific contract term. Finally, the Court observed that the Federal Reserve had promulgated a new regulation that would prohibit the vary practice at issue. The new regulation is not effective until July of 2010 -- Swanson must live with the law as it stands today.

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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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HAHN v. TRIUMPH PARTNERSHIPS LLC (March 4, 2009)

Triumph Partnerships acquired some overdue credit card debt from a bank, including a debt owed by Marylou Hahn. Triumph sent a letter to Hahn, stating that she had an "amount due" of $1051.91 and that she had "interest due" of $82.64. Hahn filed suit under the Fair Debt Collection Practices Act. Hahn alleged, and Triumph conceded, that the $82.64 represented the interest that had accrued only since Triumph acquired the debt. The $1051.91 included interest that had accrued prior to Triumph's acquisition of the debt. Hahn alleged, therefore, that the statement was a false representation of the debt and prohibited by the Fair Debt Collection Practices Act. The District Court granted summary judgment to Triumph. Hahn appeals.

In their opinion, Chief Judge Easterbrook and Judges Flaum and Manion affirmed. The Court concluded that the letter contained no false representation. It held that an “amount” that is due can include principle, interest and other components. The Court specifically pointed out that the letter did not assert that the $82.64 was the totality of the interest that had accrued on the debt since its inception. Since the statement was not false, the Court held that it does not violate the Fair Debt Collection Practices Act. Alternatively, the court affirmed on the ground that the statement was immaterial. The Court held that materiality is an element in a §1692e action. Since the letter accurately reported the debt and accurately computed the debt, whether it segregated the post-acquisition interest was immaterial. 

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SECURITIES AND EXCHANGE COMM. v. KOENIG (February 26, 2009)

James Koenig was the Chief Financial Officer of Waste Management, Inc. In the early 1990s, after years of acceptable growth, the company’s financial performance began to suffer. Koenig devised several accounting strategies that made the company appear more profitable than it was. Koenig resigned in January of 1997. In October of 1997, the company disclosed in a press release that its financial statements were inaccurate and unreliable. The SEC filed a complaint against Koenig in March of 2002. At trial, the jury found that his accounting strategies were fraudulent. The court imposed a $2.1 million civil penalty, ordered the disgorgement of almost $1 million in bonuses, imposed $1.2 million in pretax interest, and enjoined Koenig from serving as a director of a public company. Koenig appeals.

In their opinion, Chief Judge Easterbrook and Judges Manion and Wood affirmed in part, reversed in part and remanded. The Court first addressed Koenig's statute of limitations argument. Although recognizing that the statute is five years and that more than five years passed between Koenig's resignation and the filing of the complaint, the Court rejected Koenig's argument. Instead, the Court noted that there has long been a special rule for statutes of limitations in fraud cases. A victim of fraud has the full statutory time to file, beginning from the date the wrong came to light or would have with due diligence. Since Koenig's accounting misdeeds were not public until the company issued its press release and Koenig never claimed that the SEC could have known earlier, the complaint was timely. The Court then addressed several trial management objections. It concluded that the lower court did not err in allowing the SEC to put on evidence of the motives of the company's new management. Although originally denying the SEC's motion in limine, the lower court admitted motive evidence after Koenig "opened the door." The court had warned Koenig that it would allow the evidence if Koenig made motive at issue. Second, the Court approved of the trial court’s practice of allowing the jurors to submit questions for witnesses and found no abuse of discretion. Third, the Court found no violation of the discovery or notice rules in the SEC's calling as its witness Koenig’s own expert, whom he did not call. Koenig also complains that the $2.1 million penalty was greater than allowed by the statute. The statute limits a penalty to no greater than the greater of $100,000 or the defendant’s pecuniary gain. The court included pre-judgment interest in its calculation of pecuniary gain. The Court approved of this formula. It held that pecuniary gain is the amount the defendant obtained as a result of his fraudulent accounting practices plus any return he could have made by investing that sum, until its disgorgement. The Court did disagree with the district court's computation of Koenig's bonuses. The company awards bonuses based on increases in the company's earnings over the prior year. Based upon the testimony of the SEC's expert, the Court concluded that the company’s corrected earnings increased from 1991 - 1992. The Court remanded for a recalculation of Koenig’s bonuses and, if necessary, a recalculation of the penalties.

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SHALES v. GENERAL CHAUFFEURS, SALES DRIVERS AND HELPERS LOCAL UNION NO. 330 (February 27, 2009)

The losers is in a contested union election sued the winners. The defendants prevailed on all counts. As discovery proceeded during the case, it became apparent that plaintiffs could not support some of their claims. Defendants demanded that some claims be withdrawn, to no avail. Defendants asked for sanctions under 28 U.S.C. §1927 and FRCP 11. The court ordered plaintiffs’ attorney, James Banks, to pay $80,000 in sanctions. Banks appeals.

In their opinion, Chief Judge Easterbrook and Judges Rovner and Williams affirmed. The Court first addressed the defendant’s argument that the appeal was not timely. Defendants argued that Bank's motion to reconsider should not have suspended the time for appeal because it lacked merit. The Court declined to adopt such a rule. The actual rule is that the existence of the motion, and not it's merit, is what suspends the time for appeal. The Court then addressed Bank's principal argument -- that the district court should have taken into account his ability to pay in determining a sanction. The Court agreed that Rule 11 requires a court to take into account a sanctioned party’s resources. However, the Court noted that the lower court also imposed sanctions under § 1927, with a finding of bad faith. The Court concluded that tort damage principles apply to a determination of sanctions under § 1927. As such, the measure of damages depends on the victim's loss, not a lawyer's ability to pay.

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KURZ v. FIDELITY MANAGEMENT & RESEARCH CO. (February 23, 2009)

Kurz and Heinzl both invested in portfolios managed by Fidelity Management & Research Co. (“Fidelity”). Apparently, some Fidelity employees placed trades with Jeffries & Co. in return for kickbacks from Jeffries. The SEC initiated a proceeding under the Investment Company Act and the Investment Advisors Act. Fidelity and the SEC entered into a consent decree. Kurz and Heinzl thereafter filed a class-action suit in state court, alleging that the employees’ conduct resulted in a breach of contract by Fidelity. Fidelity removed to federal court on the basis that their failure to disclose the employees’ misconduct was a securities law issue. The district court denied Kurz’ motion to remand and entered judgment for Fidelity. Kurz appeals.

In their opinion, Chief Judge Easterbrook and Judges Sykes and Kendall affirmed. The Court referred to the Securities Litigation Uniform Standards Act of 1998 (the “Act”). The Act generally bars class actions based on state law which allege an omission of a material fact “in connection with the purchase or sale of a covered security. The Court noted that there are exceptions to the bar (like a derivative action) but Kurz did not invoke any exception. Instead, his position was that the claim was a contract claim -- not one for a misrepresentation or omission. The Court agreed that a true action for breach of contract would not be barred by the Act but concluded that Kurz could not maintain an action for breach of contract. The principal reason for his inability to do so was the complete absence of any promise made by Fidelity to Kurz.

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 NORFOLK SOUTHERN v. BOX (February 11, 2009)

The State of Illinois requires railroads to install walkways alongside railroad tracks in any switching yard built or renovated after February 2003. Norfolk Southern challenged the requirement in the district court, contending that it is preempted by federal law. The district court found for Illinois, first holding that federal law does not cover the subject matter and then, after a bench trial, deciding that the regulation does not conflict with a federal objective. Norfolk Southern appeals. 

In their opinion, Chief Judge Easterbrook and Judges Bauer and Sykes affirmed. The Court first noted a split in both state and federal courts over whether state walkway rules are compatible with federal law. Courts have upheld rules in California, Colorado, and Maryland. Texas and Indiana rules have been struck down as preempted by federal law. The Court3 looked to the federal law. Federal law requires that regulations relating to railway safety be as nationally uniform as practicable – but it allows a state safety regulation to remain in effect until a federal regulation covers the subject matter of the state regulation. There are no federal regulations dealing with railway walkways in particular. Norfolk Southern contends that the comprehensive federal regulation of roadbed design and construction "covers" walkways because they are so integrally related. The Court, noting that the Supreme Court has adopted a more narrow reading of "cover" than Norfolk Southern, rejected that notion. In fact, the Court referred to a still-standing 1977 federal decision to leave walkway regulation to the states. The Court moved on to the question whether the Illinois scheme conflicts with federal objectives. Illinois grants broad discretion over the design and construction of the walkways. Norfolk Southern presented expert testimony that the only viable walkway construction material was gravel but that even gravel would cause drainage problems. The district court discounted the latter conclusion for two reasons. First, photographs in the record of Norfolk Southern switching yards showed that the shallower slope between tracks that the expert said would cause drainage problems already existed. Yet, the expert could not describe the drainage problems or show evidence of yards that had the V-shaped slope he testified was necessary to prevent drainage problems. Second, in response to the court’s questions, the expert was unable to testify regarding the history of compliance with walkway regulations in other states that have had the requirement for years. If compliance with the regulation led to all sorts of drainage or other problems, the records in those states surely would show that. The Court did not find the district court’s finding clearly erroneous on that issue. Finally, the Court refused to address Norfolk Southern’s complaints that specific local situations might make compliance impossible, advising the railroad to work details out with the Commission.

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EEOC v. WATKINS MOTOR LINES (January 23, 2009)

Watkins Motor Lines (“Watkins”) experienced three episodes of employee-on-employee murder or attempted murder. It decided it would no longer employ persons who had been convicted of a crime of violence. A few months after Watkins adopted its new policy, Lyndon Jackson applied for a job. Jackson had a criminal record. Watkins declined to hire him for that reason. Jackson filed a complaint with the EEOC. The EEOC initiated an investigation. It sought to determine whether the policy had a disparate impact on minorities and, if so, whether it was a business necessity. In April 2005, the EEOC issued a subpoena to Watkins. Watkins and Jackson reached a settlement in January 2006, contingent on the EEOC abandoning the investigation. Jackson withdrew his charge – but the EEOC pressed on. It sought to enforce the subpoena in the district court. The court dismissed the EEOC’s action for lack of subject-matter jurisdiction. The court concluded that no valid charge was pending because the EEOC should have allowed Jackson to settle and withdraw his charge. The EEOC appeals.

In their opinion, Chief Judge Easterbrook and Judges Evans and Tinder reversed and remanded. Once an EEOC charge is filed, the agency determines the direction of the investigation. A charge can be withdrawn only with the consent of the agency and only when it will not defeat the purposes of Title VII. Here, the Court noted that a valid charge was filed and that the agency sought to continue the investigation even after Jackson wanted to withdraw. The agency did not commit error when it decided to continue the investigation of Watkins’ employment policy for the benefit of other applicants. The Court analogized the situation to those in which a representative class plaintiff settles with the defendants or in which settling parties want to vacate earlier judicial decisions in their case. The Supreme Court has rejected those arguments in Deposit Guaranty National Bank v. Roper, United States Parole Commission v. Geraghty, and U.S. Bancorp Mortgage Co. v. Bonner Mall Partnership. Watkins’ argument that forcing the EEOC to accept Jackson’s withdrawal will facilitate his settlement ignores the interests of the unrepresented persons. Watkins and Jackson are free to settle – and the EEOC is free to continue its investigation.

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KATZ v. GERARDI (January 5, 2009)

Jack Katz brought this action on behalf of a class of persons who contributed real property to a real estate investment trust (“REIT”). In exchange, they received an interest in the REIT. The REIT merged into a new entity in 2007. The interest-holders were offered either cash or an interest in the new entity. Katz took the cash but filed suit in state court, alleging that the offer violated the terms of their original agreement with the REIT. He based the action on the Securities Act of 1933 ( “’33 Act”). Defendants removed the suit to federal court under the Class Action Fairness Act of 2005 (“CAFA”). The district court concluded that removal was not allowed by the ’33 Act. The defendants petition for appeal.

In their opinion, Chief Judge Easterbrook and Judges Kanne and Sykes granted the petition and vacated and remanded the decision of the district court. The Court first addressed whether Katz’ action was even one under the ’33 Act. The ’33 Act applies only to purchasers of securities – Katz and the class members are sellers of securities. The Court was inclined to believe that Katz was styling his claim as one under the ’33 Act in order to prevent removal. The district court had acknowledged the same issue. It decided that the weakness of the pleading went to the merits, not to whether it was removable. The Court recognized the difficulty in distinguishing between a claim designed to defeat federal jurisdiction and one, though ultimately unsuccessful, is properly pleaded. Ultimately, the Court decided to accept the pleading as one under the ’33 Act and address the conflict between the laws.

The ’33 Act provides that actions brought under the statute in state court are not removable except in particular circumstances. CAFA allows for removal of class actions if certain criteria are met – which admittedly are met here. The Court noted the canons of construction that apply when statutes are in conflict – an older statute yields to a newer and a less specific yields to a more specific. But the Court concluded that it did not have to apply those canons. The statutes, in fact, are not incompatible. The very language of CAFA provides the answer. The broad removal authority granted by CAFA is modified by the almost identical lists of exceptions in §1332(d)(9) and §1453(d). The Court concluded that class actions brought under the ‘33 Act are removable unless one of the §1453(d) exceptions applies. Katz relied on one of the exceptions – claims that relate to rights and duties relating to any security. The Court noted an inconsistency between Katz’ attempts to fit his claim into the exception while still relying on the ‘33 Act. Nevertheless, the Court decided the best course was to remand to determine whether the claim fit within the exception.

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IDRIS v. CITY OF CHICAGO (January 5, 2009)

The City of Chicago (the City”) has installed cameras at intersections since 2003. They are used to identify drivers who fail to obey red lights. The ordinance makes the owner (or, in the case of a leased vehicle, the lessee) of the vehicle liable for the fine – regardless of who was driving at the time. A group of car owners brought suit. Each had been fined for a traffic violation. In each case, however, someone other than the car’s owner was driving the car at the time of the violation. The plaintiffs allege that the ordinance violates due process and equal protection. The court granted summary judgment for the City. Plaintiffs appeal.

In their opinion, Chief Judge Easterbrook and Judges Ripple and Rovner affirmed. The Court quickly disposed of plaintiffs’ substantive due process argument. It noted the absence of a fundamental liberty interest – a prerequisite for substantive due process. The Court then considered the enforcement system under the rational-basis doctrine. Again, it seemed to have little difficulty in finding the ordinance rational. The owner-liable system reduces the cost of enforcing the law and improves compliance with the law. The facts that it raises revenue and adopts a system different from the state system do not make it irrational. The distinction between owners and lessors is not discriminatory – it is, in fact, the rational approach. Finally, the Court rejected the plaintiffs’ procedural due process arguments. Defenses and objections must be made at a hearing and reviewed in state court before they can be the subject of a federal court proceeding.

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DENG v. SEARS (January 5, 2009)

Yuming Deng was a software developer at Sears Roebuck and Co. (“Sears”). He compiled data that Sears used in making credit decisions. Unfortunately, Deng took serious issue with a 2001 performance review and erupted. Deng stopped coming to work, claiming a disability. He continued to show up at Sears occasionally, sometimes causing a disruption. On his last visit, he deleted from Sears computers much data and the software models Sears used in analyzing the data. After an internal investigation concluded that Deng destroyed the data in retaliation for the performance review, Sears reported his conduct to the local police. The police concluded that Deng had violated Illinois law and sought him out for his version of the story. Deng, however, had left the state. Charges against him were filed in his absence. A year and a half later, Deng was arrested and brought back to Illinois. When a witness did not appear at his preliminary hearing and the judge refused a request for a continuance, the prosecutor filed a nolle prosequi. Deng then brought this action for malicious prosecution against Sears. The court granted summary judgment to Sears, holding that the nolle prosequi was not a “favorable” outcome for Deng. Deng appeals.

In their opinion, Chief Judge Easterbrook and Judges Posner and Evans affirmed. The relevant elements of the tort of malicious prosecution in Illinois are a) a favorable outcome in the criminal case, b) an absence of probable cause, and c) malice. The Court took note of the problems presented by the first element – favorable outcome – which was relied on by the district court. The Illinois Supreme Court has held that a nolle prosequi is not a favorable outcome if the case is abandoned for reasons not related to the innocence of the accused. But whether the failure of a witness to appear is a favorable outcome is an open question in Illinois. The Court questioned the merits of Illinois’ approach. Here, for example, the prosecutor was forced to attend and testify at a deposition - which the Court viewed as an intrusion on the prosecutorial function. Nevertheless, the Court respected Illinois’ right to its choice. The Court solved its dilemma by sidestepping the favorable outcome element of the tort and focusing on the absence of probable cause. Although Deng tried to explain away his conduct, the Court had no difficulty in finding probable cause.

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KAY V. BOARD OF EDUCATION (October 27, 2008)

Gail Kay taught in the Chicago public school system. After she retired in 1994, she brought a § 1983 action against the Board of Education (“Board”). She alleged that the Board penalized her on account of her speech. The parties settled the litigation in 1996 and her case was dismissed. In the settlement, the Board offered to rehire Kay into an available future position. In 1997, she was offered an opportunity to return to her former school. She taught for seven more years – yet she never received another paycheck. After retiring again in 2004, she brought suit against the Board in federal court to enforce the 1996 settlement, alleging that her seven years of teaching without pay was a breach of the settlement. The district court dismissed the case on its own accord for “lack of venue” because Kay was governed by a collective bargaining agreement that required arbitration. Kay appeals.

In their opinion, Chief Judge Easterbrook and Judges Sykes and Tinder vacated the judgment of the court and remanded with instructions to dismiss for lack of subject matter jurisdiction. First, the Court listed several reasons why the court erred in dismissing the suit because of the collective bargaining agreement’s arbitration clause: a) only the union and employer can invoke the clause, b) a settlement of a dispute is not arbitrable as a claim arising under the agreement, c) a collective bargaining agreement cannot require the arbitration of civil rights claims, and d) the Board cannot compel arbitration with a volunteer, which they claim is Kay’s status. The panel also criticized the court below for acting independently, without benefit of the views of the parties.

Although the Court held that the lower court erred in dismissing the complaint, it identified (and asked for supplemental briefing on) a different problem. The Supreme Court’s decision in Kokkonen v. Guardian Life Ins. Co. makes clear that the vehicle for enforcement of a settlement of a federal case is a contract claim, which cannot be brought in federal court unless it qualifies independently under diversity principles. Apart from a settlement, a state’s wage-payment statute is the proper vehicle for a claim for unpaid wages. Kay conceded that she has no federal claim to enforce the settlement or for unpaid wages. She asserted, however, a claim that the Board’s failure to abide by the settlement is further retaliation for her assertion of constitutional rights. The only assertion of rights she maintains, however, are those that pre-dated the settlement. The Court noted that the Board’s failure to pay cannot be deemed a revived retaliation claim under Kokkonen. Finally, the panel did consider whether the Kokkonen rule applied in the context of a state actor defendant. It held that the Constitution does not require a state actor to keep its promise; it only requires some process before depriving a person of property. Kay’s opportunity to litigate her case in state court is process enough.  

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