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

GULLEY v. MARKOFF & KRASNY (December 22, 2011)

In 2008, the City of Chicago imposed fines on Victor Gulley for Municipal Code violations. Gulley did not pay the fines because he no longer owned the real property associated with the violations. The City retained the law firm of Markoff & Krasny to collect the fines. Gulley brought suit against Markoff & Krasny pursuant to the Fair Debt Collection Practices Act alleging a number of specific statutory violations. The law firm moved to dismiss the complaint on the ground that the fines were not "debts" under the Act. Judge Gettleman (N.D. Ill.) agreed. Gully appeals.

In their opinion, Seventh Circuit Judges Flaum, Kanne, and Sykes affirmed. In affirming, the Court relied on: a) the language of the Act, which states that a "debt" must arise out of a transaction in which the subject of the transaction is "primarily for personal, family, or household purposes" b) the FTC (which is entitled not to Chevron deference but to respectful consideration in this context), which specifically excludes fines from the definition of "debts," and c) the consistent findings of district courts (no Court of Appeals has addressed the issue in a written opinion) excluding fines from FDCPA coverage.

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UNITED STATES v. SUAREZ (December 16, 2011)

José Suarez, a Mexican native, became a permanent resident of the United States in 1978. Over the course of the next 20 years, he was arrested on a few occasions but the charges were always dismissed. In mid-1996, Suarez was engaged in marijuana distribution but was not immediately charged. In December of that year, he applied for naturalization. He disclosed his earlier charges but not the marijuana distribution activity just months earlier. He eventually became a United States citizen in May of 1998. A few months later, he was charged and convicted for marijuana trafficking. He was sentenced to 87 months in prison. A few years after his release, the United States sought to revoke his naturalization on the grounds that he lacked the good moral character required for citizenship and had illegally procured his naturalization. Judge Dow (N.D. Ill.) granted summary judgment to the United States. Suarez appeals.

In their opinion, Seventh Circuit Judges Kanne, Rovner, and Sykes affirmed. Good moral character is required for citizenship. The relevant statute lists several qualities that would disqualify a person under the moral character requirement. One of those is a conviction for a controlled substance offense if the offense was committed during the five-year period prior to the application filing. The Court concluded that the conviction for the offense need not occur prior to the application. Suarez’s citizenship was therefore properly revoked. However, because the Government did not share the Court's view on the conviction’s timing and argued, instead, that the statute’s catchall provision applied, the Court addressed it. Federal regulations, which here are entitled to Chevron deference, provide that an applicant lacks good moral character if he violates a controlled substance law during the statutory period. The regulation does not speak to a conviction. Therefore, the Court concluded that Suarez was ineligible for citizenship under the catchall provision as well. Finally, the Court provided a third route under which Suarez would be barred from citizenship. Another federal regulation provides that an applicant lacks good moral character if, absent extenuating circumstances, he committed unlawful acts and was later convicted. The Court noted its concurrence with the Eleventh Circuit that a conviction during the statutory period was not required. Since Suarez raised no issues of material fact guarding the "extenuating circumstances" exception, he is ineligible for citizenship and his citizenship was properly revoked.

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COMMITTEE OF CONCERNED MIDWEST FLIGHT ATTENDANTS FOR FAIR AND EQUITABLE SENIORITY INTEGRATION v. INTERNATIONAL BROTHERHOOD OF TEAMSTERS AIRLINE DIVISION (November 30, 2011)

In mid-2009, Midwest Airlines was losing money and in dire financial circumstances. In fact, it had only nine airplanes. Republic Airways Holding purchased Midwest's parent. Within a few months, Republic had given up Midwest’s planes and its federal certificate. It kept its gates and its takeoff and landing slots. It integrated the seniority lists for several kinds of employees but it furloughed Midwest's pilots and flight attendants. Although the flight attendants were eligible to be rehired, the Teamsters Union would assign them new-hire seniority status. Several flight attendants filed suit, contending that the Federal Aviation Act requires Republic to merge the flight attendants' seniority lists. Judge Randa (E.D. Wis.) granted summary judgment to the union. The flight attendants appeal.

In their opinion, Seventh Circuit Chief Judge Easterbrook and Judges Posner and Williams reversed and remanded. The Court turned to the language of the act. It noted that the Act requires seniority list integration when two "air carriers" are "involved" in a "covered transaction." Relying on the statutory language, the Court concluded that Midwest was an "air carrier" because they held a certificate, that Midwest was "involved" in the transaction even though it was its parent that was acquired, and that the transaction was a "covered transaction" because Republic acquired all of Midwest's stock and combined two air carriers into a single carrier. The Court noticed the absence in the Act of any reference to the bankruptcy or financial wherewithal of an air carrier. In fact, the Court added that the statute grew out of the acquisition of Trans World Airlines at the time of its bankruptcy. Congress clearly did not mean to exempt bankrupt air carriers from the Act’s requirements.

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PURCELL v. BANK OF AMERICA (October 3, 2011)

Kristine Purcell brought suit in state court against Bank of America under the Fair Credit Reporting Act and state law. She alleged that the bank reported to credit agencies that she was delinquent in her loan payments, when it knew she was not. The Bank removed the case to federal court and sought judgment as a matter of law on the FCRA claim. It argued that the Act did not provide a private damages claim for their alleged conduct. It also moved to dismiss the state claims with prejudice on preemption grounds. Judge Moody (N.D. Ind.) agreed with the Bank and dismissed the FCRA claim but concluded that the state law claims were not preempted. He dismissed them without prejudice. The Bank appeals.

In their opinion, Seventh Circuit Chief Judge Easterbrook and Judges Bauer and Sykes reversed and remanded. Section 1681t(a) of the Act provides that state law claims are not preempted except as provided in subsection (b). Subsection (b) states that no requirement or prohibition relating to furnishing information to credit agencies may be imposed "under the laws of any State." The district court concluded that "laws" means only statutes, not common law. The Court disagreed. As long ago as 1938, in Erie R. R. v. Tompkins, the Supreme Court held that the word "laws" in the Rules of Decision Act included all sources of law, including the common law. The Court also found support in the Dictionary Act and in Congressional drafting manuals. The Court rejected the district court's reliance on a perceived inconsistency within the Act if "laws" included all common law. In the Court's view, the subject sections were compatible and did not support the district court's conclusion. Therefore, the “laws” reference in FCRA includes the common law and the state law claims are preempted.

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GRACZYK v. WEST PUBLISHING COMPANY (September 28, 2011)

Congress passed the Driver's Privacy Protection Act in 1993 to limit the dissemination of sensitive information acquired by state departments of motor vehicles. In general, the Act prohibits the disclosure of personal information obtained in connection with a motor vehicle record, although it contains several exceptions. A class of Illinois licensed drivers brought suit against West Publishing Company, alleging that West acquires sensitive personal information from motor vehicle departments for the purpose of reselling it, all in violation of the Act. Judge Gettleman (N.D. Ill.) dismissed the complaint, concluding both of that the plaintiff class lacked standing and that the complaint failed to state a claim. The class appeals.

In their opinion, Seventh Circuit Judges Posner, Flaum, and Williams affirmed. The Court first addressed and rejected the district court's conclusion with respect to standing. The Act creates a private right of action for the improper disclosure of personal information. The plaintiffs have alleged that West's acquisition and use of the information violates the Act. If plaintiffs prevail, West could no longer obtain and sell that information. The plaintiffs have alleged injury in fact that would be redressed by a ruling in their favor. They therefore have standing. With respect to the merits, however, the Court agreed with the district court that the complaint failed to state a claim. Here, the class does not dispute that the ultimate recipients of the sensitive information (i.e., West's customers) have a permissible use under the Act. Furthermore, the class concedes that West can lawfully obtain sensitive information from motor vehicle departments, if that information is first requested by a West customer. The class' contention is that West cannot obtain the sensitive information in bulk, without a specific request, and later sell it for an authorized purpose. Although "authorized recipient," is not defined in the Act, the Court concluded that the class' interpretation was not consistent with Congressional intent. There is no meaningful distinction between obtaining information to respond to a specific request or storing information in bulk in order to respond more efficiently to later requests. The Court also noted that the Fifth Circuit agrees and that the Department of Justice has issued an unpublished letter approving the practice. The complaint does not state a cause of action and was properly dismissed.

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BURNS v. ORTHOTEK, INC. EMPLOYEES' PENSION PLAN AND TRUST (September 15, 2011)

Dr. Richard Burns conducted his northern Indiana orthodontics practice as Orthotek, Inc. Burns was the Plan administrator, the fiduciary, and the principal participant in the company’s pension plan. In early 2003, Burns signed a Plan document that named his sons as beneficiaries. His wife Cheryl signed a document consenting to that designation. Her signatures are dated the day after those of her husband's, however. When Dr. Burns died in mid-2004, Cheryl Burns filed a benefits claim. She claimed that she did not remember signing the form, that she did not understand the form, and that her signature was not witnessed. The Plan denied her claim. Cheryl Burns brought suit against the Plan pursuant to ERISA. Chief Judge Simon (N.D. Ind.) granted summary judgment to the Plan. Burns appeals.

In their opinion, Seventh Circuit Judges Posner, Flaum, and Sykes affirmed. Under ERISA, a plan participant may designate a beneficiary other than a surviving spouse but only if the spouse consents in writing and the consent is witnessed by a plan representative. The only issue on this appeal is whether Dr. Burns witnessed his wife's signature. The Court rejected the district court's conclusion that the consent was in "substantial compliance" with ERISA. The doctrine of substantial compliance comes into play only when ERISA is silent on a subject. Here, the statute explicitly requires a witnessed consent. But the statute does not necessarily require that the witness be physically present at the time of the spouse’s signature. Furthermore, the Court stated that the statute should not be interpreted to produce absurd results. Here, a) Dr. Burns was the only Plan representative, b) he signed the required forms, c) he must have given the forms to his wife, d) his wife signed the forms, and e) she must have given the forms back to him. Under these admittedly unusual circumstances, the Court concluded that the Plan was within its discretion to find that Dr. Burns witnessed his wife's signature.

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SENNE v. VILLAGE OF PALATINE (July 11, 2011)

The Court granted a petition for rehearing en banc on September 13, 2011 and vacated the following opinion.

Jason Senne left his car parked overnight in Palatine, Illinois. Unfortunately, he was parked illegally. When he returned to his car, he found that it had been ticketed. The ticket itself included his name, his address, his date of birth, his sex, his height, and his weight. It had been placed on the car approximately five hours before he discovered it. The ticket itself could also be used as an envelope if the recipient decided to pay the fine by mail. Instead of paying the $20 fine, Senne filed a class action under the Driver's Privacy Protection Act. The Act prohibits the disclosure of personal information contained in a motor vehicle record. Judge Kennelly (N.D. Ill.) granted Palatine's motion to dismiss, concluding that the placement of the ticket on the windshield did not constitute a disclosure under the Act and that, even if it did, the disclosure was permissible under the Act. Senne appeals.

In their opinion, Chief Judge Easterbrook and Judges Flaum and Ripple (concurring in part and dissenting in part) affirmed. The Court first turned to the language of the statute to ascertain Congress's intent. The Act provides that a covered person "shall not knowingly disclose or otherwise make available" the personal information. The Court rejected the Village's strained definition of "disclose" to apply only to those situations in which information is actually shared with someone. Relying both on the standard dictionary definition of "disclose" and the rest of the statutory phrase ("or otherwise make available"), the Court concluded that the placement of a parking ticket on a car constitutes "disclosure." The Act, however, lists 14 permissible uses, one of which is that the information may be disclosed in connection with any court or agency proceeding, including the service of process. Placing a parking ticket on a car constitutes service of process. Palatine's conduct was therefore permissible. The Court specifically rejected Senne's argument that the permissible use exceptions included only disclosures that were necessary for the purpose of the exception. Finally, the Court rejected Senne's argument that including the personal information on a piece of paper that could be used as an envelope constituted a second violation. The disclosure is still in connection with the court proceeding so it was still a permissible use. Even if it was an impermissible use, it would be the ticket recipient, not the Village of Palatine, that would be liable.

Judge Ripple wrote separately. He concurred with the majority's treatment of "disclosure." In his view, however, Palatine violated the Act because it disclosed personal information that it did not need to disclose to accomplish the service of process. The exceptions must be interpreted in accordance with Congressional intent. Therefore, Judge Ripple believed that the Act must be read to limit the permissible uses to the disclosure of information that is reasonably necessary to effectuate the government's purpose. Here, none of the information Senne complains of was necessary to achieve Palatine's purpose -- to notify the owner of the car of a parking violation.

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BLOOMFIELD STATE BANK v. UNITED STATES OF AMERICA (May 11, 2011)

Bloomfield State Bank made a mortgage loan secured by real estate and all rents directly or indirectly related to the real estate. A few years later, the mortgagor defaulted and the IRS filed a tax lien against the real property. A court-appointed receiver rented some of the property the following year. The IRS filed for a declaratory judgment that its tax lien had priority over the Bank's lien with respect to the rental income. Judge McKinney (S.D. Ind.) granted summary judgment to the IRS. The Bank appeals.

In their opinion, Judges Posner, Wood, and Tinder reversed and remanded. The federal tax law gives a security interest priority over a tax lien only when the secured property is in existence at the time of the lien. The IRS argues that the "property" referred to in the statute is the rent itself -- which was not in existence at the time of the tax lien. The Bank argues that the "property" referred to in the statute is the real estate -- which was in existence at the time of the tax lien. The Court noted that there were no reported appellate decisions on the issue and inconsistent lower court rulings. The Court concluded that the statute was clear and the government was wrong. The statute's reference to property is a reference to the property that is the source of the value to repay the loan, not the proceeds from that value. Here, the source of the value is the real property. The real property existed when the mortgage was issued, long before the tax lien was filed. The rental income belongs to the Bank.

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RUBIN v. THE ISLAMIC REPUBLIC OF IRAN (March 29, 2011)

A number of American citizens suffered physical and emotional injuries in a September 4, 1997 suicide bombing in Jerusalem. Several of them brought suit and obtained a $71.5 million default judgment against Iran, based on the country's training and support of Hamas. In an effort to collect on its judgment, the plaintiffs registered the judgment in Illinois and served Citations to Discover Assets on the Oriental Institute and the Field Museum. The Oriental Institute holds two collections of Persian antiquities on loan from Iran for academic study. The Field Museum holds a collection of Persian pottery and metalworks although the Field Museum claims ownership of these works and Iran does not dispute the claim, the plaintiffs assert that Iran does own the collection because they were stolen and smuggled out of the country decades ago. The museums asserted that the collections were immune from attachment under § 1609 of the Foreign Sovereign Immunities Act. Judge Manning (N.D. Ill.) ruled that only a foreign state can raise § 1609 immunity. Soon thereafter, Iran appeared and asserted its immunity. But Iran's appearance changed the litigation’s direction. The plaintiffs served Iran with discovery requests and deposition notices that sought information not only regarding the Chicago collections but also with respect to Iran's assets in the United States generally. Iran sought a protective order and moved for summary judgment on the immunity issue. The court granted the plaintiffs additional discovery before having to respond to the motion and ordered Iran to respond to general asset discovery. Iran appeals the general asset discovery order as well as the earlier order requiring it to appear and assert its immunity.

In their opinion, Circuit Judges Bauer and Sykes and District Judge Simon reversed and remanded. The Court first addressed its appellate jurisdiction, given the general rule that a order authorizing discovery is not immediately appealable. Orders denying immunity are appealable under the collateral order doctrine, and the district courts decision ordering discovery, in effect, did just that. The earlier order appealed presented a slightly different question. That order denying immunity was immediately appealable under the collateral order doctrine. But the museums did not appeal and that time has run. The effect of the museums' failure to immediately appeal is that the order is appealable the next time an appealable order is entered. Although the Court noted that, in most cases, the next appealable order is the final judgment, it is not necessarily so. Here, there is a second appealable order so the first order is properly under review. The Court turned to the merits and the interpretation of the Foreign Sovereign Immunity Act. The Act generally codified the common law of sovereign immunity. It contains two principal sections: § 1604 makes a foreign state immune from the jurisdiction of United States courts and § 1609 makes a foreign state's property in the country immune from attachment. Each section has exceptions. For example, jurisdiction in this case was premised on a § 1605 exception for cases involving money damage claims resulting from torture or killing. Similarly, the plaintiffs rely on a § 1610 exception to attachment immunity when the foreign state's property in the country is used for commercial activity. But the district court never ruled on the exception’s merits. Instead, it ruled that Iran had to appear and affirmatively plead the exception and then, once it did appear, the court focused on discovery issues rather than the merits. The Court concluded that the district court failed to appreciate the tension between ordering discovery and the sovereign’s right to immunity. Immunity generally protects its beneficiary not only from liability but also from the burdens of litigation, like discovery. Iran is presumed immune from attachment – the plaintiffs must identify particular property and demonstrate that it fits one of the exceptions. The Court noted that the Second, Fifth, and Ninth Circuits agree that discovery should be allowed to proceed narrowly in these circumstances. Therefore, a plaintiff must identify specific property and set forth a plausible argument for an exception to immunity before a court orders discovery. With respect to the district court’s order that Iran had to appear, the Court also reversed. The Act provides that a sovereign’s assets in the country “shall be” immune from execution. Relying on that statutory language, the rest of the Act, the common law immunity history, and decisions from the Fifth and Ninth Circuits , the Court held that a foreign state need not appear to assert that its property is immune from attachment. The argument can be raised by the holders of the property or by the court itself.

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ACTIVE DISPOSAL v. DARIEN (March 14, 2011)

Many Illinois municipalities have exclusive contracts for waste removal. These contracts limit the choices that consumers of waste removal services have and prevent other waste removal providers from competing for their business. Groups of waste removal companies and businesses wanting more choices banded together and brought suit against these municipalities, alleging violations of federal antitrust laws. Judge Kennelly (N.D. Ill.) dismissed the suit, concluding that the municipalities' actions were protected by the state-action exception to federal antitrust law. The plaintiffs appeal.

In their opinion, Circuit Judges Manion and Williams and District Judge Clevert affirmed. The Court first had to determine the provenance of the municipalities' power to contract with waste haulers. In the Illinois statute governing municipalities’ powers, § 1 (titled "Contracts") grants the power to make contracts relating to the "disposition . . . of garbage." Section 5 (titled "Method Of Disposition") grants the power to dictate an exclusive method for the "disposition of garbage," and adds that items intended to be recycled are not garbage. Plaintiffs argued that the municipality's power to enter into exclusive waste hauling contracts arose from § 5 and that the recycling exclusion prevented an exclusive contract when the waste material included recyclables. The Court rejected that argument for several reasons: a) § 5 never mentions contracts, b) the term "exclusive" refers to disposal methods , not contracts, and c) the titles of the sections are inconsistent with plaintiffs' argument. The Court also rejected plaintiffs' argument that the recycling exclusion in § 5 limited the power granted in § 1. Applying standard rules of statutory construction, the Court concluded that plaintiffs' proposal would lead to confusion, create anomalies, and render certain statutory terms superfluous. Having decided that § 1 covered the municipalities' contracting power, the Court applied the state-action doctrine test. Under that test, the Court asks if the statute authorizes the conduct and whether the anti-competitive effects were foreseeable. Both questions must be answered affirmatively for the state-action exemption to apply. Here, the Court already answered the first question affirmatively -- § 1 authorizes the garbage collection contracts. The Court also answered the second question in the affirmative. The power to contract implies a power to exclusively contract. Garbage collection is a traditional municipal concern. When a legislature grants contract authority to a municipality, it is certainly foreseeable that a municipality will enter into an exclusive contract that will affect competition. The state-action doctrine therefore applies.

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WHITELY v. MORAVEC (February 16, 2011)

Waste Reduction, Inc. laid off several workers at its Indiana facilities in 2006 and filed for bankruptcy. It paid the workers' wage claims through the bankruptcy proceedings but had insufficient assets to satisfy the statutory penalty claims. Former employees filed suit against the company's ten largest shareholders pursuant to New York (where Waste Reduction was incorporated) law imposing employer liability on shareholders in some circumstances. Then-Judge Hamilton (S.D. Ind.) concluded that the defendants were entitled to judgment but kept the case open until the bankruptcy court resolved the wage claims. Once no wage claims existed, the court entered judgment. The plaintiffs appeal.

In their opinion, Chief Judge Easterbrook and Judges Posner and Rovner affirmed. The Court first rejected the plaintiffs' argument that the district court abused its discretion in not remanding the case to state court once it decided the federal ERISA issues. On removal, a federal court has discretion to resolve both the federal and state issues, which is what the court did here. The Court turned to the merits. Under New York law, the ten largest shareholders of privately held companies are jointly and severally liable for "debts, wages or salaries . . . for services performed." The Court seemed to hold that the plaintiffs could not cobble together both the Indiana late wage penalty statute and the New York investor liability statute to create a hybrid statute (likening it to a jackalope or griffin). It decided the case on narrower grounds, however. The New York statute only imposes liability for debts "for services performed." The Indiana statutory penalty is not a debt "for services."

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TINSLEY v. INTEGRITY FINANCIAL PARTNERS (February 11, 2011)

Integrity Financial Partners (IFP) is a debt collector and was trying to collect a debt from Christopher Tinsley. Tinsley retained a lawyer and had the lawyer send a letter to IFP advising them that Tinsley refused to pay the debt and had no assets. The lawyer further requested that all collection efforts cease and advised IFP to "direct all future communications to our office." When IFP called the lawyer and requested payment, Kinsley filed suit under the Fair Debt Collection Practices Act. Chief Judge Holderman (N.D. Ill.) granted summary judgment to the defendants. Tinsley appeals.

In their opinion, Chief Judge Easterbrook and Judges Manion and Hamilton affirmed. The Court began with § 1692(c)(c) of the Act. That section prohibits any communication by a debt collector with the “consumer" when it is advised that the consumer refuses to pay the debt or asks for no further communication on the debt. Tinsley argues that the prohibition on communicating with the consumer applies equally to communicating with the consumers attorney, his agent. Tinsley relies on the section of the Act that defines "communication" as conveying information directly or indirectly. Surely, he argues, communication with one’s lawyer is an indirect communication to the client. The Court noted that Tinsley's argument had been accepted by at least one district court and had apparently not been considered at the appellate court level. Although expressing some attraction to the argument at a superficial level, the Court reconsidered after it put the section in context. For example, subsections (a) and (b) of the Act are written in such a way that they would make no sense if a consumer and his lawyer were interchangeable. Furthermore, the Court noted that it is unlikely that Congress intended to prohibit all communication with a consumer’s lawyer. Finally, the Act’s definition of consumer does not include lawyer. Taking the Act as a whole, together with its purposes, the Court concluded that IFP's communication with Tinsley's lawyer was not prohibited by the Act.

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AMERICAN BANK v. CITY OF MENASHA (November 29, 2010)

The City of Menasha, Wisconsin financed a power plant conversion by issuing bonds. Unfortunately, the project ended up over-budget and the city defaulted on the bonds. Several bondholders, including American Bank, filed a class action against the City. The suit alleged violations of federal securities law. A few weeks after filing suit, the Bank submitted a public records request to the City pursuant to state law. When Menasha refused to produce the requested records, the Bank obtained an order from a state court ordering compliance. Instead of complying, Menasha sought a stay from the district court in which the class action was pending. Judge Springmann (N.D. Ind.) granted the motion and issued a stay under the Private Securities Litigation Reform Act, as amended by the Securities Litigation Uniform Standards Act. The Act requires that discovery be stayed while a motion to dismiss is pending and authorizes a district court to stay state court discovery proceedings when necessary. The Bank appeals.

In their opinion, Seventh Circuit Judges Posner, Flaum, and Sykes reversed. The Court first addressed its jurisdiction. Although discovery orders are usually not appealable, there are exceptions – plus, this may not be a discovery order. The Court concluded that jurisdiction was inseparable from the merits. If the Bank is right on the merits, it is not a discovery order but an appealable injunction. If the City is right on the merits, it is a discovery order and unappealable unless it fits within an exception. The Court sided with the Bank. First of all, discovery is a well defined word in federal civil procedure and does not generally include the entirety of a party's investigation. Second, if the Act meant to use it in a different way, there must be a reason based on statute or policy. The policy behind the discovery stay is to prevent one party from using discovery to impose exorbitant costs on the other for the purpose of inducing a settlement. That concern does not exist here, since the cost of complying with the public records request can be charged to the Bank. Menasha concedes that it couldn't refuse a newspaper's request for the same records, nor could it have refused the Bank's request if it made the request a few weeks before filing the complaint rather than a few weeks after. The City not only does not convince the Court to adopt a broad definition of "discovery" in the Act -- it convinces the Court that their interpretation is futile, would create a “precedent of unmanageable scope,” and would hold the law “out to ridicule.”

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UNIVERSITY OF CHICAGO MEDICAL CENTER v. SEBELIUS (August 25, 2010)

Prior to 1980, the federal Medicare program treated teaching hospitals and non-teaching hospitals the same for reimbursement purposes. Teaching hospitals, however, had higher service costs. The Secretary established an adjustment for teaching hospitals in 1980. The adjustment was based on the number of full-time equivalent (FTE) residents employed on a particular date. When Congress further amended the Medicare reimbursement program in 1983, it included an indirect medical education (IME) adjustment to replace the Secretary's 1980 directive that also was based on the number of FTEs. The regulations in effect in 1996 required a resident to be assigned to the outpatient department of a hospital or the "portion" of the hospital subject to the 1983 program. Further amendments in 2001 excluded time spent in research not associated with treatment or diagnosis even if the resident was assigned to one of those two departments. The University of Chicago Medical Center included pure research time in calculating its residents' FTE count for fiscal year 1996. The Medicare program Administrators excluded that time. The district court disagreed. Judge Andersen (N.D. Ill.) concluded that "outpatient department" and "portion" are geographic areas, not spheres of operation as argued by the Administrator. The Secretary appeals.

In their opinion, Judges Cudahy, Evans, and Sykes affirmed. Although the Court agreed that the plain language of the regulation referred to a resident's geographic location, it also conceded that the answer to the ultimate question was not clear. If the regulation was ambiguous, the Court would have to address the degree of deference owed to the Secretary. In any event, the Court concluded that legislation enacted after oral argument provided the answer. The Patient Protection and Affordable Care Act, enacted in March of 2010, allowed the inclusion of non-patient care activities in the IME FTE count retroactively to 1983. It also provided that pure research activities should not be counted after 2001. Although the 2001 provision specifically stated that no inference should be drawn regarding pre-2001 calculations, the Court concluded that pure research was a subcategory of "non-patient care activities" and therefore specifically included in the Act's retroactive language.

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REXAM BEVERAGE CAN CO. v. BOLGER (August 24, 2010)

Almost 50 years ago, David Bolger constructed a warehouse near Rockford, Illinois and leased it to Rexam Beverage Can Company. In 2005, Rexam attempted to renew the lease for another five-year term, but failed to give the requisite notice. Bolger advised Rexam that it would have to vacate the premises at the expiration of the lease in March of 2006. Bolger also requested that certain repairs be made. Rexam did not vacate the premises. Instead, it filed a declaratory judgment action. It also continued to pay all utilities and rent, although Bolger returned the rent checks. Eventually, Rexam found a new home, made some repairs to the Rockford warehouse, and returned possession to Bolger at the end of August, 2007. Although Rexam made significant repairs to the warehouse, it did not replace the roof as Bolger had requested. The roof repair estimate was approximately $400,000. Bolger sold the property within several months without replacing the roof. Shortly before Rexam vacated the warehouse, Judge Ashman (N.D. Ill.) ruled on the declaratory judgment action. He concluded that Rexam did not meet the lease's renewal notice requirements and that its continued occupation of the warehouse was "willful" under Illinois' Holdover Statute. After a bench trial, the court found for Bolger and awarded $1.1 million for the holdover, $400,000 for the roof replacement, $20,000 for other repairs, and over $800,000 in attorneys' fees. Rexam appeals.

In their opinion, Chief Judge Easterbrook and Judges Manion and Tinder affirmed in part and vacated and remanded in part. The Court first addressed Rexam's liability for roof repairs under the lease. Under Illinois law, the lease is like any other contract and, if unambiguous, will be applied according to its terms. Using that analysis, the Court concluded that the lease language ("Lessor shall have no obligation with respect to the maintenance and repair . . .” and "Lessee shall be solely responsible . . . for keeping all of the [buildings] in good condition, order and repair, including all structural and extraordinary changes . . .") was unambiguous and placed the contractual burden of roof repairs on Rexam. With respect to damages for the roof, which the district court fixed at the estimated repair costs, the Court noted that Illinois law limits damages in such a situation to the diminution in property value. If the repair cost exceeds diminution in value, only the latter is awarded. The district court was presented with conflicting evidence on this issue and determined that the two measurements of damages were equal. The Court found no clear error. The Court turned to the award of damages under the Holdover Statute. It first concluded that there was no clear error in the district court's factual finding that the holdover was willful. Although the statute does not define willful, the Court relied on an intermediate Illinois case that rejected a "bad faith" test and instead adopted a test that excuses a tenant who remains in possession for a "colorably justifiable" reason. The Court agreed with the district court's conclusion that Rexam's holdover was not justifiable. With respect to damages, the statute assesses a penalty of "double the yearly value of the lands." The district court based its award on expert testimony establishing the monthly gross rental rate of the warehouse. The Court concluded that the use of the gross rental rate to measure damages was incorrect. Relying on the plain language of the statute, the intent of the legislation, and the dictionary definitions of "annual value" and "land," the Court concluded that holdover damages should be based on net rental value instead of gross rental value. The Court remanded for a determination of net rental value. Finally, the Court turned to the award of attorneys’ fees. Litigants in Illinois are generally responsible for their own attorneys' fees unless a statute or contract provides otherwise. The Court agreed with the district court's conclusion that the lease in question provided a basis for Bolger to recover fees associated with the repair issues but not the holdover issue. Fees for the holdover issue were not covered because the fee provision was limited to claims arising during the lease term. By its very nature, the holdover claim did not arise during of the lease term. The Court next rejected Rexam's argument that Bolger should be limited to recovering fees on those repair claims on which he was successful. The language of the lease's fee provision did not require success. With respect to the district court's efforts to disentangle fees associated with the repair issues and the holdover issues, the Court found no abuse of discretion although it did not endorse the district court's rather superficial approach.

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SHLAHTICHMAN v. 1-800 CONTACTS (AUGUST 10, 2010)

In June of 2009, Eduard Shlahtichman purchased contact lenses from defendant 1-800 Contacts using the Internet. Shlahtichman used his credit card for the purchase. The company sent him an e-mail confirming his purchase. The e-mail contained the expiration date of his credit card. Shlahtichman brought suit pursuant to the Fair and Accurate Credit Transactions Act of 2003 ("FACTA"). FACTA prohibits a merchant from "print[ing]" a credit card expiration date on a receipt "provided to the cardholder at the point of the sale." That restriction applies only to electronically printed receipts. Judge Darrah (N.D. Ill.) dismissed the suit on two grounds: that an e-mail order confirmation does not constitute printing and that an e-mail order confirmation is not provided "at the point of the sale." Shlahtichman appeals.

In their opinion, Judges Bauer, Rovner, and Hamilton affirmed. Much of the appeal centers on the meaning of the word "print." Since it is not defined in the statute, the Court looked to its ordinary meaning. Although recognizing that a minority of courts have extended its meaning to computer displayed receipts, the Court concluded that the Act applies only to paper receipts. It relied on dictionary definitions, the overall context and content of the Act, the ready application of such an approach to face-to-face transactions versus a host of questions in the computer context, Congress' determination of the effective date of the Act using the year the printing device was first put into use, and the lack of any reference to Internet or e-mail in the Act in light of Congress' many such references in other statutes. Alternatively, the Court noted that dismissal was proper because Shlahtichman alleged no actual injury, statutory damages are available only for willful violations, and 1-800 Contacts' interpretation of the statute was reasonable, even if wrong, and could not support a finding of willfulness.

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OWNER-OPERATOR INDEPENDENT DRIVERS ASS’N v. MAYFLOWER TRANSIT (August 9, 2010)

Mayflower Transit is in the business of transporting household goods from one location to another. It frequently provides this service by leasing equipment. Mayflower pays the truck's owner-operator a per-mile fee. Federal regulations require Mayflower's trucks to be insured. Mayflower acquires insurance and deducts its cost from the fees it pays the owner-operators. A group of drivers and their trade association filed suit against Mayflower under 49 U.S.C. § 14704(a)(2), contending that Mayflower’s practice violates a federal regulation that prohibits a motor carrier from requiring its drivers to purchase any product or service from it as a condition of its lease. Judge Baker (S.D. Ind.) dismissed some claims on statute of limitations grounds and dismissed the insurance claims on the ground that the deduction did not violate the regulation. The owner-operators appeal.

In their opinion, Chief Judge Easterbrook and Judges Williams and Tinder affirmed and remanded. First addressing the limitations issue, the Court noted that § 14705(c) contains a two-year statute of limitations applicable to the administrative proceedings referenced in § 14704(b) but does not mention § 14704(a)(2). The district court applied the two-year statute anyway, concluding that a scrivener's error was responsible for the omission. The Court disagreed. It conceded that the text of the statute was inconsistent with the legislative history and that Congress may have intended a two-year limitations period. Nevertheless, the unambiguous text governs. Since the statute therefore contains no internal statute of limitations, the court concluded that the residual four-year limitations period applies. On the merits, the Court agreed with the district court. The federal regulation requires a motor carrier to purchase insurance -- the regulation is silent on who pays for it. Furthermore, the regulation relied on by the owner-operators only prohibits the lessor from requiring the purchase of a good or service from it. Since Mayflower does not and cannot sell insurance, the insurance deduction cannot be the purchase of a good or service from Mayflower. Finally, another section of the same regulation requires a lessor to specify in its lease the amount of any insurance chargeback. Although the plaintiffs suggest a convoluted reading of that section, the plain meaning of the section is inconsistent with the notion that Mayflower's charge for insurance is prohibited.

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KODISH v. OAKBROOK TERRACE FIRE PROTECTION DISTRICT (May 10, 2010)

Brian Kodish began work as a full-time firefighter and paramedic for Oakbrook Terrace in June of 2003. The Illinois Fire Protection Act prohibits the termination of a firefighter without just cause after the firefighter has "held that position for one year." In March of 2004, Kodish went on leave for a knee surgery. While he was out, he received a letter indicating that the District was going to extend his 12-month probationary period for 90 days. Although the evaluations he had received in his first nine months contained some positive remarks, Kodish was evaluated as "fair" in most categories. He was criticized for a lack of motivation, poor communication skills, and an inability to follow authority. Kodish returned from leave on July 24. On August 11, the District Board decided to terminate his employment. He filed suit against the District under § 1983, alleging a violation of his due process rights. He also alleged that he was fired in retaliation for speaking out on union issues. The district court granted summary judgment to the defendants. Kodish appeals.

In their opinion, Chief Judge Easterbrook and Judges Ripple and Rovner reversed. The Court first addressed the existence of a property right, a prerequisite for the federal due process claim. Of course, Kodish had passed his one-year anniversary before he was fired -- but, because of his four-month leave, he only actually worked a little over ten months. The Court looked to Illinois law to determine whether Kodish was protected. No Illinois court has interpreted the "held that position" language of the Act. The Court looked to Illinois decisions with respect to analogous statutes and concluded that the Illinois Supreme Court would read the plain language of the Act to impose a simple twelve-month employment requirement for the creation of the property interest. The Court rejected defendants' other arguments based on the Illinois Municipal Code and the District’s own Wage and Benefit Policy as either in applicable (in the case of the Code) or not controlling (in the case of the Policy) -- and reversed the district court's conclusion that Kodish had no property interest in continued employment. The Court then addressed Kodish's First Amendment claim. It quickly concluded that Kodish met two of the three requirements of the claim -- that the speech was protected speech and that he suffered a deprivation. In addressing the third requirement -- whether he would have been terminated but for his speech -- the Court reviewed his mixed employment evaluations as well as the evidence of the fire chief's opinion of Kodish's speech. The Court disagreed with the district court's conclusion that the only reasonable conclusion for his discharge was his employment record. Although the Court found that theory "plausible," it also found the alternate theory -- that he was fired for his speech -- one that a reasonable jury could adopt. In concluding that the First Amendment claim should have survived summary judgment, the Court also concluded that Kodish presented sufficient evidence that the fire chief's animus should be attributed to the District under either the "singular influence" or the "motivating factor" test.

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BAILEY v. PREGIS INNOVATIVE PACKAGING (April 2, 2010)

Michelle Bailey was employed by the defendant Pregis Innovative Packaging -- that is, until they terminated her for accumulating too many absenteeism points during a 12-month period. She brought suit against Pregis under the Family and Medical Leave Act. The district court granted summary judgment to Pregis. Bailey appeals.

In their opinion, Judges Posner, Manion, and Hamilton affirmed. The Court noted the two issues raised by the appeal: a) whether the 12-month period during which an employee must accumulate 1,250 hours of service to be entitled to take leave is tolled during a period of leave, and whether Pregis retaliated against Bailey by not including leave time in its own policy of removing absenteeism points twelve months after they are imposed. The Court rejected Bailey's position on the first issue. Although it found no precedent, it also found no basis for the tolling in the statute and also found comfort in the line of cases that refused to adopt an expansive definition of the term "service" in the Act. Thus, Bailey is not entitled to "service" credit for a number of days preceding the twelve month period equal to her number of days of leave. With respect to the second issue, the Court first addressed whether the employer's policy of removing absenteeism points is an “employment benefit" under the Act. Although it gave no weight to a Department of Labor opinion letter concluding that such a policy is an "employment benefit" because the letter contained no reasoning, it concluded on its own that the letter reached the right result. Even if it is an employment benefit, however, the Court noted that the Act provides that taking leave cannot result in the loss of employment benefit that has already accrued. Benefits that have not already accrued are not protected. For example, the Act specifically provides that an employee on leave does not accrue seniority. For much the same reason, an employee on leave does not accrue service days toward the twelve months after which the employer forgives an absentee day.

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MILLER v. LASALLE BANK (February 19, 2010)

In 2001, individuals entered into a mortgage on an Indiana property with LaSalle Bank's predecessor. The mortgage was recorded -- but the acknowledgment had a technical defect. In 2007, the individuals petitioned for Chapter 13 bankruptcy. The Trustee initiated an adversary proceeding against La Salle to avoid the mortgage. Indiana law provides that a "properly acknowledged" mortgage is constructive notice of the mortgage to later bona fide purchasers (BFPs). Prior to 2007, Indiana courts held that a mortgage with a technical defect in the acknowledgment did not amount to constructive notice. The Indiana legislature amended the statute in 2007 to overrule the case law and allow constructive notice even with certain technical defects. The legislature amended the statute again in 2008 to provide that the statute applied to all mortgages, regardless of the date of recording. The dispute in the adversary proceeding centered on whether, prior to the 2008 amendment, the 2007 amendment applied to mortgages recorded prior to 2007. The bankruptcy court concluded that the 2007 amendment applied only to mortgages recorded after its effective date. The district court reversed. The Trustee appeals.

In their opinion, Judges Cudahy, Wood, and Evans affirmed. The Court began with the statute and the Indiana rules of statutory construction. Concluding that both parties' constructions of the language of the statute were reasonable, the Court held that the statute was ambiguous and proceeded to apply rules of interpretation. One such rule is the presumption that an amendment to a statute is intended to change the meaning of the statute unless it is clear that the legislature intended to clarify its original intent. The Court applied the factors set forth in Middleton (intheiropinion.com post) to determine whether the 2008 amendment amended or clarified the 2007 amendment. It concluded that the 2008 amendment was a clarifying amendment under Middleton because: a) they were enacted in the same legislative session and sponsored by many of the same legislators, b) the 2007 amendment was ambiguous, and c) the bankruptcy trustees were actively seeking to avoid mortgages on technical grounds after the 2007 amendment.

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ORTEGA v. HOLDER (January 15, 2010)

Angie Ortega was the target of removal proceedings brought by the government in 2001. She asserted as a defense in those proceedings that she was a United States national. While the proceeding was pending, she filed an application for citizenship with the Immigration and Naturalization Service. When her application was denied, she appealed to the Office of Administrative Appeals (AAO). Meanwhile, the Immigration Judge in the removal proceedings dismissed with prejudice, concluding that she had in fact proven her citizenship. Months later, the AAO denied her appeal. She filed a motion to reopen and to reconsider, in which she referred to the ruling of the Immigration Judge. The AAO, four years later, denied her motion. It concluded that her motion was untimely in that it had been filed with the wrong office. It also concluded that it was at best a motion to reconsider rather than a motion to reopen. Although the regulations permit consideration of untimely motions to reopen upon a showing of reasonableness, they do not allow such discretion for a motion to reconsider. Ortega brought an action in federal court seeking a declaration of nationality under 8 U.S.C. §1503(a). On the government's motion, the district court dismissed the action on the ground that her citizenship arose in connection with her removal proceeding and her claim therefore fell within the §1503(a) exclusion. Ortega appeals.

In their opinion, Judges Flaum, Ripple and Sykes reversed and remanded. The Court began with the language of the statute. It provides that a person who is denied a right or privilege of citizenship on the ground that she is not a national may bring an action for a declaration of citizenship. The statute contains an exception. It prohibits an action if the issue of the person’s status as a national arose "by reason of, or in connection with" a removal proceeding. The Court emphasized that its interpretation of the words of the statute must also consider its context and its relationship to other provisions. In doing so, the Court stated that the exceptions were designed to prevent judicial interference into removal proceedings and to maintain a single, exclusive opportunity to challenge a removal order. Examining the various options for obtaining a declaration of citizenship, the Court concluded that Congress failed to consider the scenario in which worked Ortega found herself. A judicial declaration of citizenship, when it is pursued through the removal route, is available only when there is an order of removal that can be reviewed under §1252. Since Ortega prevailed at her removal proceeding, there was no order of removal to challenge. The Court was quite certain that Congress did not purposefully leave those in Ortega's situation without a remedy. The proper approach in such a case is to begin the application process anew after the termination of the removal proceedings. Although the government suggested a resubmission of one's application was required, the Court preferred a motion to reopen the citizenship proceedings on the “new fact” of the termination of removal proceedings. That re-instituted matter would no longer be burdened with the “arose by reason of” exclusion of §1503. Here, Ortega already filed a motion to reconsider after the removal proceedings had been terminated. She was then denied relief. Her status as a national is no longer considered to have arisen in the removal proceeding. She can avail herself of the declaratory judgment relief available under §1503.

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STORIE v. RANDY'S AUTO SALES (December 17, 2009)

Larry Storie purchased a truck from the Duckett Truck Center in June of 2004. Unbeknownst to Storie, the truck had quite a history. Duckett purchased the truck from West Side Auto Parts in February, who purchased it from Randy's Auto Sales in January, who purchased it from St. Paul Mercury Insurance Company, also in January. St. Paul acquired the truck after it was involved in an accident -- an accident in which its driver was killed -- and declared a total loss. St. Paul applied for a certificate of title in Tennessee. The title was issued to St. Paul and forwarded to Randy's -- and to Westside -- and to Duckett. No one applied for a salvage title. Storie learned of his truck's checkered past only after 18 more months and 200,000 more miles. He brought suit against Randy's. He alleges that Randy's violated an Indiana statute that requires a person who obtains a wrecked vehicle without a salvage title to apply for one within 31 days of his receipt of title. The district court granted summary judgment to Randy's, concluding that it could not have obtained a salvage title since it no longer owned the vehicle by the time it received the title from St. Paul. Storie appeals.

In their opinion, Judges Cudahy, Wood and Sykes certified a question to the Indiana Supreme Court. The Court noted that, read literally, the Indiana statute could apply to current and former owners. However, the Court identified several competing interpretations of the statute -- some supporting its application to former owners and others not. For example, one argument that it might be limited to current owners is that it requires the state to issue a certificate of a salvage title as proof of ownership. That suggests that a former owner should not apply for the title. An opposing argument is that the presumed purpose of the statute, to protect consumers from purchasing wrecked vehicles, could be evaded simply by selling the vehicle before the certificate of title is transferred. The Court concluded that the statute was ambiguous and that the question raised should be answered by the Indiana Supreme Court. Before the Court certified the question, however, it had to conclude that the answer to the question would be outcome determinative. The Court considered and rejected Randy's alternate arguments, concluded that the answer to the question was outcome determinative and certified it to the Indiana Supreme Court.

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ESTATE OF MORELAND v. DIETER (August 11, 2009)

Christopher Moreland was arrested on a drunk driving charge in 1997. While in jail, he was beaten to death. His estate filed suit, pursuant to § 1983, against three jail officers. In May of 2002, a jury returned a verdict against two of the officers for $29 million in compensatory and $27.5 million in punitive damages. The jury deadlocked in the case against the third officer. A defense verdict was returned after a September 2003 retrial. In July of 2003, Indiana amended its statute governing the indemnification of government employees. Prior to the amendment, indemnification was discretionary. After the amendment, indemnification for non-punitive damages became mandatory. In 2007, Moreland's estate filed a motion for a writ of execution to collect the award of compensatory damages from St. Joseph County. The district court denied the motion. The Estate appeals.

In their opinion, Judges Posner, Sykes and Dow affirmed. The Court looked to the statutory amendment. It noted two particularly noteworthy features: discretionary indemnification became mandatory in certain circumstances, and discretionary indemnification remained for punitive damages and settlements. In order for the Estate to benefit from the amendment, however, it must be retroactive. That Court stated the general Indiana rule that statutes apply prospectively only unless they contain explicitly retroactive language. An exception exists for certain remedial statutes. The Court rejected each of the Estate's arguments: a) the fact that there was no final judgment until after the amendment took effect does not allow for prospective application of the amendment to the earlier verdict, b) the plain language does not unambiguously support a legislative intent to apply the statute retroactively, and c) even if the statute is remedial and could fit within the exception, the Estate's interpretation would frustrate, rather than carry out the statute's purpose.

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UNITED STATES v. HERNANDEZ-ARENADO (July 6, 2009)

Pablo Hernandez-Arenado (Hernandez) was awarded immigration parole when he came to the United States from Cuba as part of the Mariel Boatlift. Four years later, Hernandez pled guilty to the sexual assault of a young boy and was sentenced to five years in state prison. He admitted to several hundred similar episodes. The Immigration and Naturalization Service (“INS”) revoked his parole and placed him in a Bureau of Prisons (“BOP”) facility after his release from state prison, pending deportation. Hernandez filed a petition for a writ of habeas corpus after 20 years in custody, after the Supreme Court ruled that the statute under which Hernandez was being held only allowed a reasonable period of custody pending removal. The petition was granted and his release was ordered. Before Hernandez was released, the government sought to civilly commit him as a sexually dangerous person pursuant to the Adam Walsh Act. The district court denied the petition, holding that the Adam Walsh Act applied only to individuals "in the custody of" the BOP and that Hernandez was in fact in the custody of Immigration and Customs Enforcement (“ICE”), the successor agency to INS. The government appeals.

In their opinion, Judges Ripple, Rovner and Evans affirmed. The Court stated that the Supreme Court has recognized different meanings for the word "custody" in different contexts. Here, for example, the BOP has physical custody of Hernandez but the ICE has legal custody. The Court went on to say that the Bureau of Persons has physical custody of many persons for whom it does not have legal custody and, in fact, has legal custody of many persons over whom it does not have physical custody. The Court did not believe that the applicability of the Act should turn on a factor, like physical custody, that is random and manipulable. Even the government refused to suggest a standard test for determining custody, and does not believe that every person in its physical custody is subject to the Act. The Court insisted on giving the term a meaning that applied beyond the narrow facts of the case. It rejected a physical custody trigger and instead adopted the interpretation that the Act applied to all federal offenders, whether they were in the physical custody of the Bureau of Prisons or not, but not to persons in the physical control of the BOP simply as a service to another agency.

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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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VALERO ENERGY CORPORATION v. UNITED STATES OF AMERICA (June 17, 2009)

Valero Energy Corp., a large U.S. refiner, acquired Ultramar Diamond Shamrock Corporation ("UDS”) in 2001. Prior to the transaction, Valero received relevant tax advice from Arthur Andersen. With Arthur Andersen's help, Valero initiated a complex set of transactions that resulted in tax deductible losses in excess of $100 million. The size of the deduction caught the eye of the IRS, which issued a summons to Arthur Andersen seeking documents relating to its tax analysis for Valero or UDS. Valero moved to quash the summons, in part based on the tax practitioner-client privilege. The government argued that the tax practitioner-client privilege did not apply because of the statutory exception for documents made in connection with the promotion of a tax shelter. The district court originally upheld Valero’s claim of privilege, concluding that the government failed to meet its burden. On a second round of document production, however, the government again challenged the privilege and supported its challenge with a detailed affidavit. This time the district court concluded the government met its burden with respect to some documents and ordered them produced. Valero appeals.

In their opinion, Judges Rovner, Evans and Tinder affirmed. The Court noted that Congress created the tax practitioner-client privilege in 1998 as a limited shield of confidentiality. It is no broader than the attorney-client privilege and does not protect general accounting advice, even if provided by an attorney. The Court first rejected Valero’s arguments that the bulk of the documents were even covered by the privilege. Although some of the documents contained legal analysis, the Court concluded they were not privileged because they contained the type of information generally collected in the process of preparing a return. With respect to the small group of documents that the district court found were protected, the Court agreed with the government that they fell within the exception for communications in connection with the promotion of a tax shelter. Under the statute, a "tax shelter" includes any plan or arrangement a "significant purpose" of which is the avoidance of income tax. Because the privilege is an exception to the broad summons power of the IRS, the Court declined to broaden the privilege through a narrow interpretation of the exception. Given that the Valero documents addressed the structure of the transactions that resulted in a large tax deduction, the Court concluded that they fit within the exception and were not covered by the privilege.

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